iilB  i 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 

SCHOOL  OF  LAW 


Digitized  by  the  Internet  Archive 

in  2008  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/corporationshavi02cook 


A  TREATISE 

ON   THE 

LAW   OF    CORPORATIONS 


Volume  Two 


A   TREATISE 


ON    THE   LAW    OF 


CORPORATIONS 


HAVING   A 


CAPITAL   STOCK 


BY 


WILLIAM    W.   COOK 

Of  the  New  York  Bar 


SEVENTH   EDITION 

IN   FIVE   VOLUMES 

VOL.  II 


BOSTON 
LITTLE,  BROWN,  AND  COMPANY 

1913 


T 

1?|3 


Copyright,  1887,  1889,  1894, 
1898,  1903,  1908,  1913, 

By  William  W.  Cook. 


Set  up  and  electrotyped  by  J.  S.  Gushing  Co.,  Norwood,  Mass. ,  U.S.A. 
Presswork  by  S.  J.  Parkhill  &  Co.,  Boston,  Mass..  U.S.A. 


CONTENTS. 


CHAPTER  XX. 

§§  331-357.  SALES  OF  STOCK  —  THE  FORMATION  AND  PERFORM- 
ANCE OF  THE  CONTRACT  —  GAJvIBLING  SALES  —  FRAUD- 
ULENT SALES Pages  1003-1121 

A.    FORMATIOX    AND    PERFORMANCE    OF    CONTRACTS    TO    SELL    STOCK 

Page 

§    331.  Shares  of  stock  are  transferable 1003 

§    332.  Restrictions  on  right  to  sell  stock  and  contracts  against  selling    .     1004 

§    333.  "Pools,"  "corners,"  and  combinations  in  stock 1004 

§    334.  Contract  for  sale  of  stock  may  be  valid  without  delivery  or  specific 

time  for  delivery  —  Construction  of  various  contracts  .  .  .  1004 
§§  335,  336.  Remedies  for  breach  of  a  contract  to  sell  stock  —  Tender  1017,  1023 
§§  337,  338.  Specific  performance  as  a  remedy  for  breach  of  a  contract  to 

buy  or  sell  stock 1028 

§§  339,  340.  Seventeenth  Section  of  statute  of  frauds  as  affecting  sales  of 

stock  —  Agreement  to  repurchase 1042,  1049 

B.    GAMBLING    SALES    OF    STOCK. 

§    341.  What  are  wager  stock  sales 1051 

§    342.  Statutes  prohibiting  wager  contracts,  and  also  certain  stock  con- 
tracts    1055 

§    343.  Test  of  legality  of  stock  transaction 1059 

§    344.  When  intent  to  deliver  is  question  for  the  jury  and  when  not       .  1060 
§§  345,  346.  Gambling  stock  contracts  as  affecting  the  relations  between 

the  principal  and  his  broker 1061,  1062 

§§  347,  348.  Gambling  stock  transactions  as  affecting  notes,  bonds,  mort- 
gages, etc.,  growing  out  thereof 1064 

C.    FRAUD    AS    AFFECTING    A    SALE    OF    STOCK. 

§    349.  Extent  of  subject  treated  herein 1066 

§    350.  What  has  been  held  to  constitute  a  fraud  herein  —  Purchase  with 

knowledge  of  previous  sale 1067 

§    351.  Fraudulent  sale  by  agent,  etc.,  in  breach  of  trust 1085 

§§  352,  353.  Fraud  may  be  by  corporate  reports  or  prospectus  .     .     1090,  1094 

§    354.  Remedies  for  the  fraud 1095 

§    355.  Action  for  deceit 1098 

§    356.  Remedy  in  equity 1107 

§    357.  Fraud  in  selling  stock  may  be  criminal 1121 

V 


CONTENTS. 


CHAPTER    XXI. 

§§  358-371.  SALES  OF  STOCK  —  SALES  WHILE  SUITS  ARE  PENDING 
AFFECTING  THAT  STOCK;  FORGERY;  LOST  AND  STOLEN 
CERTIFICATES  OF  STOCK;    CONFISCATION  OF  STOCK 

Pages  1123-1150 

A.   STOLEN  AND  LOST  CERTIFICATES,   AND  PURCHASES  WITHOUT  A  CERTIFICATE  OF 

THE    STOCK. 

Page 

§    3.58.  Stolen  or  lost  certificates  of  Stock  indorsed  in  blank 1123 

§    359.  Owner  of  a  lost  certificate  of  stock  may  obtain  a  new  certificate .  1126 
§    360.  Rights  of  a  purchaser  of  a  certificate  of  stock  where  the  corporation 
has  registered  a  transfer  to  another  without  a  surrender  of  the 

certificate 1128 

§    361.  Liability  of  the  corporation  herein 1130 

§    362.   Rights  of  purchaser  of  stock  without  certificates 1133 

B.    SALES    OF    STOCK    WHILE    SUITS    ARE    PEXDING    AFFECTING    THAT    STOCK. 

§    363.  Legal  proceedings  as  affecting  sales  of  outstanding  certificates  of 

stock 1135 

§    364.  Lis  pendens  as  affecting  a  purchase  of  stock 1141 

C.    FORGERY. 

i    365.  Forgery  as  affecting  a  sale  of  stock 1141 

§    366.  Rights  and  liabilities  of  transferees  of  forged  certificates  of  stock, 

there  being  no  intervening  registry  on  corporate  books  .  .  .  1142 
§§  367-369.  Liability  of  corporation  to  real  owner  of  stock  for  allowing 

registry  of  forged  transfer  —  Rights  of  the  corporation  in  such 

.f^ases 1145-1148 

§    370.  Rights  of  transferees  who  purchase  after   a   registry  has   been 

obtained 1149 

§     371.     D.    CONFISCATION    OF    STOCK 1150 

CHAPTER   XXII. 

§§  372-392.  SALES  OP  STOCK  —  FORMAL  METHOD  OP  TRANSFER- 
RING CERTIFICATES,  AND  REGISTRY  THEREOF 

Pages  1151-1192 

§    372.  Subject  treated  herein 1151 

§    373.  The  two  usual  steps  in  perfecting  a  transfer  of  stock      ....     11.52 
§    374.  Omission  of  either  or  both  steps 1152 

A.    .METHOD    OF    TRANSFERRING    THE    CERTIFICATE. 

§    375.   I'sual  forms  of  assignment  and  powers  of  attorney  whereby  the 

transferrer  assigns  the  certificate  of  stock  to  his  transferee  .     .     11.53 

§    376.  Questions  which  arise  herein 1156 

§    377.  A  .sea!  is  not  neces.sary  to  a  transfer  of  stock 11,56 

§  378.  The  assignment  of  the  certificate  of  stock  estops  the  transferrer 
from  claiming  any  further  title  in  the  stock  as  against  subse- 
quent hnnn  jidi'  transferees,  although  such  assignment  be  not 

n-gistered 1]57 

§    379.   Effect  of  charter  provision  requiring  registry 1160 

§    380.  Certificate  of  stock  may  be  assigned  with  the  name  of  the  transferee 

left  blank \U\\ 

vi 


CONTENTS. 

B.    METHOD    OF    REGISTERING    A    TRANSFER    OF    STOCK. 


Page 


§    381.  Registry  an  important  part  of  a  transfer  of  stock 1162 

§    382.  Formalities  of  making  registry  —  Transfer  book  and  stock  ledger 

not  necessary .•     •     •     "  llyt 

§    383.  Formalities  of  registry  may  be  waived  by  the  corporation  .     .     .  117U 
§    384.  Either  the  transferrer  or  the  transferee  may  apply  to  the  corpora- 
tion for  a  registry  of  transfer 11 ''I 

C.    RIGHTS     AND     DUTIES     OF     THE     CORPORATION     IN     ALLOWING     OR     REFUSING 

REGISTRY. 

§    385.  Corporation  may  require  proof  of  identity  ;  also  of  genuineness  of 

signature,  etc •    '       -u 

§    386.  Corporation  cannot  refuse  registry  on  account  of  the  motive  of  the 

transferrer  or  transferee  in  the  transaction^ 1173 

§    387.  Corporation  may  interplead  between  two  claimants  to  stock  .     .     1174 
§    388.  Corporation  must  obey  mandate  of  court  ordering  registry  and 

issue  of  new  certificates .'     *     "     *     H'" 

§    389.  Remedies  of  a  transferee  of  stock  against  the  corporation  for  re- 
fusal to  allow  registry 11|1 

§    390.  Remedy  by  mandamus 11^1 

§    391.  Remedy  by  suit  in  equity 11^^ 

§    392.  Remedy  by  an  action  for  damages 119" 


CHAPTER   XXIII. 

55  393-410.  RULES  FOR  CORPORATIONS  IN  REGARD  TO  REFUSING 
OR  ALLOWING  REGISTRIES  OF  TRANSFERS  OF  STOCK 

Pages  1193-1201 

§    393.  Purpose  of  the  chapter .  1193 

§    394.  Right  to  refuse  until  the  transferrer  pays  the  unpaid  subscription 

price ^^^^ 

§    395.  Whether  the  corporation  may  refuse  to  register  a  transfer  to  an 

irresponsible  transferee 1194 

§    396.  Corporation  may  refuse  to  register  as  transferees  persons  who  are 

incompetent  to  contract 1194 

§    397.  Trustees,  executors,  guardians,  agents,  pledgees 1194 

§    398.  Sales  of  stock  by  executors  or  administrators 1195 

§    399.  Sales  by  trustees 119J 

§    400.  Sales  by  guardians 1196 

§    401.  Forgery  of  transfer .•■".• 

§    402.  Corporation  must  require  a  surrender  of  the  outstanding  certifi- 
cate        1196 

§    403.  Alleged  loss  of  the  old  certificate 1197 

§    404.  Attachment  or  execution 1197 

§    405.  Decree  of  a  court  that  certificates  be  issued 1198 

§    406.  Theft  of  certificates  indorsed  in  blank 1199 

§    407.  Interpleader  by  the  corporation 1199 

§    408.  Restrictions  by  corporation   on   stockholder's   right  to  sell  or 

transfer 1199 

§    409.  Lien  of  the  corporation 1200 

§    410.  Formalities  of  registry  which  the  corporation  may  insist  upon      .  1200 

vii 


CONTENTS. 

CHAPTER  XXIV. 

§§411-444.  NON-NEGOTIABILITY    OF    STOCK   AND    DANGERS   IN- 
CURRED IN  THE  PURCHASE  OF  CERTIFICATES   OF  STOCK 

Pages  1202-1223 

A.    NON-NEGOTIABILITY. 

Page 

§    411.  Nature  and  kinds  of  negotiable  instruments 1202 

§  412.  Certificates  of  stock  are  not  negotiable  instruments,  but  have 
been  given  many  of  the  elements  of  negotiability  in  America  — 
In  England  they  are  not  negotiable  in  any  sense 1203 

§    413.  The  term  "quasi-negotiability,"  as  applied  to  certificates  of  stock, 

throws  little  light  upon  the  subject 1207 

§    414.  The  distinction  between  the  "legal"  and  the  "equitable"  title  in 

the  transfer  of  certificates  of  stock  is  unsatisfactory    ....     1208 

§  415.  The  only  method  of  treatment  of  the  subject  seems  to  be  by  in- 
quiring under  what  facts  the  holder  or  purchaser  is  protected     1209 

§    416.  The  particular  rules  protecting  a  bona  fide  purchaser  of  certificates 

of  stock  are  based  on  estoppel 1210 

B.    DANGERS    INCURRED    IN    PURCHASING    STOCK. 

§  417.  Liabilities,  risks,  and  rights  of  one  who  owns  or  purchases  a  cer- 
tificate of  stock 1212 

§    418.  Liability  on  unpaid  par  value,  that  is,  the  unpaid  subscription 

price  of  the  stock 1212 

§    419.  Forfeiture  for  non-payment  of  calls 1212 

§    420.  Statutory  liability 1213 

§    421.  Liabilitv  where  the  purchaser  has  the  transfer  made  to  a  nominal 

holder 1213 

§    422.  No  liability  for  assessments  after  the  par  value  of  the  stock  has 

been  paid  in 1213 

§    423.  Liability  when  stock  was  issued  for  property 1213 

§    424.  Lialiility  as  partners  by  reason  of  defective  incorporation  or  for 

other  reasons 1214 

§    42.5.  Danger  of  corporate  lien 1214 

§    426.  Overissued  stock 1215 

§    427.  Danger  that  transferrer  or  previous  holder  is  an  infant,  married 

woman,  or  lunatic 1215 

§    428.  Purchase  of  stock  by  or  from  a  corporation 1216 

§    429.  Purchase  from  joint  owners,  partners,  and  agents 1216 

§    430.  Purchase  of  stock  at  sheriff's  execution  sale,  or  from  assignee  in 

bankruptcy,  or  for  benefit  of  creditors 1216 

§    431.  Purchase  from  a  pledgee 1217 

§    4'.i'2.  Pledgee  is  protected  in  the  same  way  as  purchaser  of  stock     .     .  1217 
§    433.  Danger    of    purchasing    from    an    executor,    administrator,    or 

guardian 1218 

§    434.  Purchase  from  a  trustee 1218 

§  435.  Sale  by  vendor  to  another  purchaser  without  delivery  of  certifi- 
cate of  stock 1218 

§    436.  Danger  of  forgery 1219 

§    437.  Loss  or  th(  ft  of  certificates  indorsed  in  blank 1219 

§    438.  Danger  that  a  previous  holder  has  been  deprived  of  that  same 

stock  bv  fraud 1220 

§    439.  Statute  of  frauds 1220 

§    440.  Gambling  sales  of  stock 1220 

viii 


CONTENTS. 

Page 

§    441.  Method  of  assigning  a  certificate  of  stock 1220 

§    442.  Registry  of  transfer 1221 

§    443.  Purchaser  not  affected  by  rights  of  holders  of  that  stock  back  of 

the  last  registry 1221 

§    444.  Summary 1221 


PART   III. 
MISCELLANEOUS   RIGHTS  OF   STOCKHOLDERS. 

CHAPTER   XXV. 

§§  445-462.  STOCK-BROKERS  AND  THEIR  CONTRACTS 

Pages  1224-1264 

§    445.  Definitions  and  scope  of  the  subject 1224 

§    446,  Who  may  be  a  broker  and  customer 1226 

§    447.  Facts  making  person  a  broker  or  customer  unintentionally      .     .  1227 

§    448.  Broker  must  obey  specific  orders  of  customer 1227 

§    449.  Must  act  in  good  faith  and  in  reasonable  time 1229 

§    450.  Cannot  purchase  from  or  sell  to  himself 1230 

§    451.  Duties  and  liabilities  of  customer  towards  broker 1231 

§    452.  Duties  and  liabilities  of  a  broker  towards  customer  —  Discharge 

in  bankruptcy  —  Arrest  —  Criminal  liability 1234 

§    453.  Brokers'  customs  and  usages 1239 

§    454.  Privity  of  contract  between  broker  and  opposite  parties     .     .     .  1242 

§    455.  Privity  of  contract  between  the  opposite  customers 1244 

§    456.  Intermediate  sub-brokers  and  sub-customers 1245 

§    457.  Purchases  or  sales  on  margins  —  Broker  as  a  pledgee  —  Bona  fide 
purchasers  or  repledgees  —  Distribution  of  assets  on  failure  of 

broker 1248 

§    458.  Broker's  rights  and  duties  on  failure  of  margin 1254 

§    459.  What  will  excuse  notice  and  demand  for  more  margin    ....  1256 

§    460.  Customer's  remedies  and  damages  herein 1258 

§§  461,  462.  Broker's  remedies  and  damages  herein 1263 

CHAPTER   XXVI. 
§§  463  479.  PLEDGES  AND  MORTGAGES  OF  STOCK  .  Pages  1265-1349 

§    463.  Definitions  of  pledge,  mortgage,  and  lien 1265 

§    464.  Mortgages  and  pledges  of   stock  —  Trust   mortgages   covering 

stocks 1266 

§    465.  How  a  pledge  of  stock  arises  or  is  made  —  Pledge,  by  the  corpora- 
tion itself,  of  its  own  stock 1270 

§    466.  Pledgee  may  have  the  stock  registered  in  his  own  name  or  the 

name  of  another 1279 

§    467.  Stock-broker  purchasing  stock  for  a  customer  on  a  margin  is  a 

pledgee  of  the  stock 1281 

§    468.  Miscellaneous  rights  of  pledgee  and  pledgor  —  Dividends  —  Re- 
organizations —  The  equity  of  redemption 1284 

§    469.  Pledgee  need  not  retain  or  return  to  the  pledgor  the  identical  cer- 
tificates or  shares  of  stock  which  were  pledged,  but  must  have 

equal  quantity  always  on  hand 1298 

ix 


CONTENTS. 

Page 


§    470.  Pledgee's   lial)ilit3'   on   subscription   and   statutory   liability   on 

stock  .     .     .    ' 1300 

§    471.  Pledgee  has  no  right  to  sell  or  repledge  the  stock  even  temporarily, 

except  upon  notice,  unless  the  debt  is  assigned  with  the  stock       1300 

§    472.  Purchasers  or  pledgees  of  stock  from  pledgee  with  notice  are  not 

protected 1303 

§    473.  Bona  fide  repledgees  or  purchasers  of  pledged  stock  are  protected 

—  Pledgor's  remedies  —  Marshaling  the  assets 1305 

§    474.  Pledges  by  agents,  trustees,  executors,  etc.,  legally  and  in  breach 

of  trust 131S 

§    475.  Pledgor's  remedies 1317 

§  476.  Pledgee's  remedies  when  debt  secured  is  not  paid  —  Sale  and  de- 
ficiency     1327 

§    477.  Notice  of  sale  of  stock  by  pledgee  to  apply  to  debt  secured  — 

Waiver  of  notice 1335 

§    478.  Formalities  of  sale •     1339 

§    479.  If  the  pledgee  himself  purchases  at  the  sale,  then  the  sale  is 

voidable 1343 


CHAPTER   XXVII. 

480-491.  LEVY  OF  ATTACHMENT  AND  EXECUTION  UPON  SHARES 
OF  STOCK Pages  1350-1392 

480.  An  execution  at  common  law  could  not  reach  shares  of  stock       .     1350 

481.  Nor,  it  seems,  could  a  court  of  equity  subject  stock  to  the  pay- 

ment of  debts,  except  when  it  had  been  conveyed  away  fraud- 
ulently      .•     •     •     ^^^^ 

482.  By  statutory  provisions  executions  are  generally  sufficient   to 

reach  the  debtor's  stock  —  Strict  compliance  necessary  .     .     .     1353 

483.  Attachment  of  stock  as  allowed  by  the  statutes  of  the  various 

states 1355 

484.  Levy  of  attachment  or  execution  upon  stock  held  in  pledge  or  by 

trustee,  and  on  stock  which  the  debtor  has  fraudulently  trans- 
ferred away •     1357 

485.  Can  stock  or  certificates  of  stock  be  attached  elsewhere  than  ui 

the  state  creating  the  corporation  ? 1301 

486.  Rights  of  an  unregistered  transferee  of  a  certificate  of  stock  as 

against  an  attachment  or  execution  levied  on  that  stock      .     .     1365 

487.  In  California,  Delaware,  District  of  Columbia,  Idaho,  Kansas, 

Kentucky,  Louisiana,  IMichigan,  Minnesota,  Mississippi, 
Missouri,  Nebraska,  New  Jersey,  New  York,  North  Dakota, 
Ohio,  Oregon,  Pennsylvania,  South  Dakota,  Tennessee,  Texas, 
Utah,  Washington,  and  in  the  federal  courts  i)assing  upon  the 
transfer  of  national  liank  stock,  it  is  held  that  by  the  common 
law  tlie  unregistered  transferee  of  a  certificate  of  stock  is  pro- 
tected as  against  all  subsequent  attachments  or  executions 
levied  on  that  stock 1366 

488.  In    Illinois,    Maine,   Maryland,   Massachusetts,   Montana,   New 

Hampshire,  Rhode  Island,  Virginia,  West  Virginia,  Wisconsin, 
and  Wyoming,  the  statutes  have  prescribed  that  an  unregistered 
pur<-haser  or  pledgee  of  certificates  of  stock  shall  be  protected 
as  against  subsequent  attachments  or  executions  levied  upon 
that  stock 1373 

X 


CONTENTS. 

Page 

489.  Rights  and  duties  of  the  corporation  in  such  eases     .....     1378 

490.  In  Alabama,  Arkansas,  Colorado,  Connecticut,  Indiana,  Iowa, 

New  INIe.xico,  and  Vermont,  the  usual  statutes  requiring  trans- 
fers of  stock  to  be  registered  on  the  corporate  books  are  so  con- 
strued as  to  give  an  attachment  or  execution  precedence  over 
a  prior  unregistered  sale  or  pledge  of  the  certificates  of  stock  — 
Notice  of  transfer  without  registry  —  In  Ai-izona,  Florida, 
Georgia,  Hawaii,  Nevada,  North  Carolina,  Oklahoma,  and 
South  Carolina,  the  statutes  have  not  been  clearly  construed     1381 

491.  Shares  of  stock  cannot  be  subjected  to  the  paj'ment  of  the  stock- 

holder's debts  by  the  process  of  garnishment  unless  the  statutes 

so  provide 1390 


CHAPTER   XXVIII. 

§§  492-503.  CONSTITUTIONALITY  OP  AMENDMENTS  TO  CHARTERS 
—  RIGHT  OP  A  STOCKHOLDER  TO  OBJECT  .     Pages  1393-1425 

§    492.  A  corporate  charter  is  a  contract  between  three  parties  —  the 

state,  the  corporation,  and  the  stockholders 1393 

§    493.  The  charter  as  a  contract  between  the  corporation  and  the  stock- 
holders —  Amendment  of  charter  by  majority  of  stockholders 
as  allowed  by  statute  existing  at  time  of  incorporation    .     .     .     1393 

§    494.  Charter  as  a  contract  between  the  state  and  the  corporation  .     .     1395 

§§  495,  496.  Charter  as  a  contract  between  the  state  and  the  stock- 
holders      1397 

§    497.  Charter  amendments  imposed  upon  the  stockholders  —  Police 

power 1398 

§    498.  Charter  amendments  offered  to  the  stockholders 1404 

§    499.  Auxiliary  and  incidental  amendments  are  constitutional,  though 

some  of  the  stockholders  dissent 1404 

§    500.  ^Material  amendments  offered  to  the  stockholders  can  be  accepted 

only  by  a  unanimous  vote 1408 

§    501.  Amendments  imder  the  reserved  power  of  the  state  to  alter, 

amend,  or  repeal  the  charter 1409 

§    .502.  Dissentingstockholder'sremedy  against  an  illegal  amendment       .     1422 

§    503.  Assent  and  acquiescence  as  a  bar  to  the  stockholder's  remedy     .     1423 

CHAPTER   XXIX. 

§§  503a-510.  "TRUSTS"  AND  UNINCORPORATED  JOINT-STOCK  AS- 
SOCIATIONS             Pages  1426-1495 


503a.  Definition  and  legality  of  a  "trust"  —  Decisions  in  the  various 

states  on  this  subject  —  The  anti-trust  act  of  Congress  .     .     .     1426 

B.    UNINCORPORATED    JOINT-STOCK    ASSOCIATIONS. 

504.  Definitions  —  Joint-stock  associations,  clubs,  exchanges,  etc.  — 

Expulsion  —  Ownership  of  land 1465 

505.  Conduct  of  business  and  meetings  —  Statutory  joint-stock  as- 

sociation        1478 


CONTENTS. 


506.  Joint-stock  associations  may  arise  by  implication  of  law 

507.  How  a  person  becomes  a  member  —  Transfers       .     .     . 

508.  Liability  of  members  to  creditors  and  to  the  association 

509.  Actions  by  members  against  officers  and  the  association 

510.  Dissolution  —  Disposition  of  property 


Page 
1482 
1482 
1484 
1491 
1492 


CHAPTER   XXX. 


511-519.  STOCKHOLDERS'   RIGHT  TO  INSPECT  THE   BOOKS  OF 
THE  CORPORATION Pages  1496-1535 

511.  Common-law  rights 1496 

512.  Common-law  action  for  damages  for  refusal 1500 

513.  MaJidamus  is  the  preferable  remedy 1500 

514.  Not  granted  as  a  matter  of  course  unless  the  right  is  statutory   .  1502 

515.  When  it  will  and  will  not  be  granted  —  Foreign  corporation  .     .  1504 

516.  Allegation  and  form  of  writ 1512 

517.  Right  to  inspect  minutes  of  meetings  of  directors 1515 

518.  Statutes  giving  right  of  inspection 1516 

519.  Orders  to  corporation  to  allow  inspection  —  Subpoena  duces  tecum 

—  Bill  of  discovery 1519 


CHAPTER   XXXI. 

§5  520-533.  LIENS    OF    THE    CORPORATION    ON    STOCK    FOR  THE 
STOCKHOLDER'S  DEBTS  TO  THE  CORPORATION 

Pages  1536-1557 

§§520,521.  No  lien  at  common  law  .     . 1536 

§    522.  A  lien  may  be  created  by  statute,  by  charter,  or  possibly  by  by- 
law or  contract 1537 

§§52.3-525.  Notice  of  the  lien 1540,1541 

§    526.  The  lien,  when  established,  covers  all  the  stockholder's  shares  and 

dividends 1544 

§    527.  The  lien  protects  the  corporation  as  to  all  the  debts  due  to  it  from 

.    the  stockholder 1545 

§    52S.   Right  of  lien  as  against  miscellaneous  parties 1547 

§    529.  The  lien  can  be  enforced  for  the  benefit  of  the  corporation  only  .  1548 

§    530.  Methods  of  enforcing  the  lien 1548 

§    531.  The  corporation  may  waive  its  lien 1551 

§    532.  The  lien  as  affected  by  transfers  and  notice 1554 

§    533.  Liens  on  national-bank  stock 1557 


CHAPTER   XXXII. 


534-551.  DIVIDENDS 


Pages  1.558-1631 


§  534.  Definition  cf  a  dividend  and  the  four  kinds  of  dividends 

§  535.  Scrip  diviflends,  property  dividends,  and  bond  dividends 

§  .536.  Stock  divich'uds 

§  .').37.  Interest-bearing  stock 

§  5.38.  To  whom  the  corporation  is  to  pay  the  dividend  . 

§  .5.39.  To  whom  the  dividend  belongs 

§  540.  Dividends  must  be  equal  and  without  preferences 

xii 


15.58 
1562 
1566 
1570 
1570 
1573 
1577 


CONTENTS. 

Page 

§    541.  A  dividend  declared  and  specifically  set  apart  as  a  distinct  fund 

belongs  absolutely  to  the  stockholders 1579 

§§  542,  543.  It  is  a  debt  which  may  be  collected  by  legal  proceedings  1.581,  1582 
§    544.  Right  of  the  corporation  to  apply  dividends  to  the  payment  of 
debts  due  to  it  by  the  stockholder  —  Dividends  in  payment  of 

subscription  price  of  stock 1585 

§    545.  The    courts    very    rarely    compel    the    directors    to    declare    a 

dividend 1587 

§    546.  Dividends  can  usually  be  made  only  from  profits  —  Exceptions  to 

this  rule  —  What  are  profits  which  may  be  used  for  dividends      1595 

§    547.  A  stockholder  may  enjoin  an  illegal  dividend 1612 

§  548.  Dividends  which  impair  the  capital  stock  may  be  illegal,  and  may 
be  recovered  back  from  the  stockholders  —  Dividends  on  dis- 
solution     1614 

§    549.  Proceedings  to  recover  back  such  a  dividend 1618 

§    550.  The  liability  herein  of  the  corporate  officers 1621 

§    551.  Guaranty  of  dividends  by  contract 1631 


CHAPTER   XXXIII. 

§§  552-560.  LIFE  ESTATES  AND  REMAINDERS  IN  SHARES  OF  STOCK 

Pages  1632-1651 

§    552.  The  subject 1632 

§    553.  The    three    rules    in    regard    to    stock    or    extraordinary    cash 

dividends 1632 

§    554.  The  American  or  Pennsylvania  rule 1632 

§    555.  The  Massachusetts  rule 1638 

§§  556,  557.  The  EngUsh  rule 1640 

§    558.  The  apportionment  of  dividends 1643 

§    559.  The  right  to  subscribe  for  new  shares  as  between  life  tenant  and 

remainderman 1644 

§   560.  Miscellaneous  questions  herein 1646 


CHAPTER  XXXIV. 

§§  561-572e.  TAXATION  OF  SHARES  OF  STOCK  AND  OF  CORPORA- 
TIONS               Pages  1652-1707 

§   561.  The  different  methods  of  taxing  corporate  interests 1652 

A.    TAXATION    OF    SHARES    OF    STOCK. 

§  562.  Relation  of  stockholders. to  these  various  methods  of  taxation  .  1653 
§  563.  Tax  on  shares  of  stock  as  distinguished  from  the  other  methods  .  1654 
§    564.  Tax  by  a  state  or  municipality  on  stockholders  residing  in  the 

state  creating  the  corporation 1655 

§    565.  Tax  on  resident  stockholders  in  a  non-resident  or  foreign  cor- 
poration   1657 

§    566.  Tax  on  non-resident  stockholders  in  resident  or  domestic  corpora- 
tion —  Mode  of  collecting 1661 

§    567.  Double  taxation 1665 

§    568.  Exemptions  from  taxation  as  affecting  tax  on  shares  of  stock       .     1668 

xiii 


CONTENTS. 


B.    TAXATION    OF    NATIONAL-BANK    STOCK. 

Page 

§    569.  General  rules 1671 

§    570.  Place  in  which  shares  in  national-'bank  stock  may  be  taxed     .     .  1673 
§    571.  The   tax   must    not   be   greater   than   that   imposed   on   other 

"moneyed  capital" 1674 

§    572.  The  bank  may  bring  suit  to  restrain  illegal  tax  on  its  stock- 
holders       1679 

C.    OTHER    METHODS    OF    TAXING    CORPORATIONS. 

§    572a.  General  principles ,     .     .  1681 

§    5726.   Exemptions  from  taxation 1690 

§    572c.    Taxation  of  foreign  corporations 1696 

§    572f/.  Taxation  must  not  interfere  with  interstate  commerce      .     .     .  1700 

§    572e.   Inheritance  and  income  taxes 1703 


CHAPTER   XXXV. 

§§  573-587.  FORMS    OF    ACTIONS    AND    MEASURE     OF    DAMAGES 

WHERE    A   STOCKHOLDER   HAS   BEEN    DEPRIVED     OF  HIS 

STOCK Pages  1708-1736 

§    573.  Pleading  and  practice  in  actions  relative  to  stock 1708 

§    574.  Assumpsit 1708 

§    575.  Trespass  on  the  case 1709 

§    576.  Trover 1710 

§    577.  Detinue  and  reple\an 1715 

§    578.  Money  had  and  received  —  Claim  and  delivery 1716 

§    579.  Bill  in  equity 1716 

§    580.  Pleading  under  the  codes 1720 

§    581.  The  measure  of  damages  —  (a)  The  first  rule  —  Value  how  shown 

when  there  is  no  market  value 1720 

§    582.   (b)  The  second  rule 1729 

§    583.   (c)  The  third  rule 1729 

§    584.  Interest,  dividends,  and  special  damages 1731 

§    585.  Nominal  damages 1733 

§    586.  Damages  for  failure  to  complete  a  purchase  of  stock  and  for 

fraud  inducing  a  purchase  of  stock 1733 

§    587.  Damages  in  actions  between  stockbrokers  and  their  customers    .  1736 


CHAPTER  XXXVI. 

§§588-601.  STOCKTIOLDKHS'    MEETINGS  —  CALLS,    TIME,    PL.\CE, 
AND  CLASSES  OF  .MEETINGS Pages  1737-1761 

§    588.  Introductory I737 

§    589.  The  place  of  meeting  of  stockholders  must  be  within  the  state 

creating  the  corporation 1737 

§§590.  .')91.   First  meeting  under  a  special  charter 1740 

§    .")92.   Directors'  meetings 1741 

§    593.  By  whom  and  when  stockholders'  meetings  are  to  be  called  — 

Miuidtinnt.s — Fraud  in  t lie  call 1741 

§    594.  Wlicn  tli«'  stockliohh-rs  are  entitled  to  notice  of  corporate  meetings  1746 

xiv 


CONTENTS. 

Page 

§    595.  The  essential  elements  of  a  notice  of  a  meeting  are  time,  place, 

and  business 1747 

§    596.  Service  of  the  notice 1751 

§    597.  Notice  must  be  served  a  reasonable  time  before  the  meeting  .     .  1753 

§    598.  The  division  of  meetings  into  ordinary  and  extraordinary  .     .     .  1754 

§    599.  Waiver  of  notice 1754 

§    600.  Notice  is  presumed  to  have  been  regularly  given 1758 

§    601.  Adjourned  meetings 1759 


CHAPTER   XXXVII. 

§§  602-627.  ELECTIONS  AND  OTHER  CORPORATE  MEETINGS 

Pages  1762-1905 

§    602.  Scope  of  the  subject 1763 

§    603.  Elections  are  to  be  by  the  stockholders,  and  may  be  compelled  by 

mandamus .- 1763 

§    604.  The  meeting  must  be  held  at  the  prescribed  hour,  which  must  be 

reasonable 1764 

§    605.  Inspectors  of  election  —  Conducting  and  closing  elections  .     .     .     1765 
§    606.  Conducting  and  closing  meetings  generally  —  Irregularities  and 

informalities  —  Minutes  of  meeting 1767 

§  607.  The  quorum  —  A  majority  of  the  stockholders  attending  a  meet- 
ing may  transact  business 1772 

§    608.  The  majority  of  votes  cast  constitutes  an  election 1775 

§    609.  Is  every  share  of  stock  entitled  to  one  vote  ? 1777 

§    609a.  Cumulative  voting 1779 

§    610.  Proxies 1783 

§    611.  The  stock-book  as  evidence  of  a  right  to  vote 1788 

§    612.  The  right  of  trustees,  pledgees,  administrators,  etc.,  to  vote    .     .     1793 
§    613.  The  corporation  cannot  vote  upon  shares  of  its  own  stock  .     .     .     1801 

§    614.  Issuing  stock  in  order  to  carry  an  election 1802 

§    615.  Where  a  corporation  owns  a  majority  of  the  stock  of  a  rival  com- 
pany, may  it  vote  the  stock  and  control  the  latter  company  ?       1804 
§    616.  Illegal  or  fraudulent  elections  —  The  remedy  of  injunction  against 

elections  and  against  voting  particular  stock 1810 

§    617.  Illegal  or  fraudulent  elections  —  The  remedies  of  quo  warranto 

and  mandamus 1816 

§  618.  Illegal  or  fraudulent  elections  —  The  remedy  by  injunction 
against  directors  acting,  and  the  remedy  of  a  suit  in  equity 
where  the  validity  of  the  election  arises  incidentally  —  Re- 
ceivers and  masters  in  chancery  at  elections 1819 

§    619.  Illegal  or  fraudulent  elections  —  Statutory  remedy  by  petition  to 

a  court  of  equity 1824 

§    620.  Who  may  complain  of  an  illegal  election  —  A  new  election  is  not 

gi'anted  if  the  result  will  be  the  same 1826 

§    621.  "Corners"  in  stock  — "Pools" 1830 

§  622.  Voting  trusts  and  pooling  agreements  —  Restrictions  on  right  to 
vote  or  sell  stock  —  Contracts  as  to  voting,  elections,  directors,  > 

and  control 1832 

(a)  Contracts  between  stockholders  to  vote  together  —  Contracts 
involving  changes  of  officers,  and  payment  of  salaries  —  Re- 
strictions by  by-law  or  contract  as  to  amendments  to  charter, 

etc ■ 1833 

(5)  Restrictions  on  the  right  to  vote 1842 

XV 


CONTENTS. 

Page 
(c)  Contracts  between  stockholders  not  to  sell  their  stock  except 
to  each  other  or  on  condition  that  the  purchaser  will  purchase 

all  of  the  stock 1845 

((/)  Charter  provisions  and  by-laws  restricting  the  right  to  sell 

stock 1851 

(e)   Irrevocable  proxies 1856 

if)    Deposit  of  certificate  of  stock  with  trustees,  either  with  or 

without  a  transfer  of  same  to  the  trustees 1857 

(g)   One  corporation  owning  and  holding  the  stock  of  other  cor- 
porations       1873 

(h)  Voluntary  associations  to  acquire,  hold,  and  vote  shares  of 
stock 1874 

623.  Who    may   be   a   director   or   corporate   officer  —  Qualification 

shares 1889 

624.  Acceptance  and  resignation  of  office  and  failure  to  elect  directors 

—  Removal  of  directors 1897 

625.  Stockholders  can  act  only  at  corporate  meetings 1904 

626.  627.  Stockholders  cannot  carry  on  the  business  of  or  enter  into 

contracts  for  the  corporation 1905 


CHAPTER   XXXVIII. 

§§  628-642.  DISSOLUTION,  FORFEITURE,  AND  IRREGULAR  INCOR- 
PORATION           Pages  1906-2003 

§    628.  Methods  of  dissolution 1906 

§§  629,  630.  Dissolution  by  the  stockholders  —  A  court  of  equity  has  no 
power  to  dissolve  a  corporation  —  Receiver,  and  distribution  of 

assets  by  court  of  equity  —  Statutory  dissolution  .     .     .     1907,  1920 

§    631.  Acts  which  do  not  constitute  dissolution 1921 

§    632.  Only  the  attorney-general  is  authorized  to  institute  a  suit  to  for- 
feit a  corporate  charter 1924 

§    633.  Forfeiture   for   misuser  —  Acts   which   constitute   a   misuser  — 

Ultra  vires  acts  and  usurpation  of  franchises 1925 

§    634.  Non-user  as  a  cause  for  forfeiture  —  Forfeiture  for  failure  to  com- 
plete a  railroad  or  enterprise 1938 

§    635.  Injunction  at  the  instance  of  the  state 1943 

§    636.  The  state  may  waive  its  right  to  forfeit  a  charter 1947 

§    637.  Who  may  allege  that  forfeiture  or  non-incorporation  or  dissolu- 
tion exists  —  De  facto  corporations 1948 

§    638.   Lapse  of  charter  by  failure  to  comply  with  conditions    ....  1967 

§§  a39,  (V40.   Repeals  of  charters  —  Right  of  stockholders  to  object      .     .  1971 

§1  641.  The  assets  upon  dissolution  —  Distribution 1973 

§    642.  The  liabilities  upon  dissolution,  consolidation,  or  sale     ....  1990 


XVI 


CHAPTER   XX. 

SALES  OF  STOCK— THE   FORMATION  AND  PERFORMANCE    OF 
THE  CONTRACT  —  GAMBLING  SALES  — FRAUDULENT  SALES. 


A.     FORMATION     AND     PERFORMANCE     OF 
CONTRACTS    TO    SELL    STOCK. 

§  33L  Shares    of    stock    are    transfer- 
able. 

332.  Restrictions    on    right    to    sell 

stock  and  contracts  against 
selling. 

333.  "Pools,"  "corners,"  and  combi- 

nations in  stock. 

334.  Contract  for  sale  of  stock  may 

be  valid  without  delivery  or 
specific  time  for  delivery  — 
Construction  of  various  con- 
tracts. 

335.  336.  Remedies  for  breach  of  a 

contract  to  sell  stock  —  Ten- 
der. 

337,  338.  Specific  performance  as  a 
remedy  for  breach  of  a  con- 
tract to  buy  or  sell  stock. 

339,  340.  Statute  of  frauds  as  af- 
fecting sales  of  stock  — 
Agreement  to  repurchase. 

B.     GAMBLING    SALES    OF    STOCK. 

341.  What    are    gambling    sales    of 

stock. 

342.  Statutes  prohibiting  wager  con- 

tracts, and  also  certain  stock 
contracts. 


§  343.  Test  of  legality  of  stock  trans- 
action. 

344.  When  intent  to  deliver  is  ques- 

tion for  the  jury  and  when 
not. 

345,  346.  Gambling  stock  contracts 

as  affecting  the  relations  be- 
tween the  principal  and  his 
broker. 
347,  348.  Gambling  stock  transac- 
tions, as  affecting  notes, 
bonds,  mortgages,  etc.,  grow- 
ing out  thereof. 


FRAUD  AS  AFFECTING  A  SALE  OF 
STOCK. 


349. 
350. 


351. 

352, 

354. 
355. 
356. 
357. 


Extent  of  subject  treated  herein. 

What  has  been  held  to  consti- 
tute a  fraud  herein  —  Pur- 
chase with  knowledge  of  pre- 
vious sale. 

Fraudulent  sale  by  agent,  etc., 
in  breach  of  trust. 

353.  Fraud  may  be  by  corporate 
reports  or  prospectus. 

Remedies  for  the  fraud. 

Action  for  deceit. 

Remedy  in  equity. 

Fraud  in  selling  stock  may  be 
criminal. 


A.    FORMATION   AND   PERFORMANCE   OF   CONTRACTS   TO    SELL   STOCK. 

§  33L  Shares  of  stock  are  transferable.  — That  shares  of  stock  in 
a  corporation  are  transferable  the  same  as  other  personal  property  is 
a  principle  of  law  coeval  with  the  existence  of  stock  itself.  The  few 
decisions  holding  that  shares  of  stock  were  real  estate  were  exceptional 
rulings,  and  are  no  longer  considered  good  law.^  Courts  of  law  and  of 
equity  have  guarded  jealously  the  facilities  for  the  transfer  of  title  to 
stock,  and  all  unreasonable  attempts  to  restrain  the  right  of  passing 
title  have  been  declared  void  as  against  public  poHcy.  The  right  to 
transfer  stock  is  of  vital  importance,  since  the  two  chief  causes  of  the 
phenomenal  growth  of  corporations  in  recent  times  are  the  limited  lia- 

^  See  §  12,  supra. 
1003 


§§  332-334.]      CONTRACTS   TO    SELL  —  GAMBLING    SALES,    ETC.  [cH.  XX. 

billty  of  the  members  and  the  facihty  of  buying  or  selling  an  interest 
in  the  corporation  by  a  transfer  of  the  stock  a  person  has  therein.  The 
common  law  regards  shares  of  stock  as  personal  property,  capable  of 
ahenation  or  succession  in  any  of  the  modes  by  which  personal  property 
may  be  transferred.^ 

§  332.  Restrictions  on  right  to  sell  stock  and  contracts  against 
selling.  —  By-laws  restricting  the  sales  of  stock  and  contracts  against 
selling  are  generally  made  in  connection  with  contracts  for  voting  at 
elections  so  as  to  control  the  management  of  corporations.  These 
two  classes  of  contracts,  to  sell  together  and  to  vote  together,  are  closely 
allied,  and  consequently  are  treated  under  the  subject  of  "  Elections," 
in  another  part  of  this  work.^ 

§  333.  "  Pools,"  "  corners,"  and  combinations  in  stock.  —  This  sub- 
ject also  is  closely  connected  with  the  subjects  of  restrictions  on  the 
right  to  vote  and  pooling  arrangements  for  the  purpose  of  controlling 
elections,  and  consequently  is  considered  elsewhere.^ 

§  334.  Contract  for  sale  of  stock  may  he  valid  without  delivery  or 
specific  time  for  delivery  —  Construction  of  various  contracts.  —  Gen- 
erally a  sale  of  stock  is  attended  with  an  immediate  delivery  of  the 
certificates  therefor,  or  it  is  agreed  that  the  certificates  shall  be  delivered 
at  some  specified  time  in  the  future.  If,  however,  the  vendor  offers  to 
sell  his  stock  and  the  vendee  accepts  the  offer,  the  contract  is  complete 
and  binds  both  parties,  although  nothing  has  been  said  as  to  the  time 
when  the  certificates  of  stock  shall  be  delivered.  The  law  implies  that 
the  contract  will  be  performed  by  a  delivery  of  the  certificates  immedi- 
ately or  within  a  reasonable  time,  and  either  party  may  insist  upon 
carrying  out  the  contract.^     It  has  been  held  that  an  option  for  which 

1  Mobile  Mut.  Ins.  Co.  v.  Cullom,  49  though  the  certificates  are  not  for- 
Ala.    558    (1873) ;     Cole   v.    Ryan,   52    warded  with  the  draft. 

Barb.    168    (1868);     Heart    v.    State  ."The  performance  of  a  contract,  or 

Bank,  2  Dev.  Eq.  (N.  C.)  Ill  (1831);  the  tender  of  performance,  is  no  part 

Allen  V.  Montgomery  R.   R.,   11  Ala.  of    the    contract.     The    making   of   a 

437,  451   (1847) ;    Boston  Music  Hall  contract  is  one  thing,  but  the  perform- 

Assoc.  V.  Cory,  129  Mass.  435  (1880) ;  ance   thereof,    or    the   tender   of   per- 

Sargent  v.  Franklin  Ins.  Co.,  25  Mass.  formance,  is  another  and  quite  differ- 

90    (1829) ;     Chouteau    Spring    Co.    v.  ent  thing.     The  contract  set  up  in  the 

Harris,  20  Mo.  382   (1855)  ;    Poole  i'.  paragraph  in  question  is  an  executory 

Middleton,     29     Beav.     646     (1861);  one,  by  which  the  plaintiff  agreed  to 

Brightwell  v.  Mallory,  10  Yerg.  (Tenn.)  sell  to  the  defendant  the  shares  of  the 

196  (1836).  stock,  and  the  defendant  agreed  to  pay 

2  See  §  622,  infra.  him  therefor  the  sum  of  $25.  No 
'  See  §§  621 «,  622,  infra.  time  was  fixed  for  the  performance ;  the 
*  Quoted    and    approved    in    Mason  law  will  imply,  therefore,  that  it  was  to 

V.  Lievre,  145  Cal.  514  (1904),  holding  be  performed  immediately,  or  perhaps 
that  where  an  offttr  to  buy  is  accepted  witliin  a  reasonable  time.  Had  a 
and  the  vendor  forwards  a  draft  for  future  day  been  agreed  upon  for  the 
the   price    the   sale    is    binding,    even    performance  of  the  contract  on  each 

1004 


CH.  XX.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[§  334. 


nothing  is  paid  is  unilateral,  and  hence,  even  though,  by  a  subsequent 
writing,  the  option  is  exercised,  it  cannot  be  enforced  as  against  the  other 


side,  there  could  have  been  no  doubt 
as  to  its  validity,  or  the  right  of  either 
party  to  enforce  it,  he  having  done  all 
he  was  required  to  do  on  his  part. 
The  fact  that  no  time  was  agreed  upon 
for  performance  does  not  change  the 
character  of  the  contract.  The  con- 
tract did  not  pass  any  title  to' the  stock, 
but  it  was,  nevertheless,  a  valid  con- 
tract, and  one  which  either  party  can 
enforce,  he  having  been  in  no  default 
himself."  Such  is  the  law  as  laid 
down  in  Bruce  v.  Smith,  44  Ind.  1 
(1873)  -,  Kerehner  v.  Gettys,  18  S.  C. 
521  (1882)  ;  Cheale  v.  Kenward,  3  De 
G.  &  J.  27  (1858).  A  ^\Titten  agree- 
ment of  the  vendor  to  sell  and  a  -^vTitten 
agreement  of  the  vendee  to  buy  at  any 
time  within  a  year,  has  a  sufficient 
consideration.  Hardin  v.  Case,  134 
Ga.  813  (1910).  Where  a  subscriber 
to  stock  makes  a  part  payment  and 
then  declines  to  pay  the  balance,  and 
thereupon  a  director,  to  induce  him  to 
pay,  guarantees  to  pay  a  certain 
dividend  and  agrees  to  buy  the  stock, 
the  director  is  not  bound,  since  there 
was  no  consideration.  Marinovich  v. 
Kilburn,  153  Cal.  638  (1908).  A 
purchaser  of  stock  at  auction  sale  may 
enforce  the  contract  where  the  auction- 
eer declared  the  property  sold.  Meyer 
V.  Redmond,  141  N.  Y.^App.  Div.  123 
(1910).  An  offer  which  is  accepted 
with  a  partial  payment  made  in  cash  is 
a  completed  sale,  and  not  a  mere  option 
to  purchase,  even  though  the  buyer 
offered  to  execute  a  collateral  note, 
which  would  be  the  equivalent  of  a 
forfeiture  of  the  partial  paj-ment,  if  the 
sale  was  not  completed.  Cooper  v. 
Bay  State,  etc.  Co.,  127  Fed.  Rep.  482 
(1904).  A  contract  by  which  the  ven- 
dors of  the  entire  capital  stock  of  the 
company  agree  that  the  purchaser 
shall  have  entire  control  and  man- 
agement of  the  business  for  fifteen 
months,  and  elect  officers  and  direc- 
tors during  that  time,  at  the  end  of 
which  time  he  is  to  pay  for  the  stock, 
it  appearing  that  third  parties  were 
not  affected  thereby,  is  legal.  Bor- 
land V.  Prindle,  etc.  Co.,  144  Fed.  Rep. 
713  (1906).     A  contract  by  Awhich  the 


president  agrees  to  give  fifty  shares  of 
stock  to  an  employee  who  lives  up  to 
his  contract  -nath  the  corporation, 
has  no  consideration  and  cannot  be 
enforced,  although  it  might  be  other- 
wise if  the  employee  could  prove  that 
he  entered  into  the  contract  with  the 
corporation  by  reason  of  such  prom- 
ise. Petze  V.  Leary,  117  N.  Y.  App. 
Div.  829  (1907).  A  transfer  of  stock 
by  several  persons  to  a  trust  company 
for  five  years  under  an  agreement  by 
one  of  them  to  buy  the  stock  at  that 
time  if  the  other  parties  ^\ashed,  is 
not  enforceable  if  they  wait  over  a 
year  after  the  expiration  of  the  five 
years  before  giving  notice  of  their 
^ish  to  sell.  Hollis  v.  Libby,  101  Me. 
302  (1906).  An  offer  to  buy  stock 
after  six  months  at  a  price  fix:ed  may 
be  accepted  sLxty  days  after  such  six 
months.  Ellis's  Adm'r  v.  Durkee,  79 
Vt.  341  (1906).  Usage  may  deter- 
mine what  is  a  reasonable  time  for 
delivery.  Seven  days  held  reasonable. 
Stewart  v.  Cauty,  8  M.  &  W.  160 
(1841).  In  a  contract  by  which  one 
"agrees  to  deliver"  to  the  other  cer- 
tain stock  at  a  certain  price,  perform- 
ance is  to  be  within  a  reasonable 
time,  and  the  vendor  may  tender  the 
stock  and  then  sue  for  the  price. 
Boehm  v.  Lies,  60  N.  Y.  Super.  Ct.  436 
(1892).  A  contract  of  sale  may  be 
an  executed  contract,  even  though  it 
reads  that  the  parties  "have  agreed 
to  sell."  State  v.  Whited,  etc.,  104 
La.  125  (1900).  Where  two  persons 
own  a  share  of  stock  in  common,  each 
agreeing  to  pay  one-half  of  future  as- 
sessments, and  one  of  them  gives  his 
interest  to  the  other  if  the  latter  will 
pay  future  assessments,  this  is  a  sale 
and  transfers  title.  Boll  v.  Camp,  118 
Iowa,  516  (1902).  Specific  perform- 
ance of  a  contract  to  sell  stock  will 
not  be  enforced,  where  the  time  of 
performance  and  of  payment  is  not 
fixed,  and  where  five  years  have 
elapsed,  and  where  the  vendee,  the 
corporate  secretary,  misrepresented 
the  value  of  the  stock  to  the  vendor. 
Todd  V.  Diamond  State  Iron  Co.,  8 
Houst.   (Del.)  372  (1889).     An  agree- 


1005 


334. 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC, 


party,  there  being  no  new  offer  or  consideration  at  the  time  of  the  exer- 
cise of  the  option.^     A  contract  whereby  the  vendee  of  bank  stock  agrees 


ment  to  transfer  stock  at  any  time  to 
a  trustee  for  creditors  is  not  enforce- 
able against  the  insolvent  estate  of 
the  deceased  stockholder.  Chafee  v. 
Sprague,  16  R.  I.  189  (1888).  A  vague 
offer  to  sell  stock,  with  a  statement 
that  the  stock  could  probably  be  sent 
with  a  draft,  even  when  accepted  with 
a  direction  to  send  it  on,  does  not 
make  a  binding  contract.  Topliff  v. 
McKendree,  88  Mich.  148  (1891). 
Where  stock  is  sold  on  condition  that 
the  vendee  shall  be  "in  a  position  to 
take  up  the  stock,"  the  condition  is 
fulfilled  if  the  vendee  accepts  the 
stock  and  acts  as  a  director,  and  holds 
the  stock  for  five  months.  Wills  v. 
Fisher,  112  N.  C.  529  (1893). 

»  Weseott  V.  Mitchell,  95  Me.  377 
(1901).  A  unilateral  contract  is  not 
binding.  A  consideration  must  exist 
or  the  covenants  be  mutual.  Jordan 
V.  Indianapolis,  etc.  Co.,  61  N.  E.  Rep. 
12  (Ind.  1901);  s.  c,  159  Ind.  337. 
An  agreement  of  a  party  to  sell  and 
convey  stock  to  another  for  cash,  a 
small  amount  of  which  is  paid  down, 
and  the  cancellation  of  certain  accounts, 
is  not  an  option  but  a  sale,  and  the 
seller  may  sue  for  the  price.  Hender- 
son V.  Phillips,  178  Fed.  Rep.  374 
(1910).  An  agreement  that  stock  left 
on  deposit  should  be  delivered  to  a 
party  if  he  pays  for  it  is  an  option. 
Fry  V.  Thorne,  64  Wash.  479  (1911). 
An  option  to  sell  stock,  if  accepted, 
becomes  a  contract.  Russ  v.  Tuttle, 
158  Cal.  226  (1910).  Under  an  option 
to  pay  a  certain  sum  by  a  certain  date 
or  else  return  the  stock,  records,  etc., 
notice  of  such  return  must  be  given  on 
or  before  the  date  personally,  even 
though  the  vendor  lives  out  of  the 
state.  Otherwise  the  parties  are  lia- 
ble for  the  price.  Guss  v.  Nelson,  14 
Okla.296  (1904).  Cf.  130  Pac.  Rep.  1074. 

In  the  ease  Clark  v.  Campbell,  23 
Utah,  569  (1901),  the  court  discussed 
the  question  of  whether  an  option, 
given  without  consideration,  was 
binding.  Where  an  option  to  pur- 
chase stock  provides  for  immediate 
delivery  in  the  hands  of  a  third  person, 
and  for  payment  by  installments  in  ease 


the  option  is  exercised,  the  payment 
of  the  first  installment  constitutes  an 
exercise  of  the  entire  option.  Obery 
V.  Lander,  179  Mass.  125  (1901).  An 
option  to  sell  mining  stock,  with  no 
definite  time  fixed  as  to  the  duration 
of  the  option,  may  be  revoked  three 
months  later,  no  sale  having  been 
made  in  the  meantime ;  and  a  subse- 
quent sale  by  the  owner  of  the  stock 
at  an  advanced  price  to  a  party  whom 
the  party  receiving  the  option  had 
been  negotiating  with  does  not  entitle 
such  party  receiving  the  option  to 
any  interest  in  the  sale.  Rees  v.  Pel- 
low,  97  Fed.  Rep.  167  (1899),  the  court 
holding  that  such  an  option  may  be 
terminated  at  any  time  in  good  faith. 
The  various  stockholders  of  a  com- 
pany may  give  interchangeably  a  first 
option  of  thirty  days  to  purchase  their 
shares  of  stock  whenever  any  one  de- 
sires to  sell,  each  contracting  for  him- 
self, the  contract  further  providing 
that  such  thirty  days  are  to  commence 
in  case  of  the  death  of  a  stockholder, 
so  far  as  his  stock  was  concerned,  and 
they  may  further  contract  that  another 
person  is  to  have  a  simUar  option 
in  case  the  first  option  is  not  exercised. 
A  party  entitled  to  such  option  may 
have  specific  performance  of  it. 
The  mutual  covenants  of  the  contract 
are  a  sufficient  consideration  to  sup- 
port it.  Scruggs  V.  Cotterill,  67  N.  Y. 
App.  Div.  583  (1902).  A  contract  of 
sale  of  stock,  to  be  delivered  in  blocks 
of  five  shares  or  more  as  called  for 
by  the  vendee,  is  not  an  option,  but 
an  obligation  on  the  part  of  the  vendee 
to  purchase,  and  if  he  does  not  call 
for  the  stock  it  may  be  tendered 
within  a  reasonable  time  and  the 
price  recovered,  and  the  vendor  may 
obtain  judgment  and  retain  the  stock 
until  payment  is  made.  Cragin  v. 
O'Connell,  50  N.  Y.  App.  Div.  339 
(1900) ;  aff'd,  169  N.  Y.  573.  An  op- 
tion to  sell  certain  stock  at  a  certain 
price  "on  or  after  three  months  from 
November  6,  1891,"  must  be  exercised 
within  a  reasonable  time  thereafter 
and  cannot  be  exercised  seven  years 
thereafter.     McCracken  v.  Harned,  66 


1006 


<?H.  XX.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  334. 


not  to  sell  it  until  he  has  first  offered  it  to  the  vendor  at  the  book  value 
of  the  stock,  sustains  a  suit  for  damages  if  the  vendee  sells  with- 
out first  making  such  offer.  The  damage  is  nominal  unless  special 
damage  is  proved,  and  damage  cannot  be  recovered  for  loss  of  control 
of  the  corporation  by  reason  of  such  breach.^  Where  the  vendor  says, 
in  his  contract,  "  I  have  sold  "  certain  stock,  deliverable  at  seller's 
option,  within  a  specified  time,  a  sale  in  praesenti  is  made,  and  the  ven- 
dor assumes  to  have  the  stock  and  to  hold  it  for  the  benefit  of  the  pur- 
chaser until  delivery .2  An  agreement  to  pay  for  property  when  a  cor- 
poration is  created  is  enforceable  after  an  organization  is  effected  even 
though  it  is  not  a  legal  incorporation.^  A  sale  of  stock  with  an  agree- 
ment to  take  it  back  whenever  the  vendee  desires  is  an  enforceable 
contract,  even  though  the  contract  is  oral.^ 

Great  difficulty  often  arises  in  determining  whether  a  contract  of 
sale  of  stock  is  an  executed  or  is  merely  an  executory  contract  of  sale. 
There  are  a  few  general  rules  on  this  subject,^  but  each  contract  for  the 


N.  J.  L.  37  (1901).  An  offer  to  buy 
stock,  open  to  acceptance  after  Janu- 
ary 1,  must  be  accepted  before  July 
9.  Park  v.  Whitney,  148  Mass.  278 
(1889).  An  option  to  purchase  stock 
within  three  years  is  enforceable, 
though  one  party  has  an  option  which 
the  other  has  not.  Seddon  v.  Rosen- 
baum,  85  Va.  928  (1889).  An  option 
running  to  two  persons  cannot  be  ex- 
ercised by  one  of  them.  Pratt  v. 
Prouty,  104  Iowa,  419  (1898).  A  per- 
son holding  stock  in  escrow  under  an 
option  agreement  may  interplead  be- 
tween the  parties  in  interest  if  they 
make  conflicting  claims.  Walker  v. 
Bamberger,  17  Utah,  239  (1898). 
Where  the  owner  of  , stock  offers  to 
sell  it  to  a  person  at  a  certain  price, 
the  offer  to  remain  open  until  a  cer- 
tain date,  the  contract  is  not  unilat- 
eral, if  the  latter  accepts  the  offer 
within  that  time.  If  the  vendor  then 
avoids  the  vendee  so  that  the  vendee 
is  unable  to  tender  the  money,  tender 
is  excused  and  the  vendee  may  sue 
the  vendor  for  breach  of  contract. 
Guilford  v.  Mason,  24  R.  I.  386  (1902). 
An  agreement  giving  the  owner  of 
stock  the  right  to  tender  it  to  another 
person  at  a  stated  price  must  be  exer- 
cised within  a  reasonable  time.  If  he 
delays  in  exercising  his  option  for  six- 
teen months,  and  in  the  meantime  the 
stock  has  declined  in  value,  he  cannot 


enforce  it.  Electric,  etc.  Co.  v.  Smith, 
113  N.  Y.  App.  Div.  615  (1906). 

1  Cothran  v.  Witham,  123  Ga.  190 
(1905). 

2Currie  v.  White,  45  N.  Y.  822 
(1871).  When  the  option  is  exercised, 
the  time  of  delivery  as  fixed  is  as 
though  that  time  had  been  specified 
in  the  original  contract.  Kelley  v. 
Upton,  5  Duer,  336  (1856),  holds 
otherwise  where  the  contract  has  also 
the  words  "at  buyer's  option  in  ninety 
days."  Such  a  contract  is  executory 
as  to  time  of  passing  title,  and  tender 
is  necessary. 

^Childs  V.  Smith,  46  N.  Y.  34 
(1871),  rev'g  55  Barb.  45.  If  stock 
is  sold  conditionally,  and  the  condi- 
tion does  not  happen,  the  sale  is  void. 
Mitchell  V.  Wedderburn,  68  Md.  139 
(1887).  See  also  §335,  infra.  A  sale 
of  stock  to  be  paid  for  if  the  buyer 
obtained  control  of  the  company  and 
within  foixr  years  sold  its  property  or 
received  profits  for  a  certain  sum,  is  a 
conditional  sale  and  title  does  not  pass 
until  one  of  the  conditions  is  fulfilled. 
Kennedy  v.  Lee,  147  Cal.  596  (1905). 
If  both  the  vendor  and  vendee  of  stock 
are  ignorant  that  the  charter  has  ex- 
pired, this  does  not  invalidate  the  sale. 
Brooks  V.  Camak,  130  Ga.  213  (1908). 

*  See  §  339,  i7ifra. 

^  A  contract  of  sale  of  stock  was 
worded  as  follows : 


1007 


§334. 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[CH.  XX. 


sale  of  stock  is  construed  and  enforced  by  the  courts  according  to  the 
intent  of  the  parties  as  manifested  by  the  written  terms  and  conditions 
of  the  contract  itself.  Various  contracts  relative  to  the  sale  of  stock  are 
explained  and  referred  to  in  the  notes  below.^ 


"I  hold  of  the  stock  of  the  Wash- 
ington and  Hope  Railway  Company 
$33,250  or  1350  shares,  which  is  sold 
to  Paul  F.  Beardsley  [the  appellee], 
and  which,  though  standing  in  my 
name,  belongs  to  him,  subject  to  a 
payment  of  $8,000,  with  interest  at 
same  rate  and  from  same  date  as 
interest  on  my  purchase  of  Mr. 
Alderman's  stock." 

The  court  held  that  this  was  an 
executed  contract  by  which  the  owner- 
ship of  the  stock  passed  to  the  pur- 
chaser, with  a  reservation  of  title, 
simply  as  security  for  the  purchase- 
money  —  an  equitable  mortgage.  The 
court  pointed  out  the  dilference  be- 
tween an  executed  and  executory  con- 
tract of  sale  as  follows  : 

"If  an  agreement  to  sell,  the  mov- 
ing party  must  be  the  purchaser.  If  a 
sale,  an  executed  contract  with  reser- 
vation of  security,  the  moving  party 
is  the  vendor,  the  one  retaining 
security.  If  an  agreement  to  sell,  the 
moving  party,  the  piu"chaser,  must 
within  a  reasonable  time  tender  per- 
formance or  make  excuse  therefor. 
If  an  executed  contract,  a  completed 
sale,  then  the  moving  party  is  the 
vendor,  the  security-holder,  and  he 
assumes  all  the  burdens  and  risks  of 
delay.  ...  It  is  not  always  easy 
to  determine  whether  an  instrument 
is  a  contract  of  sale  or  one  to  sell ; 
yet  certain  rules  of  interpretation 
have  become  established.  .  .  .  Where 
the  buyer  is  by  the  contract  bound  to 
do  anything  as  a  consideration,  either 
precedent  or  concurrent,  on  which 
the  passing  of  the  property  depends, 
the  property  will  not  pass  until  the 
condition  be  fulfilled,  even  though 
the  goods  may  have  been  actually 
delivered  into  the  possession  of  the 
buyer."  Beardsley  v.  Beardsley,  138 
U.S.  262  (1891). 

1  An  auctioneer  of  stock  who  does 
not  tell  who  owns  the  stock  which  is 
sold  may  be  held  liable  for  failure  to 
deliver.   Meyer  v.  Redmond,  205  N.  Y. 


478  (1912).  The  agreement  by  the 
trustee  of  treasury  stock  that  for  every 
five  shares  he  sold  he  would  sell  one 
share  for  a  director  may  be  enforced 
by  the  latter,  even  though  he  took 
part  in  selling  the  treasury  stock  with- 
out insisting  on  his  rights  at  that  time. 
Quinn  v.  Whitney,  204  N.  Y.  363 
(1912).  A  demand  is  necessary  before 
the  vendee  can  sue  for  damages  for 
failure  of  the  vendor  to  deliver  the 
stock  where  no  time  for  delivery  had 
been  agreed  upon.  Spencer  v.  Hardin, 
149  N.  Y.  App.  Div.  667  (1912).  The 
defense  in  New  York  State  that  the 
tax  stamps,  which  must  be  attached 
to  a  sale  of  stock,  had  not  been  at- 
tached must  be  pleaded.  Bean  v. 
FHnt,  204  N.  Y.  153  (1912).  Where 
an  offer  for  stock  is  made  and  accepted 
and  the  vendor  directs  a  depositary 
of  stock  to  deliver  it,  this  makes  a 
complete  contract.  Clubb  v.  Scullin, 
235  Mo.  585  (1911).  An  agreement 
to  dehver  stock  to  the  amount  of 
$12,000  means  par  value.  Peek  v. 
Steinberg,  124  Pac.  Rep.  834  (Cal. 
1910).  Where  a  person  purchases 
stock  on  the  understanding  that  an- 
other person  would  take  a  part  of  it 
off  his  hands,  he  must  allege  that  he 
agreed  to  deliver  it  in  order  to  sustain 
a  suit  for  damages  against  such  person 
for  not  taking  the  stock  off  his  hands. 
Eustice  V.  Meytrott,  140  S.  W.  Rep. 
590  (Ark.  1911).  Even  though  nego- 
tiations for  the  sale  of  stock  culminate 
in  the  proposed  buyer  depositing 
money  in  the  bank  ^vith  instructions 
to  pay  it  over  on  the  delivery  of  the 
stock,  yet  the  expected  vendee  may 
withdraw  at  any  time  before  the  stock 
is  delivered.  Herrin  v.  Scandinavian- 
American  Bank,  65  Wash.  569  (1911). 
A  sale  of  stock  made  by  correspondence, 
the  certificate  being  delivered  to  a  bank 
for  delivery  to  the  buyer  on  payment 
therefor,  passes  title  and  the  vendor 
may  sue  the  vendee  for  the  price. 
Botsford  V.  Heney,  12  Cal.  App.  380 
(1910).     A  written  agreement  whereby 


1008 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  334. 


Even  though  a  contractor,  who  receives  practically  the  entire  capi- 
tal stock  for  work  to  be  done,  does  not  fulfill  the  contract,  and  even 


the  vendor  "hereby  sells  and  agrees 
to  transfer"  specified  stock  passes 
title  at  once,  even  though  the  vendor 
retains  the  stock  as  security  under  a 
separate  agreement.  Sherwood  v. 
Graham,  106  Minn.  542  (1908).  A 
contract  by  which  the  vendor  agrees  to 
sell  certain  stock  to  the  vendee,  and 
both  parties  agree  to  carry  out  the 
provisions,  becomes  an  executed  con- 
tract on  the  delivery  of  the  stock. 
McMillan  v.  Batten,  52  Oreg.  218 
(1908).  Even  though  after  a  contract 
of  sale  of  stock  is  made,  the  capital 
stock  is  reduced,  yet  if  the  vendor 
makes  delivery  and  the  vendee  accepts 
it,  after  such  decrease  of  capital  stock, 
it  is  then  too  late  for  either  party  to 
complain.  Zohrlaut  v.  Mengelberg, 
144  Wis.  564  (1910).  A  sale  of  stock 
impUes  that  at  the  time  of  delivery  the 
capital  stock  should  be  the  same  as  at 
the  time  of  the  making  of  the  contract. 
Choate  v.  Beebe,  143  N.  Y.  App.  Div. 
683  (1911).  A  contract  to  sell  and 
deUver  "25  of  the  500"  shares  of 
stock  is  binding,  even  though  subse- 
quently the  capital  stock  is  decreased. 
Zohrlaut  v.  Mengelberg,  144  Wis.  564 
(1910).  An  offer  of  stock  at  a  certain 
figure  if  declined  cannot  afterwards  be 
enforced.  Sprague  v.  Hosie,  155  Mich. 
30  (1908).  A  sale  of  stock,  the  seller 
reserving  the  next  dividend,  does  not 
carry  a  stock  dividend  which  neither 
party  expected.  Lancaster  Trust  Co. 
V.  Mason,  152  N.  C.  660  (1910).  An 
agreement  of  a  stockholder  to  sell  his 
stock  to  another  person  or  the  latter's 
appointee  at  not  less  than  a  certain 
price,  and  as  much  more  as  the  latter 
can  sell  the  stock  for,  is  an  agency  and 
not  a  sale,  and  hence  the  agent  cannot 
compel  delivery,  no  sale  to  a  third 
party  having  been  made  and  the  con- 
tract not  being  complete.  Huston  v. 
Harrington,  .58  Wash.  51  (1910). 
Where  two  parties  concoct  a  scheme 
to  acquire  pubUc  coal  lands  illegally 
and  turn  them  into  a  corporation  for 
stock,  and  the  scheme  is  partly  carried 
out,  neither  can  hold  the  other  liable 
for  breach  of  contract.  Kennedy  v. 
Lonabaugh,  117  Pac.  Rep.  1079  (Wyo. 


1911).  Where  the  vendee's  note  for 
stock  and  the  stock  itself  are  put  in 
escrow,  the  stock  to  be  delivered,  on 
payment  of  the  note  within  a  year 
there  is  no  sale  if  the  note  is  not  paid 
in  a  year.  Gray  v.  Baron,  13  Ariz.  70 
(1910).  In  a  suit  against  the  vendor 
for  failure  to  keep  a  contract  of  sale  of 
stock  if  the  sale  is  on  condition  that 
an  agreement  is  practicable,  it  must 
be  averred  that  such  is  the  case  or 
that  the  seller  has  fraudulently  refused 
to  agree  on  any  terms  and  conditions. 
Ridgley  v.  Walker,  81  N.  J.  L.  176 
(1911).  An  antecedent  oral  agree- 
ment that  the  vendor  of  stock  will 
not  engage  in  the  same  business  is  not 
admissible  in  a  suit  on  the  contract  of 
sale.  Osgood  v.  Skinner,  211  lU.  229 
(1904).  A  contract  to  take  stock  at 
the  end  of  five  years  at  a  fixed  price  is 
not  invalid  under  the  statute  against 
options.  Kantzler  v.  Benzinger,  214  lU. 
589  (1905).  Where  the  owner  of  stock 
in  two  corporations  offers  to  pay  for 
property  by  either  of  said  stocks  and 
the  property  owner  accepts  the  price 
named,  and  agrees  to  take  stock  in 
payment  "in  either"  of  the  corpora- 
tions, this  doe«  not  necessarily  mean 
the  stockholder's  option.  Aldrieh  v. 
Bay  State,  etc.  Co.,  186  Mass.  489 
(1904).  It  is  no  defense  to  a  note 
that  it  was  for  stock  and  was  to  be 
paid  for  out  of  dividends,  where  the 
defendant  is  the  only  witness  to  prove 
such  facts.  Fuller  v.  Law,  207  Pa.  St. 
101  (1903).  A  representation  by  the 
vendee  that  he  wishes  to  buy  all  the 
stock  and  will  pay  the  vendor  any  dif- 
ference between  the  amount  then  paid 
per  share  and  the  highest  price  he 
should  pay  for  any  other  of  the  same 
stock,  gives  no  cause  of  action  on  the 
part  of  the  vendor,  even  though  the 
vendee  as  trustee  buys  other  stock 
for  more  than  that  price.  Schraft  v. 
Fidelity  T.  Co.,  73  N.  J.  L.  57  (1906). 
The  remedy  of  a  corporation  against  a 
person  who  has  received  stock  from 
a  third  person  under  an  agreement  to 
sell  treasury  stock  is  not  a  forfeitm*e 
of  the  stock  so  given.  Falk  v.  Schmitz, 
etc.    Co.,    44    Wash.    612    (1906).     A 


(64) 


1009 


§  334.] 


CONTRACTS   TO    SELL  —  GAMBLING    SALES,    ETC. 


[CH.  XX. 


though  he  disposes  of  some  of  the  stock,  yet,  unless  Hquidated  damages 
for  such  breach  are  specified  in  the  contract  or  actual  damage  is  proved, 

pledgee  may  show  a  sale  by  proving 
that  he  sent  the  stock  to  a  broker 
who  reported  the  sale,  and  the  pledgee 
credited  the  pledgor  with  the  pro- 
ceeds and  notified  him  thereof,  to 
which  the  pledgor  assented.  Smith  v. 
Becker,  129  Wis.  396  (1906).  Even 
though  the  company's  name  is  signed 
to  a  contract  by  which  the  owners  of 
the  stock  sell  the  stock,  yet  the  com- 
pany is  not  liable  for  a  breach  of  the 
contraction  the  part  of  either  party, 
or  for  fraudulent  representations 
made  in  connection  with  it.  Home, 
etc.  Co.  V.  Collins,  31  Ind.  App.  493 
(1903).  A  corporation  cannot  enforce 
a  contract  by  which  the  seller  of  its 
stock  agrees  with  the  purchaser  that 
the  corporate  accounts  wall  be  col- 
lected and  that  the  debts  do  not  ex- 
ceed a  certain  amount.  Rochester^-  etc. 
Co.  V.  Fahy,  111  N.  Y.  App.  Div.  748 
(1906) ;  aff'd,  188  N.  Y.  629.  See,  in 
general,  Lindley,  Company  Law,  6th 
ed.,  pp.  676-688.  An  agreement  of  a 
party  to  sell  bonds  for  another  party  at 
a  certain  price  may  be  enforced  by  the 
party  who  is  to  give  the  bonds  to  the 
other  party  to  sell.  Plumb  v.  Camp- 
beU,  129  111.  101  (1888).  The  fact 
that  the  corporation  loses  a  large 
amount  of  money  after  a  partner 
agrees  to  take  stock  as  a  part  of  his 
share  of  the  partnership  assets  does  not 
allow  him  to  decrease  the  price  which 
it  was  estimated  to  be  worth.  Donahue 
V.  McCosh,  70  Iowa,  733  (1886). 
Only  a  de  facto  corporation  need  be 
proved.  Reynolds  v.  Myers,  51  Vt. 
444  (1879). 

The  memoranda  of  the  contract,  to- 
gether with  the  certificates  of  stock, 
are  sufficient  presumptive  evidence 
of  the  existence  of  the  corporation 
and  the  legal  issue  of  the  stock.  Mann 
V.  Williams,  143  Mass.  394  (1887). 
Where  stock  is  issued  to  a  person 
for  construction  work,  and  he  sublets 
the  contract  and  agrees  to  divide  the 
stock  with  others  who  are  to  share 
the  expense  of  construction,  they  all 
are  liable  to  the  sub-contractor.  Mc- 
Fall  V.  McKeesport,  etc.  Co.,  123  Pa. 
St.  259  (1889).     An  underwriter  may 


be  held  liable,  even  though  the  entire 
amount  is  not  underwritten,  there  be- 
ing nothing  in  the  agreement  requir- 
ing that.  Knickerbocker  T.  Co.  v. 
Davis,  143  Fed.  Rep.  587  (1906). 
Where  a  prospectus,  offering  for  sale 
trustee's  .  transferable  certificates, 
states  that  such  certificates  represent 
stock  deposited  with  the  trustee,  the 
stock  being  in  an  English  corpora- 
tion, the  trustee  is  personally  liable 
if  it  turns  out  that  the  English  cor- 
poration had  a  prior  lien  on  the  stock 
to  the  full  extent  of  its  value.  The 
trustee  was  bound  to  take  notice  of 
the  lien  created  by  the  by-laws  of  the 
English  corporation.  The  rule  of  ca- 
veat emptor  has  been  relaxed  so  as  to 
create  an  implied  warranty  of  title 
on  the  part  of  the  seller.  Even 
though  the  trustee  acted  as  agent,  yet, 
the  principal  not  being  disclosed,  the 
trustee  is  liable.  McClure  v.  Central 
Trust  Co.,  165  N.  Y.  108  (1900).  A 
broker  who  claims  to  be  acting  for  an 
undisclosed  principal  in  contracting 
for  the  purchase  of  bonds,  and  who 
stipulates  that  he  shall  not  be  per- 
sonally liable,  cannot  enforce  such 
contract  if  in  fact  he  was  the  prin- 
cipal himself.  Paine  v.  Loeb,  96  Fed. 
Rep.  164  (1899).  In  the  case  Clews 
V.  Jamieson,  89  Fed.  Rep.  63  (1898), 
where  the  broker  was  authorized  to  sell 
at  229  and  actually  did  sell  at  221,  the 
court  held  that  the  principal  could 
not  adopt  and  enforce  the  contract, 
inasmuch  as  the  broker  was  not 
authorized  to  sell  at  that  price,  and 
the  contract  not  binding  the  principal 
when  made  did  not  bind  the  other 
parties.  Even  though  a  person  accepts 
the  offer  of  a  broker  to  sell  securities, 
and  afterwards  buys  them  direct  from 
the  broker's  principal,  the  broker  can- 
not maintain  a  suit  against  the  vendee. 
Mason  v.  Chicago,  B.,  etc.  Ry.,  156  Fed. 
Rep.  959  (1907).  Even  though  the 
president  of  a  corporation  brings  about 
a  sale  of  all  its  stock,  under  a  contract 
by  which  the  corporation  is  to  pay  him 
a  certain  sum,  nevertheless  he  cannot 
collect  that  sum  from  the  corporation 
itself.     Wood  v,  Manchester,  etc.  Co., 


1010 


CH.  XX.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


334. 


the  corporation  itself  can  recover  nothing  for  such  breach,  the  only 
purpose  of  the  corporation  being  that  particular  enterprise,  and  no  busi- 


54  N.  Y.  App.  Div.  522  (1900).  It  is 
legal  for  a  person  to  contract  -ssath  the 
directors  of  an  insurance  company  to 
purchase  at  least  sixty-five  per  cent,  of 
the  stock  of  the  company,  the  same 
offer  being  made  to  all  the  stockholders, 
even  though  it  is  proposed  thereupon  to 
wind  up  the  company.  Garrett  Co.  v. 
Morton,  65  N.  Y.  App.  Div.  366  (1901). 
Where  a  person  has  turned  in  securi- 
ties under  a  plan  of  consolidation 
which  states  the  aggregate  capacity  of 
properties  which  it  is  proposed  to  ac- 
quire, or  so  many  of  them  as  the  or- 
ganizers may  deem  best,  the  party 
cannot  withdraw,  where  the  plan  has 
been  carried  out,  even  though  less 
than  half  of  the  properties  have  been 
actually  acquired.  And  even  though 
the  preUminary  contract  provided  for 
the  acquisition  of  a  certain  company, 
yet,  if  the  consolidated  company  ac- 
quires practically  aU  the  stock  and 
bonds  of  that  company,  the  party 
turning  in  securities  cannot  "withdraw, 
and  especially  cannot  reclaim  the  se- 
curities as  against  a  transferee  in 
good  faith  who  had  no  notice  of  per- 
sonal representations.  JeweU  v.  Mc- 
Intyre,  62  N.  Y.  App.  Div.  396  (1901) ; 
aff'd,  172  N.  Y.  638.  Where  the 
stockholders  transfer  a  portion  of 
their  stock  to  one  of  their  number  to 
be  disposed  of  by  him  for  the  interests 
of  the  company  and  to  raise  money  to 
carry  on  business,  he  may  use  a  por- 
tion of  the  same  to  reimburse  one  of 
the  stockholders  for  stock  which  the 
latter  used  in  the  interest  of  the  com- 
pany. Playa,  etc.  Co.  v.  Gage,  60  N.  Y. 
App.  Div.  1  (1901);  aff'd,  172  N.  Y. 
630.  Where  the  evident  intent  of  a 
contract  of  sale  of  stock  with,  partial 
dehveries  was  that  the  entire  amount 
should  be  taken  by  the  vendee,  he 
cannot  have  specific  performance  to 
the  extent  of  a  majority  of  the  stock 
only.  Clowes  v.  Miller,  74  Conn.  287 
(1901).  A  sale  of  stock  in  a  company 
to  be  organized  is  legal.  Van  Dam 
V.  Tapscott,  40  N.  Y.  App.  Div. 
36  (1899).  Where  the  incorporators 
named  in  a  special  charter  organize 
by  subscribing  one  share  each  and  al- 


lowing another  person  to  subscribe  for 
the  remainder,  he  at  the  same  time 
entering  into  a  personal  contract  vnth 
them  that  he  would  contruct  the 
street  railway  called  for  by  the  char- 
ter -^-ithin  a  certain  time,  and  for 
failure  so  to  do  he  was  to  "return  the 
charter,"  a  suit  by  the  original  incor- 
porators to  cancel  his  subscription 
and  to  obtain  control  of  the  board  of 
directors  -will  not  lie,  inasmuch  as  the 
contract  was  an  attempt  to  transfer 
the  corporate  franchise.  Simonds  v. 
East  Windsor,  etc.  Ry.,  73  Conn.  513 
(1901).  Where  in  a  special  act  of  in- 
corporation thirteen  incorporators  are 
named  and  they  organize  and  elect  di- 
rectors, and  the  latter  accept  subscrip- 
tions, and  all  the  incorporators  are 
given  opportunity  to  subscribe,  those 
who  do  subscribe  may  sell  all  their 
stock  and  thereby  transfer  the  entire 
corporation,  and  those  incorporators 
who  do  not  subscribe  are  not  entitled 
to  anv  part  of  the  price.  Roosevelt  v. 
Hamblin,  85  N.  E.  Rep.  98  (Mass. 
1908).  The  same  rule  applies  to 
promoters  who  assist  in  obtaining  the 
charter.  Dobbins  v.  Peabody,  199 
Mass.  141  (1908). 

Where,  in  order  "to  enable  the  com- 
pany to  keep  its  stock  in  the  owner- 
ship of  stockholders  of  its  own  choos- 
ing," each  stockholder  enters  into  an 
agreement  with  the  corporation  that 
in  case  he  wishes  to  sell  his  stock  it 
shall  first  be  appraised  and  then 
offered  to  the  corporation  before  it  is 
offered  to  any  one  else,  the  refusal  of 
the  board  of  directors  to  make  an 
appraisal,  in  accordance  with  the  agree- 
ment, does  not  render  the  corporation 
liable  in  damages,  inasmuch  as  it  is 
clear  that,  even  though  the  stock  were 
appraised,  the  corporation  would  not 
buy  it.  Whiton  v.  Batchelder,  etc. 
Corp.,  179  Mass.  169  (1901).  It  may 
be  shown  by  parol  that  a  written  sale 
of  stock  was  to  be  binding  only  in  ease 
an  agent  had  not  already  sold  the 
stock.  Reiner  v.  Crawford,  23  Wash. 
669  (1901).  Where  a  corporation 
having  treasury  stock  in  its  treasury 
sells  all  its  assets  to  another  corpora- 


1011 


§  334. 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


ness  having  been  transacted  by  the  corporation  in  consequence  of  such 
breach  of  the  contract.^     A  person  who  makes  a  contract  with  a  syndi- 


tion,  excepting  its  patent  rights,  such 
sale  is  not  a  sale  of  the  treasury  stock 
within  the  meaning  of  a  prior  stock- 
pooling  contract  of  the  old  corpora- 
tion that  certain  other  stock  should 
be  sold  before  such  treasury  stock  was 
sold.  Myers  v.  Buell,  67  N.  Y.  App. 
Div.  290  (1901).  Stockholders  in 
selling  their  stock  in  connection  with 
the  transfer  of  all  the  property  to  a 
new  corporation  may  reserve  what  may 
be  thereafter  realized  from  a  suit. 
Independent,  etc.  Co.  v.  Anderson,  106 
La.  95  (1901) ;  see  106  La.  55.  The 
vendee  who  agrees  to  pay  in  addition 
to  a  certain  price  a  specified  sum 
whenever  the  same  is  received  by  him 
from  the  corporation  is  not  liable  on 
the  contract  if  he  sells  the  stock 
before  receiving  anything  from  the  cor- 
poration. Hamilton  v.  Miller,  24  Ind. 
App.  617  (1900).  An  agreement  of 
the  borrower  of  stock  to  pay  for  the 
same  in  case  the  stock  is  not  returned 
accrues  when  the  stock  is  sold  by  the 
pledgee  on  default  of  the  borrower, 
and  the  statute  of  limitations  then 
begins  to  run.  Jones  v.  Powning,  25 
Nev.  399  (1900).  A  contract  to  return 
borrowed  stock  or  pay  for  it  is  a  debt. 
Dibble  v.  Richardson,  171  N.  Y.  131 
(1902).  A  contract  whereby  a  per- 
son receives  stock  and  agrees  to 
return  it  within  a  specified  time  or  else 
pay  a  specified  sum  is  not  a  bailment, 
and  hence  if  the  stock  is  not  returned 
at  the  specified  time  the  specified 
price  may  be  recovered,  even  though 
the"  party  at  a  later  time  desires  to 
return  the  stock.  Haskins  v.  Dern,  19 
Utah,  89  (1899).  A  stockholder  may 
hold  liable  in  damages  a  person  who 
has  broken  his  agreement  to  loan 
money  to  the  corporation,  the  consid- 
eration of  such  agreement  having 
been  furnished  by  the  stockholder. 
But  if  the  agreement  did  not  provide 
for  any  particular  duration  of  the 
loan,  only  nominal  damages  can  be 
recovered.     Kelly  v.  Fahrney,  97  Fed. 


Rep.  176  (1899).  Where  an  agree- 
ment for  the  pooling  and  voting  of 
stock  provides  that  any  holder  of 
trustees'  certificates  may  on,  six 
months'  notice  demand  from  the  trus- 
tee repayment  of  the  price  which  he 
paid  for  the  stock,  such  demand  may 
be  enforced  by  a  suit  and  the  money 
collected  from  the  trustee.  Wagga- 
man  v.  Nutt,  88  Md.  265  (1898). 
When  a  subscriber  to  stock  agrees  to 
sell  S5,000  worth  of  the  same  at  its 
"original  cost,"  such  cost  is  the  cost 
to  the  subscriber  and  not  the  par 
value,  nor  the  cost  including  loans  by 
the  subscriber  to  the  corporation. 
Eagan  v.  Clasbey,  5  Utah,  154  (1887). 
Where  a  person  sells  goods  to  a  corpora- 
tion and  agrees  to  take  payment  in 
stock,  he  must  take  the  stock  at  par, 
even  though  its  actual  and  market 
value  is  much  less  than  par.  Tilkey 
V.  Augusta,  etc.  R.  R.,  83  Ga.  757 
(1889).  A  contract  calling  for  "orig- 
inal ground-floor,  or  treasury  stock" 
means  any  of  the  stock  that  is  issued, 
where  the  statutes  prohibit  fictitious 
stock.  All  the  stock  is  then  presumed 
to  be  "ground-floor"  stock  and  to 
represent  at  par  the  actual  value 
received.  Williams  v.  Searcy,  94  Ala. 
360  (1891).  A  contract  by  a  corpora- 
tion that  it  will  issue  its  stock  for  one- 
fifth  of  its  par  value  is  void  under  the 
Alabama  constitutional  prohibition. 
The  subscriber  having  sold  his  contract 
to  another  person  cannot  collect  on 
such  sale.  Williams  v.  Evans,  87  Ala. 
725  (1889).  See  ch.  Ill,  supra.  An 
agency  to  sell  the  stock  of  a  company 
refers  to  the  stock  then  issued  by  the 
company.  Gates  v.  National,  etc. 
Union,  46  Minn.  419  (1891).  An 
executory  contract  to  purchase  stock  is 
not  such  a  claim  against  the  estate  of 
an  insolvent  vendee  as  to  be  provable 
against  the  assignee.  Re  Ives,  11 
N.  Y.  Supp.  650  (1890).  A  vendor  of 
the  stock  of  a  street  railway  company 
may  collect  damages  for  breach  of  the 


1  South  African,  etc.  Co.  v.  Peck,  120  Fed.  Rep.  88  (1903).     See  also  §  766c, 
infra. 

1012 


XX.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  334. 


cate  by  which  the  latter  agrees  to  sell  his  stock  and  securities  within  one 
year  at  a  price  not  less  than  the  price  specified  by  contract,  and  agrees 
that  he  shall  receive  a  stipulated  price  at  the  end  of  the  year,  may  sue 
for  the  difference  between  the  value  of  the  securities  at  the  end  of  the 
year  and  the  price  at  which  they  were  to  be  sold.^  A  contract  whereby 
a  stockholder  delivers  certain  stock  for  money  to  be  paid  to  the  corpora- 
tion, the  money  to  be  repaid  out  of  dividends  and  in  other  ways,  and  the 


contract  of  the  vendee  to  construct  the 
street  railway  to  certain  land  owned 
by  the  vendor,  even  though  the  .cor- 
poration, the  stock  of  which  was  sold, 
had  agreed  to  acquire  certain  rights  of 
way  and  had  not  done  so.  Blagen  r. 
Thompson,  23  Oreg.  239  (1892). 
Where  a  vendor  of  stock,  in  addition 
to  the  price  received,  is  to  have  an 
additional  sum  equal  to  the  highest 
price  paid  to  any  others  for  their 
stock,  he  cannot  recover  such  addi- 
tional price  by  proof  that  the  vendee, 
in  order  to  stop  a  stockholder's  suit, 
paid  a  higher  price  for  other  stock. 
Stewart  v.  Huntington,  124  N.  Y.  127 
(1890).  An  executory  agreement  by 
the  holder  of  a  note  that  he  will  can- 
cel it  in  payment  for  stock  is  a  con- 
tract by  itself,  and  is  no  defense  to 
the  note.  It  is  not  a  satisfaction  of 
the  note  nor  a  substituted  contract. 
It  may,  however,  give  a  right  to  dam- 
ages. Hayes  v.  Allen,  160  Mass.  286 
(1894).  Where  an  employee  is  to 
receive  certain  stock  if  he  remains  in 
the  employ  of  the  company  up  to  a 
certain  date,  a  receiver  of  his  property 
prior  to  that  date  cannot  demand  the 
stock  prior  to  that  date.  Delahunty 
V.  Hake,  10  X.  Y.  App.  Div.  230  (1896). 
The  holder  of  an  option,  who  there- 
after takes  the  stock  and  agi'ees  to 
pay  for  it  or  return  it  within  a  certain 
time,  must  pay  for  it  if  he  keeps  the 
stock  beyond  that  time.  Stevens 
V.  Hertzler,  109  Ala.  423  (1896).  An 
agreement  to  sell  and  deliver  all  the 
stock  of  a  corporation  within  a  cer- 
tain time  is  valid  even  though  the 
promisor  does  not  own  or  control  the 
stock.  He  may  be  sued  for  damages 
for  a  breach.  Wamsley  v.  H.  L.  Hor- 
ton  Co.,  77  Hun,  317  (1894).  Where 
the  proposed  seller  offers  to  seU  at  a 
certain  price,  and  the  buyer  accepts 
the  offer  payable  on  three  days'  sight 


draft,  and  on  the  next  day  the  buyer 
asks  for  certain  explanations  before 
confirming  his  offer,  the  seller  may 
refuse  to  carry  out  the  sale.  Cameron 
V.  Wright,  21  N.  Y.  App.  Div.  395 
(1897) ;  aff'd,  163  N.  Y.  586.  Where 
stock  is  placed  in  escrow  to  become 
the  property  of  a  person  in  case  he  is 
obliged  to  pay  a  certain  obligation, 
and  he  is  so  obliged  to  pay,  the  cred- 
itors of  the  party  placing  the  stock  in 
escrow  cannot  reach  the  stock  nor 
redeem  it.  Pabst,  etc.  Co.  v.  Montana, 
etc.  Co.,  19  Mont.  294  (1897).  Where 
upon  the  sale  of  stock  it  is  placed  in 
the  hands  of  a  third  person  to  be 
delivered  when  paid  for,  and  is  partly 
paid  for,  it  is  conversion  for  the  per- 
son so  holding  the  certificates  to 
deliver  them  to  still  another  person  on 
the  order  of  the  vendor.  Kahaley  v. 
Haley,  15  Wash.  678  (1896).  Where  a 
person  makes  a  contract  with  a  cor- 
poration to  sell  a  certain  amount  of 
its  preferred  stock,  and  in  return  he 
is  made  treasurer  at  a  monthly  salary 
for  a  year,  and  indefinitely  thereafter, 
and  he  actually  takes  some  of  the  stock 
himself  and  pays  for  it,  but  is  dis- 
charged because  he  does  not  seU 
the  stock  as  agreed,  he  can  recover 
on  his  contract,  the  company  having 
refused  to  return  the  money  he  has 
paid.  Hinchman  v.  Matheson,  etc. 
Co.,  151  Mich.  214  (1908). 

^  Gause  v.  Commonwealth  Trust 
Co.,  Ill  N.  Y.  App.  Div.  530  (1906). 
In  a  suit  against  a  trust  company  for 
failure  to  seU  securities,  as  it  agreed  to 
do  for  a  certain  price,  the  plaintiff 
must  prove  damage  by  reason  of  the 
breach  of  covenant  to  sell  as  distin- 
guished from  a  breach  of  covenant  to 
pay  money.  Gause  v.  Commonwealth 
T.  Co.,  100  N.  Y.  App.  Div.  427 
(1905). 


1013 


§  334.]  CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC.  [cH.  XX. 

stock  then  to  be  returned,  is  a  conditional  sale  and  not  a  loan  to  the 
corporation.^  A  sale  of  stock  to  be  paid  for  out  of  dividends,  the  vendee 
having  the  power  to  make  payments  in  cash  whenever  he  desires  to, 
obligates  the  vendee  to  pay  within  a  reasonable  time,  irrespective  of 
the  dividends.  Such  a  contract  is  not  void  for  uncertainty,  nor  as  being 
without  consideration.-  Where  a  note  is  given  in  payment  for  stock,  and 
recites  on  its  face  that  it  is  for  value  received,  parol  evidence  is  not  ad- 
missible to  ghow  that  the  sale  was  on  condition  that  the  stock  would 
afterwards  pay  a  certain  dividend,  and  in  case  such  dividend  was  not 
paid  the  note  was  not  to  be  paid.^  Xor  can  it  be  shown  by  parol  that  a 
written  contract  to  deliver  a  certain  amount  of  stock  was  to  be  satis- 
fied by  the  delivery  of  a  less  amount.^  If  a  contract  of  sale  is  condi- 
tional on  the  stock  being  increased,  and  the  vendor  prevents  such  in- 
crease, the  vendee  is  entitled  to  recover  back  a  partial  payment  already 
made  by  him.^  Where  a  person  contracts  to  give  to  another  person  a 
fourth  interest  in  any  mines  which  the  former  may  buy,  the  former 
must  give  the  latter  a  fourth  of  stock  which  the  former  purchases  in  a 
mining  company.^  But  an  agreement  of  various  stockholders  in  sev- 
eral street  railway  companies  to  form  a  new  corporation  and  transfer 
their  interest  thereto,  and  divide  the  new  stock  in  a  certain  proportion, 
does  not  constitute  such  a  partnership  as  to  entitle  one  to  sue  the  others 

1  Crimp  V.  MeCormick  Const.  Co.,  » Dinkier     v.     Baer,     92     Ga.     432 
71    Fed.    Rep.   356    (1896).     See   also     (1893). 

§  76,     supra.     Where     a     stockholder         *  Where   a  stockholder  has   agreed 

transfers  stock  to  another  person  for  to  sell  and  deposit  in  a  trust  company 

the  benefit  of  the  company,  he  cannot  seven  hundred  and  twenty  shares,  but 

call  the  latter  to  account  or  enforce  only  deposited  six  hundred  and  eighty- 

the  agreement,  inasmuch  as  the  com-  seven  shares,  and  the  vendee  has  on 

pany     has     the     beneficial     interest,  his  part  deposited  the  purchase  price 

although  he  might  maintain  a  suit  in  with  the  trust  company  to  be  paid  on 

behalf  of  the  company  if  it  declined  to  the  delivery  of  the  seven  hundred  and 

sue.     Parmenter  v.  Homans,  125  N.  Y.  twenty    shares,     the    vendor    cannot 

App.  Div.  399  (1908).  rescind  on  the  ground  that  there  was  a 

2  Stewart  v.  Herron,  77  Ohio  St.  contemporaneous  oral  understanding 
130  (1907).  A  contract  under  which  that  six  hundred  and  eighty-seven 
stock  is  transferred  to  be  paid  for  by  shares  would  be  suflficient.  Dady  v. 
dividends,  cannot  be  rescinded  by  the  O'Rourke,  172  N.  Y.  447  (1902).  A 
transferrer  as  being  without  consider-  contract  by  a  person  with  another  to 
ation.  White  v.  Cooper  Co.,  7  Ohio  purchase  all  of  certain  stock  held  by 
Cir.  Ct.  Rep.  (N.  S.)  114  (1903);  a  third  person  is  broken  by  a  failure 
aff'd,  72  Ohio  St.  615  and  691  and  to  purchase  only  a  part  thereof;  but 
76  Ohio  St.  635.  A  provision  in  the  where  there  are  other  provisions  in 
contract  that  the  vendor  of  stock  shall  the  contract  sufficient  to  support  it, 
have  all  the  dividends,  may  be  shown  the  rule  may  be  different.  Stokes  v. 
to  mean  that  he  was  to  apply  the  Foote,  172  N.  Y.  327  (1902). 
dividends  to  the  purchase  price.  Com-  ^  Lovell  v.  Jacobs,  150  N.  Y.  84 
mercial,   etc.   Bank  v.   Pott,   150  Cal.  (1896). 

358  (1907).     Cf.  86  Atl.  Rep.  150.  «  Dennison  v.  Chapman,  105  Cal.  447 

(1895). 
1014 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[§  334. 


for  an  accounting  of  profits,  where  the  others  had  formed  such  a  corpora- 
tion with  other  parties,  leaving  out  the  first-named  party. ^  Where  the 
vendor  guarantees  that  the  vendee  can  sell  the  stock  within  a  year  at  a 
certain  price,  and  the  vendee  sells  it  after  the  year  at  a  less  price,  he 
may  recover  the  difference  from  the  vendor.^  The  agreement  of  ven- 
dors of  stock  to  protect  the  vendee  against  the  payment  of  existing  claims 
of  a  corporation  is  not  enforceable  until  payment  is  actually  made.^ 
Many  cases  are  referred  to  in  the  notes  below  relative  to  the  contracts 
and  rights  of  agents,  promoters,  and  partners,  in  the  purchase  or  sale 
of  stock.^    A  defense  to  a  sale  of  stock  that  the  stamp  tax  was  not  paid 


1  Sehantz  v.  Oakman,  163  N.  Y.  148 
(1900).  Cf.  §§  705-707,  ijtfra,  and 
§  320,  supra. 

2Lobeck  v.  Duke,  50  Neb.  568 
(1897).  The  vendor  may  guarantee 
that  the  stock  will  be  at  par  within  a 
certain  time.  Suit  lies  if  it  is  not  at 
par  within  that  time.  Hill  v.  Smith, 
21  How.  283  (1858).  A  contract 
guaranteeing  a  certain  dividend  over 
and  above  certain  corporate  expenses 
does  not  include  payment  of  salaries, 
etc.  Central,  etc.  Assoc,  v.  James,  81 
Ga.  762  (1888).  A  guaranty  upon  the 
sale  of  stock  that  certain  dividends 
will  be  declared  is  enforceable  against 
the  guaranteeing  firm,  even  though 
they  acted  as  agents  for  an  undis- 
closed principal.  Their  obligation  is 
primary,  and  not  that  of  guarantors 
for  the  company.  Kernochan  v.  Mur- 
ray, 111  N.  Y.  306  (1888).  See  also 
as  to  guarantees,  §  775,  infra.  Where 
the  vendors  of  stock  guaranty  that 
the  stock  shall  be  non-assessable  until 
they  have  advanced  .$30,000,  a  stock- 
holder who  is  held  liable  on  a  statu- 
tory liability  may  hold  the  guarantors 
liable  if  they  have  not  paid  the  $30,000. 
Omo  V.  Bernart,  108  Mich.  43  (1895). 
A  guaranty  by  an  outside  party  that 
upon  the  winding-up  of  a  corporation 
the  stock  should  receive  so  much, 
passes  to  a  purchaser  of  the  stock,  the 
transfer  ha\'ing  been  made  subject 
to  the  agreement.  Bacon  v.  Gross- 
mann,  71  N.  Y.  App.  Div.  574  (1902). 
A  contract  whereby  a  stockholder 
sells  his  stock  to  an  individual  who 
guarantees  that  the  former  will  be 
employed  at  a  stated  salary  by  the 
corporation  for  two  years  is  enforce- 
able against  the  person  so  purchasing 


the  stock,  even  though  the  corporation 
passes  into  the  hands  of  a  receiver 
before  the  expiration  of  the  two  years 
and  the  employment  is  thereby  stopped. 
Kinsman  v.  Fisk,  37  N.  Y.  App.  Div. 
443  (1899).      See  141  N.  W.  Rep.  407. 

3  Cochran  v.  Selling,  36  Oreg.  333 
(1899).  Where  in  the  sale  of  the 
stock  of  a  street  railroad  a  warranty 
is  made  that  the  liabilities  of  the 
company  do  not  exceed  a  certain  sum, 
a  note  given  in  payment  for  the  stock 
may  be  defeated  if  the  liabilities 
exceed  that  sum.  Millsaps  v.  Mer- 
chants', etc.  Bank,  71  Miss.  361  (1893). 
A  corporation  cannot  enforce  a  promise 
made  by  a  stockholder  to  a  purchaser 
of  his  stock  that  he,  the  vendor,  would 
pay  the  corporate  debts.  German 
St.  Bank  v.  Northwestern,  etc.  Co., 
104  Iowa,  717  (1898).  See  also  §  354, 
infra. 

*  For  a  sale  of  stock  where  the  ven- 
dee was  to  divide  with  the  vendor 
the  amount  for  which  the  stock 
should  be  resold  by  the  vendee,  see 
Jones  V.  Kent,  80  N.  Y.  585  (1880). 
An  agreement  to  divide  the  profits  on 
stock  in  consideration  of  information 
to  be  furnished  is  enforceable.  Par- 
sons V.  Robinson,  59  N.  Y.  Super.  Ct. 
546  (1891) ;  aff'd,  133  N.  Y.  537.  But 
an  agreement  to  set  on  foot  and  to 
help  carry  along  a  congressional 
investigation  into  the  affairs  of  a  cor- 
poration, in  anticipation  that  it  would 
depress  the  market  value  of  its  stock, 
which  it  did,  and  to  furnish  the 
defendants  with  information  from 
time  to  time  respecting  damaging 
facts  brought  out  against  it  upon  the 
investigation  to  enable  them  to  take 
advantage  of  the  market,  in  considera- 


1015 


§334. 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


CH.  XX. 


at  the  time  of  the  transfer,  as  required  by  the  New  York  statute,  must 
be  pleaded  in  order  to  be  available.^ 


tion  of  sharing  in  the  profits  of  their 
speculation,  is  void  as  against  public 
policy ;  and  the  courts  will  not  permit 
a  recovery  upon  such  an  agreement. 
Veazey  r.  AUen,  173  N.  Y.  359  (1903). 
A  contract  whereby  an  agent,  one  of 
the  partners,  is  to  have  half  of  what 
he  could  sell  partnership  shares  of 
stock  for,  is  legal  and  enforceable  by 
him.  Wight  v.  Wood,  85  N.  Y.  402 
(1881).  A  promoter  who  has  brought 
about  the  sale  of  a  large  plant  to  new 
parties,  who  have  agreed  to  organize 
a  new  corporation  and  give  the  pro- 
moter a  certain  amount  of  stock 
therein,  cannot,  upon  the  ground  that 
he  is  being  defrauded  of  his  commis- 
sions, enjoin  the  parties  from  closing 
the  transaction  irrespective  of  the 
promoter,  nor  can  he  have  specific 
performance  of  the  contract  to  incorpo- 
rate a  company  and  deliver  the  stock. 
There  is  no  fiduciary  relation  between 
the  parties ;  the  value  of  the  stock  can 
be  estimated  in  damages ;  there  was 
no  allegation  of  defendant's  insolv- 
ency', and  the  promoter  has  ample 
remedy  at  law  for  damages.  Avery 
V.  Ryan,  74  Wis.  591  (1889).  A 
promise  and  contract  of  promoters  to 
subs'?ribers  to  certain  bonds  may 
create  an  equitable  lien  on  the  bonds 
enforceable  in  equity.  Badgerow  v. 
Manhattan  Trust  Co.,  64  Fed.  Rep. 
931  (1894).  Where  stock  is  purchased 
to  be  re-sold  on  joint  account,  and 
one  party  refuses  to  live  up  to  the 
contract,  the  other  may  dispose  of  the 
stock  on  the  best  terms  possible. 
Davidor  v.  Bradford,  129  Wis.  524 
(1906).  Where  minority  stockholders 
agree  to  finance  the  company  if  they 
are  given  control  of  its  business  and 
under  such  agreement  do  finance  the 
company  and  the  majority  stockholders 
then  take  control,  the  minority  stock- 
holders may  have  a  receiver  appointed, 
if  the  company  is  not  able  to  repay 
money  advanced  on  their  credit. 
Wood,  etc.  Co.  V.  American,  etc.  Co., 
62  Atl.  Rep.  768  (N.  J.   1906).     Even 


though  promoters  send  to  a  person  a 
printed  form  of  application  for  stock, 
and  he  signs  and  returns  the  same, 
this  does  not  obligate  them  to  allot  to 
him  such  stock  or  any  part  thereof. 
Feitel  v.  Dreyfous,  117  La.  7.56  (1906). 
A  stockholder  who  unites  with  other 
stockholders  in  depositing  his  stock 
with  a  third  person  with  authority 
to  sell,  and  the  latter  does  so,  may 
bring  suit  against  the  purchaser  for 
the  purchase  price.  Dowling  v. 
Wheeler,  117  Mo.  App.  169  (1906). 
An  oral  arrangement  between  several 
persons  that  one  shall  -buy  certain 
stock  and  pay  for  it  on  joint  account, 
but  without  each  one  agreeing  to  take 
and  pay  for  his  share,  is  not  enforce- 
able against  the  one  who  was  to  buy 
and  who  did  buy.  He  may  keep  the 
stock  he  purchased.  Joseph  v.  Sulz- 
berger, 136  N.  Y.  App.  Div.  499  (1910). 
An  agent  employed  by  several  stock- 
holders to  sell  their  stock  and  all  their 
interest  in  the  corporation  cannot 
collect  a  commission  based  on  the  value 
of  all  the  property  of  the  corporation. 
Servant  v.  McCampbell,  46  Colo. 
292  (1909).  A  suit  does  not  lie  against 
a  corporation  for  the  breach  of  a  con- 
tract between  the  stockholders  rela- 
tive to  dividends,  etc.  Aldrich  v. 
Crawford  Chan-  Co.,  152  Mich.  369 
(1908).  The  question  of  whether 
a  sale  or  pledge  was  involved  in  the 
relations  between  a  contractor  and 
the  party  who  financiered  the  matter 
for  him  was  involved  in  Griggs  v. 
Day,  58  N.  Y.  Super.  Ct.  385  (1890), 
finally  decided  in  158  N.  Y.  1  (1899). 
The  fact  that  a  vendee  makes  out  a 
check  to  a  person  and  delivers  it  to 
him  in  payment  for  stock  does  not 
prove  that  the  latter  is  the  vendor  and 
liable  for  misrepresentations.  Aron  v. 
De  Castro,  131  N.  Y.  648  (1892). 
For  a  breach  of  an  agreement  to  give 
a  certain  quantity  of  stock  in  payment 
for  services  to  be  performed,  the  per- 
son entitled  to  the  stock  may  sue  for 
damages.     Alford  v.  Wilson,   20  Fed. 


1  Bean  v.  Flint,  204  N.  Y.  153  (1912). 
1016 


CH.   XX.] 


CONTRACTS   TO    SELL  —  GAMBLIx\G   SALES,    ETC. 


[§  335. 


§  335.  Remedies  for  breach  of  a  contract  to  sell  stock  —  Tender.  — 
A  person  who  is  under  contract  to  sell  and  deliver  shares  of  stock  may 


Rep.  96  (1884).  The  corporation  is  not 
liable  for  the  breach  of  an  agreement 
among  the  organizers  as  to  the  distribu- 
tion of  stock.  Summerlin  v.  Fronteriza, 
etc.  Co.,  41  Fed.  Rep.  249  (1890). 

Where  the  promoters  of  a  company 
agree  to  sell  property  to  the  company 
in  consideration  of  a  certain  number 
of  paid-up  shares,  specific  perform- 
ance may  be  had.  See  Fyfe  v.  Swabev, 
16  Jur.  49  (1851),  M.  R.  As  to  pro- 
moters' contracts,  see  §§  705-707, 
infra.  Where  a  party  to  a  contract 
relative  to  an  incorporation  and  divi- 
sion of  the  stock  sues  to  recover  his 
interest  according  to  the  contract,  the 
court  will  decree  a  proper  division  of 
the  stock,  all  parties  being  allowed  the 
amounts  invested  by  them  in  for- 
warding the  enterprise.  Bates  v.  Wil- 
son, 14  Colo.  140  (1890).  Where  the 
owner  of  a  patent  agrees  to  convey  it 
to  a  corporation  for  stock,  and  then  to 
divide  the  stock  with  others,  he  may 
be  compelled  to  perform  his  agree- 
ment. But  where  the  patentee  does 
not  convey  the  patent  to  the  corpora- 
tion, but  conveys  to  another  corpora- 
tion, the  latter  is  protected  in  its  title, 
though  some  of  its  incorporators  and 
directoi^s  knew  all  the  facts.  Davis, 
etc.  Co.  V.  Davis,  etc.  Co.,  20  Fed.  Rep. 
699  (1884).  Where  a  patentee  agrees 
with  a  promoter  to  sell  the  patent  to 
the  corporation  for  stock,  and  divide 
the  stock  with  the  promoter,  but  the 
patentee,  after  obtaining  the  stock, 
sells  the  certificates  to  a  bona  fide  pur- 
chaser, the  latter  is  protected,  though 
the  transfer  is  not  registered  on  the 
corporate  books.  The  purchaser  may 
come  into  a  suit  instituted  by  the  pro- 
moter against  the  corporation  to  com- 
pel a  transfer.  Thurber  v.  Crump,  86 
Ky.  408  (1887).  Where  a  person  holds 
property  in  trust  or  as  agent  for 
others,  and  conveys  that  property  to  a 
corporation  for  its  shares  of  stock, 
the  persons  who  had  an  equitable 
interest  in  the  property  may  compel 
this  agent  or  trustee  to  transfer  to 
themselves  such  stock.  But  all  the 
principals  or  cestuis  que  trust  must 
be  made  parties  t.o  the  suit.     O'Connor 


V.  Irvine,  74  Cal.  435  (1887).  Where 
there  is  a  joint  operation  in  stocks,  a 
"pool,"  the  transactions  being  carried 
on  in  the  name  of  one  only,  the  others 
may  have  specific  performance  lead- 
ing to  a  di"\asion  of  the  stocks.  John- 
son V.  Brooks,  46  N.  Y.  Super.  Ct. 
13  (1880);  Thornton  v.  St.  Paul,  etc. 
Ry.,  45  How.  Pr.  416  (1873);  s.  c, 
dismissed,  6  N.  Y.  Week.  Dig.  309 
(1878).  Equity  has  jurisdiction  to 
compel  the  transfer  of  stock  as  between 
parties.  Thus,  where  stock  is  issued 
in  payment  for  property,  and  the 
party  to  whom  the  certificate  is  issued 
refuses  to  di\'ide  it  among  the  owners 
of  the  property,  as  provided  by  con- 
tract, a  court  of  equity  may  compel 
the  di^dsion,  and  may  enjoin  any  elec- 
tion of  the  corporation,  until  such 
division  is  made.  Ai-cher  v.  Amer. 
etc.  Co.,  50  N.  J.  Eq.  33  (1892).  It 
is  a  question  of  fact  whether  a  person 
selling  stock  is  an  agent  or  vendee 
of  the  person  from  whom  he  obtained 
the  stock,  and  whether  the  latter  is 
liable  on  misrepresentation  made  by 
such  person.  Henneberger  v.  Matter, 
88  Mich.  396  (1891) ;  Florida,  etc.  Co. 
V.  Merrill,  52  Fed.  Rep.  77  (1892).  A 
party  selling  stock  is  not  liable  for 
the  false  repi*esentations  of  the  vendee 
to  another  person  to  whom  the  vendee 
is  re-selling  the  stock.  Masterton  v. 
Boyce,  6  N.  Y.  Supp.  65  (1889).  A 
corporation  cannot  enforce  a  contract 
by  which  the  seller  of  its  stock  agrees 
with  the  purchaser  that  the  corporate 
accounts  will  be  collected  and  that  the 
debts  do  not  exceed  a  certain  amount. 
Rochester,  etc.  Co.  v.  Fahy,  111  N.  Y. 
App.  Div.  748  (1906) ;  aff'd,  188  N.  Y. 
629.  For  the  allegations  in  a  com- 
plaint by  one  promoter  against  another 
for  breach  of  contract  in  selling  the 
stock  for  the  benefit  of  the  enterprise 
and  for  mismanaging  the  corporation, 
see  Woolf  v.  Barnes,  46  N.  Y.  Misc. 
Rep.  169  (1905).  Failure  of  the  ven- 
dee to  complete  the  purchase  in  accord- 
ance with  the  contract,  in  which  con- 
tract certain  other  persons,  who  had 
agreed  to  purchase  the  stock,  join, 
renders    all    of    them    jointly    liable. 


1017 


§  335.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


fulfill  the  obligation  on  his  part  by  tendering  to  the  vendee  certificates 
of  stock,  duly  indorsed  by  himself,  and  containing  a  power  of  attorney 
authorizing  the  vendee  to  obtain  a  registry  of  the  transfer  on  the  cor- 
porate books. ^  If  the  vendor  causes  the  stock  to  be  transferred  on  the 
corporate  book  to  the  vendee,  this  is  sufficient.'-  If  the  defendant  is  not 
in  the  state  at  the  time  when  tender  should  be  made,  tender  may  be 
made  when  he  returns.^  A  tender  of  a  certificate  indorsed  in  blank,  not 
by  the  vendor,  but  by  some  previous  owner,  is  insufficient.  The  vendee 
is  not  obliged  to  trace  his  vendor's  title  from  the  name  appearing  on  the 
certificate.^  A  contract  to  buy  stock  in  a  West  Virginia  corporation 
cannot  be  enforced  by  tendering  stock  in  a  Connecticut  corporation.^ 


Walter  v.  Rafalsky,  113  N.  Y.  App. 
Div.  223  (1906) ;  aff'd,  186  N.  Y.  543. 
1  "When  certificates  of  shares  are 
given  to  a  purchaser  they  are  analo- 
gous to  the  sale  of  chattels,  and  the 
assignment  and  delivering  of  the  cer- 
tificates is  a  symbolical  delivery  of  the 
shares  themselves."  Noyes  v.  Spauld- 
ing,  27  Vt.  420  (1855);  Duchemin  v. 
Kendall,  149  Mass.  171  (1889) ;  Mer- 
chants' Nat.  Bank  v.  Richards,  6  Mo. 
App.  454  (1879) ;  Eastman  v.  Fiske,  9 
N.  H.  182  (1838);  Munn  v.  Barnum, 
24  Barb.  283  (1857) ;  Bruce  v.  Smith, 
44  Ind.  1  (1873).     Cf.  Moore  v.  Hud-    of    the    company,    and    the    company 


ficient  delivery  if  the  stock  is  already 
held  by  one  of  them  in  pledge,  all  of 
which  is  known  to  the  other.  Fuehr- 
man  v.  McCord,  107  N.  Y.  App.  Div. 
12  (1905) ;  aff'd,  186  N.  Y.  566. 

2  White  V.  Salisbury,  33  Mo.  1.50 
(1862).  See  Merchants'  Nat.  Bank 
V.  Richards,  6  Mo.  App.  454  (1879); 
aff'd,  74  Mo.  77.  Where  an  execu- 
tory sale  of  stock  is  made,  with  a  for- 
feit in  case  it  is  not  completed,  and 
the  vendor,  without  the  knowledge  of 
the  vendee,  causes  the  stock  to  be 
transferred  to  the  vendee  on  the  books 


son  River  R.  R.,  12  Barb.  L56  (1851). 
It  is  not  a  sufficient  tender  to  deposit 
the  certificates  of  stock  with  the 
clerk  of  the  court  unindorsed.      Sub- 


fails,  and  the  next  day  the  parties, 
without  knowledge  of  the  failure, 
close  the  transaction,  the  vendor  may 
be  held  liable  on  the  statutory  liability 


sequent    indorsement    after   the   stock    on    such   stock.     May    v.    McQuillan, 


has  been  sold  for  non-payment  of  assess- 
ments is  insufficient.  Kelley  v.  Owens, 
120  Cal.  502  (1898) ;  aflf'd,  .52  Pac.  Rep. 
797  (1898).  Where  a  firm  contracts 
to  sell  stock,  and  then  both  members  of 
the  firm  die,  a  tender  of  certificates 
standing  in  the  names  of  the  indi- 
vidual members  of  the  firm,  and  not 
signed  in  blank,  is  not  a  sufficient 
tender.  Nicholls  v.  Reid,  109  Cal. 
630  (1895).  See  also  Holmes,  etc. 
Manuf.  Co.  v.  Holmes,  etc.  Metal  Co., 
53  Hun,  52  (1889);  aff'd,  127  N.  Y. 
252.  Where  the  vendor  brings  into 
court  a  certificate  for  fifty-six  shares 
of  stock,  and  the  sale  was  for  only  fif- 


129  Mich.  392  (1902).  In  Oklahoma 
it  is  held  that  the  vendor  of  stock  in 
suing  for  the  price,  must  allege  tender 
and  refusal  of  stock,  and  that  the 
plaintiff  was  able,  willing  and  ready 
to  deliver,  even  though  the  vendor  had 
transferred  the  stock  to  the  vendee  on 
the  books  and  had  tendered  the  new 
certificate,  but  brought  suit  to  enforce 
the  contract  instead  of  to  recover 
damages  for  its  breach.  Haynes  v. 
Brown,   18  Okla.  389  (1907). 

3  Edmonds  v.  Evarts,  146  Mich.  485 
(1906). 

4  Hare  v.  Waring,  3  M.  &  W.  362, 
380     (18.38),     per     Parke,     B.     "The 


ty-one  shares,  he  cannot  recover  the  party  is  to  convey  and  deliver  certifi- 

purchase    price.     Hamilton    v.    Finne-  cates    showing   either   on  the  face   of 

gan,    117    Iowa,    623    (1902).     Where  them  or  from  the  indorsements  that 

a  stockholder  "agrees  to  turn  over"  the  title  is  in  the  person  conveying." 
to  two  parties  all  the  stock  owned  by  ^  Craig    Silver    Co.    v.    Smith,    163 

him  in  a  certain  corporation  it  is  suf-  Mass.  262  (1895). 

1018 


XX.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  335. 


An  agreement  to  deliver  stock  in  a  company  to  be  formed,  nothing  being 
said  as  to  any  preferred  stock,  is  not  fulfilled  by  delivering  common 
stock,  where  there  is  preferred  issued  also.^  The  vendor  in  order  to  sue 
for  the  purchase  price  must  keep  on  hand  or  within  control  from  the 
time  of  tender  to  the  time  of  trial  the  stock  involved.^  Where  tender 
of  the  stock  is  made  in  court  and  the  vendor  obtains  judgment  for  the 
price,  the  tender  is  presumed  to  have  been  continued.^  A  tender  fol- 
lowed up  by  producing  the  certificates  in  court  and  filing  them  with 
the  clerk  on  the  trial  is  sufficient.''  A  person  holding  an  option  or  right 
to  buy  stock  need  not  make  a  technical  common-law  tender  of  the  money, 
inasmuch  as  there  is  something  to  be  performed  on  both  sides,  and  hence 
if  the  purchaser  cannot  find  the  vendor  after  due  search  for  him  and  the 
purchaser  then  notifies  the  vendor  by  letter,  there  is  a  sufficient  tender 
on  his  part.^  Tender  of  stock  may  be  made  by  the  vendors  depositing 
"  the  same  in  a  bank  and  notifying  the  vendees  of  such  deposit,  where  the 
vendees  are  nine  in  number  and  the  sale  is  to  all  of  them  jointly,  and 
where  such  delivery  is  a  reasonable  one.  Even  though  such  tender  is 
made  after  the  day  fixed  by  the  contract,  yet,  if  other  features  of  the 
contract  have  been  carried  out  by  the  vendor,  a  tender  after  the  day 
fixed  may  be  sufficient.^     A  sale  of  stock  for  one  dollar  and  certain  pay- 


iMcIlquham  v.  Taylor,  [1895]  1 
Ch.  53.  See  also  Faulkner  v.  Robin- 
son, 70  S.  W.  Rep.  990  (Tex.  1902). 
An  agreement  that  a  note  may  be 
paid  by  certain  stock  in  case  the  stock 
is  not  sold  when  the  note  becomes  due 
is  effective  only  in  case  the  stock  is 
tendered  when  the  note  becomes  due, 
and  if,  in  the  meantime,  the  stock  has 
been  largely  increased,  the  tender  is 
not  good.  Tranter  v.  Hibbard,  108 
Ky.  265  (1900). 

2  Ortmann  v.  Fletcher,  117  Mich. 
501  (1898). 

3  West  V.  Averill,  etc.  Co.,  109 
Iowa,  488  (1899).  See  also  Cragin  v. 
O'Connell,  50  N.  Y.  App.  Div.  339 
(1900);  aff'd,  169  N.  Y.  573.  In  a 
partition  suit,  where  the  defendant 
claims  that  he  is  entitled  to  a  deed 
from  the  plaintiff  on  delivering  a 
certain  amount  of  stock,  the  defend- 
ant need  not  bring  the  stock  into 
court  and  make  a  tender  upon  the 
trial.  The  decree  may  provide  that 
the  deed  shall  be  made  upon  the  de- 
livery of  the  stock.  Heyman  v. 
Swift,  91  N.  Y.  App.  Div.  352  (1904). 
Where  the  purchaser  of  a  plant  and 
stock  is  sued  for  the  price  and  judg- 


ment is  recovered,  he  may  afterwards 
bring  suit  for  the  stock  and  for  divi- 
dends paid  after  the  time  when  he 
would  have  been  entitled  to  the  stock, 
if  he  had  fully  complied  with  his  con- 
tract. Beaty  v.  Johnston,  66  Ark.  529 
(1899).     See'§  476  and  note  1,  p.  1118. 

*  Wisconsin  Lumber  Co.  v.  Greene, 
etc.  Co.  127  Iowa,  350  (1904). 

5  Guilford  v.  Mason,  22  R.  I.  422 
(1901)  ;  s.  c,  53  Atl.  Rep.  284.  Even 
though  a  promoter  by  agreement 
made  with  a  foreign  corporation,  be- 
fore the  incorporation  of  a  mining 
company,  was  to  have  one  share  of 
stock  for  his  services  for  every  ten 
shares  which  he  obtained  subscrip- 
tions for,  and  the  company  accepted 
the  subscriptions,  yet  he  cannot  hold 
it  liable  for  the  value  of  the  stock 
to  be  received  by  him  as  commissions 
where  he  merely  demanded  it  by  let- 
ter and  the  company  offered  to  deliver 
it  after  suit  was  brought.  Teeple  v. 
Hawkeye,  etc.  Co.,  137  Iowa,  206 
(1908). 

«  Kauffman  v.  Reader,  108  Fed.  Rep. 
171  (1901).  It  is  a  sufficient  tender 
if  the  stock,  duly  assigned,  is  sent  to 
a  bank  at  the  purchaser's  place  of  busi- 


1019 


§335. 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[CH.  XX. 


merits  thereafter  to  be  made  is  an  executory  sale,  and  if  the  stock  by  the 
agreement  is  deposited  in  a  bank  to  be  dehvered  on  payment  of  price, 
the  vendor  may  maintain  a  suit  in  equity  for  the  price,  it  being  in  the 
nature  of  specific  performance,  and  it  not  being  possible  for  him  to  tender 
the  stock  itself.^  The  vendor  need  not  tender  the  stock  before  suing  for 
failure  of  the  vendee  to  complete  the  purchase,  where  the  contract  pro- 
vided that  the  vendor  should  hold  the  stock  until  called  for.^  A  vendor 
of  bonds  must  make  tender  even  though  the  vendee  has  applied  for 
further  time.^  Where  one  promoter  does  not  deliver  to  the  other  the 
stock  to  which  the  latter  is  entitled  by  contract,  but  tenders  only  one-half 
of  it,  the  latter  may  obtain  judgment  for  the  value  of  the  entire  amount 
of  stock  to  which  he  is  entitled.^  An  owner  of  stock,  having  the  option 
to  sell  the  same  to  a  person  on  a  certain  day,  must  tender  it  on  that  day, 
even  though  it  is  a  holiday  other  than  Sunday.  The  fact  that  the  tender 
was  made  later,  and  the  vendee  took  time  to  consider  and  then  returned 
the  stock,  and  the  fact  that  the  vendee  afterwards  offered  to  take  a  part 
of  the  stock,  is  not  a  waiver  of  the  tender.^  Tender  need  not  be  made 
where  the  ability  to  make  a  tender  is  shown,  and  the  other  party  re- 
fuses to  accept  tender  and  denies  the  contract.^  In  England,  where 
a  transfer  of  shares  is  to  be  made  by  a  deed,  it  is  the  duty  sometimes  of 


ness  with  instructions  to  transfer  the 
same  to  the  purchaser  on  payment  of 
the  amount  due  and  the  bank  notifies 
the  purchaser  to  that  effect,  especially 
where  the  purchaser  had  notified  one  of 
the  vendors  that  he  would  not  perform. 
Osgood  V.  Skinner,  211  111.  229  (1904). 
'  David  V.  M'Rae,  18.3  Fed.  Rep. 
812   (1910) ;  aff'd,  184  Fed.  Rep.  988. 

2  Weymouth  v.  Goodwin,  105  Me. 
510  (1909). 

3  Greenwood  v.  Watson,  171  Fed. 
Rep.  619  (1909). 

*Shuler?;.Allam,  45  Colo.  372  (1909). 

5  Page  V.  Shainwald,  169  N.  Y.  246 
(1901).  Where  a  contract  of  sale  of 
stock  is  made  February  12th  and  the 
vendee  asks  delivery  and  offers  to  pay 
on  June  13th,  the  measure  of  damages 
in  a  suit  by  him  for  non-delivery  is  the 
difference  between  the  contract  price 
and  the  market  value  on  June  13th, 
even  though  a  formal  tender  of  the 
purchase  price  is  not  made  until 
about  two  months  later,  the  vendor 
not  having  objected  to  the  first  form 
of  tender.  Sloan  v.  McKane,  131  N.  Y. 
App.  Div.  244  (1909).  The  necessity 
of  tender  is  not  waived  by  the  buyer's 
letter  that  his  agent  would  communi- 


cate with  the  seller.  Greenwood  v. 
Watson,  171  Fed.  Rep.  619  (1909). 
6Eames  V.  Haver,  111  Cal.  401 
(1896).  Where  the  vendor  delivers  a 
part  of  the  securities  under  a  contract 
of  sale,  and  the  vendee  retains  the 
same  and  claims  that  they  had  always 
been  his  property,  the  vendor  need  not 
tender  the  remainder  before  suing  for 
the  purchase  price,  but  is  liable  to  the 
vendee  for  the  part  not  so  tendered. 
Stokes  V.  Mackay,  147  N.  Y.  223 
(1895).  No  tender  is  necessary  under 
a  contract  giving  the  right  to  return 
stock  one  year  after  date,  where,  be- 
fore the  termination  of  the  year,  the 
original  vendor  refused  tender  and 
ordered  the  vendee  not  to  return  and 
stated  that  the  stock  was  worthless, 
which  was  a  fact.  Williams  v.  Pat- 
rick, 177  Mass.  160  (1900).  A  tender 
of  the  stock  need  not  be  made  by  the 
vendor  if  the  vendee  declines  to  com- 
plete the  contract  on  the  ground  that 
the  contract  was  not  legal.  West  v. 
Averill,  etc.  Co.,  109  Iowa,  488  (1899). 
No  tender  of  the  stock  need  be  made 
if  the  vendor  repudiates  the  contract. 
Maguire  v.  Halsted,  18  N.  Y.  App. 
Div.   228    (1897).     A   tender   may   be 


1020 


I.  XX.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[§  335. 


the  vendor/  and  sometimes  of  the  vendee,"  to  furnish  the  necessary  deed, 
according  to  the  custom  of  the  market  in  which  the  sale  is  made.  If, 
after  the  vendee  accepts  a  tender  of  the  certificates,  the  corporation  re- 
fuses to  allow  a  registry  and  transfer  on  the  corporate  books,  the  vendor 
is  liable  to  him,  since  the  registry  is  held  to  have  been  guaranteed.^ 
The  vendee  may  decline  to  accept  the  certificates  if  the  stock  has  been 
attached."*  But  the  vendee  cannot  decline  the  tender  on  the  ground 
that  the  corporation  has  issued  stock  at  a  discount,  nor  because  it  has 
mortgaged  its  property.^  A  contract  whereby  stock  is  sold  to  be  paid 
for  in  the  future  is  not  forfeited  by  mere  failure  to  pay  as  agreed  upon.^ 


waived.  Kuhn  v.  McKay,  7  Wyo.  42 
(1897).  A  broker  in  suing  a  customer 
on  the  latter' s  agreement  to  hold  the 
broker  harmless  in  repurchasing  cer- 
tain stock  need  not  tender  the  stock  in 
suing  on  the  agreement.  Rawle  v. 
Moore,  142  N.  Y.  App.  Div.  429 
(1911).     See  101  N.  E.  Rep.  1058. 

1  Shaw  V.  Rowley,  16  M.  &  W.  810 
(1847). 

2  Stephens  v.  De  Medina,  4  Q.  B. 
422  (1843). 

3  Wilkinson  t'.  Llovd,  7  Q.  B.  27 
(1845). 

^Eastman  v.  Fiske,  9  N.  H.  182 
(1838). 

^Noyes  v.  Spaulding,  27  Vt.  420 
(1855).     See    also    §  350,    etc.,    infra. 

*  Chater  v.  San  Francisco,  etc.  Co., 
19  Cal.  219  (1861),  where  payment 
was  made  in  notes  and  labor,  and  the 
notes  were  not  paid.  Subsequent  div- 
idends on  the  stock  are  to  be  applied 
to  the  payment  of  such  notes  when 
the  dividends  have  been  received  by 
the  vendor.  A  sale  of  stock  to  take 
effect  when  a  note  given  in  payment 
is  paid  does  not  enable  the  vendee  to 
claim  the  stock  long  subsequently,  the 
note  not  having  been  paid.  Davison 
V.  Davis,  125  U.  S.  90  (1888).  Where, 
however,  two  parties',  one  owning 
stock,  the  other  bonds,  contract  to  ex- 
change the  same,  delivery  being  in 
escrow  at  once,  and  absolutely  after 
the  performance  of  certain  things,  a 
failure  of  one  party  to  perform  on  his 
part  enables  the-  other  to  have  the 
contract  canceled  by  a  court  of  equity. 
Wilson  V.  Roots,  119  111.  379  (1887). 
Where  no  certificates  of  stock  are 
issued  and  a  stockholder  delivers  an 
assignment  of  her  stock  for  a  specified 


sum,  delay  in  paying  the  sum  does  not 
enable  the  vendor  to  sell  the  stock  in 
the  meantime  to  some  one  else.  Jud- 
son  V.  Stonnington  Min.  Co.,  128 
Mich.  103  (1901).  Where  fifty  shares 
of  stock  are  sold,  but  only  twenty- 
five  shares  are  delivered,  and  the, 
vendor  declines  to  deliver  the  balance, 
a  suit  by  the  vendee  on  the  ground 
of  fraud  and  a  rescission  will  fail. 
Matthews  v.  Cady,  61  N.  Y.  651 
(1875).  Although  a  party  to  whom 
bonds  and  stock  have  been  sold  or 
issued  to  be  paid  for  in  installments 
has  paid  in  part  and  is  unable  to  pay 
the  remainder,  the  vendor  cannot  re- 
scind and  demand  back  the  securities 
unless  he  returns  the  money  already 
paid.  American  Water-works  Co.  v. 
Venner,  18  N.  Y.  Supp.  379  (1892). 
Where  the  owner  of  a  majority  of  the 
stock  sells  it,  the  purchase  price  being 
only  paid  in  part,  and  retains  the 
stock  in  his  own  name  until  the  full 
price  is  paid,  he  cannot  be  compelled 
to  deliver  the  stock  or  to  refrain  from 
ousting  the  vendee  from  the  presi- 
dency of  the  corporation,  where  the 
vendee  fails  to  meet  the  other  pay- 
ments, even  though  the  vendee  has 
proceeded  to  improve  the  property. 
Stockton  V.  Russell,  54  Fed.  Rep.  224 
(1892).  For  failm-e  to  deliver  the 
measure  of  damages  is  the  difference 
in  the  market  value  at  the  date  of  the 
contract  and  at  the  date  fixed  in  the 
contract  for  the  delivery,  or  the  date 
of  the  breach  of  the  contract.  The 
price  at  which  the  vendee  had  re-sold 
is  not  admissible  unless  the  vendor 
had  notice  thereof.  Coffin  v.  State, 
144  Ind.  578  (1896).  A  company  may 
give  a  person  an  option  to  subscribe 


1021 


§335. 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


A  person  who  is  under  contract  to  purchase  stock  cannot  defeat  that 
contract  by  the  fact  that  the  corporation  was  insolvent  at  the  time  the 
contract  was  entered  into.^  An  agreement  to  dehver  stock  free  and  clear 
of  all  incumbrances  does  not  refer  to  incumbrances  against  the  corpora- 
tion.^  The  legality  of  the  sale  of  stock  is  governed  by  the  law  of  the 
state  within  which  it  is  made.^  It  is  no  defense  to  a  contract  to  buy 
stock  for  the  vendee  to  allege  that  the  directors  have  committed  an 
ultra  vires  act  in  issuing  other  stock  at  a  discount.'*  A  purchaser  of 
stock  in  a  de  facto  corporation  cannot  repudiate  the  sale  on  the  ground 
that  the  company  was  not  properly  organized.^ 


for  shares  of  stock  in  the  company. 
If  the  company  sells  its  assets  before 
such  option  is  exercised,  the  party 
holding  the  option  may  exercise  it 
and  sue  for  damages.  The  price  at 
which  the  company  sold  its  assets  is 
the  basis  of  the  damage.  Re  South 
African,  etc.  Co.,  74  L.  T.  Rep.  769 
(1896) ;  aff'd,  77  L.  T.  Rep.  377.  A 
person  who  contracts  to  sell  to  another, 
on  or  before  three  years  from  date, 
certain  stock  at  a  certain  price,  interest 
to  be  paid  by  the  vendee  in  the  mean- 
time, and  the  stock  to  be  deposited  in 
escrow,  cannot  recover  the  price  at 
the  end  of  the  three  years  if  he  has  not 
deposited  the  stock  in  escrow  as  agreed. 
Umfrid  v.  Brooks,  14  Wash.  67.5  (1896). 
An  agreement  of  a  stockholder  that  if 
he  sells  a  certain  amount  of  his  stock  he 
shall  sell  to  another  stockholder  his 
remaining  stock  does  not  apply  where 
he  transfers  only  a  portion  of  the  first- 
mentioned  stock.  Burden  v.  Burden, 
8  N.  Y.  App.  Div.  160  (1896) ;  aff'd, 
159  N.  Y.  287  (1899).  See  also  §  766c, 
infra. 

1  See  §  350,  infra.  A  seller  cannot 
treat  a  contract  as  abandoned  sim- 
ply because  the  purchaser  does  not 
make  payments  promptly  in  accord- 
ance with  the  contract,  unless  the  pur- 
chaser refuses  in  such  a  way  as  to 
show  that  he  intends  to  renounce  the 
contract.  Monarch,  etc.  Co.  v.  Royer, 
etc.  Co.,  105  Fed.  Rep.  324  (1900). 
Where  the  buyer  does  not  pay  for 
shipments  as  called  for  by  the  con- 
tract, the  seller  may  repudiate  the 
contract..  Hull,  etc.  Co.  v.  Empire, 
etc.  Co.,  113  Fed.  Rep.  2.56  (1902).  If 
the  seller  claims  that  the  amount  al- 
ready paid  is  forfeited  by  the  failure 


of  the  purchaser  to  pay  one  of  the 
installments  when  due,  it  is  his  duty 
to  inform  the  purchaser  of  such 
claim,  in  order  that  he  may  pay  or 
tender  such  amount.  Cushman  v. 
Jewell,  7  Hun,  525  (1876).  Where  an 
executory  contract  for  the  sale  of 
chattels  provides  that  the  purchase 
price  shall  be  paid  in  installments, 
and  that  title  shall  not  pass  until  the 
price  is  fully  paid,  and  the  vendor 
permits  the  vendee  to  retain  posses- 
sion and  make  other  payments,  after 
the  whole  contract  price  is  due,  he 
may  not  seize  the  property  and  ter- 
minate the  contract  for  non-payment 
until  he  has  demanded  payment. 
O'Rourke  v.  Hadeock,  114  N.  Y.  541 
(1889). 

2  Williams  v.  Hanna,  40  Ind.  535 
(1872). 

'  Dow  V.  Gould,  etc.  Co.,  31  Cal.  629 
653     (1867).     See    also     §  343,    infra. 

*  Faulkner  v.  Hebard,  26  Vt.  452 
(1854).  A  preferred  stockholder  may 
agree  with  the  corporation  that  his 
stock  shall  be  common  stock  in  con- 
sideration of  the  corporation  waiving 
the  right  to  redeem  such  preferred 
stock  as  provided  by  the  terms  of  such 
stock  in  the  original  issue  thereof. 
A  purchaser  of  other  stock  in  the  cor- 
poration cannot  when  sued  on  the 
contract  of  purchase  set  up  that  such 
agreement  in  regard  to  the  preferred 
stock  was  illegal.  A  pledgee  of  such 
preferred  stock  is  not  bound  thereby, 
but  if  the  debt  is  afterwards  paid  his 
objection  falls.  Pendleton  v.  Harris- 
Emerey  Co.,  124  Iowa,  361  (1904). 
That  fraud  is  a  defense,  see  §§  349-357, 
infra. 

^Burwash    v.    Ballou,    230    111.    34 


1022 


XX.] 


CONTKACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  336. 


§  336.  Difficulty  is  often  experienced  in  determining  what  the  meas- 
ure of  damages  is  for  breach  of  a  contract  relative  to  the  sale  of  stock. 
In  certain  cases,  where  the  stock  has  been  delivered  or  tendered,  the 
measure  of  damages  is  the  purchase  price  fixed  by  the  contract  itself.^ 


(1907).  See  also  §  334,  supra.  In  a 
suit  by  the  vendor  of  the  stock  for 
the  price,  it  is  no  defense  that  the 
corporation  had  not  recorded  its  cer- 
tificate of  incorporation  with  the  re- 
corder of  deeds  as  required  by  statute, 
it  being  shown  that  the  certificate  had 
been  filed  with  the  secretary  of  state 
and  the  corporation  organized  and  is 
doing  business.  Marshall  v.  Keach, 
227  111.  35  (1907). 

1 A  vendor  may  tender  the  stock 
and  sue  for  the  purchase  price.  Prest 
V.  Cole,  183  Mass.  283  (1903).  A  ven- 
dor may  recover  the  price  of  the  stock 
as  specified  in  the  contract.  Osgood 
V.  Skinner,  211  111.  229  (1904).  The 
vendor  may  sue  for  the  contract  price 
after  tendering  the  stock,  and  in  his 
damages  he  is  not  confined  to  the  differ- 
ence between  the  contract  price  and 
the  value  of  the  stock  at  the  time  of 
breach.  Pittsburgh,  etc.  Co.  v.  Bown, 
174  Fed.  Rep.  981  (1909).  Where 
the  stock  is  sold  to  be  delivered  there- 
after, and  the  vendee  refuses  to  accept 
the  stock,  the  vendor  may  tender  the 
stock  and  then  sue  for  the  contract 
price.  In  Mobley  v.  Morgan,  6  Atl. 
Rep.  694  (1886),  the  court  said: 
''The  court  refused  to  instruct  the 
jury  that  it  was  necessary  for  Morgan 
to  seU  the  stock  on  the  market  for  the 
best  price  he  could  get,  and  that  the 
measure  of  damages  would  be  the  dif- 
ference between  the  price  thus  ob- 
tained and  the  contract  price ;  and 
this  refusal  is  assigned  for  error.  Of 
course,  the  seller  would  be  at  liberty, 
after  tender  and  refusal,  to  adopt  this 
course ;  but  it  was  not  essential  to 
his  right  of  action.  The  measure  of 
damages  was  the  difference  between  the 
market  price  of  the  stock  at  the  time 
of  the  breach  and  the  contract  price. 
This  is  the  ordinary  rule ;  but  there 
was  evidence  that  the  stock  had  no 
value,  and  there  is  no  certainty  — 
indeed,  no  proof  —  that  upon  a  re-sale 
any  price  could  have  been  obtained 
for  the  stock,  or  that  it  had  any  market 


value  when  Parker  finally  refused  to 
take  it.  Under  these  circumstances 
we  see  no  reason  why  the  price  agreed 
to  be  paid  should  not  be  adopted  as 
the  measure  of  damages,  if  that  was  the 
only  mode  by  which  fuU  compensation 
could  be  made  for  the  breach  of  con- 
tract by  the  purchaser." 

In  Barnes  v.  Brown,  130  N.  Y.  372 
(1892),  the  court  said:  "In  the  ab- 
sence of  special  circumstances  in  an 
action  for  conversion  of  personal  prop- 
erty as  well  as  one  for  failure  to  de- 
liver it  in  performance  of  a  contract 
where  consideration  has  been  re- 
ceived, the  value  of  the  property  at 
the  time  of  such  conversion  or  de- 
fault, with  interest,  is  the  measure  of 
compensation."  As  to  remedies  for 
a  breach,  see  also  Benjamin  on  Sales. 
For  the  measure  of  damage,  see  ch. 
XXXV,  infra.  The  vendor  of  stock 
which  has  been  delivered  to  a  third 
person,  according  to  the  agreement, 
may  sue  for  the  price  irrespective  of 
the  market  value  of  the  stock.  Obery 
V.  Lander,  179  Mass.  125  (1901).  As 
regards  the  pleadings  in  an  action  by 
a  vendor  of  stock  to  recover  damages 
against  the  vendee  for  refusal  to  ac- 
cept and  pay  for  stock  which  the  lat- 
ter had  agreed  to  accept  at  a  stated 
price,  one  year  from  date,  if  the  for- 
mer desired  to  sell,  see  Struthers  v. 
Drexel,  122  U.  S.  487  (1887).  The  ven- 
dor on  tendering  the  stock  is  entitled 
to  sue  for  the  purchase  price.  Rey- 
nolds V.  Callender,  19  Pa.  Sup.  610 
(1902).  The  remedy  of  a  person,  who 
has  sold  his  stock  to  another  person, 
who  had  agreed  to  pay  him  the  same 
price  that  the  latter  received  for  other 
similar  stock,  but  who  paid  the  for- 
mer less,  is  at  law  and  not  in  equity. 
Martin  v.  Wilson,  155  Fed.  Rep.  97 
(1907).  Where  the  contract  of  piu-- 
chase  says  "I  take,"  the  vendor  may 
tender  the  stock  and  sue  for  the  full 
purchase  price,  this  being  not  a  prom- 
ise to  purchase  but  an  actual  pur- 
chase.    Graham  v.  Burgiss,  70   C.  S. 


1023 


§336. 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[CH.  XX. 


The  vendor  may  tender  the  stock  to  the  vendee  and  sue  for  the  price, 
or  may  sell  after  notice  to  the  vendee  and  then  sue  for  the  difference, 

404  (1907) ;  holding  also  that  the  property  connected  with  its  use  for 
vendor  may  assign  to  another  person  milling  and  distilling  purposes.  With- 
his  right  to  tender  the  stock  and  sue  out  discussing  the  question  whether 
for  the  purchase  price.  Where  the  the  sale  of  shares  of  stock  can  be 
price  is  fixed  in  the  contract  the  meas-  specifically  enforced  in  equity,  it  is 
ure  of  damages  in  a  suit  against  the  sufficient  to  say  that  the  sale  here  was 
vendee  for  failure  to  take  the  stock  is  in  fact  a  sale  of  real  estate,  and  the 
the  price  agreed  upon  and  not  the  circumstance  that  personalty  was  in- 
difference between  the  market  price  eluded  in  the  sale  would  not  affect 
and  the  contract  price.  Lydon  v.  the  power  of  a  court  of  equity  to  af- 
Sullivan,  101  S.  W.  Rep.  940  (Ky.  ford  relief  by  requiring  specific  per- 
1907).  The  vendor  may  claim  dam-  formance."  The  measure  of  damages 
ages  for  a  breach,  in  that  the  vendee  for  breach  of  a  contract  to  purchase 
does  not  pay  the  contract  price  and  stock  is  the  difference  between  the 
take  the  stock,  or  he  may  bring  contract  price  and  the  market  value 
an  action  "in  effect  for  the  specific  of  the  stock  at  the  time  and  place  of 
performance  thereof,"  in  which  ease  delivery,  with  interest.  Corser  v. 
he  must  allege  readiness  to  deliver  Hale,  149  Pa.  St.  274  (1892).  Where 
the  stock.  Corning  v.  Roosevelt,  11  a  vendee  refuses  to  carry  out  an  ex- 
N.  Y.  Supp.  758  (1890).  For  breach  eeutory  contract  for  the  sale  of 
the  vendor  may  tender  the  stock  and  shares,  the  measure  of  damages  is 
then  sue  for  the  entire  price.  The  the  difference  between  the  price  as 
judgment  will  allow  the  vendor  to  fixed  by  the  contract  and  the  value  of 
retain  the  stock  until  the  judgment  is  the  stock  at  the  time  of  tender  and  re- 
satisfied.  Finlayson  v.  Wiman,  84  fusal  of  the  vendee  to  fulfill.  See 
Hun,  357  (1895).  Where  the  vendee  Earned  v.  Hamilton,  2  Ry.  &  Canal 
agrees  to  give  a  note  and  the  stock  as  Cas.  624  (1841) ;  Tempest  v.  Kilner,  3 
coUateral,  but  gives  the  note  only,  C.  B.  249  (1846),  and  Stewart  v. 
the  vendor  may  return  the  note  and  Cauty,  8  M.  &  W.  160  (1841) ;  Shaw  «. 
sue  at  once  for  the  price.  Rennyson  Holland,  15  M.  &  W.  136  (1846).  If  a 
V.  Reifsnyder,  1  Pa.  Dist.  Rep.  758  person  sells  and  conveys  property  to 
(1892).  The  court  will  compel  the  a  company  to  be  paid  for  in  stock, 
vendee  to  take  and  pay  for  stock  which  the  vendee  refuses  to  deliver, 
where  it  would  compel  the  vendor  to  the  vendor  may  recover  the  value  of 
deliver  the  stock  if  he  defaulted  on  the  stock.  Humaston  v.  Telegraph 
the  contract  to  sell.  Bumgardner  v.  Co.,  20  Wall.  20  (1873).  Where  an 
Leavitt,  35  W.  Va.  194  (1891).  Where  agent  to  sell  stock  is  to  have  any  ex- 
the  vendor  gets  judgment  for  the  cess  of  price  over  a  sum  named  to  him 
price  of  the  stock  sold  but  not  deliv-  by  the  vendor,  and  the  agent  finds  a 


ered,    the    court    will    order    him    to 
deposit   the  stock  with   the  court  or 
lose    his    judgment.       McKeever     v. 
Dady,  18  N.  Y.  Supp.  439  (1892). 
In  Perin  v.  Megibben,  53  Fed.  Rep. 


customer  at  an  advanced  price  and 
the  vendor  refuses  to  sell,  the  agent 
may  recover  such  profit  as  he  lost 
thereby.  Mattingly  v.  Roach,  84  Cal. 
207    (1890).     See   also,   as   to   agents, 


86   (1892),   the  court  granted  specific  §  334,  supra.     Where  the  vendor,  after 

performance  of  a  contract  to  sell  stock  tendering    the    stock,    assumes    to    be 

in  behalf  of  the  vendor  and  against  the  owner  and  directs  a  sale  and  gives 

the  vendee.     The   court   said:     "The  a  proxy  to  vote,  he  can  recover  only 

agreement  was  in  form  a  contract  to  the    difference    between    the    market 

buy   all    the    shares    of   stock  .in    the  price  at  the  time  of  delivery  and  the 

incorporated      companies.     The      Ian-  contract  price.     Hamilton  v.  Finnegan, 

guage  of  the  contract  shows  that  the  117  Iowa,  623  (1902).     Where  a  party 

real  agreement  was  to  buy  certain  real  holding    stock    in    escrow    refuses    to 

estate,     together    with    the    personal  deliver  when  he  should  and  in  a  suit 

1024 


CH.   XX. 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  336. 


or  may  retain  the  stock  and  sue  for  the  difference  between  the  contract 
and  market  price.^     The  supreme  court  of  the  United  States  lays  down 


for  conversion,  instead  of  depositing 
the  stock  in  court,  sets  up  a  defense 
which  is  without  merit,  the  value  of 
the  stock  and  di\adends  and  interest 
may  be  recovered.  Clarke  v.  Eureka, 
etc.  Bank,  123  Fed.  Rep.  922  (1903) ; 
aff'd,  130  Fed.  Rep.  .325.  Where  a 
person  sells  stock,  nothing  being  paid 
down,  but  by  the  contract  on  speci- 
fied dates  any  decline  in  the  market 
price  of  the  stock  should  be  paid  by 
the  vendee  to  the  vendor  and  any 
rise  should  be  paid  by  the  vendor  to 
the  vendee,  and  the  vendor  dies,  his 
estate  is  entitled  to  the  full  selling 
price  on  the  next  accounting  day,  and 
if  the  vendee  does  not  pay  on  a  de- 
mand at  that  time,  and  the  stock  sub- 
sequently advances  in  price,  the  ven- 
dee cannot  have  specific  performance, 
neither  can  he  recover  damages  if  the 
contract  price  exceeded  the  market 
value  when  payment  should  have  been 
made.  Re  Schwabacher,  98  L.  T. 
Rep.  127  (1908). 

1  See  the  cases  in  the  preceding 
note.  The  vendor  of  stock  to  the 
corporation  itself  may  claim  specific 
performance  where  the  stock  has  no 
market  value  and  the  sale  was  in  con- 
sideration of  his  refraining  from  oppos- 
ing certain  measures.  Cole  v.  Cole, 
etc.  Co.,  169  Mich.  347  (1912).  The 
vendor  may  sue  for  the  price  or  may 
re-sell  and  sue  for  the  difference  or 
may  keep  the  stock  and  sue  for  the 
difference  between  the  contract  price 
and  the  market  value  at  the  time  and 
place  of  delivery,  but  where  the  title 
has  not  passed  the  full  price  cannot  be 
sued  for.  Cuthill  v.  Peabody,  12.5 
Pac.  Rep.  926  (Cal.  1912).  The 
vendor's  remedies  for  a  breach  of  a 
contract  to  buj^  stock  are:  (1)  To 
hold  the  stock  for  the  vendee  and 
require  payment  of  the  entire  price ; 

(2)  to  sell  after  notice  to  the  vendee 
and  sue  for  the  difference  between 
the  contract  price  and  the  selling  price  ; 

(3)  to  retain  the  stock  and  sue  for  the 
difference  between  the  contract  price 
and  the  market  value  price.  In  re 
Ives,  11  N.  Y.  Supp.  6.50  (1890). 
No  tender  is  necessary  when  the  suit 


is  for  damages  and  the  vendor  intends 
to     retain     the     stock.     Nysewander 
V.     Lowman,     124    Ind.    584     (1890). 
When  suit  is  brought  to  recover  the 
price  of  stock  sold,  a  delivery  or  tender 
must  be  shown.     Holmes,  etc.  Co.  v. 
Morse,    53    Hun,    58    (1889);     aff'd, 
127    N.    Y.    252.     Where   a    party   is 
sued  on  a  note  he  may  recoup  by  setting 
up  that  the  note  was  given  to  plaintiff 
on     plaintiff's     agreement     to     assign 
and    deliver    certain    shares    of   stock, 
which  were   not   tendered   until  eight 
months   after   the   time   agreed   upon. 
Hill  V.  Southwick,  9  R.  I.  299  (1869). 
For  failure  to  deliver,  the  measure  of 
damages  is  the  difference  in  the  market 
value  at  the  date  of  the  contract  and 
at  the  date  fixed  in  the  contract  for  the 
delivery,  or  the  date  of  the  breach  of 
the  contract.     The  price  at  which  the 
vendee   had   re-sold  is   not  admissible 
unless  the  vendor  had  notice  thereof. 
Coffin  V.  State,   144  Ind.   578   (1896). 
An  order  to  buy  stock  binds  the  pur- 
chaser to  pay  the  whole  price  to  the 
intermediary  and  he  cannot  claim  that 
he    is    liable    only   for    the    difference 
between    the    market    value    and    the 
contract  price.     Bellows  v.  McKenzie, 
212  Mass.  601  (1912).     An  agreement 
to  sell  a  certain  amount  of  stock  in  a 
corporation    to   be    organized    with   a 
specified    capital    is    not    fulfilled    by 
tendering  stock  of  a  corporation  with 
a  less  capital.     Faulkner  v.  Robinson, 
70  S.  W.  Rep.  990  (Tex.  1902).     Liqui- 
dated damages,  specified  in  a  contract 
in  case  of  failure  of  a  party  not  trans- 
ferring   property   in    consideration   of 
stock  to  be  issued  by  a  corporation, 
cannot  be  proved  against  his  bankrupt 
estate,    the  stock   never   having  been 
issued  and  the  property  never  trans- 
ferred, and  no  actual  damage  having 
been   suffered.     Northwest,    etc.    Co., 
V.  Kilbourne,  etc.  Co.,  128  Fed.  Rep. 
256   (1904).     Where  the  vendor  does 
not  tender  the  stock,  he  cannot  recover 
the  contract  price,  but  only  the  differ- 
ence between  that  price  and  the  market 
value.     Andrews  v.  Watson,  Ohio  Cir- 
cuits    (1887),     p.     686.     This     same 
case  arose  three  years  later  in  Ohio 


(65) 


1025 


§336. 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[cH.  XX. 


the  rule  that  the  vendor  of  stock,  upon  the  vendee  refusing  to  fulfill, 
may  sell  the  same  to  the  highest  bidder  at  a  time  and  place  mentioned 
in  a  notice  to  the  vendee,  and  may  hold  the  latter  liable  for  the  differ- 
ence between  the  price  agreed  upon  and  the  price  realized  at  such  sale. 
At  such  sale  the  vendor  may  purchase,  wide  publicity  of  the  notice 
having  been  given  and  full  opportunity  for  competition  at  the  sale  hav- 
ing been  offered.^  The  statute  of  limitations  may  be  a  bar  to  the  ac- 
tion.^ A  deposit  as  a  forfeit  in  case  the  purchaser  does  not  fulfill  may 
be  kept  by  the  vendor  if  the  purchaser  does  not  fulfill.^ 

The  vendee's  remedy  for  a  failure  on  the  part  of  the  vendor  to  de- 
liver is  an  action  for  damages  ^  or  a  bill  in  equity  to  obtain  specific  per- 


Circuit  Courts  (1901),  p.  692,  and  it 
was  then  held  that,  there  being  a 
conflict  of  testimony  as  to  whether 
a  tender  was  made,  that  was  a  question 
for  the  jury,  and  that  the  measure  of 
damages  was  the  difference  between 
the  contract  price  and  the  market 
price,  the  purchaser  having  repudiated 
the  contract  and  thereby  waived 
tender.  A  contract  whereby  the 
vendee  of  bank  stock  agrees  not  to 
sell  it  until  he  has  first  offered  it  to 
the  vendor  at  the  book  value  of  the 
stock,  sustains  a  suit  for  damages 
if  the  vendee  sells  without  first  mak- 
ing such  offer.  The  damage  is  nom- 
inal, unless  special  damage  is  proved, 
and  damage  cannot  be  recovered  for 
loss  of  control  of  the  corporation  by 
reason  of  such  breach.  Cothran  v. 
Witham,  123  Ga.  190  (1905).  A  per- 
son who  makes  a  contract  with  a 
syndicate  by  which  the  latter  agrees 
to  sell  his  stock  and  securities  within 
one  year  at  a  price  not  less  than  the 
price  specified  by  contract,  and  agrees 
that  he  shall  receive  a  stipulated 
price  at  the  end  of  the  year,  may  sue 
for  the  difference  between  the  value 
of  the  securities  at  the  end  of  the 
year  and  the  price  at  which  they 
were  to  be  sold.  Gause  v.  Common- 
wealth Trust  Co.,  Ill  N.  Y.  App.  Div. 
530  (1906). 

1  Clews  V.  Jamieson,  182  U.  S.  461, 
497  (1901). 

2  The  statute  of  limitations  runs 
against  a  receipt  reciting  a  first  pay- 
ment of  stock  "standing  in  my  name 
but  owned  by  him,  and  he  remaining 
responsible  for  the  balance  of  the 
installments   when    called    in,"    there 


being  no  agreement  as  to  the  future 
disposition  of  the  stock  and  of  divi- 
dends. Cone  V.  Dunham,  59  Conn.  145 
(1890).  A  sale  of  a  certificate  to  the 
effect  that  when  stock  is  issued  a  speci- 
fied amount  will  be  issued  to  the  holder 
is  a  valid  sale  and  is  not  defeated  by 
the  statute  of  limitations.  Meehan  v. 
Sharp,  151  Mass.  564  (1890).  Where 
certain  owners  of  stock  place  it  in  the 
hands  of  a  trustee  for  sale  and  the 
trustee  invites  subscriptions  thereto, 
the  subscription  contract  providing 
for  payment  of  one-third  down  and  the 
balance  when  called  for,  the  statute 
of  limitations  is  no  bar  to  an  action 
for  the  two-thirds,  although  six  years 
have  elapsed  since  the  first  payment 
was  made.  Williams  v.  Taylor,  120 
N.  Y.  244  (1890).  See  also  note  4, 
p.  1040,  infra. 

3  Sprague  v.  Booth,  101  L.  T.  Rep. 
211  (1909).  Where  a  person  agrees 
to  buy  stock  for  $8,000  and  gives  his 
note  for  $1,500  to  secure  performance, 
that  amount  to  be  credited  if  the 
balance  is  paid,  this  is  liquidated 
damages  if  the  balance  is  not  paid, 
and  may  be  collected.  Moyses  v. 
Schendorf,  238  111.  232  (1909). 

^  A  person  entitled  by  contract  to 
purchase  stock  of  another  may  col- 
lect damages  against  the  latter  for 
failure  to  comply  with,  the  terms  of 
the  agreement.  Rand  v.  Wiley,  70 
Iowa,  110  (1886).  The  vendor  for 
failure  to  deliver  is  liable  in  damages 
for  the  difference  between  the  contract 
price  and  the  highest  market  value 
of  the  stock  between  the  date  fixed  for 
delivery  and  a  reasonable  time  there- 
after as  determined  by  the  jury.     Vos  v. 


1026 


CH.   XX.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  336. 


formance.^  In  almost  all  cases,  however,  his  remedy  is  an  action  for 
damages  only,  inasmuch  as  specific  performance  of  a  sale  of  personalty 
is  rarely  granted.  In  a  suit  by  the  vendee  for  breach  of  warranty  of 
title,  the  damage  is  the  purchase  price  and  interest,  and  not  the  value  of 
the  stock  and  the  dividends.-  Where  the  vendee  has  paid  the  price  of 
the  stock  and  has  been  refused  delivery  he  may  recover  the  value  of  the 
stock  at  the  time  of  demand.^     In  a  suit  against  the  vendor  for  failure 


ChUd,  etc.  Co.,  137  N.  W.  Rep.  209 
(Mich.  1912).  Where  the  vendor 
has  been  paid  and  fails  to  deliver  for 
thirty  days  and  the  stock  declines, 
the  vendee  can  recover  damages,  even 
though  he  accepted  delivery  at  the 
end  of  thirty  days.  Chapman  v. 
Fowler,  132  N.  Y.  App.  Div.  251  (1909). 
Even  though  the  vendor  of  stock, 
who  takes  a  note  in  payment,  agrees 
that  he  will  renew  it  until  the  dividends 
should  pay  it,  sells  the  note  and  it  is 
enforced  against  the  vendee,  the  ven- 
dee's damage  is  nominal  unless  he 
proves  that  the  stock  is  worth  less 
than  the  amount  of  the  note,  the  stock 
being  retained  by  him.  Troutwine  v. 
Hoff,  126  N.  y.  App.  Div.  556  (1908) ; 
aff'd,  198  N.  Y.  536.  For  failure  to 
deliver,  the  measure  of  damages  is  the 
difference  in  the  market  value  at  the 
date  of  the  contract  and  at  the  date 
fixed  in  the  contract  for  the  delivery, 
or  the  date  of  the  breach  of  the  con- 
tract. The  price  at  which  the  vendee 
has  re-sold  is  not  admissible  unless  the 
vendor  had  notice  thereof.  Coffin  v. 
State,  144  Ind.  578  (1896).  The  meas- 
ure of  damages  in  a  suit  brought  by 
the  purchaser  of  stock  for  failure  of 
the  jvendor  to  fulfill  is  the  difference 
between  the  contract  price  and  the 
market  value  of  the  stock  on  the  day 
of  delivery.  Market  quotations  are 
evidence  of  value  of  stock  only  when 
such  quotations  are  based  on  actual 
sales.  Where  there  have  been  no 
sales,  evidence  of  a  bid  for  the  stock  is 
not  admissible,  unless  it  is  shown  under 
what  circumstances  the  bid  was  made, 
and  whether  it  was  in  good  faith 
and  with  intent  to  fulfill.  Wildes  v. 
Robinson,  50  N.  Y.  App.  Div.  192 
(1900).  In  a  suit  by  a  purchaser  of 
stock  for  failure  of  the  seller  to  de- 
liver, the  damage  is  the  difference 
between   the   purchase   price   and   the 


actual  value  of  the  stock.  Written 
reports  of  the  corporation  to  public 
officials  not  purporting  to  give  the 
value  of  the  property  are  insufficient 
to  prove  value.  Patterson  v.  Plum- 
mer,  10  N.  Dak.  95  (1901).  Where 
a  person  is  paid  for  stock  and  fails  to 
deliver,  the  measure  of  damages  for  a 
breach  of  the  contract  is  what  it 
would  cost  the  party  to  purchase  the 
stock  which  he  is  entitled  to.  If  he 
cannot  purchase  it,  then  the  par  value 
of  the  stock  is  the  measm-e  of  value, 
inasmuch  as  he  would  have  had  to 
pay  that  to  the  corporation  in  order  to 
have  had  the  stock  issued  to  him. 
Barnes  v.  Seligman,  55  Hun,  339 
(1890) ;  aff'd,  130  N.  Y.  372.  Where  a 
vendee  of  stock  in  a  corporation 
which  has  a  franchise,  but  nothing 
else,  is  entitled  to  two  thousand 
shares  of  full-paid  stock  at  a  later 
date,  according  to  the  contract  of  sale, 
his  measure  of  damages  for  failure  of 
the  vendor  to  deliver  the  two  thou- 
sand shares  is  nominal  damages, 
where  there  was  no  market  or  actual 
value  for  the  stock.  Barnes  v.  Brown, 
130  N.  Y.  372  (1892).  If  there  is  a 
dispute  as  to  the  price,  evidence  of  the 
value  of  the  assets  of  the  corporation 
is  admissible.  Mcintosh  v.  McNair, 
53  Oreg.  87  (1909).  Where  the  vendor 
of  stock  is  unable  to  obtain  the  stock 
for  delivery  by  reason  of  an  injunc- 
tion against  the  corporation,  the  vendee 
may  sue  for  the  return  of  the  purchase- 
money.  Rose  V.  Foord,  96  Cal.  152 
(1892).  That  damages  are  a  sufficient 
remedy,  see  1  University  Law  Rev. 
218  (1894). 

1  See  §  337,  infra. 

2  Morgan  v.  Hendrie  Bros.,  etc.,  34 
Colo.  25  (1905). 

3  Belden  v.  Krom,  34  Wash.  184 
(1904).  The  vendee  may  sue  to 
recover  back  his  money,  delivery  hav- 


1027 


§§  337,  338.]      CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC.  [cH.  XX. 

to  deliver  stock,  the  damages  may  include  lost  anticipated  profits,  if 
such  loss  was  within  the  contemplation  of  the  parties,  as  a  measure  of 
liability  in  case  of  breach,  and  if  the  breach  was  the  approximate  cause 
of  the  loss  and  if  the  loss  is  made  out  with  reasonable  certainty.^  A  con- 
tract of  a  person  to  purchase  stock  on  or  before  a  certain  date  is  not  can- 
celed by  his  becoming  bankrupt  before  the  date,  the  purchase  not  having 
been  completed  before  that  date,  even  though  a  subsequent  discharge 
in  bankruptcy  is  granted  to  him.  The  obligation  was  not  absolute 
at  the  time  of  bankruptcy  within  the  meaning  of  the  bankruptcy  act.^ 

§  337.  Specific  performance  as  a  remedy  for  breach  of  a  contract 
to  buy  or  sell  stock.  —  It  frequently  happens  that  the  person  who  has 
contracted  to  purchase  stock  is  particularly  anxious  to  procure  that 
stock,  and  that,  under  the  circumstances  of  the  case,  the  stock  is  worth 
to  him  a  value  not  to  be  compensated  for  by  mere  money  damages. 
This  cannot  happen  in  the  case  of  a  contract  to  sell  securities  issued  by 
the  government,  since  they  may  be  easily  purchased  in  the  market. 
Accordingly,  it  is  well  established,  both  in  England  and  America,  that 
a  contract  for  the  sale  of  government  securities  will  not  be  specifically 
enforced  by  a  court  of  equity,  but  the  vendee  may  sue  the  vendor  in 
an  action  at  law  for  damages  for  breach  of  contract.^ 

§  338.  An  entirely  different  rule  prevails  as  regards  contracts  for 
the  sale  of  stock  of  private  corporations.  If  the  stock  contracted  to 
be  sold  is  easily  obtained  in  the  market,  and  there  are  no  particular  rea- 
sons why  the  vendee  should  have  the  particular  stock  contracted  for,  he 
is  left  to  his  action  for  damages.'*  But  where  the  value  of  the  stock  is 
not  easily  ascertainable,  or  the  stock  is  not  to  be  obtained  readily  else- 

ing   been    refused.     Kinser   v.    Cowie,  538  (1720) ;    Dorison  v.  Westbrook,  5 

235  111.383(1908).     Where  the  vendee  Vin.    Abr.    540     (1722);     Cappur    v. 

pays  for  bonds,  but  -the  vendor  does  Harris,  Bunb.  135  (1723) ;    Buxton  v. 

not  deliver,   the  measure  of  damages  Lister,   3  Atk.   383   (1746).     Cf.   Dol- 

is  not  necessarily  the  market  value  of  oret  v.   Rothschild,   1   Sim.   &  S.   590 

the  bonds,  but  they  may  be  shown  to  (1824)  ;    Colt  v.  Nettervill,  2  P.  Wms. 

be  worth  more  or  less  than  the  market  304  (1725).     See  also  South,  etc.  Co. 

value.     If   there   is   no   market   value  v.  Wallington,  [1898]  A.  C.  309. 

the  real  value  can  be  proved  by  other  *  "It  is  within  the  power  of  a  court 

facts.     Henry  v.  North  American,  etc.  of  equity   to  decree  specific   perform- 

Co.,  158  Fed.  Rep.  79  (1907).  ance  of  a  contract  for  the  sale  and 

1  Crocker- Wheeler  Co.  v.  Bullock,  purchase  of  shares,  yet  when  shares 
134  Fed.  Rep.  241  (1904),  a  case  in-  are  dealt  in  largely  on  the  market, 
volving  a  plan  to  consolidate  two  com-  and  any  one  can  go  and  buy  them,  as 
peting  corporations.  appears   to  be   the  fact  in   this   case, 

2  Phenix  National  Bank  v.  Water-  there  is  no  reason  why  they  should 
bury,  197  N.  Y.  161  (1910).  not  be  in  the  same  position  as  govern- 

'  Ross  r.'Union  Pac.  Ry.,  Woolw.  26,  ment  stock  is  in  the  ease  of  a  eon- 
32  (1863) ; '  s.  c,  20  Fed.  Cas.  1245,  tract  for  the  sale  and  purchase  of 
1247  ;  Cud  or  Cuddee  v.  Rutter,  1  P.  such  stock."  Re  Sehwabacher,  98  L.  T. 
Wms.  570  (1710) ;    s.  c,  5  Vin.  Abr.     Rep.  127  (1908). 

1028 


CH.   XX.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  338. 


where,  or  there  is  some  particular  and  reasonable  cause  for  the  vendee's 
requiring  the  stock  contracted  to  be  delivered,  a  court  of  equity  will 
decree  a  specific  performance  and  compel  the  vendor  to  deliver  the 
stock.^ 

This  rule,  as  applicable  to  contracts  for  the  sale  of  railway  stock, 
was  clearly  established  in  England  in  1841,  in  the  case  of  Duncuft 
V.  Albrecht.-  Contracts  for  the  sale  of  stock  not  only  in  railroad,  but 
also  in  mining  and  other  private  corporations  will  be  specifically  en- 
forced under  some  circumstances.^ 


'  Quoted  and  approved  in  Ryan  v. 
McLane,  91  Md.  175  (1900) ;  Schmidt 
V.  Pritchard,  135  Iowa,  240  (1907). 
Hills  V.  McMunn,  232  111.  488  (1908). 
Hogg  V.  MeGuffin,  76  W.  Va.  456 
(1910),  and  Turley  v.  Thomas,  31 
Nev.  181  (1909)  and  78  S.  E.  Rep.  161. 

2  12  Sim.  189  (1841) ;  Parish  v.  Par- 
ish, 32  Beav.  207  (1863),  granting  also 
an  accounting  of  dividends ;  Poole  v. 
Middleton,  29  Beav.  646  (1861); 
Turner  v.  Moy,  32  L.  T.  Rep.  56 
(1875) ;  Beckitt  v.  Bilbrough,  8  Hare, 
188  (1850),  dictum.  Contra,  dictum  in 
Ross  V.  Union  Pacific  Ry.,  Woolw.  26, 
32  (1863);  s.  c,  20  Fed.  Cas.  1245, 
1247,  per  Miller,  J.  In  Cheale  v.  Ken- 
ward,  3  De  G.  &  J.  27  (1858),  the 
court  said  :  "  There  is  no  doubt  that  a 
bill  will  lie  for  a  specific  performance 
of  an  agreement  to  transfer  railway 
shares.  This  was  set  at  rest  by  Dun- 
cuft V.  Albrecht,  12  Sim.  189  (1841)." 

'  Treasurer  v.  Commercial  Coal 
Min.  Co.,  23  Cal.  390  (1863).  The 
vendee  may  have  specific  performance 
if  the  stock  is  unlisted  and  is  held  in 
a  pooling  trust  and  the  value  is 
uncertain.  Wood  v.  Kansas  City,  etc. 
Co.,  223  Mo.  537  (1909).  Specific 
performance  of  an  agreement  to 
exchange  stocks,  one  of  which  was  in  a 
close  corporation,  was  granted  in  Hogg 
V.  MeGuffin,  76  W.  Va.  456  (1910). 
Where  a  person  sells  the  entire  capital 
stock  and  takes  it  back  as  security 
for  payment  of  part  of  the  purchase 
price,  together  with  an  agreement  that 
he  shall  remain  treasurer,  director 
and  financial  manager,  and  he  is 
afterwards  ousted  from  those  posi- 
tions, he  may  apply  to  the  court  to 
be  reinstated  and  the  agreed  salary 
paid.     Goetzinger    v.     Donahue,     138 


Wis.  103  (1909).  The  vendee  of  a 
majority  of  the  stock  of  a  heat,  light 
and  power  company  may  maintain  a 
bill  for  specific  performance,  even 
though  such  vendee  already  controls 
a  competing  heat,  light  and  power 
company.  Doherty  &  Co.  v.  Rice, 
186  Fed.  Rep.  204  (1910).  Where  by 
contract  one  corporation  agrees  to 
issue  one  share  of  its  stock  for  every 
two  shares  of  stock  in  a  corporation, 
a  stockholder  in  the  latter  may  have 
specific  performance  of  such  an  agree- 
ment. Motley  V.  Southern  Ry.  Co., 
184  Fed.  Rep.  9.56  (1911).  An  oral 
contract  by  which  plaintiff  canceled 
a  claim  and  paid  certain  cash  for  an 
interest  in  certain  stock,  may  be 
enforced  in  equity.  Cree  v.  Lewis, 
49  Col.  186  (1910).  A  sale  with  a 
right  to  repurchase  may  amount 
to  a  pledge  and  the  party  may  main- 
tain a  bill  in  equity  to  recover  back 
the  stock  in  payment,  it  appearing 
that  it  has  no  ascertainable  market 
value  and  has  a  peculiar  value  to 
plaintiff,  greater  than  the  market 
value  at  the  time  of  transfer.  Eich- 
baum  V.  Sample,  213  Pa.  St.  216 
(1906).  Where  it  is  decided  that  a 
litigant  who  claims  stock  does  not  own 
it,  he  cannot  afterwards  in  another 
case  claim  that  the  stock  belonged 
to  the  corporation.  Leigh  v.  National, 
etc.  Co.,  224  111.  76  (1906).  Specific 
performance  will  be  granted  to  com- 
pel a  corporation  to  issue  common 
stock  in  payment  for  property  in 
accordance  with  a  contract  of  the  cor- 
poration, where  the  stock  has  no  mar- 
ket value,  and  it  appears  that  there 
have  never  been  any  sales  of  such 
stock.  Selover  v.  Isle,  etc.  Co.,  91 
Minn.  451    (1904).     Specific  perform- 


1029 


§338. 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


The  New  York  court  of  appeals  has  held  that  a  vendee  of  stock  may 
be  granted  specific  performance  of  the  contract  on  showing  that  the 

anee  lies  where  stock  in  dispute  carries 
the  control  of  the  corporation  and  such 
control  is  important  and  the  stock 
has  no  certain  market  value,  but  great 
intrinsic  value  if  properly  controlled. 
Sherwood  v.  Wallin,  1  Cal.  App.  532 
(1905).  A  person  having  an  option 
on  bonds,  which  the  vendor  is  to  use 
in  foreclosing  and  buying  in  and  re- 
organizing the  property,  cannot  main- 
tain a  suit  against  the  vendor  for 
stock  issued  by  the  reorganized  com- 
pany to  represent  such  bonds,  where 
the  agreement  is  not  sufficiently 
explicit  for  specific  performance.  Pat- 
terson V.  Farmington,  etc.  Ry.,  76 
Conn.  628  (1904).  Where  the  pledgor 
agrees  to  sell  the  stock  to  the  pledgee, 
but  the  coporation  claims  a  lien  and 
refuses  to  transfer  it,  and  for  three 
years  the  pledgee  does  nothing  and 
the  stock  quadruples  in  value,  specific 
performance  will  not  be  granted  at 
the  instance  of  the  pledgee.  Schimpff 
V.  Dime,  etc.  Bank,  208  Pa.  St.  380 
(1904).  Where  the  vendee  files  a  bill 
for  fraud  and  yet  asks  that  the  vendor 
be  required  to  deliver  the  stock,  he 
thereby  affirms  the  transaction.  Chi- 
cago, etc.  Bank  v.  Ball,  208  111.  256 
(1904).  The  vendor  in  a  contract  for 
the  sale  of  the  stock  and  property  of 
a  railroad  and  a  coal  mining  company 
may  have  specific  performance  where 
the  railroad  has  been  delivered  and 
the  vendee  refuses  to  take  the  coal 
properties.  McCuUough  v.  Souther- 
land,  1.53  Fed.  Rep.  418  (1907).  A 
construction  company  may  maintain 
a  bill  in  equity  against  a  street  rail- 
way company  to  compel  the  latter  to 
deliver  to  the  former  four-fifths  of 
the  latter's  capital  stock  and  certain 
mortgage  bonds  in  accordance  with  a 
contract  between  them  for  the  con- 
struction of  the  road,  inasmuch  as 
such  stock  cannot  be  procured  on  the 
market  and  has  no  general  market 
value,  and  whatever  value  it  has  was 
given  to  it  chiefly  by  the  construction 
work.  Even  though  it  turns  out  that 
prior  to  the  commencement  of  the  suit 
the  railroad  company  had  sold  the 
stock  and  since  the  commencement  of 


the  suit  had  sold  the  bonds,  yet  the 
court  may  render  a  decree  for  the 
value  of  the  stock  and  bonds.  Altoona, 
etc.  Co.  V.  Kittanning,  etc.  Ry.,  126 
Fed.  Rep.  559  (1903).  A  vendee  of 
stock  who  has  filed  a  bill  in  equity  for 
specific  performance  will  not  be  granted 
an  injunction  against  the  stock  being 
voted  by  the  vendor  in  the  meantime, 
where  the  former  does  not  allege  that 
the  vendor  is  insolvent  or  is  about  to 
dispose  of  the  stock.  Lucas  v.  Mil- 
liken,  139  Fed.  Rep.  816  (1905).  A 
person  who  has  been  induced  by  fraud- 
ulent misrepresentations  to  exchange 
stock  for  other  stock  may  have  re- 
scission without  proving  damage,  the 
suit  being  very  similar  to  one  for  spe- 
cific performance,  and  it  being  alleged 
that  the  actual  value  of  the  stock  can- 
not be  shown.  Jahn  v.  Reynolds,  115 
N.  Y.  App.  Div.  647  (1906).  Where  a 
pledgee  brings  suit  to  obtain  posses- 
sion of  the  pledge,  which  had  been 
wrongfully  diverted,  and  during  the 
suit  the  pledge  becomes  worthless, 
a  supplemental  complaint  may  be 
served  alleging  that  fact  and  demand- 
ing the  value  of  the  pledge  at  the 
time  demand  was  made  therefor.  Cen- 
tral T.  Co.  V.  West  India,  etc.  Co.,  109 
N.  Y.  App.  Div.  517  (1905).  A  pur- 
chaser of  stock  cannot  have  specific 
performance  where  the  only  advan- 
tage of  getting  the  stock  is  a  financial 
advantage,  even  though  there  have 
been  no  sales  of  the  stock,  and  it  is 
not  listed  and  it  will  be  difficult  to 
ascertain  its  value.  The  remedy  at 
law  is  sufficient.  Clements  v.  Sher- 
wood-Dunn, 108  N.  Y.  App.  Div.  327 
(1905);  aff'd,  187  N.  Y.  521.  A 
vendee  cannot  compel  specific  per- 
formance simply  on  the  giound  that 
there  had  been  no  sales  of  the  stock  and 
that  it  would  be  difficult  to  ascertain 
its  value.  The  value  may  be  ascer- 
tained by  the  corporate  contracts  and 
business  and  dividends,  etc.  Butler  v. 
Wright,  103  N.  Y.  App.  Div.,  463 
(1905) ;  rev'd  on  another  ground  in 
186  N.  Y.  2.59.  Specific  performance 
to  compel  the  delivery  of  stock  in 
accordance  with  a  contract,  by  which 


1030 


CH.  XX. 


CONTILA.CTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  338. 


stock  had  never  been  listed  on  any  exchange  and  had  no  quoted  value 
or  any  definite  market  price  or  any  certain  value  capable  of  exact  as- 


it  was  to  be  issued  in  payment  for 
services,  will  not  be  granted,  unless 
it  is  alleged  and  proven  that  it  has  a 
peculiar  value  or  that  the  plaintiff 
could  not  recover  at  law  the  damages 
for  the  breach.  Kennedy  v.  Thomp- 
son, 97  N.  Y.  App.  Div.  296  (1904). 
Where  a  stockholder  delivers  his 
stock  to  the  president  to  be  used  to 
induce  a  person  to  loan  money  to  the 
corporation,  and  the  president  instead 
of  so  using  it  converts  it  to  his  own 
use,  the  stockholder  may  maintain  a 
suit  in  equity  to  recover  back  the 
stock,  and  the  statute  of  limitations 
does  not  begin  to  run  until  he  has  dis- 
covered or  should  have  discovered  the 
facts.  Slaybaek  v.  Raymond,  93  N.  Y. 
App.  Div.  326  (1904).  A  bill  in  equity 
does  not  lie  to  compel  an  underwrit- 
ing syndicate  to  assign  to  plaintiff  an 
interest  therein,  which  they  had  con- 
tracted to  sell  to  him,  even  though  he 
alleges  that  the  value  is  uncertain 
and  that  specific  performance  is  the 
only  full  and  adequate  relief.  Gilbert 
V.  Bunnell,  92  N.  Y.  App.  Div.  284 
(1904).  A  suit  in  equity  does  not  lie 
to  recover  the  value  of  bonds  which  a 
depository  refuses  to  give  up,  even 
though  the  bonds  are  not  dealt  with 
on  the  market  and  are  obligations  of 
a  corporation,  which  has  been  fore- 
closed. The  remedy  is  trover  or 
replevin.  Sawyer  v.  Atchison,  129 
Fed.  Rep.  100  (1904).  A  contractor 
who  constructs  a  road  for  stock  to  be 
delivered  may  maintain  a  biU  in  equity 
for  the  delivery  of  the  stock  after  the 
road  is  completed,  where  he  shows 
that  he  cannot  prove  the  pecuniary 
value  of  the  stock,  and  hence  that 
damages  at  law  would  not  be  sufficient. 
Baumhoff  v.  St.  Louis  &  K.  R.  Co., 
205  Mo.  248  (1907).  Specific  per- 
formance of  a  contract  to  sell  stock 
may  be  had  where  its  value  is  not 
easily  ascertainable.  Manton  v.  Ray, 
18  R.  I.  672  (1894).  See  also  Frue  v. 
Houghton,  6  Colo.  318  (1882),  and 
§  61,  supra.  Where  the  control  of  a 
railroad  is  deposited  with  a  third 
party  to  be  delivered  to  the  vendee 
upon   certain   things   happening,    and 


such  things  do  happen,  he  may  have 
specific  performance,  the  stock  having 
no  ascertainable  value.  Rumsey  v. 
New  York,  etc.  R.  R.,  203  Pa.  St.  579 
(1902).  In  Leach  v.  Fobes,  77  Mass. 
506  (1858),  specific  performance  of  a 
contract  to  convey  land  and  stock  was 
granted  chiefly  because  of  the  land 
part  of  the  contract.  Todd  v.  Taft, 
89  Mass.  371  (1863),  decreed  specific 
performance  of  contract  to  convey 
railway  shares.  See  also  Baldwin  v. 
Commonwealth,  11  Bush  (Ky.),  417 
(1875) ;  Ashe  v.  Johnson,  2  Jones,  Eq. 
(N.  C.)  149  (1855).  As  to  when 
specific  performance  of  a  contract  to 
sell  stock  will  be  specifically  enforced, 
see  also  1  White  &  T.  Lead  Cas.  914- 
923,  etc.  As  to  possibility  of  manda- 
tory injunction,  see  authorities  in 
High  on  Injunctions.  Specific  per- 
formance of  a  contract  relative  to 
stock  is  not  an  absolute  right  and  will 
not  be  granted  if  it  would  result  in 
injustice  to  either  party.  Shinkle  v. 
Viekery,  156  Mo.  1  (1900).  Specific 
performance  will  be  granted  where 
the  stock  has  no  market  value  and 
cannot  be  purchased  in  the  market ; 
but  where  the  contract  is  an  uncon- 
scionable one  and  by  mistake  omits 
an  important  provision,  specific  per- 
formance will  not  be  granted.  Newton 
V.  Wooley,  105  Fed.  Rep.  541  (1900). 
An  agreement  of  several  parties  to 
sell  their  property  to  a  corporation 
in  exchange  for  stock  of  the  latter, 
the  amount  of  stock  going  to  each  to 
be  determined  by  arbitrators,  wiU  not 
be  specifically  enforced  where  the 
arbitrators  have  fixed  the  value  in  an 
illegal  way.  Any  party  may  withdraw 
from  such  a  contract  prior  to  the  time 
when  it  has  been  signed  by  all.  Con- 
solidated, etc.  Co.  V.  Nash,  109  Wis. 
490  (1901).  Where  a  purchaser  of 
stock  knew  or  had  reason  to  know 
that  the  stock  was  not  owned  by  the 
vendor  personally,  but  by  a  firm  in 
which  he  was  interested,  the  pur- 
chaser cannot  have  specific  perform- 
ance, but  will  be  remitted  to  a  court 
of  law.  Jones  v.  Tunis,  99  Va.  220 
(1901).     Specific  performance  may  not 


1031 


§338. 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


certainment,  and  that  the  defendant  owned  ninety-two  per  cent,  of  the 
stock  and  controlled  the  balance.     The  court  further  held  that  the 


be  granted  where  the  defendant  has 
not  got  the  stock  to  deliver.  Booth 
V.  Dingley,  148  Mich.  197  (1907). 
Specific  performance  will  not  be 
granted  at  the  instance  of  the  pur- 
chaser of  stock  where  the  purchase 
is  from  the  committee  of  a  pool  of 
such  stock,  where  it  is  shown  that  the 
pooling  agreement  required  a  vote 
of  three-fourths  of  the  stock  in  the 
pool  before  a  sale  could  be  made, 
and  it  is  also  shown  that  the  contract 
of  purchase  was  partly  an  option  in 
that  the  purchaser  was  to  forfeit  a 
deposit  he  had  already  made,  in  case 
he  did  not  fulfill,  and  it  being  further 
shown  that  in  another  suit  the  com- 
plainant had  stated  the  value  of  the 
stock,  and  it  being  further  shown  that 
the  purpose  of  the  contract  was  to 
obtain  control  of  a  large  system  of 
railroads,  including  the  board  of 
directors.  Ryan  v.  McLane,  91  Md. 
175  (1900).  Even  though  stock  has  no 
market  value  and  no  dividends  have 
been  paid,  yet  in  an  action  for  spe- 
cific performance  it  must  be  alleged 
that  the  stock  had  no  value  that  could 
be  estimated  in  an  action  for  damages. 
Moulton  V.  Warren,  etc.  Co.,  81  Minn. 
259  (1900).  A  corporation  cannot 
have  specific  performance  of  an  agree- 
ment of  a  person  to  purchase  its 
debentures.  The  remedy  is  an  action 
for  damages.  South,  etc.  Co.  v.  Wal- 
lington,  [1898]  A.  C.  309,  aff'g  [1897] 
1  Q.  B.  692.  Where  an  insolvent  cor- 
poration which  has  never  issued  any 
certificates  of  stock  resolves  by  a  vote 
of  its  stockholders  to  apply  its  assets 
to  the  extent  of  their  value  to  the 
payment  of  the  debts,  and  that  new 
stock  be  issued  to  the  stockholders 
upon  their  paying  therefor  in  full, 
and  one  stockholder  sells  his  interest 
in  the  original  stock,  and  the  pur- 
chaser for  seven  years  does  not  com- 
plain, he  cannot,  after  the  corpora- 
tion has  become  prosperous,  claim 
that  he  is  entitled  to  the  old  stock  or 
any  interest  in  the  corporation.  Stod- 
dard V.  Decatur,  etc.  Co.,  184  111.  53 
(1900).  A  subscriber  for  stock  who 
has  given  his  note  in  payment  may 


file  a  bill  in  equity  to  compel  the  cor- 
poration to  recognize  him  as  a  stock- 
holder, where  the  corporation  denies 
that  he  is  a  stockholder  and  has 
issued  all  its  stock  to  other  parties  who 
took  with  notice.  It  is  unnecessary 
to  bring  into  the  suit  the  other  parties 
who  actually  have  the  stock,  the  stock 
having  been  held  by  the  company  as 
collateral  security.  Morey  v.  Fish,  etc. 
Co.,  108  Wis.  520  (1901).  See  also 
§  58,  supra.  A  contract  between  the 
owner  of  property  and  a  promoter,  by 
which  the  former  agrees  to  sell  his 
property  to  a  corporation  to  be  formed 
by  the  latter,  with  a  specified  capital 
stock,  cannot,  a  year  after  the  trans- 
action has  been  carried  out,  be  made 
the  basis  of  a  suit  in  equity  to  com- 
pel the  promoter  to  cancel  excessive 
stock  which  was  issued  to  the  pro- 
moter, there  being  no  allegation  that 
the  promoter  still  had  the  stock.  The 
remedy  of  the  vendor  is  at  law.  Even 
though  several  vendors  to  the  cor- 
poration had  a  similar  claim,  yet  one 
of  them  cannot  file  such  a  bill  in 
equity  in  behalf  of  himself  and  others. 
Brehm  v.  Sperry,  92  ]Md.  378  (1901). 
As  applicable  to  manufacturing  cor- 
porations, see  Chater  v.  San  Fran- 
cisco, etc.  Co.,  19  Cal.  219  (1861). 
Granted  in  a  towboat  association  case 
in  White  v.  Schuyler,  1  Abb.  Pr.  (N. 
S.)  300  (1865).  Refused  in  the  case 
of  stock  in  a  land  association.  Jones 
V.  Newhall,  115  Mass.  244  (1874). 
And  in  a  paper  company.  Noyes  v. 
Marsh,  123  Mass.  286  (1877).  See 
Cushman  v.  Thayer  Mfg.  Co.,  76 
N.  Y.  365  (1879),  the  court  saying: 
"While  the  general  rule  is  for  courts  of 
equity  not  to  entertain  jurisdiction 
for  a  specific  performance  on  the  sale 
of  stock,  this  rule  is  limited  to  cases 
where  a  compensation  in  damages 
would  furnish  a  complete  and  satis- 
factory remedy."  This  case,  however, 
was  not  a  case  of  specific  performance 
of  a  sale  of  stock,  but  of  compelling 
the  corporation  to  register  a  transfer. 
See  also,  in  general,  Austin  v.  Gillas- 
pie,  1  Jones,  Eq.  (N.  C.)  261  (1854) ; 
Nutbrown  v.  Thornton,  10  Ves.  Jr.  160 


1032 


CH.  XX.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  338. 


decision  of  such  a  case  rests  in  the  sound  discretion  of  the  court.^     The 
stockliolders  in  a  private  trading  corporation  may  agree,  that  upon  the 


(1804) ;  Shaw  v.  Fisher,  5  De  G.,  M. 
&  G.  596  (1855);  Wynne  v.  Price,  3 
G.  &  Sm.  310  (1849) ;  Wilson  v.  Keat- 
ing, 7  W.  R.  484  (1859) ;  aff'd,  4  De 
G.  &  J.  588 ;  Oriental,  etc.  Steam  Co. 
V.  Briggs,  2  Johns.  &  H.  625  (1861); 
Paine  v.  Hutchinson,  L.  R.  3  Eq.  257 
(1866);  aff'd,  L.  R.  3  Ch.  App.  388; 
Shepherd  v.  Gillespie,  L.  R.  5  Eq.  293 
(1867) ;  Bermingham  v.  Sheridan,  33 
Beav.  660  (1864)  ;  Strasburg  R.  R.  v. 
Echternacht,  21  Pa.  St.  220  (1853); 
Fallon  V.  Railroad  Co.,  1  Dill.  121 
(1871);  s.  c,  8  Fed.  Cas.  977.  In 
regard  to  a  specific  performance  of  a 
trust  of  stock,  see  Ferguson  v.  Paschall, 
11  Mo.  267  (1848);  Cowles  v.  Whit- 
man, 10  Conn.  121  (1834);  Clark  v. 
Flint,  39  Mass.  231  (1839) ;  Mechan- 
ics' Bank  v.  Seton,  1  Pet.  299  (1828) ; 
Gage  V.  Fisher,  5  N.  Dak.  297  (1895). 
Specific  performance  of  a  contract  to 
sell  stock  will  be  decreed  where  the 
stock  has  no  recognized  market  value 
and  cannot  be  bought  in  the  market. 
Goodwin,  etc.  Co.'s  Appeal,  117  Pa. 
St.  514  (1888).  Specific  performance 
was  refused  in  Eckstein  v.  Downing, 
64  N.  H.  248  (1886),  there  being  no 
evidence  that  the  vendee  had  any  wish 
or  reason  for  wishing  to  own  that  par- 
ticular stock  or  stock  in  that  particular 
corporation.  See  also  Cruse  v.  Paine, 
L.  R.  6  Eq.  641  (1868).  Where  a 
stockholder,  who  is  also  a  director, 
contracts  to  give  a  person  a  certain 
amount  of  stock  if  he  will  do  certain 
work  for  the  corporation,  and  the 
board  of  directors,  including  this 
director,  discharge  such  person  without 
cause,  and  thus  prevent  completion, 
a  court  of  equity  will  compel  a  delivery 
of  the  stock.  Price  v.  Minot,  107 
Mass.  49  (1871).  In  suits  in  equity 
to  compel  a  transfer  of  stock,  parties 
interested  by  a  purchase  from  the 
defendant  should  be  brought  in. 
O'Connor  v.  Irvine,  74  Cal.  435  (1887). 
Specific  performance  of  a  contract  to 
sell  stock  will  be  decreed  where  the 
property    of    the    corporation    is    real 


estate  —  a  distillery  —  and  the  real 
transaction  is  a  sale  of  the  entire 
property.  Megibben  v.  Perin,  49  Fed. 
Rep.  183  (1892);  rev'd  on  another 
point  in  Perin  v.  Megibben,  53  Fed. 
Rep.  86  (1892).  Specific  performance 
will  not  be  decreed  where  there  is 
doubt  both  as  to  the  contract  actually 
being  made  and  as  to  the  considera- 
tion, one  party  being  dead.  Hibbert 
V.  Mackinnon,  79  Wis.  673  (1891). 
Where  a  debtor  agreed  to  transfer 
stock  as  collateral  security  for  a  debt, 
and  died  insolvent  before  doing  so, 
the  court  refused  to  enforce  specific 
performance  of  the  agreement  to  the 
injury  of  other  creditors.  City  F.  Ins. 
Co.  V.  Olmstead,  33  Conn.  476  (1866). 
The  vendee  may  file  a  bill  in  equity 
for  a  specific  performance.  Willis  v. 
Jefferis,  51  Atl.  Rep.  1110  (N.  J.  1902). 
Specific  performance  of  a  contract  to 
deliver  stock  for  services  was  granted 
in  Le  Vie  v.  Fenlon,  39  N.  Y.  Misc. 
Rep.  265  (1902).  In  general,  see  also 
Stevens  v.  Wilson,  18  N.  J.  Eq.  447 
(1867).  An  alleged  vendee's  suit  for 
a  di\adend  is  res  judicata  as  to  a  suit 
for  the  stock.  Shepard  v.  Stockham, 
45  Kan.  244  (1891). 

Where  a  person  claims  that  he  has 
a  contract  for  the  purchase  of  stock 
which  the  stockholder  vendor  is  about 
to  sell  or  has  already  sold  to  others, 
and  the  first-named  person  brings  a 
suit  in  equity  to  obtain  the  stock,  he 
must  show,  first,  that  it  is  a  case  for 
specific  performance  ;  and,  second,  that 
the  stock  was  impressed  with  a  trust, 
and  that  the  last  purchaser  took  with 
notice  of  that  trust.  See  1  White  & 
T.  Lead.  Cas.  914,  919,  and  Pooley 
V.  Budd,  14  Beav.  34,  43,  44  (1851). 

Lindley  on  Company  Law  (5th 
ed.),  pp.  499,  500,  states  the  rule  as 
follows:  "A  contract  for  the  sale  of 
shares  by  one  individual  to  another  is 
distinguishable  in  many  respects  from 
a  contract  for  the  allotment  and 
acceptance  of  shares  in  a  company,  and 
Lord   Romilly  refused   to  decree  spe- 


Butler  V.  Wright,  186  N.  Y.  259  (1906). 
1033 


§338. 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


death  of  any  one  or  more  of  them  the  remainder  shall  have  the  right  to 
purchase  the  stock  of  the  decedent  at  its  value.  This  is  not  invalid 
as  against  public  policy  or  as  an  improper  restraint  of  the  power  of 
alienation.  The  court  may  grant  specific  performance  of  such  con- 
tract.^   The  various  stockholders  of  a  company  may  give  interchange- 


cific  performance  of  a  contract  of  this 
kind,  on  the  ground  that  the  decree 
would  be  ineffectual,  as  the  shares 
might  be  transferred  immediately 
after  the  contract  was  performed. 
Sheffield  Gas,  etc.  Co.  v.  Harrison,  17 
Beav.  294  (18.53) ;  Bluck  v.  Mallalue, 
27  Beav.  398  (1859) ;  Columbine  v. 
Chichester,  2  Ph.  Ch.  27  (1846) .... 
In  this  last  case  there  were  circum- 
stances to  show  that  specific  per- 
formance was  impossible."  Page  586  : 
"In  order  that  specific  performance 
of  an  agreement  to  take  or  deliver 
shares  in  a  company  may  be  decreed, 
it  is  necessary  that  the  agreement 
should  be  concluded  and  binding 
(which  it  was  not  in  Oriental,  etc.  Co. 
V.  Briggs,  4  De  G.,  F.  &  J.  191  — 
(1861),  and  be  untainted  by  fraud 
(which  was  not  the  case  in  New 
Brunswick,  etc.  Co.  v.  Muggeridge,  4 
Drew.  686  —  1859,  and  1  Drew.  &  Sm. 
363;  or  in  Maxwell  v.  Port  Tennant, 
etc.  Co.,  24  Beav.  495  —  1858),  or  un- 
fairness (as  to  agreements  between  co- 
directors,  see  Flanagan  v.  Great  West- 
ern Ry.,  L.  R.  7  Eq.  116  —  1868), 
and  be  capable  of  being  performed  by 
the  defendant  (Ferguson  v.  Wilson, 
L.  R.  2  Ch.  App.  77  —  1866 ;  Colum- 
bine ;;.  Chichester,  2  Ph.  Ch.  27  — 
1846),  and  not  involve  any  breach  of 
trust  (Fry,  Sp.  Perf.  p.  177,  2d  ed. ; 
and  see  Flanagan  v.  Great  Western 
Ry.,  L.  R.  7  Eq.  116  —  1868),  or  per- 
formance by  either  party  of  obliga- 
tions the  performance  of  which  a 
court  cannot  practically  enforce  (Flan- 
agan V.  Great  Western  Ry.,  7  Eq.  116 
—  1868 ;  Stoeker  v.  Wedderburn,  3  K. 
&  J.  393  —  18.57)."  Page  587  :  "An 
action  will  lie  for  specific  performance 
of  a  contract  for  the  purchase  and 
sale  of  shares,  if  it  is  capable  of  being 
performed  (see  as  to  this,  Berming- 
ham  V.  Sheridan,  33  Beav.  660  — 
1864,  and  compare  Poole  v.  Middleton, 
29  Beav.  646  —  1861) ;  ...  and  the 
purchaser   will   be   compelled    to   pay 


the  price,  although  it  may  have  been 
expressed  to  be  paid  in  the  deed  of 
transfer,  if,  in  fact,  it  was  not  thus 
paid  (Wilson  v.  Keating,  27  Beav.  121, 
and  4  De  G.  &  J.  588,  aff'g  7  W.  R. 
484  — 1859).  The  case  seems,  at 
first  sight,  to  have  been  a  hard  one 
upon  the  defendant ;  but  the  deed 
stated  that  he  had  paid  the  money, 
and  this  he  knew  was  not  the  fact.  He 
could  not,  therefore,  be  treated  as  hav- 
ing been  misled  by  the  plaintiff  or  by 
the  contents  of  the  deed ;  and  will  be 
compelled  to  accept  a  transfer  of  the 
shares  he  has  bought  and  to  indem- 
nify the  seller  from  all  liabilities 
accruing  subsequently  to  the  sale 
(Wynne  v.  Price,  3  De  G.  &  S.  310  — 
1849).  As  to  the  right  of  a  mortgagee 
of  shares  to  an  indemnity  from  his 
mortgagor,  see  Phene  v.  Gillan,  5 
Hare,  1  (1845) ;  and  the  seller  will 
be  compelled  to  account  for  any 
moneys  he  may  have  received  from  an 
improper  subsequent  sale  to  another 
person  (Beckitt  v.  Bilbrough,  8  Hare, 
188  —  1850).  The  court  has,  how- 
ever, refused  to  compel  a  purchaser 
of  scrip  to  accept  shares,  and  indem- 
nify the  seller  from  calls  upon  them 
(Jackson  v.  Cocker,  4  Beav.  59  — 
1841.  Compare  this  with  the  last 
case) ;  and  to  compel  an  allottee  of 
shares  to  accept  them,  and  to  execute 
the  company's  deed  in  respect  of 
them  (Sheffield,  etc.  Gas  Co.  v.  Har- 
rison, 17  Beav.  294  —  1853) ;  and  to 
compel  the  promoters  of  a  company 
to  deliver  shares  to  a  subscriber  to 
ttie  company  (Columbine  v.  Chiches- 
ter, 2  Ph.  Ch.  27  —  1846.  In  this 
case,  however,  the  promoters  did  not 
appear  to  have  any  shares  which  they 
could  allot).  Neither  will  the  court 
interfere  to  compel  the  completion  of 
a  gratuitous  and  intended  transfer 
(see  Milroy  v.  Lord,  4  De  G.,  F.  &  J. 
264  —  1862)." 

1  Fitzsimmons  v.   Lindsay,  205  Pa. 
St.  79  (1903). 


1034 


XX.] 


CONTR.\CTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  338. 


ably  a  first  option  of  thirty  days  to  purchase  their  shares  of  stock  when- 
ever any  one  desires  to  sell,  each  contracting  for  himself,  the  contract 
further  providing  that  such  thirty  days  are  to  commence  in  case  of  the 
death  of  a  stockholder,  so  far  as  his  stock  was  concerned,  and  they  may 
further  contract  that  another  person  is  to  have  a  similar  option  in  case 
the  first  option  is  not  exercised.  A  party  entitled  to  such  option  may 
have  specific  performance  of  it.^ 

In  Pennsylvania  it  is  held  that  specific  performance  will  be  granted 
at  the  instance  of  the  vendee  in  a  contract  for  the  sale  of  five-sixths  of 
the  capital  stock  of  the  company  and  a  portion  of  its  bonds,  inasmuch 
as  such  stock  and  bonds  cannot  be  secured  elsewhere  and  a  money  judg- 
ment would  not  afford  a  substitute  for  the  sale ;  and  it  is  further  held 
that,  even  though  the  vendor  has  sold  the  stock  to  other  parties,  yet, 
if  the  latter  took  with  notice  of  the  prior  contract,  they  may  be  joined 
as  parties  defendant  and  compelled  to  deliver  up  the  stock.^ 


1  The  mutual  covenants  of  the  con- 
tract are  a  sufficient  consideration  to 
support  it.  Scruggs  v.  Cotterill,  67 
N.  Y.  App.  Div.  583  (1902).  In  the 
case  Jones  v.  Brown,  171  Mass.  318 
(1898),  in  a  close  corporation,  the 
stockholders  made  a  contract,  the 
essential  parts  of  which  are  set  forth 
in  the  opinion  of  the  court,  providing 
for  the  purchase  of  the  stock  of  a 
certain  stockholder  in  case  of  his 
death,  and  for  the  purchase  of  the 
stock  of  any  other  stockholder  who 
ceased  to  be  connected  with  the  cor- 
poration. The  former  stockholder  hav- 
ing died,  the  court  granted  specific 
performance  of  the  contract  and  com- 
pelled his  estate  to  deliver  the  stock 
upon  payment  of  the  specified  price. 
A  court  wiU  enjoin  a  party  from  vot- 
ing upon  or  disposing  of  his  stock  in 
a  corporation  pendente  lite  where  the 
plaintiffs  show  that  they  transferred 
the  stock  to  the  defendant  on  the 
latter's  agreement  not  to  sell  the 
same,  except  with  the  consent  of  the 
former,  and  that  when  he  did  sell  the 
stock  three-fourths  of  the  proceeds 
should  belong  to  the  former,  and  it 
appearing  further  that  the  defendant 
had  given  the  stock  to  his  sister  with- 
out consideration.  Weston  v.  Gold- 
stein, 39  N.  Y.  App.  Div.  661  (1899). 
Where  one  person  advances  money  to 
another  to  purchase  a  certain  stock 
on  an  agreement  that  they  will  coop- 


erate, and  in  case  the  latter  wishes  to 
seU  he  will  not  sell  to  unfriendly  par- 
ties without  giving  the  former  the 
first  chance  to  purchase,  and  the  stock 
is  in  the  possession  of  the  former  as 
security  for  the  loan,  a  sale  by  the 
latter  to  an  unfriendly  party  with 
notice  of  the  facts  is  not  sufficient  to 
sustain  a  bill  in  equity  to  compel  the 
first-named  party  to  transfer  the  stock 
to  such  purchaser.  The  court  said : 
"One  or  more  stockholders  in  a  cor- 
poration may  agree  to  stand  together 
in  carrying  out  an  honest  business 
policy  consistent  with  what  they 
believe  to  be  to  the  best  interests  of 
all  the  stockholders.  This  was  not  a 
pooling  agreement,  to  vest  the  govern- 
ment of  the  corporation  for  a  time  in 
certain  members  of  it,  or  to  yield  the 
control  to  a  few  who  might  dominate, 
regardless  of  the  interests  of  the 
many.  It  was  intended  to  maintain 
a  status  of  independence  for  the  rail- 
way company  that  it  might  be  oper- 
ated under  the  purposes  of  its  char- 
ter." Rigg  V.  Reading,  etc.  Ry.,  191 
Pa.  St.  298  (1899).  See  also  §  622,  infra. 
•  Northern,  etc.  R.  R.  v.  Walworth, 
193  Pa.  St.  207  (1899).  The  court 
held  also  that  the  fact  that  the  con- 
tract recited  that  the  seller  merely 
claimed  to  be  the  owner  of  the  stock 
did  not  render  the  contract  so  uncer- 
tain as  to  prevent  specific  performance, 
and   that  the   fact    that   the   contract 


1035 


§  338.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


Specific  performance  is  often  granted  as  between  several  parties 
each  of  whom  is  entitled  to  a  certain  part  of  stock  which  is  received 
by  or  held  in  the  name  of  one  of  them.  A  court  will  compel  him  to 
distribute  the  stock  in  accordance  with  the  contract.^  Such  cases  arise 
often  in  "  pools  "  of  stock,  and  in  selling  property  to  the  company  in 
consideration  of  stock,  and  in  buying  stock  in  the  names  of  other  persons 
or  agents.  Thus,  where  parties  to  a  construction  contract  agreed  to 
divide  the  stock  in  a  certain  way,  a  court  of  equity  will  grant  specific 
performance  and  order  transfers  of  the  stock,  it  having  no  market  value 
and  the  remedy  at  law  being  inadequate.-  Where  two  parties  orally 
agree  that  each  of  them  will  purchase  certain  stock  as  opportunity  oc- 
curs, on  joint  account,  one-half  to  each,  and  one  of  them  purchases  the 
same,  the  other  may  be  granted  specific  performance  of  the  contract.^ 
A  promoter  cannot  maintain  a  suit  in  equity  to  have  specific  perform- 
ance of  an  agreement  to  deliver  to  him  certain  stock,  the  complaint  ask- 
ing for  the  par  value  of  the  stock  if  specific  performance  is  not  granted, 
unless  it  is  alleged  that  the  stock  had  a  peculiar  value  or  that  it  was 
difficult  or  impossible  to  ascertain  the  value  of  the  stock  or  other  facts 
are  alleged  showing  that  there  is  no  adequate  remedy  at  law.^     A  pro- 


pro^aded  that  the  buyer  purchased 
only  on  condition  that  his  examin- 
ation of  the  books  should  be  sat- 
isfactory and  should  corroborate  the 
correctness  of  a  statement  as  to  lia- 
bilities, did  not  prevent  specific  per- 
formance, and  that  the  fact  that  the 
seller  agreed  that  all  debts  of  the 
company  should  be  paid  on  the  day  of 
the  transfer  did  not  prevent  specific 
performance. 

1  Where  it  is  agreed  between  two 
brothers  that  one  shall  buy  stock  in  a 
corporation  in  joint  account,  and  this 
is  done,  and  the  one  purchasing  charges 
his  brother  with  the  cost  of  the  portion 
of  the  stock,  and  this  account  is  ac- 
cepted, a  suit  in  equity  lies  to  obtain 
the  stock  upon  payment  therefor,  the 
corporation  being  a  close  corporation. 
Rand  v.  Whipple,  71  N.  Y.  App.  Div. 
62  (1902).  Where,  by  contract  be- 
tween two  stockholders  owning  an 
equal  share  in  the  corporation,  future 
stock  acquired  by  either  of  them  is  to 
belong  one-half  to  each,  such  contract 
may  be  specifically  enforced.  Stewart 
V.  Pierce,  116  Iowa,  733  (1902).  See 
also  §  320,  suprn. 

2  Krohn  v.  Williamson,  62  Fed.  Rep. 
869  (1894) ;    aff'd,  66   Fed.  Rep.  655. 


See  also  §§  .333,  334,  s^lpra,  and  §  705, 
infra,  and  .Jones  v.  Brown,  171  Mass. 
318  (1898). 

3  Sherman  v.  Herr,  220  Pa.  St.  420 
(1908). 

*  Bateman  v.  Straus,  86  N.  Y.  App. 
Div.  .540  (1903).  An  agreement  of  a 
stockholder  to  give  promoters  a  cer- 
tain amount  of  stock  for  their  best 
efforts  to  sell  treasury  stock,  may  be 
enforced  where  they  have  sold  all 
the  treasury  stock  contemplated  at 
that  time,  and  the  remedy  may  be 
specific  performance  if  the  stock  has  no 
market  value,  and  the  damages  can- 
not be  fixed  in  money.  Turley  v. 
Thomas,  31  Nev.  181  (1909).  A 
promoter  may  not  by  a  bill  in  equity 
compel  other  promoters  to  organize  a 
corporation  and  distribute  stock  in 
accordance  with  the  agreement,  and  he 
cannot  enjoin  them  from  organizing  a 
different  corporation  in  violation  of  the 
agreement  where  there  are  no  negative 
covenants  in  the  agreement,  but  he 
may  maintain  a  suit  at  law  for  damages, 
Perrin  v.  Smith,  135  N.  Y.  App.  Div. 
127  (1909).  In  the  case  Wait  v. 
Kern  River,  etc.  Co.,  157  Cal.  16  (1909), 
it  was  held  that  a  promoter  who  is  en- 
titled to  a  portion  of  certain  unissued 


1036 


CH.   XX.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  338. 


moter  who  is  to  have  five  per  cent,  of  the  stock  may  have  specific  per- 
formance where  there  is  no  stock  on  the  market  and  its  value  cannot  be 
ascertained.^ 

Specific  performance  may  also  be  said  to  be  granted  where  a 
corporation  is  ordered  by  a  court  to  issue  certificates  of  stock 
to  its  stockholders.^  Principles  of  law  somewhat  similar  to  the 
above  are  involved  in  suits  brought  by  a  purchaser  of  stock  to 
compel  the  corporation  to  transfer  the  stock  on  the  corporate 
books,^  and  in  suits  instituted  by  claimants  of  stock  against  other 
parties  claiming  the  same  stock ;  ^  or  by  the  corporation  to  recover 
back  stock  improperly  issued.^ 


stock  in  an  Arizona  mining  company, 
which  did  all  its  business  in  California, 
and  which  company  had  contracted  to 
issue  such  stock  to  another  promoter, 
who  had  not  yet  actually  received  it, 
might  by  a  bill  in  equity  in  California 
against  the  corporation  and  the  other 
promoter  obtain  a  decree  that  the 
corporation  issue  to  him  the  stock  to 
which  he  is  entitled,  even  though 
jurisdiction  of  the  other  promoter  was 
obtained  only  by  publication.  The 
court  held  also  that  the  remedy  at 
law  was  insufficient  when  the  stock  had 
no  market  value,  and  the  property  of 
the  company  consisted  merely  of 
mining  claims  of  unknown  value.  A 
mining  expert  who  is  to  be  paid  in 
stock  cannot  maintain  a  suit  in  equity 
for  the  stock  unless  it  is  shown  that 
its  value  cannot  be  easily  fixed  or  that 
it  could  not  be  purchased  in  the  market. 
Eckley  v.  Daniel,  193  Fed.  Rep.  279 
(1908).  A  so-called  preliminary  agree- 
ment between  a  syndicate  and  a  re- 
organization committee  outlining  the 
terms  of  the  reorganization,  cannot  be 
enforced  by  the  syndicate  where  the 
contract  was  not  sufficiently  certain 
and  definite.  The  court  will  not 
grant  specific  performance.  Van 
Dyke  v.  Norfolk  Southern  R.  R.,  72 
S.  E.  Rep.  6.59  (Va.  1911).  A  promoter 
who  is  entitled  to  a  portion  of  the  stock 
may  have  specific  performance  and  an 
injunction  where  the  defendant  is  not 
responsible  and  there  have  not  been 
enough  sales  of  stock  to  fix  its  value 
sufficient  to  constitute  a  market  value. 
Rau  V.  Seidenberg,  53  N.  Y.  Misc.  Rep. 
386  (1907).  Where  a  person  who  ob- 
tains options  and  purchases  stock  for 


another  is  to  have  an  interest  in  the 
profits  on  the  sale  of  the  same,  it  is 
immaterial  whether  it  is  a  technical 
partnership  or  a  mere  joint  venture, 
inasmuch  as  the  same  legal  rules  ap- 
ply, in  a  suit  by  the  former  for  an  ac- 
counting by  the  latter.  Spier  v.  Hyde, 
92  N.  Y.  App.  Div.  467  (1904).  A  suit 
between  promoters  relative  to  the 
division  of  stock  received  for  promot- 
ing, was  sustained  in  Boice  v.  McCor- 
mick,  106  N.  Y.  App.  Div.  539  (1905). 
A  promoter  cannot  maintain  a  suit  in 
equity  to  collect  from  an  inventor  one- 
half  of  what  the  latter  received  in 
stock  and  cash,  even  though  the  con- 
tract between  the  two  gave  the  for- 
mer such  one-half.  His  remedy  is 
at  law.  Everett  v.  De  Fontaine,  78 
N.Y.  App.  Div.  219  (1903).  C/.  §  705, 
infra. 

1  Dennison  v.  Keasbey,  200  Mo.  408 
(1906).  A  promoter  may  have  spe- 
cific performance  of  a  contract  by 
which  he  interested  capital  in  a  com- 
pany formed  to  take  over  and  work  a 
patent,  for  which  he  was  to  receive 
one-half  the  stock.  Butler  v.  Mur- 
phy, 106  Mo.  App.  287  (1904).  An 
oral  agreement  between  parties,  to 
locate  and  develop  mining  claims,  was 
sustained  in  a  suit  by  one  against  the 
other  for  stock  received  for  a  mining 
claim,  which  the  latter  transferred, 
and  the  statute  of  frauds  was  held  to 
be  no  bar.  Mack  v.  Mack,  39  Wash. 
190  (1905).     Cf.  140  N.  W.  Rep.  407. 

^  See  §  61,  supra,  and  §  766c,  infra, 
relative  to  contractors. 

3  See  §  391,  infra. 

^  See  §  391,  infra. 

5  See  §  387,  infra. 


1037 


§338. 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


As  a  general  rule  a  vendee  cannot  maintain  a  bill  in  equity  to  compel 
the  vendor  to  deliver  the  stock  unless  an  unusual  and  exceptional  situa- 
tion is  shown  to  the  effect  that  money  damages  at  law  would  be  clearly 
incomplete  and  inadequate.^  Specific  performance  will  not  be  granted 
where  the  purpose  of  the  purchaser  of  stock  is  to  obtain  control  of  a 
national  bank,  when  the  change  in  management  would  probably  be 
to  the  detriment  of  the  bank.^  A  party  claiming  an  option  to  purchase 
stock  wdll  not  be  granted  specific  performance  where  he  acted  in  bad 
faith.^  Wliere  the  vendor's  contract  is  to  deliver  stock  and  construct 
a  railway,  the  court  will  not  decree  specific  performance,  since  part  of 
the  contract  is  never  the  subject  of  such  compulsory  performance.* 
A  contract  to  pay  a  broker  in  stock  for  his  services  cannot  be  specifically 
enforced  by  him,  where  the  number  of  shares  was  not  stated,  but 
he  is  entitled  to  a  judgment  for  what  the  services  were  reason- 
ably worth. ^  Specific  performance  of  a  contract  to  deliver  bonds  will 
not  be  granted  where  the  party  seeking  performance  is  not  himself  able 
to  fully  perform.^    A  vendor  cannot  have  specific  performance  where 

1  Bernier  v.  Griseom-Speneer  Co., 
169  Fed.  Rep.  889  (1909).  A  person 
entitled  to  stock  from  a  corporation 
for  services  cannot  maintain  a  bill  in 
equity  for  specific  performance  unless 
he  shows  that  the  legal  remedy  would 
be  inadequate  and  the  damages  not 
easily  estimated,  there  being  no  ele- 
ment of  trust.  Bernier  v.  Griscom- 
Spencer  Co.,  161  Fed.  Rep.  438  (1908). 
A  vendee  cannot  maintain  a  suit  in 
equity  for  specific  performance  on  the 
ground  of  an  accounting,  the  contract 
being  an  option,  unless  he  shows  that 
damages  would  be  inadequate.  Harle 
V.  Brennig,  131  N.  Y.  App.  Div.  742 
(1909). 

2  Foil's  Appeal,  91  Pa.  St.  434  (1879), 
the  court  saying:  "I  know  of  no 
instance  in  this  state  in  which  a  court 
of  equity  has  decreed  specific  per- 
formance of  a  sale  of  stock." 

'McLaughlin  v.  Leonhardt,  113 
Md.  261  (1910). 

^  Ross  V.  Union  Pac.  Rv.,  Woolw.  26 
(1863),  per  Miller,  J. ;  s.  c,  20  Fed. 
Cas.  124.5.  The  court  will  not  decree 
specific  performance  of  a  contract  of 
a  company  to  deliver  its.  stock  to  a 
constructor  of  its  road,  even  though 
the  latter,  the  complainant,  is  willing 
to  perform.  The  court  cannot  com- 
pel the  latter  to  perform  and  hence 
will  not  tie  up  the  stock  of  the  for- 


mer. Peto  V.  Brighton,  etc.  Ry.,  1 
Hem.  &  M.  468  (1863).  Equity  wiU 
not  grant  specific  performance  of  a 
contract  for  the  sale  of  stock  unless  it 
can  compel  performance  of  the  other 
provisions  of  the  contract.  Deitz 
V.  Stephenson,  51  Oreg.  596  (1908). 
A  vendee  cannot  have  specific  per- 
formance where  the  contract  obligates 
him  to  furnish  entertainments  for  ten 
years,  and  the  court  eould  not  spe- 
cifically compel  performance  of  this. 
Pantages  v.  Grauman,  191  Fed.  Rep. 
317  (1911). 

5  Oliver  v.  Little,  31  Nev.  476 
(1909).  Under  the  Roman-Dutch  law 
of  South  Africa  a  person  who  has  con- 
tracted to  sell  his  land  and  take  in  pay- 
ment a  specified  number  of  shares  in  a 
syndicate  to  be  formed  for  developing 
the  property  as  a  mine  cannot  ask 
specific  performance  where  the  pur- 
poses of  the  syndicate  and  the  extent 
and  character  of  its  operations  are 
not  defined  or  ascertainable  with 
precision.  Douglas  v.  Baynes,  99  L.  T. 
Rep.  ,599  (1908). 

«  Stokes  V.  Stokes,  148  N.  Y.  708 
(1896).  The  holder  of  a  written  op- 
tion on  stock  cannot  have  specific  per- 
formance decreed,  where  it  is  sho-wn 
by  oral  evidence  that  it  was  not  to  be 
exercised,  unless  another  option  on 
real  estate  was  exercised  at  the  same 


1038 


CH.   XX. 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  338. 


he  had  told  the  vendee  that  a  certain  person  of  responsibihty  had  offered 
a  higher  price  for  the  stock,  when  in  fact  such  person,  after  making  the 
offer,  had  investigated  and  then  had  withdrawn  the  offer.^  If  the  vendor 
is  not  in  possession  of  the  desired  stock,  specific  performance  will  not  be 
granted,^  except  to  the  amount  of  stock  which  he  has.^  But  where  a 
person,  who  is  under  contract  to  deliver  certain  stock,  gives  the  stock  to 
a  relative  for  nothing,  the  party  entitled  to  the  stock  by  contract  may 
compel  such  relative  to  give  up  the  stock.*  Although  a  court  of  equity 
refuses  to  grant  specific  performance,  yet  it  will  not  always  send  the 
party  to  a  court  of  law,  but  in  some  of  the  states  will  grant  him  damages.^ 
Where  a  vendee  of  stock  seeks  specific  performance  he  must  tender  the 
price,  and  cannot  first  demand  that  the  stock  be  deposited  in  a  bank.^ 
In  a  suit  for  specific  performance  of  a  sale  of  stock,  the  complaining  ven- 
dee may  have  a  preliminary  injunction  against  the  vendor's  selling  to 
others.^     Where  a  vendee  of  stock  brings  action  for  a  specific  perfor- 


time.     Reynolds    v.    Hooker,    76    Vt. 
184  (1904). 

1  Moline  Plow  Co.  v.  Carson,  72  Fed. 
Rep.  387  (1895). 

2  Columbine  v.  Chichester,  2  Ph. 
Ch.  27  (1846).  Specific  performance 
as  to  issuing  stock  is  not  decreed 
when  performance  is  impossible.  Sum- 
merlin  V.  Fronteriza,  etc.  Co.,  41  Fed. 
Rep.  249  (1890).  An  injunction 
against  a  transfer  in  the  meantime 
may  be  granted.  Ruttman  v.  Hoyt, 
N.  Y.  L.  J.,  July  19,  1890. 

3  Turner  v.  Moy,  32  L.  T.  Rep. 
66  (1875).  In  the  case  Lamb,  etc. 
Co.  I'.  Lamb,  119  Mich.  568  (1899), 
where  a  party  claiming  to  be  the  real 
owner  of  stock  filed  a  bill  to  compel 
the  holder  of  such  stock  to  deliver 
up  the  same,  but  it  appeared  that  the 
defendant  had  already  disposed  of  the 
stock  before  the  commencement  of 
the  suit,  the  court  refused  to  grant 
relief,  even  though  it  further  ap- 
peared that  the  defendant  had  other 
stock  in  the  same  corporation  equal 
in  amount  to  the  stock  in  issue. 

*  Graham  v.  O'Connor,  73  L.  T. 
Rep.  712  (1896). 

^  Wonson  v.  Fenno,  129  Mass.  405 
(1880).  Where  specific  performance 
cannot  be  granted  because  the  party 
has  sold  the  stock,  the  court  will  follow 
the  unpaid  price.  Hogg  v.  MeGuifin, 
76  W.  Va.  456  (1910).  Cf.  Austin  v. 
Gillaspie,    1   Jones   Eq.    (N.    C.)    261 


(1854).  A  suit  to  obtain  stock  which 
the  defendant  had  contracted  to  obtain 
and  deliver  does  not  fail,  even  though  it 
appears  that  the  defendant  has  not 
obtained  it,  inasmuch  as  the  complaint 
would  sustain  a  judgment  for  damages 
for  breach  of  contract.  Grant  v.  Walsh, 
36  Wash.  190  (1904).  Even  though 
the  vendor  of  stock  in  an  agreement 
providing  for  general  releases  and  the 
giving  of  certain  new  notes  cannot 
obtain  a  specific  performance,  the 
court  being  unable  to  grant  complete 
specific  performance,  yet  the  court 
may  retain  the  suit  and  assess  dam- 
ages for  that  part  of  the  contract 
which  cannot  be  specifically  enforced. 
Lvle  V.  Addieks,  62  N.  J.  Eq.  123 
(1901). 

6  Wescott  V.  Mulvane,  58  Fed.  Rep. 
305  (1893),  holding  also  that  if  the 
vendee,  after  obtaining  an  injunc- 
tion against  a  sale  of  the  stock  by  the 
vendor  to  others,  withdraws  his  de- 
mand for  specific  performance  and 
asks  merely  for  damages,  the  injunc- 
tion will  be  dissolved. 

'  McLure  ;'.  Sherman,  70  Fed.  Rep. 
190  (1895).  In  a  suit  by  the  vendee  of 
stock  to  have  specific  performance,  the 
vendor  may  be  enjoined  from  dispos- 
ing of  the  stock  pending  litigation. 
Rice  V.  Doherty  &  Co.,  184  Fed.  Rep. 
878  (1911).  In  a  suit  to  recover  stock 
an  injunction  is  more  readily  granted 
than  in  a  suit  to  recover  other  kinds 


1039 


§  338.] 


CONTBACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


mance,  and  obtains  judgment,  the  judgment  should  be  in  the  alternative, 
either  for  the  stock  or  for  damages  specified  in  the  decree.^  In  a  suit 
by  a  claimant  of  stock  to  obtain  the  stock  from  another  person,  the 
corporation  is  a  proper  but  not  a  necessary  party .'^  But  in  a  suit  to 
compel  a  corporation  to  transfer  to  the  plaintiff  stock  standing  on  its 
books  in  the  name  of  a  third  person,  the  corporation  and  the  third  per- 
son are  both  necessary  parties.^  Laches  may  constitute  a  bar  to  the 
bill  in  equity  to  enforce  specific  performance.'*     Where  a  person  claims 


of  personal  property.  Currie  v.  Jones, 
138  N.  C.  189  (1905).  See  also  §§  363, 
391,  579,  infra. 

1  Eastman  v.  Reid,  101  Ala.  .320 
(1893).  In  a  suit  to  recover  certain 
stock,  even  though  the  plaintiff  al- 
leges conversion  and  asks  judgment 
for  the  value  of  the  stock,  yet  if  he 
makes  the  corporation  a  party  de- 
fendant, and  also  all  the  parties  inter- 
ested in  the  stock,  and  the  court  de- 
crees a  cancellation  of  the  outstand- 
ing certificate,  and  the  issue  of  a  nev/ 
one  to  plaintiff,  the  defeated  party 
cannot  complain  that  the  judgment 
should  have  been  for  money  damages. 
Crawford  v.  Ft.  Dodge,  etc.  Co.,  125 
Iowa,  658  (1904).  A  bill  in  equity  to 
compel  delivery  of  stock  or  pay  its  value, 
followed  by  an  arbitration  giving  an 
award  to  that  effect,  is  proper.  Brock 
V.  Lawton,  210  Pa.  St.  195  (1904). 

2  Quoted  and  approved  in  Lucas  v. 
Milliken,  139  Fed.  Rep.  816  (1905), 
holding  that  in  a  suit  by  a  vendee 
against  a  vendor  of  stock  to  compel 
specific  performance,  the  corporation 
is  but  a  nominal  party  and  is  not 
considered  in  deciding  whether  the 
suit  may  be  removed  to  the  federal 
court.  Williamson  v.  Krohn,  66  Fed. 
Rep.  655  (1895)  ;  Johnson  v.  Kirby, 
65  Cal.  482  (1884).  In  a  suit  be- 
tween stockholders  as  to  the  title  to 
stock  the  corporation  is  a  proper 
party  defendant,  but  is  a  nominal 
party,  and  is  not  considered  in  deter- 
mining whether  the  suit  is  removable 
to  the  United  States  court.  Higgins 
V.  Baltimore,  etc.  R.  R.,  99  Fed.  Rep. 
640  (1900).  And  see  §§  356,  363,  391, 
579,  infra.  The  corporation  is  a 
proper  but  not  a  necessary  party  to  an 
action  by  one  person  to  compel  an- 
other person  to  transfer  stock  to  him 


in  accordance  with  the  contract.  Say- 
ward  V.  Houghton,  82  Cal.  628  (1890). 
Where  a  citizen  of  Wisconsin  claims 
stock  in  a  Wisconsin  corporation  as 
against  a  citizen  of  Illinois  in  whose 
name  the  stock  stands  on  the  corpo- 
rate books,  the  corporation  is  a  neces- 
sary party  defendant  and  the  case 
cannot  be  removed  to  the  federal 
courts.  Rogers  v.  Van  Nortwick,  45 
Fed.  Rep.  513  (1891).  The  corpora- 
tion is  a  proper  party  defendant.  Ken- 
dig  V.  Dean,  97  U.  S.  423  (1878); 
Budd  V.  Munroe,  18  Hun,  316  (1879) ; 
Crump  V.  Thurber,  115  U.  S.  56 
(1885).  The  reason  of  this  rule  is 
that  complete  possession  of  the  stock 
can  be  obtained  only  by  obtaining  a 
transfer  of  that  stock  on  the  corpo- 
rate books  to  the  plaintiff.  Where,  in 
a  suit  for  specific  performance,  the 
corporation  is  joined  as  a  party  de- 
fendant, in  order  to  obtain  a  transfer 
on  the  books,  it  is  a  necessary  party, 
and  the  other  defendant  cannot  re- 
move the  case  to  the  federal  court  if 
the  complainant  and  the  corporation 
are  citizens  of  the  same  state.  Pat- 
terson V.  Farmington,  etc.  Ry.,  Ill 
Fed.  Rep.  262  (1901).  A  state  court 
may  decree  that  national  bank  stock 
standing  in  the  name  of  one  person  be- 
longs to  another  person.  The  bank  is 
not  necessarily  a  party  defendant.  In 
re  Fisher's  Estate,  128  Iowa,  18  (1905). 

3  St.  Louis,  etc.  Ry.  v.  Wilson,  114 
U.  S.  60  (1885).  In  a  suit  by  the  ven- 
dee to  obtain  possession  of  the  stock 
in  the  hands  of  a  third  person,  the 
price  having  been  paid,  the  vendor  is 
not  a  necessary  party.  Leigh  v. 
Laughlin,  222  111.  265  (1906).  See 
also  §  391,  supra. 

*  An  agreement  transferring  a  por- 
tion of  the  stock  in  a  mining  corpo- 


1040 


CH.  XX.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


338. 


to  hold  stock  in  a  corporation,  as  against  another  person,  and  sues  the 
corporation  without  joining  the  second  claimant,  the  latter  is  not  bound 
by  the  judgment,  even  though  he  is  notified  of  the  suit,  it  appearing 
that  he  was  not  allowed  to  take  part  in  the  trial. ^  A  suit  by  a  person  to 
compel  his  associate  to  deliver  certain  bonds  is  not  barred  by  a  subse- 
quent suit  in  another  state  relative  to  stock  involved  in  the  same  trans- 
action, although  the  latter  suit  has  passed  into  a  decree.^    A  suit  by 


ration  cannot  be  enforced  in  a  court 
of  equity  eight  years  after  the  com- 
plainant had  made  a  demand  for  the 
stock,  the  statute  of  limitations  at 
law  being  a  bar.  Moore  v.  Niekey,  133 
Fed.  Rep.  289  (1904).  Where  for 
fifty  years  a  claimant  of  stock  takes  no 
proceedings  to  obtain  it  and  during 
that  time  other  persons  claim  the 
stock  and  have  possession  of  it  and 
have  received  dividends  upon  it,  laches 
is  a  bar  to  a  suit  by  the  former  to 
recover  the  stock.  Livingston  v.  Pro- 
prietors', etc.,  15  Fed.  Cas.  691  (1879) ; 
s.  c,  16  Blatch.  549.  Where  a  stock- 
holder delivers  his  stock  to  the  presi- 
dent to  be  used  to  induce  a  person  to 
loan  money  to  the  corporation,  and  the 
president  instead  of  so  using  it  converts 
it  to  his  own  use,  the  stockholder  may 
maintain  a  suit  in  equity  to  recover 
back  the  stock,  and  the  statute  of 
limitations  does  not  begin  to  run  until 
he  has  discovered  or  should  have  dis- 
covered the  facts.  Slavback  v.  Ray- 
mond, 93  N.  Y.  App.  Div.  326  (1904). 
Delay  in  instituting  a  suit  to  compel 
the  delivery  of  stock  which  parties  had 
earned  in  common,  is  not  fatal,  short  of 
the  statute  of  limitations.  Eno  v. 
Sanders,  39  Wash.  238  (1905).  Seven 
years'  delay  in  bringing  suit  for  spe- 
cific performance  is  a  bar.  York  v. 
Passaic,  etc.  Co.,  30  Fed.  Rep.  471 
(1887).  Five  years'  delay  held  fatal 
where  "the  relations  of  the  parties 
have  changed  and  the  stock  has  greatly 
appreciated  in  value."  Mundy  v. 
Davis,  20  Fed.  Rep.  353  (1884). 
Where  a  person  sells  stock  to  be  de- 
livered within  a  reasonable  time,  and 
receives  the  money  for  it,  but  is  un- 
able to  perform  his  contract  by  reason 
of  an  injunction,  the  statute  of  limita- 
tions begins  to  run  from  the  vendee's 
demand  for  the  retm-n  of  the  purchase- 
money.     Rose  V.   Foord,  96  Cal.   154 


(1892).  Three  years'  delay  in  bring- 
ing action  for  specific  performance,  the 
stock  in  the  meantime  having  increased 
tenfold  in  value,  is  fatal.  Rogers  v. 
Van  Nortwick,  87  Wis.  414  (1894). 
Specific  performance  will  not  be 
granted  to  the  vendee  of  stock  where  he 
has  delayed  for  over  two  years  in  com- 
mencing suit  and  in  the  meantime  the 
situation  has  materially  changed  and 
the  vendee  commenced  the  suit  for  the 
benefit  of  other  parties.  Ringler  v. 
Jetter,  35  N.  Y.  Misc.  Rep.  750  (1901). 
Where  one  of  the  partners  in  a  firm 
organized  to  locate,  develop,  and 
operate  mines  does  not  turn  into  the 
firm  a  mine  located  by  him,  but  trans- 
fers the  same  to  a  corporation  for  stock, 
and  the  other  partners  delay  for  two 
years  after  knowledge  thereof  before 
filing  a  bill  claiming  an  interest  in 
the  stock,  and  in  the  meantime  the 
corporation  has  expended  money  and 
the  stock  may  have  passed  into  other 
hands,  the  court  will  refuse  relief  on 
the  ground  that  the  firm  evidently 
intended  to  deny  any  obligation  if  the 
mine  turned  out  to  be  worthless,  but 
to  claim  an  interest  if  it  turned  out 
to  be  valuable.  Curtis  v.  Lakin,  94 
Fed.  Rep.  251  (1899).  A  court  of 
equity  may  enforce  a  written  agree- 
ment for  the  delivery  of  stock.  A 
court  of  equity  has  jurisdiction  al- 
though the  party  who  contracted  to 
deliver  the  stock  has  disposed  of  the 
stock  for  cash.  The  lapse  of  time 
is  no  bar  to  the  suit,  there  being  a 
complete  breach  of  trust,  unless  such 
lapse  is  exceptionally  great,  the  facts 
having  been  concealed.  Wood  v.  Per- 
kins, 57  Fed.  Rep.  258  (1893).  See 
also  note  4,  1026,  supra. 

1  Fifth,  etc.  Society  v.  Holt,  184  Pa. 
St.  572  (1898). 

^Laughlin   v.   Leigh,   226  Mo.   620 
(1910). 


(66) 


1041 


§  339.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


CH.  XX. 


the  purchaser  of  a  certificate  of  stock  to  compel  delivery  may  be  brought 
at  the  place  where  the  certificate  is,  and  absent  defendants  may  be  served 
by  publication.^  Where,  pending  an  appeal  from  a  decree  ordering  a 
person  to  turn  stock  over  to  another,  the  former  pays  assessments 
on  the  stock,  he  can  recover  these  assessments  from  the  latter  if  the 
decree  is  affirmed.^  Upon  an  appeal  from  final  judgment,  an  interloc- 
utory judgment  ordering  the  transfer  of  stock  from  a  trustee  to  the 
party  entitled  to  the  same  will  not  be  enforced,  provided  the  party  is 
allowed  to  vote  thereon.^  If  a  decree  directs  the  transfer  of  certain 
stock  in  the  distribution  of  an  estate,  and  the  corporation  makes  such 
transfer,  and  thereafter  the  decree  is  reversed  on  appeal,  the  executors 
may  bring  suit  to  have  the  transfer  canceled.^  Where  a  sale  of  stock  is 
decreed  and  an  appeal  taken  and  a  bond  given  on  appeal,  and  the  stock 
depreciates  during  the  appeal  and  the  decree  is  affirmed,  the  liability 
on  the  bond  is  the  amount  of  the  depreciation.^ 

§  339.  Seventeenth  section  of  statute  of  frauds  as  affecting  sales  of 
stock. — Agreement  to  repurchase.  —  In  England  the  rule  is  firmly 
established  that  the  seventeenth  section  of  the  statute  of  frauds,  re- 
lating to  contracts  for  the  sale  of  "  goods,  wares,  and  merchandise," 


'  Ryan  v.  Seaboard,  etc.  R.  R.,  83 
Fed.  Rep.  889  (1897).  A  suit  lies  in 
a  New  Jersey  court  to  compel  the 
transfer  of  stock  in  a  New  Jersey  cor- 
poration, even  though  the  stockholder 
of  record  is  a  non-resident  and  is  not 
served  within  the  state.  Andrews  v. 
Guayaquil,  etc.  Ry.,  69  N.  J.  Eq.  211 
(1905). 

A  suit  to  recover  back  stock  which 
has  been  illegally  transferred  by 
a  trustee  may  be  brought  in  the  state 
where  the  corporation  was  incorporated, 
even  though  the  holder  of  the  outstand- 
ing certificate  is  a  non-resident,  inas- 
much as  the  latter  may  be  served  by 
publication.  People's  Nat.  Bank  v. 
Cleveland,  117  Ga.  908  (1903).  A 
citizen  of  Alabama  cannot  maintain  in 
the  courts  of  Alabama  a  suit  to  enjoin 
non-residents  from  transferring  stock  in 
a  non-resident  corporation  where  the 
defendants  are  not  personally  served 
within  the  state.  Rucker  v.  Morgan, 
122  Ala.  308  (1899).  Where  a  corpo- 
ration has  not  yet  issued  stock  as  called 
for  by  a  contract,  a  claimant  of  such 
stock  may  bring  suit  in  the  state  where 
corporation  was  organized  to  obtain 
the  stock,  even  though  the  other 
claimant   is  a  non-resident.     Jennings 


V.  Rocky  Bar,  etc.  Co.,  29  Wash.  726 
(1902).     See  §§  12,  363. 

-  Irvine  v.  Angus,  93  Fed.  Rep. 
629  (1899). 

3  Potter  V.  Rossiter,  109  N.  Y.  App. 
Div.  32  (1905). 

*  The  suit  is  properly  in  equity. 
Ashton  V.  Heggerty,  130  Cal.  516 
(1900).  Under  the  statute  of  Califor- 
nia, even  though  stock  is  distributed  by 
executors  in  accordance  with  a  decree 
of  distribution,  and  the  distributees  sell 
the  stock  and  it  is  transferred  on  the 
books  of  the  company,  nevertheless  if 
the  decree  is  reversed  on  appeal,  the 
transfers  are  void  and  the  company  is 
liable  for  dividends  paid  in  the  mean- 
time to  such  purchasers.  In  a  suit 
by  the  executors  to  recover  such  divi- 
dends the  purchasers  need  not  be  made 
parties.  Ashton  v.  Zeila  Min.  Co.,  134 
Cal.  408  (1901).  Where,  in  accordance 
with  a  judgment,  stock  is  delivered 
and  the  party  receiving  it  sells  it  and 
thereafter  the  judgment  is  reversed, 
such  stock  cannot  be  recovered  back 
from  the  transferee.  Thaxter  v.  Thain, 
100  N.  Y.  App.  Div.  488  (1905).  See. 
also  §§  330,  391,  supra. 

6  Welch  V.  Welch,  60  S.  W.  Rep. 
409  (Ky.  1901). 


1042 


CH.  XX. 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  339. 


does  not  apply  to  sales  of  stock.  Xo  delivery,  payment  of  earnest 
money,  or  memorandum  in  writing  is  necessary  in  order  to  render  the 
contract  of  sale  valid.  This  principle  of  law  was  doubted  in  the  early 
cases,^  but  was  determined  by  the  case  of  Humble  v.  ^Mitchell,  in  1839.^ 
In  1838  this  question  arose  in  this  country,  apparently  for  the  first 
time,  and  it  was  decided  in  Tisdale  v.  Harris  ^  chiefly  on  the  authority 
of  the  early  English  cases,  that  a  contract  for  the  sale  of  stock  was  within 
the  seventeenth  section  of  the  statute  of  frauds.  This  decision  has  been 
uniformly  followed  in  America.^  The  statute  of  frauds  does  not  apply 
to  an  original  subscription  for  stock  that  may  be  oral.^ 


1  Mussell  V.  Cooke,  Finch's  Prec.  in 
Ch.  533  (1720),  holding  that  the 
statute  applied,  but  was  not  properly 
pleaded  ;  Pickering  v.  Applebj',  1  Com. 
Rep.  353  (1721),  not  decided,  the 
judges  being  divided  six  and  six ;  Colt 
V.  NetterviU,  2  P.  Wms.  304  (1725), 
not  decided,  the  lord  chancellor  say- 
ing it  was  too  difficult  to  decide  on  a 
demurrer ;  CruU  v.  Dodson,  Sel.  Cas. 
Ch.  t.  King  (2d  ed.,  p.  113-1725), 
statute  held  to  apply. 

2  11  A.  &  E.  205,  followed  in  Dun- 
cuft  V.  Albreeht,  12  Sim.  189  (1841), 
the  court  saying  that  the  statute  ap- 
plies only  to  goods  capable  of  part 
delivery  ;  Hibblewhite  v.  McMorine,  6 
M.  &  W.  200,  214  (1840) ;  Tempest  v. 
Kilner,  3  C.  B.  249  (1846) ;  Heseltine 
V.  Siggers,  1  Exch.  856  (1848). 

3  37  Mass.  9. 

*  Baltzen  v.  Nicolay,  53  N.  Y.  467 
(1873),  rigidly  appljnng  the  rule  ; 
North  V.  Forest,  15  Conn.  400  (1843), 
where  the  court  said  :  "Such  contracts 
fall  clearly  within  the  mischiefs  which 
the  legislature  by  the  statute  intended 
to  remedy.  There  is  as  much  danger 
of  fraud  and  perjiu-y  in  the  parol 
proof  of  such  contracts  as  in  any 
other;"  Pray  v.  Mitchell,  60  Me. 
430  (1872) ;  Fine  v.  Hornsby,  2  Mo. 
App.  61  (1876)  ;  Colvin  v.  Williams,  3 
Har.  &  J.  (Md.)  38  (1810);  Sher- 
wood V.  Tradesman's  Nat.  Bank,  16 
N.  Y.  W.  Dig.  522  (1883) ;  French  ;;. 
Sanger,  N.  Y.  L.  J.,  July  22,  1892.  Cf. 
Brownson  v.  Chapman,  63  N.  Y.  625 
(1875).  Contra,  dictum,  Vawter  v. 
Griffin,  40  Ind.  593,  602  (1872).  See 
Reed,  Stat,  of  Frauds,  §  234 ;    Hagar 


V.  King,  38  Barb.  200  (1862),  holding 
that  a  sale  of  railroad  bonds  is  within 
the  statute.  This  decision  was  over- 
ruled in  58  Barb.  148.  An  oral 
agreement  to  sell  stock,  the  price 
being  more  than  S50,  is  void  under  the 
statute  of  frauds,  even  though  the 
agreement  involved  other  stock  which 
was  actually  delivered  and  paid  for. 
Tompkins  v.  Sheehan,  158  N.  Y.  617 
(1899).  The  statute  of  frauds  renders 
void  an  oral  promise  to  pay  the  note 
of  another  party  as  a  part  of  the  con- 
sideration of  stock.  Beeson  v.  Wright, 
1.59  Cal.  133  (1911).  If  an  essential 
part  in  a  sale  of  stock  is  oral  the  sale 
is  void  by  the  statute  of  frauds.  Snow 
Storm  Min.  Co.  v.  Johnson,  186  Fed. 
Rep.  745  (1911).  Stock  is  goods  with- 
in the  statute  of  frauds.  Sprague  v. 
Hosie,  155  Mich.  30  (1908).  A  sale 
of  stock  is  within  the  meaning  of  the 
statutes  of  frauds  relative  to  the 
sale  of  goods.  Raymond  v.  Colton, 
104  Fed.  Rep.  219  (1900);  s.  C, 
Colton  V.  Raymond,  114  Fed.  Rep. 
863.  The  written  agreement  of  the 
purchaser  to  buy  stock  does  not  satisfy 
the  statute  of  frauds  if  there  is  no 
written  agreement  of  the  vendor  to 
sell.  Melh-oy  v.  Richards,  148  Mich. 
694  (1907).  A  subscription  for  stock 
is  not  a  contract  for  the  sale  of  goods, 
etc.,  within  the  meaning  of  the  statute 
of  frauds.  Webb  v.  Baltimore,  etc. 
R.  R.,  77  Md.  92  (1893).  In  Florida 
the  statute  applies,  the  word  "per- 
sonal" propertv  being  used.  South- 
ern Life  Ins.  Co.  v.  Cole,  4  Fla.  359, 
378  (1852).  See  also  Mason  v.  Decker, 
72    N.    Y.    595    (1878),    affirming    10 


*  Peninsula,  etc.  Co.  v.  Cody,  161  Mich.  604  (1910). 

1043 


See  also  §  52,  supra. 


§339. 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


CH.  XX. 


A  broker,  however,  as  a  common  agent,  may  make  the  memorandum 
for  both  parties.^  An  auctioneer's  sale  of  stock  may  be  enforced.'^  A 
principal  cannot  defend  against  a  suit  by  his  agent  for  the  price  of  stock 
purchased  by  the  latter  for  the  former,  on  the  ground  that  the  order 
was  oral  and  void  by  the  statute  of  frauds.^  A  part  payment  of  the 
consideration  makes  the  contract  valid,^  and  a  payment  in  property  ^  or 


Jones  &  S.  115;  Johnson  v.  Mulry, 
4  Rob.  (N.  Y.)  401  (1867),  holding 
that  the  New  York  Stock  Jobbing 
Act  (Laws  N.  Y.  1858,  ch.  134), 
did  not  affect  the  application  of  the 
statute  of  frauds.  The  statute  is 
not  sufficiently  pleaded  by  alleging 
that  the  contract  of  sale  of  stock 
"was  void  in  law  and  not  binding 
upon  him."  Vaupell  v.  Woodward,  2 
Sandf.  Ch.  143  (1844).  The  question 
of  whether  there  was  a  delivery  suf- 
ficient to  take  a  ease  of  sale  of  stock 
out  of  the  statute  of  frauds  was  sub- 
mitted to  the  jury  in  Hinchman  v.  Lin- 
coln, 124  U.  S.  38  (1888),  discussed  in 
N.  Y.  D.  Reg.,  Jan.  28,  1888.  A  con- 
tract to  sell  stock  at  the  vendee's  op- 
tion within  three  years  is  not  void  by 
the  statute  of  frauds,  since  the  option 
may  be  exercised  within  a  year.  Sed- 
don  V.  Rosenbaum,  85  Va.  928  (1889). 
A  subscription  payable  when  the  road 
reaches  a  certain  point  becomes  ab- 
solutely payable  then  upon  demand. 
The  statute  of  frauds  does  not  apply 
to  such  a  subscription.  Webb  v.  Balti- 
more, etc.  R.  R.,  77  Md.  92  (1893). 
An  oral  subscription  is  not  void  by 
the  statute  of  frauds.  Reed  v.  Gold, 
102  Va.  37  (1903).     See  §  52,  supra. 

1  Colvin  V.  Williams,  3  Har.  &  J. 
(Md.)  38  (1810).  Without  a  memo- 
randum in  writing  a  contract  for  the 
sale  of  stock  is  not  enforceable,  al- 
though made  in  the  Stock  Exchange, 
whose  rules  provide  that  the  contract 
shall  be  enforceable.  Ryers  v.  Tuska, 
14  N.  Y.  Supp.  926  (1891).  Where 
a  stockholder  in  a  letter  offers  a 
commission  to  a  broker  to  sell  his 
stock,  this  is  sufficient  to  satisfy  the 
statute  of  frauds.  Jones  v.  Wattles 
66  Neb.  533  (1902).  A  letter  relative 
to  the  sale  of  stock  may  satisfy  the 
statute  of  frauds.  Weymouth  v.  Good- 
win, 105  Me.  510  (1909). 


2  Meyer    v.    Redmond,    141    N.    Y. 
App.  Div.  123  (1910). 

3  Wiger  V.  Carr,  131  Wis.  584  (1907). 
*  Thompson  v.  Alger,  53  Mass.  428 

(1847).  A  check  is  a  part  pay- 
ment, taking  a  sale  of  stock  out  of  the 
statute  of  frauds.  McLure  v.  Sherman, 
70  Fed.  Rep.  190  (1895).  An  oral 
agreement  to  purchase  stock  is  void 
by  the  statute  of  frauds,  notwithstand- 
ing the  vendor  claims  that  he  re- 
signed as  president  and  delivered  the 
stock  in  escrow,  there  being  a  conflict 
of  testimony  on  that  subject.  Rey- 
nolds V.  Scriber,  41  Oreg.  407  (1902). 
Where  a  partial  payment  is  made  on 
the  stock  the  contract  is  not  void  by 
the  statute  of  frauds.  So  also  where 
an  oral  contract  is  subsequently  em- 
bodied in  letters  the  statute  of  frauds 
does  not  apply.  Cooper  v.  Bay  State, 
etc.  Co.,  127  Fed.  Rep.  482  (1904). 
Where  two  oral  contracts  between  two 
persons  for  the  sale  of  stock  are  void, 
under  the  statute  of  frauds,  a  subse- 
quent payment  on  one  of  such  con- 
tracts does  not  validate  the  other, 
unless  at  the  time  of  such  payment 
the  other  is  restated  and  validated  by 
reason  of  such  payment.  Koewing  v. 
Wilder,  128  Fed.  Rep.  558  (1904).  A 
sale  of  stock  for  $50  or  more  is  within 
the  statute  of  frauds ;  but  if  the 
purchaser  agrees  to  and  did  give  up  a 
lucrative  position  and  accept  a  fixed 
salary  from  the  corporation  there  is 
part  performance  on  his  part  and  the 
vendor  is  bound.  Hightower  v.  Ans- 
ley,  126  Ga.  8  (1906).  Where  a  party 
has  bought  various  stocks  through 
other  persons  and  made  payment  on 
account,  the  statute  of  frauds  is  not 
applicable  to  a  purchase  of  a  particular 
stock.  Berwin  v.  BoUes,  183  Mass.  .340 
(1903).  An  oral  contract  by  which 
plaintiff  canceled  a  claim  and  paid 
certain  cash  for  an  interest  in  certain 


5  Eastern  R.  R.  v.  Benedict,  76  Mass.  212  (1857). 
1044 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  339. 


services  ^  suffices.  The  usual  transfer  on  the  back  of  a  certificate  of 
Stock,  when  signed  by  the  stockholder  is  sufficient  to  satisfy  the  statute 
of  frauds.^  Of  course  the  statute  of  frauds  does  not  apply  to  an  oral 
sale  of  stock  after  the  certificate  has  actually  been  delivered  to  the 
vendee.^  The  statute  does  not  apply  as  between  partners  for  the  pur- 
pose of  buying  stock.^  A  contract  for  the  sale  of  stock  in  a  corporation 
not  yet  incorporated  has  been  held  not  to  be  within  the  statute.^  The 
statute  must  be  pleaded  in  order  to  be  effective  as  a  defense.^  The 
assignee  of  a  contract  for  the  sale  of  stock,  void  by  the  statute  of  frauds, 
takes  nothing  by  the  assignment." 

An  agreement  by  the  vendor  of  stock  to  take  it  back  at  any  time  is 
not  affected  by  the  statute,  and  such  an  agreement  is  a  part  of  the  exe- 


stock,  may  be  enforced  in  equity. 
Cree  v.  Lewis,  49  Colo.  186  (1910). 
An  oral  sale  of  stock  is  void  by  the 
statute  of  frauds  even  though  the 
vendee  deposited  the  money  with  a  third 
party  to  be  paid  on  delivery  of  the 
stock.  Leonard  v.  Roth,  164  Mich. 
646  (1911).  An  oral  sale  of  stock  is 
not  void  by  the  statue  of  frauds  where 
the  purchaser  at  once  takes  possession 
of  the  corporate  business  and  a  part 
of  the  sale  was  other  personal  property, 
which  was  actually  delivered.  The 
vendor  need  not  tender  a  certificate  of 
stock  if  none  had  been  issued.  Ford 
V.  Howgate,  106  Me.  517  (1910). 

^  White  V.  Drew,  56  How.  Pr.  53 
(1878),  holding  that  the  furnishing 
of  reliable  information  is  sufficient. 
An  oral  agreement  to  deliver  stock 
in  part  payment  for  services  to  be 
rendered  cannot  be  enforced  against 
the  party  agreeing  to  deliver  the 
stock,  even  though  the  services  have 
been  performed.  Franklin  v.  Matoa, 
etc.  Co.,  158  Fed.  Rep.  941   (1908). 

2  Flowers  v.  Steiner,  108  Ala.  440 
(1895).  Where  stock  is  sold  and  the 
certificate  transferred  to  the  vendee, 
and  is  then  attached  to  a  note  given 
in  payment  of  part  of  the  purchase 
price,  this  constitutes  a  delivery  and 
acceptance  of  the  stock,  and  the  stat- 
ute of  frauds  does  not  invalidate  the 
sale.  Dinkier  v.  Baer,  92  Ga.  432 
(1893).  In  Cameron  v.  Tompkins,  72 
Hun,  113  (1893),  it  was  held  that  the 
statute  of  frauds  prevented  the  collec- 
tion of  a  note  which  was  given  in  pay- 
ment for  stock,  even  though  the  stock 


was  collateral  security  for  the  note, 
and  even  though  there  were  letters 
prior  to  the  sale  in  which  the  pro- 
posed sale  was  referred  to.  The  court 
said :  "A  contract  to  sell  shares  of 
stock  in  a  private  corporation  is 
within  the  third  section  of  the  statute 
of  frauds  of  the  state  of  New  York." 

3  East  V.  McClung,  49  Colo.  502 
(1911).     Cf.  132  Pac.  Rep.  88. 

*  Tomlinson  v.  Miller,  7  Abb.  Pr. 
(N.  S.)  364  (1869).  Nor  as  between 
persons,  one  of  whom  buys  stock  in 
his  own  name  for  the  joint  benefit 
of  both.  Stover  v.  Flack,  41  Barb.  162 
(1862).  A  division  of  bonds  by  oral 
agreement  between  partners  is  not  a 
sale  within  the  meaning  of  the  stat- 
ute of  frauds.  Mason  v.  Spiller,  186 
Mass.  346  (1904).  The  statute  of 
frauds  applies  to  an  oral  sale  of  stock, 
but  where  a  party  purchases  for  him- 
self and  another  the  latter  must 
fulfill.  Stiff t  V.  Stiewel,  91  Ark.  445 
(1909). 

5  Gadsden  v.  Lance,  McMuU  Eq. 
(S.  C.)  87  (1841) ;  Green  v.  Brookins, 
23  Mich.  48,  54  (1871),  where  a  person 
was  induced  to  subscribe  on  parol 
contract  that  a  purchaser  for  the  stock 
would  afterwards  be  found.  In  Massa- 
chusetts, on  similar  facts,  except  that 
a  certain  person  agreed  to  purchase,  a 
contrary  decision  was  rendered. 
Boardman  v.  Cutter,  128  Mass.  388 
(1880). 

« Porter  v.  Wormser,  94  N.  Y.  431, 
450  (1884). 

■  Mayer  v.  Child,  47  Cal.  142  (1873). 


1045 


§  339.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[CH.  XX. 


cuted  sale.^     Where  the  vendor  of  stock  agrees  to  take  it  back,  and  in 
the  meantime  the  corporation  fails  and  the  stock  is  assessed,  the  vendor 


1  Fitzpatrick  v.  Woodruff,  96  N.  Y. 
561  (1884);  Thorndike  v.  Locke,  98 
Mass.  340  (1867) ;  Fay  v.  Wheeler,  44 
Vt.  292  (1872) ;  Bank  of  Lyons  v. 
Demmon,  Hill  &  D.  Supp.  398  (1844). 
An  agreement  by  promoters  with  a 
subscriber  for  stock  that  they  would 
take  the  stock  from  him  within  a  cer- 
tain time,  if  he  desired,  is  valid  and 
enforceable.  Meyer  v.  Blair,  109  N.  Y. 
600  (1888) ;  Morgan  v.  Struthers,  131 
U.  S.  246  (1889).  An  agreement  to 
take  back  bonds  if  the  vendee  desires 
to  retiu-n  them  is  valid  and  enforce- 
able. Johnston  v.  Trask,  116  N.  Y. 
136  (1889).  A  guaranty  that  a  vendor 
will  take  back  the  stock  sold  if  the 
vendee  desires  is  enforceable,  even 
after  the  company  sells  out  to  another 
company  for  its  shares  of  stock,  the 
vendee  not  assenting.  Richter  v. 
Frank,  41  Fed.  Rep.  859  (1890). 
An  agreement  that  a  person  would 
not  lose  anything  by  a  purchase  of 
stock,  is  one  of  indemnity,  and  not  an 
agreement  to  take  the  stock  up. 
Bullock  V.  Lewis,  125  Pac.  Rep.  849 
(Col.  1912).  The  agreement  of  a  cor- 
poration with  an  employee,  to  take  back 
certain  stock  at  par  if  it  discharged 
him,  may  be  enforced  by  him  upon 
his  discharge.  Strait  v.  Northwestern, 
etc.  Works,  148  Wis.  2.54  (1912).  An 
agreement  of  the  vendor  to  buy  back 
the  stock  is  enforceable.  Graham  v. 
Houghton,  1.53  Mass.  384  (1891).  A 
broker's  agreement  to  take  bonds  back 
at  a  certain  price  at  any  time  is  en- 
forceable, where  the  bonds  were  sold 
in  1888,  and  in  1890,  when  the  bonds 
were  tendered  back,  the  broker  de- 
layed action  and  said  he  would  take 
them  at  any  time,  and  in  1895  a  final 
tender  was  made,  and  in  1897  suit 
was  commenced.  Lydig  v.  Braman, 
177  Mass.  212  (1900).  In  a  suit  on  a 
note  given  in  payment  for  stock  the 
defendant  may  prove  an  oral  agree- 
ment showing  that  he  had  a  right  to 
return  the  stock  and  demand  back  the 
note.  Germania  Bank,  etc.  i'.  Osborne, 
81  Minn.  272  (1900).  The  oral  agree- 
ment of  the  vendor  of  stock  to  buy 
it  back  at  the  same  price  is  not  void 


by  the  statute  of  frauds,  even  though 
a  stock  dividend  has  been  received 
in  the  meantime,  but  this  is  returned 
with  the  stock.  Trenholm  v.  Kloep- 
per,  88  Neb.  236  (1911).  The  oral 
agreement  of  the  vendor  of  stock  to 
repurchase  it  is  not  void  under  the 
statute  of  frauds.  Hankwitz  v.  Barrett, 
143  Wis.  639  (1910).  The  written 
agreement  of  the  vendor  of  stock  to  buy 
it  back  if  the  vendee  wished  at  a  cer- 
tain time  at  a  higher  price,  is  legal, 
although  it  amounts  to  an  option. 
Raiche  v.  Morrison,  37  Mont.  244 
(1908).  The  agreement  of  the  vendor 
to  take  back  at  a  dollar  per  share 
within  a  year,  the  stock  which  he 
sells  at  fifty  cents  a  share,  is  enforceable 
and  need  not  be  in  writing.  Vohland 
V.  Gelhaar,  136  Wis.  75  (1908).  An 
agreement  of  a  corporation  to  repur- 
chase treasury  stock  which  it  is  selling, 
if  the  purchaser  desires  within  six 
months,  need  not  be  in  writing. 
Mulford  V.  Torrey,  etc.  Co.,  45  Colo. 
81  (1909).  Even  though  a  sale  of 
stock  is  in  writing,  yet  the  vendee  may 
prove  an  oral  guarantee  of  the  vendor 
against  loss.  Wood  v.  Boese,  135  N.  Y. 
App.  Div.  810  (1909).  The  agree- 
ment of  the  vendor  to  sell  the  stock  for 
the  buyer  within  a  year  at  an  advance, 
gives  the  vendee  a  cause  of  action  for 
the  entire  value,  if  such  resale  is  not 
made  and  if  the  stock  becomes  worth- 
less. Aken  v.  Clark,  146  Iowa,  436 
(1909).  An  employee  having  the 
right  to  resell  stock  to  the  company 
within  six  months  after  discharge 
must  make  an  actual  tender  of  the 
certificates  and  a  letter  is  insufficient. 
Olsen  V.  Northern  S.  S.  Co.,  127  Pac. 
Rep.  112  (Wash.  1912).  An  option 
to  the  purchaser  to  resell  the  stock 
to  the  seller  at  any  time  after  six 
months  on  ninety  days'  notice  is  not 
affected  by  the  statute  of  limitations 
until  after  the  option  has  been  exer- 
cised. Vickrev  v.  Maier,  129  Pac. 
Rep.  273  (Cal.  1912).  The  joint 
guarantee  by  several  parties  of  a  speci- 
fied dividend  for  a  specified  time  on 
certain  stock,  in  order  to  bring  about 
its  sale,  together  with  their  agreement 


1046 


CH.   XX.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  339. 


must  refund  to  the  vendee  the  assessment  as  well  as  the  purchase  price.^ 
Where  the  vendee  agrees  in  writing  to  resell  the  stock  to  the  vendor  at  a 


to  purchase  the  stock  at  par  at  the  end 
of  the  time,  and  if  they  fail  to  do  so 
to  continue  to  pay  the  guaranteed  divi- 
dends, is  enforceable  against  all  for 
the  guaranteed  dividends  for  the  speci- 
fied time,  but  as  to  the  purchase  is 
enforceable  against  those  only  upon 
whom  a  demand  is  made  that  they 
purchase  the  stock  in  accordance  with 
the  agreement.  Rogers  v.  Burr,  105 
Ga.  432  (189S).  The  oral  agreement 
of  the  agent  of  the  buyer  that  the 
seller  would  repurchase  the  stock  is 
void  by  the  statute  of  frauds,  because 
this  is  a  separate  contract.  Morse  v. 
Douglass,  112  N.  Y.  App.  Div.  798 
(1906).  An  agreement  of  the  vendor 
to  buy  back  the  stock  in  one  year  if 
the  vendee  desired  is  not  void  by  the 
statute  of  frauds.  Gurwell  v.  Morris, 
2  Cal.  App.  451  (1905).  An  oral 
agreement  that  the  vendor  will  buy 
the  stock  back  again  at  the  same  price 
is  so  improbable  that  strong  evidence 
is  necessary  to  establish  it.  Blair  v. 
Minzesheimer,  124  N.  Y.  App.  Div.  177 
(1908).  The  Illinois  statute  against 
options  does  not  apply  to  a  contract 
by  which  the  vendor  of  stock  agrees 
to  buy  it  back  at  the  end  of  five  years 
if  the  vendee  so  desires,  the  vendee 
on  his  part  agreeing  not  to  sell  the 
stock  to  any  one  in  the  meantime, 
without  first  offering  it  to  the  vendor. 
Ubben  v.  Binnian,  182  111.  .508  (1899). 
An  agreement  of  the  vendor  of  bonds 
to  buy  them  back  at  the  same  price  at 
a  certain  time  if  the  vendee  wishes  is 
not  a  gambling  contract.  Wolf  v. 
Nat.  Bank  of  Illinois,  178  III.  85 
(1899).  Where  the  vendee  has  the 
right  to  return  the  stock  within  a 
reasonable  time,  the  statute  of  limita- 
tions on  such  right  is  not  to  begin  to 
run  until  a  reasonable  time  after  the 
date  of  the  contract.  Oaks  v.  Tay- 
lor, 30  N.  Y.  App.  Div.  177  (1898). 
The  agreement  of  the  vendor  of  stock 
to  buy  it  back  at  the  price  paid,  and 
one  per  cent,  a  month  in  addition,  is 
not  usurious  as  a  matter  of  law.     Phil- 


Ups  V.  Mason,  66  Hun,  580  (1893). 
Where  the  vendor  agrees  to  refund 
the  money  upon  the  return  of  the 
stock  sold,  the  vendee  cannot  sue  for 
the  money  unless  he  returns  the  stock. 
Henderson  v.  Wheaton,  139  111.  581 
(1891).  Where  stock  is  sold  with  a 
contract  on  the  part  of  a  vendor  that 
he  will  repurchase  it  if  desired  "at 
the  end  of  one  year,"  the  time  may 
be  e.xtended  by  oral  agreement.  Weld 
V.  Barker,  153  Pa.  St.  465  (1893).  The 
vendee,  in  enforcing  the  contract  of 
the  vendor  to  take  the  stock  back, 
must  make  and  allege  a  tender.  Tay- 
lor V.  Blair,  59  Hun,  347  (1891).  An 
agreement  of  the  vendor  to  repur- 
chase the  stock  at  the  option  of  the 
purchaser  at  the  end  of  one  year  be- 
comes enforceable  at  the  end  of  one 
year,  e.xcluding  the  day  of  the  con- 
tract from  the  count.  A  custom  of 
brokers  to  the  contrary  does  not  ap- 
ply to  such  a  transaction.  An  ex- 
tension of  the  time  by  the  original 
vendee  by  agreement  does  not  waive 
his  rights.  Weld  v.  Barker,  153  Pa. 
St.  465  (1893).  Where,  however,  the 
vendee  turns  in  his  stock  on  a  reorgan- 
ization and  takes  new  stock,  he 
cannot  enforce  the  vendor's  contract. 
Kolsky  V.  Enslen,  103  Ala.  97  (1894). 
Where  a  party  has  a  right  to  re- 
turn the  stock  and  receive  back  his 
money,  he  may,  after  making  a  ten- 
der, do  any  acts  in  regard  to  the 
stock  reasonably  necessary  to  protect 
his  interest,  and  yet  not  lose  his  right 
to  rescind.  But  where  he  directs  a 
sale  of  the  stock,  and  gives  a  proxy 
thereon  and  attends  meetings,  he 
waives  his  right  to  rescind.  Jessop 
V.  Ivory,  158  Pa.  St.  71  (1893) ;  s.  c, 
172  Pa.  St.  44.  A  receipt  given  by  a 
vendor  may,  by  its  wording,  be  a 
contract  on  the  part  of  the  vendor 
to  take  the  stock  back  if  the  vendee 
becomes  dissatisfied.  Jessop  v.  Ivory, 
172  Pa.  St.  44  (1895).  Where  it  is 
agreed  between  the  vendor  and  ven- 
dee stockholder  that  the  money  should 


1  Gay  V.  Dare,  103  Cal.  454  (1894). 
1047 


§339. 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


CH.  XX. 


specified  price,  an  oral  notice  by  the  vendor  that  he  wishes  to  repurchase 
is  sufficient,  but  he  must  tender  the  money  unless  such  tender  is  excused 
by  the  conduct  of  the  vendee.^ 

So,  also,  the  agreement  of  third  parties  to  take  the  stock,  or  to  pro- 
tect from  loss  the  party  buying  it,  is  enforceable  if  founded  on  a  sufficient 
consideration.^ 


be  paid  to  the  corporation  in  order 
to  meet  corporate  debts,  and  the  ven- 
dor agreed  to  repay  the  money  if  the 
stock  became  worthless,  the  statute  of 
frauds  does  not  prevent  the  vendee 
from  recovering  the  money,  even 
though  the  contract  was  oral.  Kil- 
bride V.  Moss,  113  Cal.  432  (1896). 
Where  a  corporation  issues  stock  in 
payment  for  a  patent  right  and  agrees 
to  take  back  the  stock  and  pay  the 
par  value  thereof  at  the  end  of  five 
years,  if  the  purchaser  so  wishes,  the 
purchaser  may  enforce  the  agreement. 
Browne  v.  St.  Paul  Plow  Works,  62 
Minn.  90  (1895).  The  vendee  having 
the  right  to  return  stock  within  a 
year  does  not  waive  that  right  by 
authorizing  the  vendor  to  sell  it. 
Corey  v.  Woodin,  195  Mass.  464 
(1907).  A  contract  to  repurchase 
stock  may  be  assigned  by  the  holder 
of  the  stock.  Mitchell  v.  Taylor, 
27  Oreg.  377  (1895).  A  verbal  agree- 
ment to  take  the  stock  back  is  not 
good  as  against  a  note  given  in  pay- 
ment. Riley  v.  Treanor,  25  S.  W. 
Rep.  1054  (Tex.  1894).  The  right  to 
rescind  and  tender  back  stock  after 
one  year  can  be  exercised  only  by  a 
tender  after  the  year  and  not  before ; 
but  the  tender  is  waived  if  the  vendor 
states  that  he  will  not  accept  the  ten- 
der. The  fact  that  the  vendee  has 
sold  some  of  the  stock  is  immaterial 
if  he  has  other  shares  to  take  the 
place  of  the  part  sold.  The  fact  that, 
by  agreement,  the  property  has  been 
merged  in  another  corporation  in  the 
meantime  is  immaterial.  Schultz  v. 
O'Rourke,  18  Mont.  418  (1896).  An 
agreement  to  repurchase  at  the  end 
of  a  year  if  thirty  days'  notice  is 
given  is  effective  if  the  thirty  days' 
notice  is  given  at  any  time  before 
the  expiration  of  the  year.  Maguire 
V.  Halsted,  18  N.  Y.  App.  Div.  228 
(1897).     An   agreement   to   reimburse 


a  party  as  to  stock  "  at  or  before"  a 
certain  date  cannot  be  enforced  by 
the  promisee  prior  to  the  expiration 
of  the  specified  time.  Wilson  v.  Bick- 
nell,  170  Mass.  259  (1898).  An  agree- 
ment to  take  back  stock  on  a  certain 
day  if  the  purchaser  so  desires  does 
not  enable  the  purchaser  to  tender 
the  stock  back  after  that  day.  Cabot 
V.  Kent,  20  R.  I.  197  (1897).  An  agree- 
ment of  two  persons  to  repurchase 
stock  on  a  specified  notice  does  not 
take  effect  upon  a  notice  to  each  one 
of  them  to  repurchase  one  half  of  it. 
Baird  v.  Hagen,  143  N.  Y.  App.  Div. 
679  (1911).  An  oral  agreement  of 
the  vendor  of  stock  to  buy  it  back  at 
an  advanced  price  is  void  by  the  statute 
of  frauds,  and  even  though  a  subse- 
quent letter  stated  that  he  intended 
to  keep  the  contract,  but  not  stating 
the  amount  of  stock  or  the  time  of 
performance,  this  is  not  suflfieient. 
Leach  v.  Weil,  129  N.  Y.  App.  Div. 
688  (1909).  In  a  decree  that  certain 
stock  given  away  by  a  bankrupt  shall 
be  returned  to  his  trustee  in  bank- 
ruptcy, damages  may  also  be  awarded 
for  depreciation  in  the  stock  in  the 
meantime.  Wasey  v.  Holbrook,  65 
N.  Y.  Misc.  Rep.  84  (1909).  As 
against  a  promissory  note  given  to  a 
corporation  for  its  stock,  it  is  no  defense 
that  there  was  an  oral  agreement  that 
the  defendant  might  return  the  stock 
and  cancel  the  note.  Nixon  v.  First 
State  Bank,  etc.,  127  S.  W.  Rep.  882 
(Tex.  1910). 

1  Hanson  v.  Slaven,  98  Cal.  377 
(1893).  Where  the  vendor  of  stock 
has  the  right  to  repurchase  in  case  a 
certain  event  does  not  occur,  and  it 
does  not  occur,  and  the  vendee  tenders 
back  the  stock  and  the  vendor  refuses 
to  purchase,  this  puts  an  end  to  his 
option.  Hooker  ;;.  Midland,  etc  Co. 
215  111.  444  (1905). 

2  Where    a    stockholder    subscribes 


1048 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  340. 


§  340.   Other  sections  of  statute  of  frauds  as  affecting  sales  of 
stock.  —  The  provision  of  the  statute  of  frauds  relative  to  answering 


for  an  increased  capital  stock  on  the 
agreement  of  parties  to  take  the  stock 
if  the  subscriber  does  not  want  it,  the 
latter  may  hold  the  former  liable  for 
the  difference  between  what  the  latter 
pays  for  the  stock  and  what  he  is 
able  to  sell  it  for.  Herd  v.  Thompson, 
149  Pa.  St.  434  (1892).  A  guaranty 
that  the  vendee  of  stock  shall  not  lose 
money  by  the  purchase  may  be 
enforced  by  the  vendee  when  he  proves 
that  the  stock  has  no  market  value, 
and  that  he  has  tried  to  sell  it  but 
has  failed.  Phipps  v.  Sharps,  142 
Pa.  St.  597  (1891).  A  statement  of  a 
party  who  is  endeavoring  to  sell  stock 
for  another,  that  he  will  see  the  latter 
whole  in  the  matter,  creates  no  liabil- 
ity on  the  part  of  the  former.  Mar- 
tin's Estate,  131  Pa.  St.  638  (1890). 
An  agreement  of  a  stockholder  that 
another  stockholder  shall  be  made 
"whole"  for  any  loss  due  to  not  selling 
stock  is  without  consideration  and 
void.  Martin's  Estate,  4  Ry.  &  Corp. 
L.  J.  449  (Orphans'  Ct.  Phil.  1888). 
A  person  who  writes  to  a  party,  when 
the  latter  subscribes  for  stock,  that 
the  former  will  pay  the  subscription 
if  the  road  is  not  completed  within 
a  certain  time,  is  a  surety  and  may 
be  held  liable.  Allison  v.  Wood,  147 
Pa.  St.  197  (1892).  The  agreement 
of  a  person  with  a  subscriber  for  stock 
that  he  will  pay  to  the  latter  one  hun- 
dred cents  on  the  dollar  for  the  stock 
within  ninety  days  is  not  enforceable 
unless  the  subscriber  tenders  the  stock 
and  demands  the  money  within  that 
time ;  and  a  guaranty  to  save  the  sub- 
scriber harmless  from  any  loss  as  a 
stockholder  does  not  guaranty  against 
loss  by  a  decline  in  the  value  of  the 
stock  itself.  Morris  v.  Veach,  111  Ga. 
435  (1900).  Where  a  vendor  of 
machinery  to  a  corporation  takes  its 
bonds  in  payment  therefor  on  the 
promise  of  the  officers  that  they  will 
purchase  the  bonds  at  par  at  any  time 
within  six  months,  he  may  tender  the 
bonds  and  sue  for  the  purchase  price. 
Erie,  etc.  Works  v.  Thomas,  139  Fed. 
Rep.  995  (1905).  A  corporation  in 
selling  its  stock  may  agree  to  repur- 


chase it  at  a  specified  time  if  the  ven- 
dee   so  desires,  and    if    the    president 
also    makes    such    agreement    he   also 
may   be  held  liable.     Ophir,   etc.   Co. 
;;.     Brynteson,     143     Fed.     Rep.    829 
(1906).     Where  a  subscriber  to  stock 
makes     a     part     payment     and     then 
declines  to  pay  the  balance,  and  there- 
upon a  director,  to  induce  him  to  pay, 
guarantees  to  pay  a  certain  dividend 
and  agrees  to  buy  the  stock,  the  direc- 
tor is  not  bound,  since  there  was  no 
consideration.     Marinovieh  v.  Kilburn, 
153    Cal.    638     (1908).     A    guaranty 
of  a  person  to  a  purchaser  of  stock 
of    the   latter's    money    invested   is   a 
guaranty  against  loss  and  not  an  agree- 
ment to  take  the  stock  off  the  latter's      ^ 
hands.     Norris  v.  Reynolds,  131  N.  Y. 
App.   Div.   818   (1909).     The  offer  of 
the   president   to   take   a   subscriber's 
stock  off  his  hands  on  a  certain  day 
at  cost  must  be  accepted  at  the  time 
in  order  to  be  availed  of  later.  Schmitt 
V.    Weil,    46    Ind.    App.    264    (1910). 
The    written    agreement    of    a    third 
person    to    pm-chase    stock    from    the 
vendee    thereof    at    the    same    price 
after    six    months    is    enforceable,    it 
being  made  as  a  part  of  the  original 
purchase,  and  if  such  right  is  to  exist 
after    six    months,    it    must    be    exer- 
cised within   a  reasonable   time  after 
the    six    months    expire.     Moeneh    v. 
Hower,    137    Iowa,    621     (1908).     An 
oral    promise    by    a   stockholder    that 
he  would  repay  at  any  time  after  one 
year    the    amount    paid    by    an    indi- 
vidual to  the  corporation  for  stock,  if 
the  latter  did  not  receive  a  profit    of 
twenty  per   cent.,  is   void   under   the 
statute  of  frauds.     Moore  v.  Vosburgh, 
66  N.  Y.  App.  Div.  223  (1901).     The 
promise  of  the  directors  of  a  corpora- 
tion,   inducing   a   person    to    purchase 
stock  from  the  corporation,  that  they 
will  pay  enough  to  make  the  dividend 
eight  per  cent,  as  long  as  the  corpora- 
tion   exists,    is    not    void,    under    the 
statute  of  frauds,  and  is  enforceable. 
Crook   V.  Scott,  65  N.    Y.  App.  Div. 
139   (1901);  aff'd,  174  N.  Y.  520.     A 
person    induced    to    subscribe    by    an 
agreement  of  a  third  person   to  pur- 


1049 


§340. 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[CH. 


for  the  debts,  defaults,  or  miscarriages  of  another  may  not  apply  to  a 
guaranty  that  there  will  be  a  certain  dividend  on  stock  purchased,^  nor 
to  a  broker's  relation  towards  his  client.^  An  oral  agreement  of  the 
vendor  to  repay  to  the  vendee  any  money  lost  by  the  latter  by  reason  of 
the  failure  of  the  corporation  is  void  by  the  statute  of  frauds.^  The 
provision  of  the  statute  relative  to  transfers  of  land  does  not  apply  to 
stock,^  since  shares  of  stock  are  personal  property.^  A  transfer  of  stock 
for  the  purpose  of  defrauding  the  transferrer's  creditors  is  void,  and  a 
court  of  equity  will  set  it  aside,^  or  the  stock  may  be  attached  or  sold 
under  execution  the  same  as  though  no  attempt  at  transfer  had  been 
made.^  In  a  suit  by  a  trustee  in  bankruptcy  to  set  aside  a  sale  of  stock 
by  the  bankrupt  as  fraudulent,  the  court  in  setting  the  sale  aside  cannot 
give  a  judgment  for  the  value  of  the  stock  even  though  it  has  depre- 
ciated in  the  meantime,  it  appearing  that  the  defendant  still  has  the 
stock  on  hand  and  is  able  to  deliver  it  back.^  An  oral  agreement 
whereby  one  party  makes  a  loan  to  the  corporation  in  consideration  of 
the  other  party  keeping  the  former  in  control  and  giving  him  an  option 
on  the  latter's  stock  does  not  sustain  a  suit  for  damages,  even  if  broken 
by  the  latter,  inasmuch  as  it  is  void,  under  the  statute  of  frauds,  as  not 
to  be  performed  within  a  year.^ 


chase  the  stock  at  par  at  any  time, 
may  collect  from  the  latter  the  dif- 
ference between  the  price  at  which 
the  former  sells  and  the  par  value, 
the  latter  ha\'ing  declined  to  perform. 
Lewis  V.  Coates,  93  Mo.  170  (1888). 
See  also  §  334,  siipra.  A  memoran- 
dum, "We  agree  to  pay  A.  Rampacker 
the  par  value  of  this  stock  .  .  . 
upon  the  surrender  of  this  certificate," 
indorsed  on  the  back  of  the  certificate 
enables  him  to  tender  the  stock  and 
collect  the  par  value,  even  though 
there  was  no  consideration  for  the 
promise.  Wheaton  v.  Rampacker,  3 
Wyo.  441  (1891).  An  agreement  of 
persons  holding  a  majority  of  the 
stock,  they  being  directors  also,  that 
a  person  purchasing  stock  from  them 
shall  be  general  manager,  and  may  at 
the  end  of  two  years  sell  the  stock 
back  to  them  at  a  stated  price,  is  con- 
trary to  public  policy  and  void.  The 
vendors  need  not  repurchase.  The 
arrangement  is  unfair  to  the  corpora- 
tion. Wilbur  V.  Stoepel,  82  Mich.  344 
(1890).  Where  certain  stockholders 
agreed    with    a    subscriber    for    stock 


that  he  shall  receive  certain  dividends 
and  that  they  will  take  his  stock  if 
he  desires  after  three  years,  he  has  a 
reasonable  time  after  the  three  years 
to  exercise  his  right  to  sell  to  them. 
Rogers  v.  Burr,  97  Ga.  10  (1895)  ;  s.  c, 
105  Ga.  432  (1898).  See  also  §  775, 
infra,  and  156  S.  W.  Rep.  457. 

1  Moorehouse  v.  Crangle,  36  Ohio 
St.  130  (1880).     C/.  §  339,  supra. 

2  Genin  v.  Isaacson,  6  N.  Y.  Leg. 
Obs.  213  (1848);  Rogers  v.  Gould,  6 
Hun,  229  (1875). 

3  Gansey  v.  Orr,  173  Mo.  532  (1903). 
Cf.  note  2,  p.  1048. 

*  Watson  V.  Spratley,  10  Exch.  222 
(1854);  Powell  v.  Jessopp,  18  C.  B. 
336  (1856);  Walker  v.  Bartlett,  18 
C.  B.  845  (1856) ;  Ashworth  v.  Munn, 
L.  R.  15  Ch.  D.  363,  368  (1880). 

^  See  ch.  L  supra. 

6  See  §481,  infra. 

7  See  §  484,  infra. 

8  Wasey  v.  Holbrook,  141  N.  Y. 
App.  Div.  336  (1910). 

9  Gazzam  v.  Simpson,  114  Fed.  Rep. 
71  (1902). 


1050 


CH.   XX.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  341. 


B.     GAMBLING   SALES    OF    STOCK. 


§  341.  What  are  wager  stock  sales.  —  Executory  contracts  for  the 
sale  of  stock  may  be  made  with  an  intent  to  actually  deliver  the  stock, 
or  they  may  be  made  with  an  intent  not  to  deliver  it,  but  to  pay  in  cash 
the  amount  lost  or  won  by  the  rise  or  fall  of  the  market  price  of  the  stock. 
A  sale  with  the  former  intent  is,  at  common  law,  legal  and  valid. ^  A 
sale  with  the  latter  intent  is  a  gambling  or  wager  contract,  and  is  not 
enforceable.-     The  essential  difference  between  a  wager  contract  and  a 


1  Irwin  V.  Williar,  110  U.  S.  499, 
508  (1884),  the  court  saying:  "The 
generally  accepted  doctrine  of  this 
country  is  .  ,  .  that  a  contract  for 
the  sale  of  goods  to  be  delivered  at  a 
future  day  is  valid,  even  though  the 
seller  has  not  the  goods  nor  any  other 
means  of  getting  them  than  to  go 
into  the  market  and  buy  them ;  but 
such  a  contract  is  only  valid  when 
the  parties  really  intend  and  agree 
that  the  goods  are  to  be  delivered 
by  the  seller  and  the  price  to  be  paid 
by  the  buyer ;  and  if  under  guise  of 
such  a  contract  the  real  intent  be 
merely  to  speculate  in  the  rise  or  fall 
of  prices,  and  the  goods  are  not  to  be 
delivered,  but  one  party  is  to  pay  to 
the  other  the  difference  between  the 
contract  price  and  the  market  price 
of  the  goods  at  the  date  fixed  for 
executing  the  contract,  then  the 
whole  transaction  constitutes  nothing 
more  than  a  wager,  and  is  null  and 
void.  And  this  is  now  the  law  in 
England  by  force  of  the  statute  of 
8  and  9  Viet.,  e.  109,  §  18,  altering 
the  common  law  in  that  respect." 
In  England  it  is  held  that  although  the 
parties  may  have  contemplated  that, 
as  a  whole,  there  would  be  a  mere  pay- 
ment of  differences  between  them,  yet, 
inasmuch  as  the  actual  contracts 
entered  into  involved  the  liability  for 
the  actual  delivery  of  the  stock  dealt 
with,  they  were  not  gaming  or  wager- 
ing transactions.  Universal  Stock 
Exch.  V.  Stevens,  66  L.  T.  Rep.  612 
(1892).  It  may  be  speculation  ;  never- 
theless it  is  valid.  Clarke  v.  Foss,  7 
Biss.  540  (1878);  s.  c,  5  Fed.  Cas. 
955 ;  Smith  v.  Bou\ier,  70  Pa.  St.  325 
(1872) ;  Kirkpatrick  v.  Bonsall,  72  Pa. 
St.  155  (1872),  where  the  court  said: 


"We  must  not  confound  gambling, 
whether  it  be  in  corporation  stocks 
or  merchandise,  with  what  is  com- 
monly termed  speculation.  Merchants 
speculate  upon  the  future  prices  of 
that  in  which  they  deal,  and  buy  and 
sell  accordingly."  Hatch  v.  Douglas, 
48  Conn.  116  (1880) ;  Flagg  v.  Bald- 
win, 38  N.  J.  Eq.  219  (1884);  Kent 
V.  Miltenberger,  13  Mo.  App.  503 
(1883).  If  deliveries  are  made  the 
transaction  is  not  gambling.  Pratt 
V.  Boody,  55  N.  J.  Eq.  175  (1896).  A 
corporation  organized  to  act  as  a 
broker  in  buying  and  selling  grain  is 
subject  to  the  same  rule  as  regards 
gambling  contracts  that  indi\'iduals 
are.  Peek  v.  Doran,  etc.  Co.,  57  Hun, 
343  (1890).  An  agreement  of  the  ven- 
dor of  bonds  to  buy  them  back  at  the 
same  price  at  a  certain  time  if  the 
vendee  wishes  is  not  a  gambling  eon- 
tract.  Wolf  V.  Nat.  Bank  of  Illinois, 
178  111.  85  (1899). 

•  "Wagers  at  common  law  are  valid 
and  enforceable  in  the  courts;"  and, 
with  certain  exceptions  growing  out 
of  the  peculiar  subject  of  the  wager, 
they  have  been  held  to  be  valid  eon- 
tracts.  Dewey,  Contracts  for  Future 
DeUvery,  etc.  (1886),  p.  10.  To  same 
effect:  Good  v.  ElUott,  3  T.  R.  693 
(1790) ;  Gilbert  v.  Sykes,  16  East,  1-50 
(1812);  Atherfold  v.  Beard,  2  T.  R. 
610  (1788) ;  Morgan  v.  Pebrer,  4  Seo. 
230  (1837);  Hussey  v.  Crickitt,  3 
Camp.  168  (1811) ;  Grant  v.  Hamilton, 

3  McLean,  100  (1842) ;  s.  c,  10  Fed. 
Cas.  978;  Campbell  v.  Richardson,  10 
Johns.    406    (1813);    Bunn    v.    Riker, 

4  Johns.  426  (1809) ;  Johnson  v.  Fall, 
6  Cal.  359  (1856);  Johnston  v.  Rus- 
sell, 37  Cal.  670  (1869);  Dewees  v. 
Miller,    5    Harr.    (Del.)    347    (1851); 


1051 


§  341.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[CH.  XX. 


contract  not  a  wager  is  whether  there  is  an  intent  to  dehver  the  prop- 
erty sold.^  Even  though  the  original  intent  was  not  to  dehver,  yet  a 
subsequent  actual  sale  and  purchase  validates  the  transaction.^  "  In 
order  to  invahdate  a  contract  as  a  wagering  one,  both  parties  must  in- 
tend that  instead  of  the  delivery  of  the  article  there  shall  be  a  mere 
payment   of   the   difference   between    the    contract   and   the   market 


Porter  v.  Sawyer,  1  Harr.  (Del.)  517 
(1832);  Griffith  v.  Pearce,  4  Houst. 
(Del.)  209  (1870);  Richardson  v. 
Kelly,  85  111.  491  (1877);  Petillon  v. 
Hippie,  90  111.  420  (1878);  Trenton, 
etc.  Ins.  Co.  v.  Johnson,  24  N.  J.  L. 
576  (1854);  Dunman  v.  Strother,  1 
Tex.  89  (1846);  McEh-oy  v.  Carmi- 
chael,  6  Tex.  454  (1851);  Wheeler 
V.  Friend,  22  Tex.  683  (1859) ;  Monroe 
V.  Smelly,  25  Tex.  586  (1860).  Con- 
tra: In  Pennsylvania  —  Edgell  v. 
McLaughlin,  6  Whart.  176  (1841); 
PhilHps  V.  Ives,  1  Rawle,  36  (1828); 
Brua's  Appeal,  55  Pa.  St.  294  (1867) ; 
in  Vermont  —  Collamer  v.  Day,  2  Vt. 

144  (1829) ;  Tarleton  v.  Baker,  18  Vt. 
9  (1843) ;  in  New  Hampshire  —  Clark 
V.  Gibson,  12  N.  H.  386  (1841);  Win- 
chester V.  Nutter,  52  N.  H.  507  (1872) ; 
in  Maine  —  McDonough  v.  Webster, 
68  Me.  530  (1878) ;  Gilmore  v.  Wood- 
cock, 69  Me.  118  (1879);  Missouri 
—  Waterman  v.  Buckland,  1  Mo. 
App.  45  (1876) ;  and  Massachusetts  — 
Ball  V.  Gilbert,  53  Mass.  397  (1847) ; 
Babcock  v.  Thompson,  20  Mass.  446 
(1826) ;  Sampson  v.  Shaw,  101  Mass. 

145  (1869).  The  supreme  court  of 
the  United  States  said,  in  Irwin  v. 
Williar,  110  U.  S.  499  (1884):  "In 
England  it  is  held  that  the  contracts, 
although  wagers,  were  not  void  at 
common  law,  .  .  .  while  generally, 
in  this  country,  all  wagering  contracts 
are  held  to  be  illegal  and  void  as 
against  public  policy,"  citing  Dickson 
V.  Thomas,  97  Pa.  St.  278  (1881); 
Gregory  v.  Wendell,  40  IMich.  432 
(1879);  Lyon  v.  Culbertson,  83  III. 
33  (1876);  Melchert  v.  American 
U.  Tel.  Co.,  3  McCrary,  521  (1882) ; 
s.  c,  11  Fed.  Rep.  193  and  note; 
Barnard  v.  Backhaus,  52  Wis.  593 
(1881);  Love  v.  Harvey,  114  Mass. 
80  (1873);  Embrey  v.  Jemison,  131 
U.  S.  336  (1889).  A  contract  for  the 
sale  and  purchase  of  stocks  with  no 


intent  of  delivery,  but  merely  to  pay 
differences,  is  illegal.  Re  Gieve,  [1899] 
1  Q.  B.  794. 

1  Roundtree  v.  Smith,  108  U.  S.  269 
(1883);  Re  Hunt,  26  Fed.  Rep.  739 
(1886).  Mr.  Dewey  (Contracts  for 
Future  Delivery  and  Commercial 
Wagers,  p.  28)  states  the  rule  accu- 
rately as  follows  :  ' '  Where  the  par- 
ties to  a  contract  in  the  form  of  a  sale 
agree  expressly  or  by  implication,  at 
the  time  it  is  made,  that  the  contract 
is  not  to  be  enforced,  that  no  delivery 
is  to  be  made,  but  the  contract  is  to 
be  settled  by  the  payment  of  the  dif- 
ference between  the  contract  price 
and  the  market  price  at  a  given  time 
in  the  future,  such  a  transaction  is  a 
wager,"  citing  many  cases.  If  there 
is  an  intent  to  deUver,  then  the  trans- 
action is  legal,  though  the  parties 
"exercise  the  option  of  settling  the 
difference  in  price,  rather  than  make 
delivery  of  the  property."  Ward 
V.  Vosburgh,  31  Fed.  Rep.  12  (1887). 
As  regards  sales  and  margins  see 
§  457,  infra.  In  Indiana,  it  was  held 
that  a  note  given  in  New  York  to  set- 
tle a  gambling  cotton  debt  was  gov- 
erned by  New  York  laws  as  to  its 
legality.  Sondheim  v.  Gilbert,  117 
Ind.  71  (1888).  An  order  from  a  per- 
son in  Tennessee  to  New  York  stock 
brokers  to  buy  or  sell  stock  on  ttie 
New  York  Stock  Exchange  is  governed 
by  the  law  of  New  York  as  to  its 
legality.  Berry  v.  Chase,  146  Fed. 
Rep.  625  (1906). 

2  In  re  Taylor,  etc.,  192  Pa.  St.  304 
(1899).  Where  the  broker  actually 
buys  the  securities  for  the  customer 
the  transaction  is  not  gambling,  even 
though  the  securities  are  afterwards 
resold,  and  where  the  purchaser  takes 
up  stocks  still  held  by  the  broker  he 
legalizes  all  the  past  transactions. 
Young  V.  Glendenning,  194  Pa.  St.  550 
(1900). 


1052 


CH.   XX.] 


CONTRACTS   TO    SELL  —  GAMBLING    SALES,    ETC. 


[§  341. 


price."  ^  A  sale  for  future  delivery,  although  a  "  short  "  sale,  is  not  a 
gambling  contract  per  se.-  An  "  option,"  "  put,"  "  call,"  "  straddle," 
or  other  similar  stock-exchange  contract,  may  be  made  with  an  intent 
to  actually  deliver  the  stock,  and,  if  so,  are  unobjectionable  and  are 
enforceable.^  A  pool  with  a  guaranty  of  a  return  of  the  money  is  a 
gambling  contract,  and  a  participant  cannot  recover  back  the  money .^ 
The  fact  that  stock  transactions  were  carried  on  by  "  margins  " 
is  no  evidence  that  they  were  gambling  contracts,^  excepting  in  Mary- 


1  Clews  V.  Jamieson,  182  U.  S.  461, 
489  (1901).  The  purchase  of  stock  by 
brokers  is  not  gambling  unless  both  the 
customer  and  broker  expected  that 
settlement  would  be  merely  of  the 
differences.  Pelouze  v.  Slaughter,  241 
111.  215  (1909). 

2  Clews  V.  Jamieson,  182  U.  S.  461, 
489  (1901).  A  trading  corporation 
may  sell  cotton  to  be  delivered  in  the 
future.  Marengo  Abstract  Co.  v. 
Hooper  &  Co.,  56  S.  Rep.  580  (Ala. 
1911).    Cf.  130  Pac.  Rep.  774. 

3  For  definitions  of  these  terms,  see 
§  445,  n.,  infra.  A  "put"  is  not  per  se 
conclusive  evidence  of  an  intent  not 
to  deliver.  Bigelow  v.  Benedict,  70 
N.  Y.  202  (1877).  A  "straddle"  fol- 
lows the  same  rule.  The  parties  may 
have  intended  to  deliver  the  stock. 
Harris  v.  Tumbridge,  83  N.  Y.  92 
(1880)  ;  Story  v.  Salomon,  71  N.  Y. 
420  (1877).  Cf.  Ex  parte  Young,  6 
Biss.  53  (1874);  s.  c,  30  Fed.  Cas. 
828;  Webster  v.  Sturges,  7  111.  App. 
560  (1880);  Tenney  v.  Foote,  4  111. 
App.  594  (1879);  Lyon  v.  Culbert- 
son,  83  111.  33  (1876) ;  Gilbert  v.  Gan- 
ger, 8  Biss.  214  (1878) ;  s.  c,  10  Fed. 
Cas.  345.  A  short  sale  is  not  per  se 
a  wager  nor  is  it  presumed  to  be. 
Maxton  v.  Gheen,  75  Pa.  St.  166 
(1874);  Hess  v.  Rau,  95  N.  Y.  359 
(1884) ;  Knowlton  v.  Fitch,  52  N.  Y. 
288  (1873) ;  White  v.  Smith  54  N.  Y. 
522  (1874) ;  Cameron  v.  Durkheim,  55 
N.  Y.  425  (1874) ;  Third  Nat.  Bank  v. 
Harrison,  10  Fed.  Rep.  243  (1882). 
These  decisions  rest  upon  the  princi- 
ple of  law  laid  down  in  Stanton  v. 
Small,  3  Sandf.  230  (1849),  that  "a 
contract  for  the  sale  of  goods  to  be  de- 
livered at  a  future  day  is  not  invali- 
dated by  the  circumstance  that  at 
the  time  of  the  contract  the  vendor 
neither  has  the  goods  in  his  possession. 


nor  has  entered  into  any  contract  to 
buy  them,  nor  has  any  reasonable 
expectation  of  becoming  possessed  of 
them  at  the  time  appointed  for  deliver- 
ing them,  otherwise  than  by  purchasing 
them  after  making  the  contract." 
See  also  §  457,  infra.  There  are  many 
cases  to  the  same  effect.  See  Noyes  v. 
Spaulding,  27  Vt.  420  (1855) ;  Shales 
V.  Seignoret,  1  Ld.  Raym.  440  (1700) ; 
Frost  V.  Clarkson,  7  Cow.  25  (1827) ; 
Dewey,  Contracts  for  Future  Delivery, 
p.  97 ;  Thacker  v.  Hardy,  L.  R.  4  Q.  B. 
D.  685  (1878),  holding  that,  if  the  in- 
tent at  the  time  of  buying  was  to  de- 
liver, it  is  not  a  wager,  even  though  that 
intent  be  afterwards  changed.  As  to 
the  legality  of  a  "corner,"  see  §  6216, 
infra.  Where  there  is  evidence  of  some 
intent  to  deliver,  the  transaction  is  not 
gambling.  Cothran  v.  Ellis,  125  111. 
496  (1888).  A  sale  delivery  to  be  in 
twelve  months,  or,  if  vendor  wishes, 
before  then,  is  not  a  gambling  con- 
tract. Perryman  v.  Wolffe,  93  Ala. 
290  (1890). 

^  Richards  v.  Starck,  [1911]  1  K.  B. 
296. 

*  Sawyer  v.  Taggart,  14  Bush  (Ky.), 
727  (1879);  Wall  v.  Schneider,  59 
Wis.  352  (1884);  Bartlett  v.  Smith, 
13  Fed.  Rep.  263  (1882) ;  Whitesides 
V.  Hunt,  97  Ind.  191  (1884);  Union 
Nat.  Bank  v.  Carr,  15  Fed.  Rep.  438 
(1883);  Hatch  v.  Douglas,  48  Conn. 
116  (1880).  A  purchase  on  margin  is 
not  necessarily  gambling,  even  though 
subsequently  the  purchaser  causes  the 
stock  to  be  sold.  Fearon  v.  Little, 
227  Pa.  St.  348  (1910).  Purchase  of 
stock  on  a  margin  is  illegal  where 
only  the  payment  of  differences  is  con- 
templated by  both  customer  and 
broker.  Raymond  v.  Parker,  84  Conn. 
694  (1911).  A  purchase  of  stock  on 
margin    is    not    necessarily    gambling. 


1053 


§341. 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[CH.  XX. 


land  and  New  Jersey.  In  these  states  this  fact  alone  seems  to  be  suffi- 
cient evidence  of  a  wager.^  A  cotton  mill  may  purchase  cotton  to  be 
delivered  in  the  future  and  may  put  up  a  margin  to  carry  the  contract.^ 
A  sale  of  stock  with  the  condition  that  the  vendor  might  repurchase 
after  one  year  does  not  violate  a  constitutional  prohibition  against 
sales  of  stock  to  be  delivered  at  a  future  day.^  A  wager  contract  is  not 
proved  by  the  fact  that  the  party  selling  stock  to  be  delivered  at  a  future 
time  intends  to  purchase  that  amount  of  stock  in  time  for  the  delivery, 
or  vice  versa}     "  An  executory  contract  for  the  sale  of  goods  for  future 


but  is  gambling  if  there  is  no  inten- 
tion to  deliver  but  merely  to  settle 
the  loss  or  gain.  Wagner  v.  Hilde- 
brand,  187  Pa.  St.  136  (1898).  Many 
other  eases  do  not  directly  pass  on 
this  question,  but  assume  that  the  de- 
posit of  a  margin,  as  a  security  to  the 
broker,  does  not  prove  an  intent  not 
to  have  a  delivery  of  the  stock.  Where 
the  customer  called  for  the  stock,  and 
it  is  tendered  to  him,  the  broker  may 
recover  the  price,  even  though  the 
stock  was  first  bought  on  a  margin. 
Anthony  v.  Unangst,  174  Pa.  St.  10 
(1896).  Transactions  on  margins  are 
not  necessarily  gambling.  Hopkins 
V.  O'Kane,  169  Pa.  St.  478  (1895). 
But  see  Ruchizky  v.  De  Haven,  97  Pa. 
St.  202  (1881) ;  Dickson  v.  Thomas,  97 
Pa.  St.  278  (1881) ;  Fareira  v.  Gabell, 
89  Pa.  St.  89  (1879) ;  Maxton  v.  Gheen, 
75  Pa.  St.  166  (1874) ;  North  v.  Phil- 
lips, 89  Pa.  St.  250  (1879). 

iPlagg  V.  Baldwin,  38  N.  J.  Eq. 
219  (1884).  See  also  Justh  v.  HoUi- 
day,  2  Mackey,  346  (1883).  A  pur- 
chase on  margin  is  gambling  per  se. 
Cover  V.  Smith,  82  Md.  586  (1896). 
A  broker  cannot  enforce  a  contract 
between  himself  and  his  customer, 
where  the  customer  testifies  that  he 
put  up  $100  as  a  margin  for  one  hun- 
dred shares  of  stock,  and  that  if  the 
stock  advanced  a  point  he  would 
have  a  profit,  and  if  it  declined  a 
point  he  would  lose  the  .$100,  and 
also  another  $100  to  be  paid.  Bilhngs- 
lea  V.  Smith,  77  Md.  504  (1893). 

2  Sampson  v.  Camperdown  Cotton 
Mills,  82  Fed.  Rep.  833  (1897). 

^  Birkel  Co.  v.  Howze,  12  Cal.  App. 
645  (1910). 

*  In  Ashton  v.  Dakin,  7  W.  R.  384 
(1859),  the  court  held  it  not  to  be  a 


wager  contract  to  order  a  broker  to 
buy  stock,  "and  let  the  bargain  be  so 
as  to  the  day  of  payment  that  you 
may  have  an  opportunity  of  reselling 
it  for  me  by  such  a  day,  when  I  ex- 
pect the  market  will  have  risen,  and 
then  you  will  pay  the  seller  for  me 
with  the  money  you  receive  from  the 
purchaser,  and  I  shall  receive  the 
gain  from  j"ou,  if  any,  or  pay  you  the 
loss."  So,  also.  Smith  v.  Bouvier,  70 
Pa.  St.  325  (1872),  holds  that  stocks 
bought  and  sold  upon  speculation  are 
not  necessarily  wager  contracts.  A 
person  may  sell  without  owning  the 
stock,  and  at  time  of  delivery  buy  to 
deliver,  and  yet  the  transaction  be 
not  a  wager,  where  the  jury  finds 
that  there  was  an  intent  to  deliver  in 
both  the  selling  and  buying.  See 
also  Thacker  v.  Hardy,  L.  R.  4  Q.  B. 
D.  685  (1878) ;  Sawyer  v.  Taggart,  14 
Bush  (Ky.),  727  (1879).  In  Massa- 
chusetts it  is  held  that  the  contract  is 
not  gambUng  merely  because  there 
was  an  expectation  that  only  differ- 
ences would  be  settled.  Barnes  v. 
Smith,  159  Mass.  344  (1893).  Where 
the  seller  of  grain  does  not  intend  to 
deUver  the  property  sold,  but  simply 
to  settle  the  difference  in  price,  the 
transaction  is  illegal  under  a  statute, 
whether  his  brokers  and  the  pur- 
chaser knew  of  his  intention  or  not. 
Margins  lost  in  such  transactions  can- 
not be  recovered  back.  Connor  v. 
Black,  132  Mo.  150  (1896).  A  pur- 
chase of  corn  may  be  legal  although 
made  to  fill  certain  sales  which  the 
party  had  made  previously.  A  mort- 
gage given  to  a  broker  for  advance- 
ments made  in  the  transaction  is 
valid.  Douglas  v.  Smith,  74  Iowa, 
468  (1888). 


1054 


CH.  XX.]  CONTRACTS   TO    SELL  —  GAMBLING    SALES,    ETC. 


[§  342. 


delivery  is  not  infected  with  the  qiiaHty  of  a  wager  by  reason  of  the 
fact  that  at  its  date  the  vendor  had  not  the  goods,  and  had  not  entered 
into  any  arrangement  to  provide  them,  and  had  no  expectation  of  re- 
ceiving them,  unless  by  subsequently  going  into  the  market  and  buying 
them."  ^  A  bona  fide  sale  of  grain  deliverable  in  a  certain  month,  on  a 
day  to  be  fixed  by  seller,  is  not  a  gambling  contract.^ 

§  342.  Statutes  prohibiting  wager  contracts,  and  also  certain 
stock  contracts.  —  There  are  two  classes  of  statutes  affecting  stock 
sales  as  regards  their  speculative  character.  One  class  does  not  specify 
sales  of  stock,  but  declares  in  general  terms  that  all  gaming  and  wager- 
ing contracts  shall  be  void,  thereby  rendering  actions  for  the  recovery 
of  money  won  on  such  wagers  unsustainable.  Such  statutes  exist  in 
England  ^  and  New  York.'*  The  second  class  of  statutes  is  more  explicit, 
and  prohibits  specified  transactions  in  stock,  irrespective  of  whether  such 
transactions  be  wager  contracts  or  not.  Statutes  affecting  speculative 
sales  of  stock  exist  in  many  of  the  states.  In  Massachusetts  short 
sales  are  prohibited ;  ^  in  Ohio,  sales  of  stock  for  future  delivery,  which 
the  vendor  has  not  on  hand  or  the  vendee  the  means  to  pay  for ;  ^  in 
IlUnois,  all  options  are  made  gambUng  contracts  and  are  void ;  ^    in 


1  Conner  v.  Robertson,  37  La.  Ann. 
814  (1885),  the  court  saying  also  that 
Lorymer  v.  Smith,  1  Barn.  &  C.  1 
(1822),  has  been  repeatedly  overruled. 
See  also  supra,  p.  1053,  n.  3. 

2  White  V.  Barber,  123  U.  S.  392 
(1887). 

38  &  9  Vict.,  c.  109,  §  18;  Grize- 
wood  V.  Blane,  11  C.  B.  526  (1851). 
Agreements  between  buyers  and  sellers 
of  stock  to  pay  or  receive  the  dif- 
ferences between  their  prices  on  one 
day  and  their  prices  on  another  day 
are  gaming  and  wagering  transac- 
tions within  the  meaning  of  the  stat- 
ute. Thacker  v.  Hardy,  L.  R.  4  Q.  B. 
D.  685  (1878).  The  statute  does  not 
necessarily  affect  "corners"  in  stocks. 
Barry  v.  Croskey,  2  .J.  &  H.  1  (1861). 
As  to  the  application  of  this  statute, 
see  also  Heiman  v.  Hardie,  12  Ct.  of 
Sess.  406  (Sc,  4th  ser.,  1885). 

*  New  York  Penal  Law,  §  992.  As 
applied  to  stock  cases,  see  Kingsbury 
V.  Kirwan,  77  N.  Y.  612  (1879); 
Story  V.  Salomon,  71  N.  Y.  420  (1877) ; 
Harris  v.  Tumbridge,  83  N.  Y.  92 
(1880);  Yerkes  v.  Salomon,  11  Hun, 
471  (1877). 

5  Mass.  Gen.  Stat.,  eh.  105,  §  6. 
For  cases  arising  under  this  and  similar 


statutes,  see  Howe  v.  Starkweather, 
17  Mass.  240  (1821);  Sargent  i 
Franklin  Ins.  Co.,  25  Mass.  90  (1829) 
Barrett  v.  Mead,  92  Mass.  337  (1865) 
Brigham  v.  Mead,  92  Mass.  245  (1865) 
Barrett  v.  Hyde,  73  Mass.  160  (1856) 
Durant  v.  Burt,  98  Mass.  161  (1867) ; 
Brown  v.  Phelps,  103  Mass.  313 
(1869) ;  Price  v.  Minot,  107  Mass.  49 
(1871);  Colt  V.  Clapp,  127  Mass.  476 
(1879) ;  Rock  v.  NichoUs,  85  Mass. 
342  (1862) ;  Wyman  v.  Fiske,  85  Mass. 
238  (1861) ;  Pratt  v.  American  Bell 
Teleph.  Co.,  141  Mass.  225  (1886),  fol- 
lowing the  decisions  under  the  New 
York  statute,  from  which  the  statute 
iln  question  was  copied. 

In  Pennsylvania,  by  statute,  sales 
for  futiu^e  delivery  were  formerly  pro- 
hibited. See  Pa.  Laws,  1841,  p.  398, 
§  6.  This  statute,  however,  has  been 
repealed.  For  decisions,  see  Krause 
V.  Setley,  2  Phila.  Rep.  32  (1856); 
Chillas  V.  Snyder,  1  Phila.  Rep.  289 
(1852). 

6  Ohio  Laws,  1885,  p.  254.  Gam- 
bling contract  in  grain.  Lester  v. 
Buel,  49  Ohio  St.  240  (1892). 

^  111.  Rev.  Stat.  (Starr  &  C),  p.  791, 
1fl78.  For  decisions,  see  Wolcott  v. 
Heath,  78  111.  433   (1875);    Pickering 


1055 


§  342.] 


CONTRACTS   TO    SELL  —  GAMBLING    SALES,    ETC. 


CH.  XX. 


Georgia,  short  sales  cannot  be  enforced.^  A  state  statute  declaring 
illegal  all  options  to  sell  or  buy  at  a  future  time  is  constitutional,  even 
though  it  may  interfere  with  what  would  otherwise  be  legitimate  con- 
tracts.2  The  legislature  may  prohibit  the  keeping  of  offices  for  dealing 
in  stocks  for  future  delivery  unless  recorded  and  a  tax  paid  thereon.^ 
The  California  constitutional  provision  making  void  all  contracts  for 
sales  of  stock  on  a  margin  and  providing  for  recovery  back  of  money 
paid  on  such  contracts  is  constitutional,  even  though  it  applies  to  bona 
fide  transactions  as  well  as  gambling  transactions.'^  In  New  York, 
the  statute  of  1812,^  reenacted  in  the  Revised  Statutes  of  1828,^  pro- 

V    Cease    79   111.   328    (1875) ;    Pixley  bv  statute,  a  "put"  is  void.     Schneider 

V.   Boynton,  79   111.  351   (1875);   San-  i'.  Turner,  130  111.  28  (1889).     The  stat- 

born  V.  Benedict,  78  111.  309   (1875);  ute  against  cornering  the  market  applies 

Cole  V.   Milmine,   88   111.   349    (1878).  to  a  purchase  of  corn  to  raise  its  price. 

This  statute  is  restricted  by  the  deci-  Foss  v.  Cummings,  149  111.  353  (1894). 

sions    to   cases  where  the   transaction  ^  Ga.  Code,  §  2638. 

is    to    be    "adjusted    only    by    differ-  =  Booth    v.    lUinois,  184   U.    S.  425 

ences."     But   see  Ward  ;).   Vosburgh,  (1902). 

31     Fed.     Rep.     12     (1887).      A    suit  ^  Brodnax   v.   Missouri,    219   U.    S. 

under  an  Illinois  statute  by  a  customer  285  (1911). 

to  recover  back  stocks  deposited  with  a  ^  Otis  v.  Parker,  187  U.  S.  606 
broker  on  the  ground  that  the  stocks  (1903).  A  suit  by  a  customer  agamst 
had  been  lost  in  gambling  transactions  a  broker  to  recover  back  moneys  paid 
failed  in  Pelouze  v.  Slaughter,  241  111.  on  gambling-stock  transactions  was 
215  (1909).  An  option  to  purchase  sustained  under  the  California  statute 
stock  at  a  specified  price  is  not  in  in  Stilwell  v.  Cutter,  146  Cal.  657 
violation  of  the  Illinois  statute  against  (1905).  A  sale  of  stock  with  the  eon- 
gambling.  Bawden  v.  Taylor,  254  111.  dition  that  the  vendor  might  repur- 
464(1912).  The  IlUnois  statute  against  chase  after  one  year  does  not  violate 
gambling  transactions  does  not  apply  a  constitutional  prohibition  against 
to  an  option  given  to  the  president  and  sales  of  stock  to  be  delivered  at  a 
general  manager  of  a  trade  journal  cor-  future  day.  Birkel  Co.  v.  Howze, 
poration  to  buy  the  stock  of  such  corpo-  12  Cal.  App.  645  (1910).  In  Cali- 
ration.  Bawden  v.  Taylor,  254  111.  fornia  the  relation  of  a  broker  and  cus- 
464  (1912).  A  contract  to  repurchase  tomer  is  that  of  vendor  and  vendee,  and 
stock  sold,  if  the  purchaser  desu-es,  hence  a  completed  delivery  of  stock  is 
is  not  invalid  under  a  statute  prohibit-  not  in  violation  of  the  constitutional 
ing  option  contracts  for  the  sale  of  provision  against  sales  of  stock  on 
stock  for  future  delivery.  Osgood  margin.  Conradt  v.  Lepper,  13  Wyo. 
V.  Skinner,  211  111.  229  (1904).  In  473  (1905). 
Illinois,  by  statute,  an  option  to  ^  2  R.  L.  187,  §  18. 
buy  coal  at  a  future  time  is  void.  «  1  R.  S.,  p.  710,  §  6.  For  cases  com- 
Osgood  V.  Bander,  75  Iowa,  5.50  (1888).  ing  under  this  statute,  see  Dykers  v. 
A  sale  with  an  agreement  of  the  ven-  Townsend,  24  N.  Y.  57  (1861),  disap- 
dor  to  take  the  stock  back  at  the  proving  Stebbins  v.  Leowolf,  57  Mass. 
same  price  and  interest  within  a  cer-  137,  143  (1849).  See  also  Thompson 
tain  time  if  the  vendee  desired  is  not  v.  Alger,  53  Mass.  428  (1847),  on  the 
a  gambling  contract  under  the  Illinois  New  York  statutes ;  Staples  v.  Gould, 
statute.  Richter  v.  Frank,  41  Fed.  9  N.  Y.  520  (18.54)  (criticizing  Gram 
Rep.  859  (1890).  Concerning  an  in-  v.  Stebbins,  6  Paige,  124  —  1836); 
dictment  under  the  Illinois  law  for  Frost  v.  Clarkson,  7  Cow.  24  (1827)  ; 
keeping  a  "bucket  shop,"  see  Sobv  d.  Cassard  v.  Hinmann,  14  How.  Pr.  84 
People,  134  111.  66  (1890).     In  Illinois,  (1856) ;    aff'd,  1  Bosw.  207.     In  New 

1056 


XX.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  342. 


hibiting  short  sales,  was  repealed  by  implication  by  the  statute  of  1858, 
declaring  the  sale  to  be  valid  though  there  be  no  consideration  or  pay- 
ment of  consideration,  or  no  ownership  by  the  vendor  of  such  stock  at 
the  time  of  the  sale.  Various  other  states  have  statutes  on  this  sub- 
ject.^ Where  a  customer  gives  to  his  broker  in  Missouri  an  order 
to  buy  stock  and  the  order  is  executed  in  New  York,  the  statute  of 
Missouri  rendering  illegal  the  purchase  of  stock  without  intent  to  pay 
for  the  same  does  not  apply,  but  the  common  law,  which  is  presumed 
to  be  the  law  of  New  York,  does  apply,  and  the  transaction  is  legal. 
Moreover,  proof  that  one  of  the  parties  intended  the  contract  to  be 
gambling  does  not  invalidate  the  transaction,  and  the  broker  may  re- 
cover from  the  customer  his  losses.^  In  California  the  question  whether 
stock  purchased  on  a  margin  violates  the  constitutional  prohibition  is 
one  of  fact.^  The  California  constitutional  amendment  changing  the 
law  as  to  the  validity  of  contracts  to  sell  stock  on  margin  repeals  an 
existing  right  of  action  to  recover  back  money  paid  under  such  contract, 
but  does  not  stop  a  suit  to  recover  back  a  pledge  made  to  secure  such  an 
illegal  contract.^  In  Massachusetts  also  the  statute  enables  the  cus- 
tomer to  sue  the  broker  for  any  losses,^  but  a  cause  of  action  given  by 


York  a  director  is  prohibited  from 
selling  "short."  Penal  Code,  §  610. 
In  Arkansas  a  broker  and  others  are 
liable  criminally  for  doing  business 
in  futures.  Fortenbury  v.  State,  47 
Ark.  188  (1886). 

1  A  promissory  note  is  void  under 
the  Tennessee  act  against  gambling 
in  futures  where  such  note  was  given 
therein.  Snoddy  v.  American  Nat. 
Bank,  88  Tenn.  .573  (1890).  The  Cali- 
fornia constitution  renders  void  a 
transaction  wherein  a  broker  buys 
stock  for  the  customer  with  the  brok- 
er's money  and  holds  the  stock  as  se- 
curity and  charges  the  customer  inter- 
est and  commissions.  Cashman  v. 
Root,  89  Cal.  373  (1891).  Gambling 
stock  transactions  have  been  held  void 
under  the  Kentucky  statute  in  Lyons 
V.  Hodgen,  90  Ky.  280  (1890).  Under 
the  Kentucky  statute  a  customer  may 
recover  back  money  lost  in  gambling 
in  stocks.  Boyd,  etc.  Co.  v.  Coates,  69 
S.  W.  Rep.  1090  (Ky.  1902).  The 
Montana  statute  prohibiting  places 
dealing  in  stocks  on  margin  does  not 
apply  to  a  stock  exchange  where  actual 
deliveries  are  intended.  Re  Dorr, 
186  Fed.  Rep.  276  (1911). 

^  Edwards,  etc.  Co.  v.  Stevenson,  160 


Mo.  516  (1901).  A  sale  is  not  gam- 
bling merely  because  one  of  the  par- 
ties intended  it  so  to  be ;  and  where 
orders  are  given  in  Missouri  to  be 
executed  in  New  York,  the  New  York 
law  governs.  Gaylord  v.  Duryea,  95 
Mo.  App.  574  (1902).  A  note  given 
by  a  resident  of  Rhode  Island,  dated 
in  Rhode  Island  but  payable  to  brokers 
in  Boston  and  delivered  in  Boston, 
becomes  valid  only  upon  delivery, 
and  hence  its  validity  is  governed  by 
Massachusetts  law.  Winward  v.  Lin- 
coln, 23  R.  I.  476  (1902). 

^  Kullman  v.  Simmens,  104  Cal. 
595  (1894). 

*  Willcox  V.  Edwards,  162  Cal.  455 
(1912). 

5  Crandell  v.  White,  164  Mass.  54 
(1895).  The  Massachusetts  statute 
enabling  the  principal  to  recover  back 
money  paid  by  him  to  his  broker  on 
stock  gambling  contracts  does  not  ap- 
ply where  the  broker  actually  bought 
the  securities  and  the  principal  knew 
it.  Rice  V.  Winslow,  180  Mass.  500 
(1902).  For  a  case  where  a  recovery 
was  had  against  the  broker,  see  Bal- 
lon V.  Willey,  180  Mass.  562  (1902). 
In  the  case  Davy  v.  Bangs,  174  Mass. 
238     (1899),     a     customer    recovered 


(67) 


1057 


§342. 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


the  statute  for  margins  paid  may  be  released  after  it  has  accrued.^ 
The  Massachusetts  statute  against  gambhng  in  stocks  does  not  apply 
to  a  sale  made  in  another  state  where  such  sale  was  valid  in  that  other 
state.^  In  England  the  statute  of  1734,^  prohibiting  gambling  in  the 
public  funds,  was  repealed  in  I860,'*  but  the  statute  of  1845  still 
exists.^  The  state  may  make  it  a  criminal  offense  for  a  person  to 
gamble  in  commodities  with  no  intent  to  deliver  even  though  the 
transactions  are  between  parties  in  two  different  states.^  It  is 
evident  from  the  history  of  these  statutes  against  stock  gambling 
that  it  is  a  difficult  and  delicate  task  to  frame  a  statute  that  will 


against  a  broker  the  value  of  stock  lost 
in  a  gambling  contract,  such  recovery 
being  based  on  the  Massachusetts 
statute.  A  suit  by  a  customer  to 
recover  back  losses  under  the  Mas- 
sachusetts statute  succeeded  in  Allen 
V.  Fuller,  182  Mass.  202  (1902).  The 
Massachusetts  statute  against  gam- 
bling transactions  in  stock  was  enforced 
in  Marks  v.  Metropolitan  Stock  Ex- 
change, 181  Mass.  251  (1902),  where 
the  defendant  was  to  deliver  certain 
stock  at  a  certain  price  on  three  days' 
notice,  or  by  mutual  consent  was  to 
pay  any  profit  thereon  above  that 
price,  and,  on  the  other  hand,  the 
margin  deposited  was  to  be  applied  to 
any  loss.  And  it  was  also  enforced  in 
Corey  v.  Griffin,  181  Mass.  229  (1902), 
where,  in  order  to  evade  the  statute,  a 
customer  agreed  to  indemnify  the 
defendant  against  all  damage.  The 
Massachusetts  statute  was  enforced  in 
Welch  V.  Corey,  202  Mass.  165  (1909). 
Under  the  Massachusetts  statute  a 
customer  may  file  a  bill  to  have  a 
mortgage  canceled,  such  mortgage 
having  been  given  to  pay  gambling 
debts.  Rice  v.  Winslow,  182  Mass.  273 
(1902).  For  a  decision  under  the 
Massachusetts  statute  to  recover  back 
money  spent  in  connection  with  a 
gambling  contract,  see  Wheeler  v. 
Metropolitan,  etc.  Exchange,  72  N.  H. 
315  (1903).  In  a  suit  by  a  customer 
to  recover  losses  from  a  broker  under 
the  Massachusetts  statute,  the  broker 
is  not  liable  if  he  actually  purchased 
the  securities  and  afterwards  sold  them 
on  the  order  of  the  plaintiff.  Post  v. 
Leland,  184  Mass.  GOl  (1904).  See 
100  N.  E.  Rep.  1029. 

1  Wall   V.   Metropolitan   Stock    Ex- 


change, 168  Mass.  282  (1897).  A 
release  under  seal  by  a  customer  to 
avoid  the  effect  of  the  Massachusetts 
statute  against  stock  gambling  was 
construed  away  in  Clark  v.  Bullard, 
208  Mass.  586  (1911). 

2  Bearse  v.  McLean,  199  Mass.  242 
(1908). 

3  7  Geo.  II.,  c.  8,  and  10  Geo.  II., 
c.  8.  For  cases  under  this  statute, 
see  Hewitt  v.  Price,  4  Man.  &  G.  355 
(1842);  Fisher  v.  Price,  11  Beav.  194 
(1848) ;  Mortimer  v.  McCallan,  6  M.  & 
W.  58  (1840);  Ellsworth  v.  Cole,  2 
M.  &  W.  31  (1836) ;  Byles  on  Bills, 
15th  ed.,  p.  161 ;  2  Kent,  Com.,  468, 
note  (^).  The  statute  did  not  apply 
to  stock  in  private  corporations.  Hib- 
blewhite  v.  McMorine,  5  M.  &  W.  462 
(1839),  overruling  Bryan  v.  Lewis, 
Ryan  &  M.  386  (1826). 

*  23  &  24  Vict.,  c.  28. 

^  Where  both  parties  to  a  transac- 
tion on  the  stock  exchange  intend 
that  no  stocks  shall  be  delivered,  but 
only  that  "differences"  shall  be  paid, 
the  fact  that  the  contract  provides 
that  either  party  may  require  com- 
pletion of  the  purchase  and  delivery 
or  receipt  of  the  stock  does  not  pre- 
vent the  transaction  from  being  a 
gaming  and  wagering  contract  within 
the  Gaming  Act,  1845  (8  &  9  Vict.,  c. 
109),  and  therefore  void.  Universal, 
etc.  Exchange  v.  Strachan,  [1896]  A.  C. 
166,  holding  also  that  securities  de- 
posited in  connection  with  such  a  con- 
tract may  be  recovered  back. 

estate  V.  Clayton,  138  N.  C.  732 
(1905).  In  Anderson  v.  State,  58  S.  E. 
Rep.  401  (Ga.  1907),  a  person  was 
con\icted  for  violating  the  "Anti- 
Bucket-Shop   Law"   of  Georgia. 


1058 


CH.  XX.]  CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC.  [§  343. 

cure  the  evil.  The  great  danger  is  that  any  such  statute  will 
interfere  with  legitimate  transactions  —  transactions  which  for  many 
years  have  been  building  the  railways  and  developing  the  material 
resources  of  the  country.^ 

§  343.  Test  of  legality  of  stock  transactions.  —  Although,  as  al- 
ready stated,  stock  sales,  where  no  delivery,  but  merely  a  settlement 
of  gain  or  loss,  is  intended,  are  wagers,  and  although  such  wagers  are 
void  by  the  statutes  of  some  states,  and  by  the  rules  of  public  policy  in 
others,^  yet  difficulty  is  experienced  in  determining  whether  the  parties 
really  intended  to  deliver  the  stock  or  to  pay  differences.  The  question 
of  intent  is  always  difficult  of  ascertainment  and  of  positive  proof.  It 
is  preeminently  a  question  for  the  jury.  It  is  accordingly  found  in 
most  of  the  cases  involving  the  question  whether  the  transaction  was 
stock  gambling,  that  the  court  submitted  to  the  jury  whether  an  actual 
delivery  of  the  stock  was  intended  or  not.  If  there  was  no  such  intent, 
then,  as  a  matter  of  law,  the  transaction  was  a  wager.  If  a  wager,  it  is, 
by  statutes  in  some  states,  by  public  policy  in  others,  a  void  transac- 
tion, and  the  parties  have  only  the  rights  given  them  on  void  contracts.^ 
The  fact  that  the  customer  is  speculating  does  not  prove  that  he  is 
dealing  in  differences,  nor  the  fact  that  he  buys  on  margin  nor  the  fact 
that  he  buys  options.^  Yet  at  common  law  a  contract  to  purchase  stock 
on  margin  with  no  intent  on  either  side  to  deliver  and  pay  for  the  same, 
is  a  wagering  contract  and  is  illegal,  and  the  broker  cannot  recover  losses 
from  the  purchaser.^  At  common  law  and  by  statute  in  Massachusetts 
a  broker  cannot  recover  commissions  where  both  parties  contemplated 
buying  and  selling  on  a  margin  without  the  actual  purchase  and  retain- 
ing of  the  stock  w^ith  a  view  to  a  subsequent  sale.^ 

1  Dos     Passes,     Stock     Brokers    &  to  prevent  the  practices  at  which  they 

Stock  Exch.  (1882),  p.  405,  says:  "The  are    aimed    than    legislation    directed 

history    of    these    stock-jobbing    acts  against  the  laws  of  nature." 
seems  to  prove  conclusively  that  they         ^  Particularly   in   Pennsylvania   are 

have  never  been  effective  in  prevent-  such    stock    wagers    void    by    public 

ing  speculations  in  stocks.     In  almost  policy.     North  v.  Phillips,  89  Pa.  St. 

every   instance    in   which    they    have  250  (1879) ;    Fareira  v.  Gabell,  89  Pa. 

been  adopted,  after  Hngering  for  years  St.  89  (1879) ;   Ruchizky  v.  De  Haven, 

on  the  books,  scorned  and  violated  by  97    Pa.    St.   202    (1881) ;     Dickson   v. 

'the   unbridled   and   defiant   spirit   of  Thomas,  97  Pa.  St.  278  (1881) ;  Brua's 

speculation,'    despite   the    earnest    ef-  Appeal,  55  Pa.  St.  294  (1867). 
forts  of    the  courts   to  enforce    them,  ^  See    §§  345,    346    infra.     See    also 

they  have   finally  been   repealed.     It  Greenhood,  Pub.  Policy,  pp.  230-237. 
is,  perhaps,  better  to  allow  the  evil  to  *  Kendall  v.  Fries,  71  N.  J.  L.  401 

correct  itself,  as  it  surely  does,  than  (1904). 

to    bring    the    administration    of    jus-  ^  Gibney  v.  Olivette,  196  Mass.  294 

tice  into  contempt  by  filling  the  books  (1907). 

with   useless   laws,    which    are   at   all         ^  Beers    v.    Wardwell,     198    Mass. 

times  openly  violated  and  laughed  at,  236  (1908). 
and  which  seem  hardly  more  effective 

1059 


§  344.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


§  344.  When  intent  to  deliver  is  question  for  the  jury  and  when 
not.  —  The  question  whether  the  parties  to  an  executory  sale  of  stock 
intended  to  actually  deliver  the  stock,  or  merely  to  pay  and  receive 
the  gain  or  loss,  may  be  for  the  jury.^  In  the  application  of  this  rule, 
however,  great  care  is  to  be  exercised  in  submitting  the  question  and 
charging  the  jury.  The  parties  may  be  asked  directly  whether  they 
intended  that  a  delivery  should  be  made.^  If  one  party  intended 
to  have  a  delivery,  the  transaction  is  valid,  even  though  the  other  party 
intended  otherwise.^  As  between  a  party  and  his  broker,  however, 
greater  difficulty  arises,  and  in  some  jurisdictions  the  intent  between 
them  governs  their  relations,  irrespective  of  the  intent  of  the  party 
deaUng  with  them.^    The  financial  responsibility  of  the  parties,^  and 


'  Whitesides  v.  Hunt,  97  Ind.  191 
(1884) ;  Gregory  v.  Wendell,  39  Mich. 
337  (1878) ;  s.  c,  40  Mich.  432.  And 
all  the  circumstances  are  to  be  taken 
into  consideration.  Beveridge  v.  Hew- 
itt, 8  111.  App.  467  (1881) ;  Hawley  v. 
Bibb,  69  Ala.  52  (1881) ;  Brand  v.  Hen- 
derson, 107  111.  141  (1883) ;  Barnard  v. 
Backhaus,  52  Wis. '593  (1881);  Kirk- 
patrick  v.  Bonsall,  72  Pa.  St.  155  (1872). 

*  Yerkes  v.  Salomon,  11  Hun,  471 
(1877) ;  Cassard  v.  Hinman,  6  Bosw. 
9,  14  (1860) ;  Fu-st  Nat.  Bank  v.  Oska- 
loosa  Packing  Co.,  66  Iowa,  41 
(1885);  Ex  parte  Young,  6  Biss.  53 
(1874) ;  s.  c,  30  Fed.  Cas.  828.  In 
the  case  Porter  v.  Viets,  1  Biss.  177 
(1857) ;  s.  c,  19  Fed.  Cas.  1077,  the 
court  refused  to  admit  parol  evidence 
that  the  contract  was  gambling,  for 
the  reason  that  it  varied  a  written 
contract. 

»Wall  V.  Schneider,  59  Wis.  352 
(1884);  Irwin  v.  Williar,  110  U.  S. 
499  (1884) ;  Whitesides  v.  Hunt,  97 
Ind.  191  (1884) ;  Pixley  v.  Boynton, 
79  III.  351  (1875) ;  Ward  v.  Vosburgh, 
ai  Fed.  Rep.  12  (1887);  Powell  v. 
McCord,  121  111.  330  (1887) ;  Lehman 
V.  Strassburger,  2  Woods,  554  (1875) 
s.  c,  15  Fed.  Cas.  254 ;  Conner  v.  Rob- 
ertson, 37  La.  Ann.  814  (1885).  Contra 
Fareira  v.  Gabell,  89  Pa.  St.  89  (1879). 
Cf.  Beveridge  v.  Hewitt,  8  111.  App. 
467  (1881).  In  Tennessee,  by  statute, 
dealing  in  futures  is  gambling,  if 
either  party  does  not  intend  to  de- 
liver. See  McGrew  v.  City  Produce 
Exchange,  85  Tenn.  572  (1887).  If 
either  of  the  parties    intends,   at   the 


close  of  a  series  of  transactions  in 
buying  and  selling  stocks,  to  accept 
or  make  actual  delivery  of  the  re- 
maining stock,  the  transaction  is  not 
gambling,  as  between  the  customer 
and  broker,  although  the  buying  and 
selling  are  done  upon  a  margin  in 
the  hope  of  profit  from  the  fluctua- 
tions. Dillaway  v.  Alden,  88  Me.  230 
(1895).  The  intent  of  the  principal 
not  to  have  deliveries  but  to  pay  dif- 
ferences does  not  invalidate  a  note 
given  in  settlement,  where  there  is 
no  proof  of  any  such  intent  on  the 
part  of  the  brokers.  Winward  v.  Lin- 
coln, 23  R.  I.  476  (1902).  A  gambling 
intent  on  the  part  of  one  party  is 
immaterial  where  there  was  no  such 
intent  on  the  part  of  the  other  party. 
McCarthy  v.  Weare,  etc.  Co.,  87  Minn. 
11  (1902).  The  fact  that  a  broker 
advanced  all  the  money  except  the 
margin,  and  never  delivered  any  stock 
excepting  on  one  occasion  and  re- 
mitted gains  and  collected  losses  on 
various  occasions,  is  evidence  to 
prove  that  the  contract  was  a  gam- 
bling contract.  Sharp  v.  Stalker,  63 
N.  J.  Eq.  596  (1902). 

4  See  §§  345,  346,  infra. 

5  Kirkpatrick  v.  Bonsall,  72  Pa.  St. 
155  (1872) ;  First  Nat.  Bank  v.  Oska- 
loosa  Packing  Co.,  66  Iowa,  41  (1885) ; 
Re  Green,  7  Biss.  338  (1877) ;  s.  c,  10 
Fed.  Cas.  1084;  Beveridge  v.  Hewitt, 
8  111.  App.  467  (1881) ;  Justh  v.  Holli- 
day,  2  Mackev,  346  (1883) ;  North  v. 
Phillips,  89  Pa.  St.  250  (1879) ;  Pat- 
terson's Appeal,  16  Rep.  59  (Pa. 
1883) ;   Flagg  v.  Baldwin,  38  N.  J.  Eq. 


1060 


CH.   XX.] 


CONTIL\CTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  345. 


their  other  transactions  in  the  same  Hne,^  are  admissible  as  evidence  as 
to  whether  there  was  an  intent  to  dehver  the  stock  or  merely  to  pay  the 
gain  or  loss.  The  burden  of  proving  that  a  stock  transaction  is  a  gam- 
bling contract  is  upon  him  who  affirms  it.^  The  remedy  of  a  customer 
to  recover  back  under  a  statute  sums  paid  for  margins  or  transactions, 
no  delivery  being  contemplated,  is  at  law  and  not  in  equity.^ 

§  345.  Gambling  stock  contracts  as  affecting  the  relations  between 
the  principal  and  his  broker.  —  A  broker  is  but  an  agent  of  his  prin- 
cipal. As  such  he  may  hold  the  principal  liable  for  commissions  and 
for  losses  paid  on  stock  transactions  where  those  stock  transactions  are 
legitimate  and  legal.  Where,  however,  the  stock  contracts  are  of  a 
wager  or  gambling  nature,  a  more  difficult  question  arises,  and  the  deci- 
sions are  irreconcilable.  In  England,  in  1878,  Judge  Lindley,  in  Thacker 
V.  Hardy ,^  a  carefully  considered  case,  held  that,  where  the  principal 
has  been  carrying  on  gambling  transactions,  he  cannot  escape  or  re- 
pudiate his  liabilities  to  his  broker  in  those  transactions,  even  though 
the  latter  knew  of  the  gambling  character  of  the  business.  The  prin- 
cipal is  liable  to  his  broker  as  though  the  transactions  were  free  from  such 
objections.     This  is  the  well-established  rule  in  England.^ 


219  (1884) ;  Colderwood  v.  McCrea,  11 
111.  App.  543  (1882).  The  fact  that 
one  of  the  parties  is  already  under 
obligation  to  other  parties  to  purchase 
cotton  several  times  greater  in  value 
than  his  fortune  is  evidence  of  an 
intent  to  gamble.  Beadles  v.  McEl- 
rath,  85  Ky.  230  (1887).  The  fact 
that  a  party  is  financially  unable  to 
pay  for  property  is  evidence  that  the 
contract  is  gambling.  Myers  v.  Tobias, 
16  Atl.  Rep.  641   (Pa.   1889). 

1  Barkpatriek  v.  Bonsall,  72  Pa.  St. 
155  (1872);  Beveridge  v.  Hewitt,  8 
lU.  App.  467  (1881) ;  Irwin  v.  WiUiar, 
110  U.  S.  499  (1884).  Contra,  Tom- 
blin  V.  Callen,  69  Iowa,  229  (1886). 
The  jury,  in  passing  upon  the  defense 
to  a  note  that  it  was  given  in  a  stock- 
gambling  operation,  may  consider  all 
the  acts  and  accounts  and  the  actual 
dealings.  Gaw  v.  Bennett,  153  Pa.  St. 
247  (1893).  As  to  the  competency  of 
evidence  herein,  and  that  evidence  of 
custom  of  settling  by  differences  is 
incompetent,  see  Scofield  v.  Black- 
marr,  4  Atl.  Rep.  208  (Pa.  1886). 
Proof  of  intent  to  deliver  may  be  by 
the  conduct  of  the  parties  as  well  as 
the  contract.  Press  v.  Duncan,  100 
Iowa,  355  (1896). 


2  Dewey,  Contracts  for  Future  De- 
livery, p.  207,  says:  "All  the  cases 
except  Barnard  v.  Backhaus,  52  Wis. 
593  (1881);  Cobb  v.  PreU,  15  Fed. 
Rep.  774  (1883) ;  Beveridge  v.  Hewitt, 
8  111.  App.  467  (1881);  Stebbins  .;. 
Leowolf,  57  Mass.  137  (1849),  and 
possibly  Chandler's  Case,  Ex  parte 
Young,  6  Biss.  .53  (1874) ;  s.  c,  30  Fed. 
Cas.  828,  hold  that  these  contracts 
are  presumed  to  be  bona  fide;  and  in 
order  to  show  them  to  have  been  used 
as  covers  for  wagers,  an  agreement  to 
that  effect  must  appear  to  have  been 
made.  According  to  these  excepted 
cases,  option  contracts  are  presumed 
to  be  invalid,  and  proof  must  be  made 
that  they  are  bona  fide.''  See  also 
Dewey,  Contracts  for  Future  De- 
livery, p.  46.  In  Illinois  the  burden 
of  proof  is  on  the  customer  to  prove 
a  gambling  intent  on  the  part  of  both 
parties.  In  Wisconsin  a  contrary  rule 
seems  to  prevail.  See  Ward  v.  Vos- 
burgh,  31  Fed.  Rep.  12  (1887). 

5  Blessing  v.  Smith,  74  N.  J.  Eq.  593 
(1908). 

^  L.  R.  4  Q.  B.  D.  685. 

5  Re  Hart,  5  W.  N.  95  (1870) ; 
Cooper  V.  Neil,  13  W.  N.  128  (1878) ; 
Ex  parte  Rogers,  L.  R.  15  Ch.  D.  207 


1061 


§346. 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


§  346.  In  this  country  an  opposite  rule  prevails  for  the  most  part. 
The  great  weight  of  authority  holds  that,  where  the  broker  has  knowl- 
edge of  the  purpose  to  gamble  in  stocks  and  aids  in  carrying  out  that 
purpose,  he  cannot  recover  for  services  rendered  or  losses  incurred  and 
paid  by  himself.^  A  few  cases  hold  to  the  same  effect  as  the  English 
rule.^    ]\Iany  cases  which  seem  to  favor  the  English  rule  do  so  only  by 


(1880) ;  Faikney  v.  Reynous,  4  Burr. 
2069  (1767) ;  Jessopp  i'.  Lutwyche,  10 
Exch.  614  (1854)  ;  Knight  v.  Cambers, 
15  C.  B.  562  (1855) ;  Knight  v.  Fitch, 
15  C.  B.  566  (1855) ;  Lyne  v.  Siesfeld, 
1  H.  &  N.  278  (1856) ;  Rosewarne  v. 
Billing,  15  C.  B.  (N.  S.)  316  (1863). 
In  Pidgeon  v.  Burslem,  3  Exch.  465 
(1849),  the  court  says  expressly: 
"The  case  differs  altogether  from 
those  in  which  the  contract  is  for- 
bidden, as  under  the  acts  against 
stock-jobbing,  or  where  the  purpose 
for  which  the  money  was  paid  was 
illegal."  Contra,  Byers  v.  Beattie,  Ir. 
Rep.  2  C.  L.  220  (1867).  A  contract 
is  not  a  gaming  contract,  and  a  broker 
may  recover  the  balance  due  him  on 
account,  although  the  customer,  a  per- 
son of  small  means,  instructed  the 
broker  to  make  purchases  and  sales 
and  advanced  only  a  small  part  of 
the  purchase-money,  the  balance  being 
obtained  by  the  broker  by  pledge  of 
the  security,  and  the  customer  never 
asking  for  delivery  of  the  stock,  and, 
as  the  broker  well  knew,  did  not  pur- 
chase as  an  investment,  but  as  a 
speculation,  to  sell  again  when  the 
price  went  up,  and  the  broker  was 
paid  by  commissions  on  the  transac- 
tions. Forget  V.  Ostigny,  [1895]  A.  C. 
318.  A  customer  may  recover  from 
his  broker  margins  which  he  de- 
posited, the  transactions  having  re- 
sulted in  a  profit  to  the  customer.  Re 
Cronmire,  [1898]  2  Q.  B.  383. 

1  Irwin  V.  WiUiar,  110  U.  S.  499,  510 
(1884) ;  Flagg  v.  Gilpin,  17  R.  I.  10 
(1890) ;  McLean  v.  Stuve,  15  Mo.  App. 
317  (1884),  per  Thompson,  J. ;  Ream 
V.  Hamilton,  15  Mo.  App.  577  (1884). 
Cf.  Kent  V.  Miltenberger,  13  Mo.  App. 
503,  511  (1883).  See  also,  as  support- 
ing above  rule,  Everingham  v.  Meig- 
han,  55  Wis.  354  (1882);  Re  Green, 
7  Biss.  338  (1877) ;  s.  c,  10  Fed.  Cas. 
1084 ;   Bartlett  v.  Smith,  13  Fed.  Rep. 


263  (1882);  Tenney  v.  Foote,  4  lU. 
App.  594  (1879);  affirmed,  95  111. 
99  (1880),  defeating  a  note  given  to 
the  broker  ;  Colderwood  v.  McCrea,  11 
111.  App.  543  (1882) ;  Webster  v.  Stur- 
ges,  7  111.  App.  560  (1880);  Barnard 
V.  Backhaus,  52  Wis.  593  (1881),  de- 
feating notes ;  Beveridge  v.  Hewitt,  8 
111.  App.  467  (1881);  Whitesides  v. 
Hunt,  97  Ind.  191,  203  (1884);  Mel- 
chert  V.  American  U.  Tel.  Co.,  11  Fed. 
Rep.  193  (1882) ;  First  Nat.  Bank  v. 
Oskaloosa  Packing  Co.,  66  Iowa,  41 
(1885),  holding  a  note  void;  Stewart 
V.  Sehall,  65  Md.  289  (1886).  Suit 
by  broker  against  customer  for  mon- 
eys lost  in  purchase  of  grain  for  the 
customer.  Mohr  v,  Miesen,  47  Minn. 
228  (1891).  Brokers  are  bound  to 
know  that  banks  have  no  power  to 
purchase  cotton  futures  on  margins, 
and  cannot  recover  commissions  and 
losses  on  such  transactions.  The 
idtra  vires  contract  was  not  executed, 
inasmuch  as  the  corporation  received 
no  property.  Jemison  v.  Citizens'  Sav. 
Bank,  44  Hun,  412  (1887).  A  broker 
may  recover  commissions,  etc.,  from 
his  principal  when  the  former  knew 
nothing  of  the  latter's  intention  to 
gamble.  Lehman  v.  Feld,  37  Fed.  Rep. 
852  (1889) ;  Edwards  v,  Hoeffinghoff, 
38  Fed.  Rep.  635  (1889) ;  Boyd  v.  Han- 
son, 41  Fed.  Rep.  174  (1890). 

2  Brown  v.  Speyers,  20  Gratt.  (Va.) 
296  (1871) ;  Wyman  v.  Fiske,  85  Mass. 
238  (1861),  on  the  ground  that  the 
note  sued  on  was  a  voluntary  pay- 
ment to  the  broker  ;  Warren  v.  Hewitt, 
45  Ga.  501  (1872) ;  Marshall  v.  Thrus- 
ton,  3  Lea  (Tenn.),  741  (1879),  where 
also  a  note  had  been  given ;  Jackson 
V.  Foote,  12  Fed.  Rep.  37  (1882),  also 
a  note  case,  the  court  saying  that,  as 
between  the  broker  and  his  principal, 
the  decision  probably  would  be  differ- 
ent. Cf.  Tinsley's  Case,  cited  in  10 
Fed.  Rep.  248. 


1062 


CONTRACTS  TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  346. 


dicta,  inasmuch  as  the  transactions  involved  in  such  cases  are  held  not 
to  be  wager  contracts.^  In  Pennsylvania  and  New  Jersey  the  American 
rule  is  rigidly  enforced.  The  broker  is  held  to  be  dealing  as  a  principal, 
not  as  an  agent,  in  all  stock-gambling  transactions.-  He  cannot  recover 
commissions  or  losses.^  If  his  principal  is  an  infant,  the  broker  is  liable 
to  such  infant  for  all  sums  received  by  way  of  margins.^  If,  however, 
the  parties  do  not  raise  the  question  of  the  legality  of  the  transaction, 
the  court  cannot.^  In  Ohio  it  is  held  that  the  broker  may  be  made  to 
account  for  profits,  even  though  the  transaction  was  a  gambling  one.® 
A  note  and  mortgage  given  to  the  broker  in  settlement  of  a  gambling 
transaction  will  not  be  interfered  with.^  The  broker  is  not  liable  for  a 
sale  of  the  stock  on  failure  of  margin,  without  notice  to  the  principal, 
where  the  business  is  gambling.^  A  partner  in  a  partnership  for  the 
purpose  of  carrying  on  a  gambling  business  on  the  market  cannot  have 
an  accounting  from  his  partner.^  At  common  law  a  customer  cannot 
recover  margins  and  profits  from  a  broker  on  gambling  transactions.^*^ 


'  Lehman  v.  Strassberger,  2  Woods, 
554  (1875);  s.  c,  15  Fed.  Cas.  254; 
Rumsey  v.  Berry,  65  Me.  570  (1876) ; 
Sawyer  v.  Taggart,  14  Bush  (Ky.), 
727  (1879)  ;  Durant  v.  Burt,  98  Mass. 
161  (1867) ;  WilUams  v.  Carr,  80  N. 
C.  294  (1879). 

2  Ruchizky  v.  De  Haven,  97  Pa.  St. 
202  (1881). 

3  North  V.  Phillips,  89  Pa.  St.  250 
(1879);  Flagg  v.  Baldwin,  38  N.  J. 
Eq.  219  (1884) ;  Fareira  v.  Gabell,  89 
Pa.  St.  89  (1879),  holding  that  notes 
given  to  the  broker  are  void.  A  suit 
by  a  broker  for  balance  of  account 
fails  where  not  a  single  delivery  was 
made,  and  there  clearly  was  no  inten- 
tion to  deliver.  Snider  v.  Harvey, 
215  Pa.  St.  538  (1906).  The  agent 
cannot  recover  commissions  where  he 
tnew  the  transaction  was  gambling. 
Dows  V.  Glasfield,  4  N.  D.  251  (1894). 

*  Ruchizky  v.  De  Haven,  97  Pa.  St. 
202  (1881).  An  infant  gambling  in 
stocks  on  a  margin  may  recover  from 
the  brokers  all  that  he  deposited  with 
them.  Mordecai  v.  Pearl,  63  Hun,  553 
(1892) ;   aff'd,  136  N.  Y.  625. 

*Gheen  v.  Johnson,  90  Pa.  St.  38 
(1879);  Williams  v.  Carr,  80  N.  C. 
294  (1879).  Contra,  Minzesheimer  v. 
Doolittle,  60  N.  J.  Eq.  394  (1900). 

6  Norton  v.  Blinn,  39  Ohio  St.  145 
(1883).  Where  gambling  stock  trans- 
actions   are    closed    and    the    account 


settled,  and  the  balance  due  the  cus- 
tomer is  left  on  deposit  with  the 
broker,  the  latter  must  pay  it  over. 
Peters  v.  Grim,  149  Pa.  St.  163  (1892). 
In  winding  up  a  solvent  bucket-shop 
corporation  a  customer  may  prove  a 
claim  for  the  amount  paid  by  him  or 
a  profit  equal  to  the  amount  which  he 
could  have  recovered  in  an  action  at 
law.  Weiss  v.  Haight,  etc.  Co.,  156 
Fed.  Rep.  877  (1907). 

7  Clarke  v.  Foss,  7  Biss.  540  (1878) ; 
s.  c,  5  Fed.  Cas.  955.  CJ.  Tantum  v. 
Arnold,  42  N.  J.  Eq.  60  (1886).  At 
common  law  a  mortgage  and  note 
given  to  a  broker  for  commissions  in 
buying  and  selling  futures  and  for 
advances  are  legal.  Where  such  note 
has  been  reduced  to  judgment  in  one 
state  it  will  be  enforced  in  another 
state.  Peet  v.  Hatcher,  112  Ala.  514 
(1896). 

8  North  V.  Phillips,  89  Pa.  St.  250 
(1879). 

9  Wright  V.  Cudahy,  168  111.  86 
(1897). 

1"  Northrup  v.  Buffington,  171  Mass. 
468  (1898).  A  principal  cannot  call 
his  agent  to  account  on  a  gambling 
contract.  Rogers  v.  Marriott,  59  Neb. 
759  (1900).  Brokers  receiving  a  draft 
of  the  president  of  a  bank  on  the 
bank  itself  for  margins  may  be  com- 
pelled to  refund  the  money  to  the 
bank.     Lamson  v.  Beard,  94  Fed.  Rep. 


1063 


§§  347,  348.]       CONTRACTS   TO    SELL  —  GAMBLING    SALES,    ETC. 


[CH.   XX. 


A  bucket-shop  corporation  cannot  maintain  a  bill  to  compel  a  board 
of  trade  to  furnish  quotations  to  it.^  A  bucket-shop  keeper  may  be 
required  to  restore  trust  funds  which  one  of  his  customers  has  used  in 
gambling  in  stocks.^ 

§§  347,  348.  Gambling  stock  transactions  as  affecting  notes,  bonds, 
mortgages,  etc.,  growing  out  thereof.  —  The  penalty  of  engaging  in  a 
stock-gambling  operation  is  that,  in  case  the  transaction  is  declared 
by  a  court  of  justice  to  be  illegal  as  a  wager  contract,  the  court  de- 
clines to  aid  either  party .^  As  a  general  rule,  all  liability  on  the  part 
of  either  party  is  unenforceable.  Money  paid  by  the  principal  cannot 
be  recovered  back.^  A  customer  who  has  made  a  gambling  contract 
with  a  bucket-shop  dealer  cannot  enjoin  the  latter  from  removing  his 
money  from  the  state. ^  Neither  principal  can  collect  the  gains  of  the 
transaction,  and  neither  is  liable  for  a  loss.^  Notes  given  in  settlement 
are  void   and   not  collectible,^  even  in  the  hands  of  bona  fide  pur- 


30  (1899).  On  this  point  see  §293, 
supra.  Money  deposited  with  a  broker 
to  make  gambling  sales  may  be 
recovered  back,  it  not  having  been 
used.  Munns  v.  Donovan,  etc.  Co. 
117  Iowa,  516  (1902). 

'  Central,  etc.  Exch.  v.  Board  of 
Trade,  196  111.  396  (1902).     See  §  939. 

2  Joslyn  V.  Downing,  etc.  Co.,  150 
Fed.  Rep.  317  (1906).     See  §  452. 

3  Rees  V.  Fernie,  13  W.  R.  6  (1864), 
holding  that  the  court  will  not  aid  one 
who  has  been  tricked  in  gambling  in 
stocks.  The  Chicago  Board  of  Trade 
cannot  obtain  an  injunction  against 
the  use  of  its  quotations  by  a  bucket- 
shop  concern,  where  the  evidence 
shows  that  the  transactions  of  the 
Chicago  Board  of  Trade  were  chiefly 
in  futures,  which  were  settled  by  the 
payment  of  differences  in  violation  of 
law.  Board  of  Trade  v.  O'Dell,  etc. 
Co.,  115  Fed.  Rep.  574  (1902). 

*  Gregory  v.  Wendell,  39  Mich.,  337 
(1878);  s.  c,  40  Mich.  4.32  (1879); 
Wyman  v.  Fiske,  85  Mass.  2.38  (1861). 
Cf.  Norton  v.  Blinn,  39  Ohio  St.  145 
(1883).  In  Tennessee,  by  statute,  a 
contrary  rule  prevails.  McGrew  v. 
City  I»roduce  Exchange,  85  Tenn.  572 
(1887);  Dunn  v.  Bell,  85  Tenn.  581 
(1887),  holding  also  that  where  there 
are  several  partners  or  co-conspirators 
who  take  the  principal's  money  they 
are  liable  therefore  jointly  and  sev- 
erally.    Under  the  New  York  statute 


money  paid  by  a  customer  to  a  broker 
on  gambling  speculations  may  be 
recovered  back.  Peck  v.  Doran,  etc. 
Co.,  57  Hun,  343  (1890).  Where  a 
gambling  contract  is  illegal  by  stat- 
ute, a  customer  who  gave  money  to 
the  broker  to  gamble  with,  according 
to  orders,  cannot  recover  it  back. 
White  V.  Barber,  123  U.  S.  392  (1887) ; 
Sowles  V.  Welden  Nat.  Bank,  61  Vt. 
375  (1889).  A  certificate  of  deposit 
given  to  a  broker  in  the  course  of 
gambUng  transactions  may  be  recov- 
ered back.  Dempsey  v.  Harm,  12  Atl. 
Rep.  27  (Pa.  1887).  The  customer 
may  recover  back  money  deposited 
in  the  hands  of  a  third  person  for 
margins  on  a  gambUng  contract. 
Dauler  r.  Hartley,  178  Pa.  St.  23  (1896). 

5  Baxter  v.  Deneen,  98  Md.  181 
(1903). 

^Grizewood  v.  Blane,  11  C.  B.  526 
(1851);  Webster  v.  Sturges,  7  lU. 
App.  560  (1880);  Ex  parte  Young,  6 
Biss.  53  (1874) ;  s.  c,  30  Fed.  Cas. 
828 ;  Thompson  v.  Cummings,  68  Ga. 
124  (1881);  Yerkes  v.  Salomon,  11 
Hun,  471  (1877).  A  partner,  however, 
may  have  contribution  for  losses  paid 
at  the  express  request  of  the  other 
member  of  the  firm.  Petrie  v.  Han- 
nay,  3  T.  R.  418  (1789). 

'  Barnard  v.  Backhaus,  52  Wis.  593 
(1881);  Fareira  v.  Gabell,  89  Pa.  St. 
89  (1879) ;  Lowry  v.  Dillman,  59  Wis. 
197  (1884);  Da\'is  v.  Davis,  119  Ind. 


1064 


CH.   XX.] 


CONTR.\CTS   TO    SELL  —  GAMBLING    SALES,    ETC.       [§§  347,  348. 


chasers ;  ^  but  the  better  rule  is  that  such  bona  fide  holders  are  pro- 
tected."    Bonds  and  mortgages  given  in  payment  are  void.^ 

Due  bills,^  acceptances/   and  guarantees  ^  of   notes   are  not  valid 
or  enforceable.     If  a  part  of  the  consideration  is  void  the  whole  contract 


511  (1889);  Justh  v.  HoUiday,  2 
Maekey,  346  (1883) ;  Cunningham  v. 
Augusta  Nat.  Bank,  71  Ga.  400 
(1883);  Tenney  v.  Foote,  4  111.  App. 
594  (1879);  aflarmed,  95  111.  99.  Cf. 
Wyman  v.  Fiske,  85  Mass.  238  (1861). 
A  person  loaning  money  and  taking 
notes  therefor  cannot  be  defeated  in 
a  suit  on  the  notes  by  evidence  that 
he  knew  the  loan  was  to  be  used  in 
gambling  operations.  Defendant  must 
prove,  also,  that  plaintiff  intended 
that  the  monev  should  be  so  used. 
Waugh  V.  Beck, 'l  14  Pa.  St.  422  (1886). 
Checks,  notes,  etc.,  in  gambling  con- 
tracts are  void.  Kahn  v.  Walton, 
46  Ohio  St.  195  (1889);  Embrey  v. 
Jemison,  131  U.  S.  336  (1889).  Sales 
and  purchases  in  Ohio  on  margins  are 
gambling  and  void,  and  a  note  in  settle- 
ment of  such  transactions  is  void. 
Morris  v.  Norton,  75  Fed.  Rep.  912 
(1896).  Notes  given  by  the  customer 
to  the  broker  on  dealings  in  stock, 
merely  margins  being  paid,  are  iUegal 
and  not  enforceable.  Mechanics',  etc. 
Bank  v.  Duncan,  36  S.  W.  Rep.  887 
(Tenn.  1896).  A  note  given  by  a 
broker  for  profits  in  gambling  in  grain 
is  not  enforceable.  Nave  v.  Wilson, 
12  Ind.  App.  38  (1894).  If  deUvery 
was  intended  and  made,  a  note  by  one 
of  the  principals  to  the  other  is  good, 
although  the  warehouse  receipts  were 
left  with  the  broker  to  secure  advances. 
Fisher  v.  Fisher,  8  Ind.  App.  665 
(1894). 

1  Barnard  v.  Backhaus,  52  Wis.  593 
(1881);  Steers  v.  Lashley,  6  T.  R.  61 
(1794)  ;  Tennev  v.  Foote,  4  111.  App. 
694  (1879) ;  aff'd,  95  lU.  99 ;  Cunning- 
ham V.  Augusta  Nat.  Bank,  71  Ga.  400 


(1883);  Lowry  v.  Dillman,  59  Wis. 
197  (1884) ;  Root  v.  Merriam,  27  Fed. 
Rep.  909  (1886). 

2  A  bona  fide  holder  of  a  note  given 
in  stock-gambling  transactions  can 
enforce  the  same  in  Pennsylvania. 
Northern  Nat.  Bank  v.  Arnold,  187 
Pa.  St.  356  (1898) ;  Crawford  v.  Spen- 
cer, 92  Mo.  498  (1887);  Third  Nat. 
Bank  v.  Harrison,  10  Fed.  Rep.  243 
(1882);  Lilley  v.  Rankin,  55  L.  T. 
Rep.  814  (1886).  An  accommodation 
indorser  to  the  note  may  set  up  the 
defense  of  illegality.  Justh  v.  Holli- 
day,  2  Maekey,  346  (1883).  A  note 
given  to  a  bank  is  valid,  though  the 
proceeds  were  to  pay  a  stock-gambling 
debt  and  the  bank  knew  that  fact. 
Marshall  v.  Thruston,  3  Lea  (Tenn.) 
741  (1879).  Cf.  Cannan  v.  Bryce,  3 
B.  &  A.  179  (1819). 

3  Amory  v.  Meryweather,  2  B.  &  C. 
573  (1824) ;  Flagg  v.  Baldwin,  38  N.  J. 
Eq.  219  (1884);  Griffiths  v.  Sears,  112 
Pa.  St.  523  (1886) ;  Barnard  v.  Back- 
haus, 52  Wis.  593  (1881).  A  judgment 
entered  by  confession  on  a  bond  given 
for  a  gambling  debt  may  be  set  aside. 
Everitt  v.  Knapp,  6  Johns.  331  (1810) ; 
Beveridge  v.  Hewitt,  8  111.  App.  467 
(1881).  A  court  of  equity  will  enjoin 
the  transfer  of  a  note  and  will  decree 
the  cancellation  of  a  mortgage  given 
by  a  married  woman  in  payment 
of  her  husband's  stock-gambling  debts. 
Tantum  v.  Arnold,  42  N.  J.  Eq.  60 
(1886).  But  will  not  where  given 
by  the  party  himself  to  his  brokers. 
Clarke  v.  Foss,  7  Biss.  540  (1878); 
s.  c,  5  Fed.  Cas.  955.  A  mortgage  to 
a  broker  to  pay  losses  on  gambling 
speculations  is  void  and  not  enforce- 


*  Rudolf  V.  Winters,  7  Neb.  125 
(1878).  If  a  broker  proves  that  he 
intended  to  purchase  the  stock  and  was 
ready  to  deliver  it,  a  due  bill  given  by 
the  customer  to  him  is  valid.  Mac- 
Donald  V.  Gessler,  208  Pa.  St.  177 
(1904). 

5  Steers    v.    Lashley,    6    T.    R.    61 


(1794).  Rawlings  v.  Hall,  1  Car.  & 
P.  11  (1823),  holds  that  the  broker  on 
the  witness  stand  need  not  admit  that 
the  consideration  was  a  gambling 
debt,  since  it  would  subject  him  to  a 
common-law  criminal  prosecution. 
6  Tenney  v.  Foote,  95  lU.  99  (1880). 


1065 


§  349.]  CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC.  [cH.  XX. 

and  all  securities  given  thereunder  are  void.^  A  pledge  of  stock  to  se- 
cure a  note  given  for  a  gambling  debt  is  void.-  In  Illinois,  by  statute, 
a  customer  who  deposits  securities  with  a  broker  on  a  gambling  stock 
contract  may  recover  them  back,  even  though  he  has  not  paid  losses 
incurred  by  the  transaction.^  In  New  Jersey  it  is  held  that  purchases 
and  sales  of  cotton  for  future  delivery,  the  arrangement  being  to  pay 
differences  on  the  rise  and  fall  of  prices,  are  illegal,  and  even  though  a 
judgment  is  obtained  thereon  in  New  York  state  and  a  judgment  on 
that  judgment  obtained  in  New  Jersey,  yet  a  court  of  equity  will  not 
set  aside  a  deed  of  land  as  being  in  fraud  of  such  judgment,  even  though 
the  gambling  nature  of  the  transaction  is  not  pleaded  ;^  but  a  later  case 
is  somewhat  to  the  contrary.^  A  board  of  trade  has  a  property  interest 
in  its  quotations,  and  may  enjoin  persons  obtaining  and  using  them 
without  its  permission,  even  though  transactions  of  the  board  of  trade 
are  gambling.® 

C.  FRAUD  AS  AFFECTING  A  SALE  OF  STOCK. 

§  349.  Extent  of  subject  treated  herein.  —  In  a  previous  chapter  of 
this  treatise  the  effect  of  fraud  and  fraudulent  representations  on  a  sub- 
scription for  stock  was  fully  treated.  There  is  little  difference  in  the 
principles  of  law  governing  fraud  as  affecting  sales  of  stock  from  fraud 
as  affecting  subscriptions  for  stock.  Most  of  the  cases  assume  that  the 
same  principles  apply  to  both  kinds  of  transactions.     Consequently, 

able.     Walters  v.  Comer,  79  Ga.  796  of    them   fraudulently   overstates    the 

(1887).     But  see  Crawford  v.  Spencer,  losses,  he  is  liable  to  account  for  the 

92  Mo.  498  (1887).     Where  a  citizen  amount     fraudulently     allowed     him. 

of    Alabama    gives    to    a    New    York  Wells  v.  McGeoch,  71  Wis.  196  (1888). 

broker   a    deed    of    land    in    Alabama  ^  Menardi  v.  Wacker,  32  Nev.   169 

in  settlement  of  futures,   its   validity  (1909). 

as   to  futures  depends   on  the  law   of  '  Jamieson  v.  Wallace,  167  111.  388 

New   York.     Hubbard   v.    Sayre,    105  (1897). 

Ala.  440  (1895).  A  customer  cannot  ^  Minzesheimer  v.  Doolittle,  60 
have  a  mortgage  canceled  and  cash  N.  J.  Eq.  394  (1900). 
returned  to  him  by  his  broker  where  he  ^  After  the  broker  has  obtained 
does  not  clearly  prove  that  the  eon-  judgment  against  his  customer  and 
tract  was  a  gambling  one.  Richter  then  brings  suit  to  set  aside  an  illegal 
V.  Poe,  109  Md.  20  (1908).  Cf.  130  transfer  of  property  by  the  customer 
Pac.  Rep.  774.  it  is  no  defense  that  the  original 
1  Tenney  v.  Foote,  95  111.  99  (1880).  claim  was  a  gambling  one.  More- 
See  also  Fareira  v.  Gabell,  89  Pa.  St.  over,  purchases  and  sales  by  the 
89  (1879).  But  where,  upon  the  close  broker  for  the  customer  are  legal 
of  a  successful  "corner,"  which  is  unless  it  is  proven  that  it  was  agreed 
illegal  by  statute,  one  of  the  parties  or  understood  that  only  differences 
leaves  his  share  of  the  profits  with  were  to  be  paid.  Thompson  v.  Wil- 
the  other  party  to  invest,  the  latter  liamson,  67  N.  J.  Eq.  212  (1904). 
must  account  for  it  when  called  upon  «  Board  of  Trade  v.  Christie,  etc. 
so  to  do.  Where,  upon  the  close  of  an  Co.,  198  U.  S.  236  (1905),  rev'g 
unsuccessful  "corner,"  the  parties  Christie,  etc.  Co.,  v.  Board  of  Trade, 
losing  settle  among  themselves,  but  one  125  Fed.  Rep.  161  (1903).     See  §  939. 

1066 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  350. 


the  questions  of  what  constitutes  fraud  herein ;  what  remedies  the  de- 
frauded person  has ;  and  the  general  principles  governing  this  branch 
of  the  law,  wuU  be  fully  understood  only  by  a  comparison  of  these  two 
parts  of  this  work.^ 

§  350.  What  has  been  held  to  constitute  a  fraud  herein.  —  Pur- 
chase with  knowledge  of  previous  sale.  —  It  is  difficult  to  lay  down 
rules  as  to  what  does  and  what  does  not  amount  to  fraudulent  misrepre- 
sentations. The  courts,  consequently,  let  each  case  stand  upon  its 
own  facts.  Certain  states  of  fact  have,  however,  been  passed  upon  as 
constituting  fraud,  and  as  such  they  aid  in  coming  to  a  conclusion  on 
facts  in  somewhat  similar  cases.  Thus,  it  has  been  held  to  be  a  fraudu- 
lent representation  to  make  false  statements  as  to  the  location,  explora- 
tions, and  developed  state  of  a  mine ;  ^  or  that  a  patent  owned  by  the 
company  was  of  great  value,  and  that  certain  other  persons  were  owners 
of  stock ;  ^  that  the  company  was  prosperous,  when  in  fact  large  over- 
issues of  stock  had  been  made ;  ^    or  that  the  corporate  property  was 


^  See  eh.  IX,  supra.  In  the  impor- 
tant case  of  Western  Bank  v.  Addie, 
L.  R.  1,  Sc.  App.  (H.  L.)  145  (1867), 
part  of  the  shares  had  been  subscribed 
for  and  part  purchased.  The  courts 
applied  the  same  principles   to  both. 

2  Morgan  v.  Skiddv,  62  N.  Y.  319 
(1875).  In  Crocker  v.  Manley,  164 
111.  282  (1896),  the  court  held  that  it 
was  not  fraudulent  to  represent  that 
the  mines  owned  by  the  company  were 
rich  and  would  pay  more  than  twenty 
per  cent,  dividends,  and  that  the  ore 
on  hand  was  of  a  certain  value,  where 
it  is  shown  that  the  vendee  made  a 
personal  examination  and  was  satis- 
fied, and  no  actual  fraud  is  shown. 
Rescission  was  refused. 

'MiUer  v.  Barber,  66  N.  Y.  558 
(1876).  A  person  induced  to  buy 
stock  on  representations  that  the  com- 
pany owns  a  valuable  patent  when  in 
fact  it  does  not  own  it,  can  recover 
back  his  money,  and  it  is  no  defense 
that  the  stock  was  worth  the  price 
paid.  A  suit  to  recover  money  paid 
may  be  treated  as  a  suit  for  rescis- 
sion under  the  California  code.  Spreck- 
les  V.  Gorrill,  152  Cal.  38.3  (1907). 

*  Cazeaux  v.  Mali,  25  Barb.  578 
(1857).  In  a  suit  for  false  represen- 
tations as  to  the  condition  of  a  com- 
pany a  subsequent  mortgage  fore- 
closure may  be  proved  if  the  condi- 
tion of  the  company  has  not  changed 


between  the  time  of  the  representa- 
tions and  such  foreclosure.  Walker 
V.  Russel,  186  Mass.  69  (1904).  Plain- 
tiff need  not  allege  that  he  relied 
solely  on  the  misrepresentations.  A 
false  statement  that  the  company  is 
perfectly  solvent  is  a  material  mis- 
representation and  the  fact  that  two 
or  three  years  thereafter  all  the  cor- 
porate assets  have  disappeared  and  it 
went  into  liquidation,  is  proof  of  such 
misrepresentation.  It  may  be  shown 
that  at  the  time  of  the  misrepresenta- 
tion the  company  owed  its  officers 
and  employees  a  large  sum  of  money. 
It  may  be  shown  that  the  corporate 
books  and  statements  overvalued  the 
assets.  The  treasurer,  secretary,  and 
bookkeeper  is  a  competent  witness 
to  prove  that  at  a  certain  time  the 
company  was  not  solvent.  In  an 
action  against  the  president  for  dam- 
ages for  false  representations  it  need 
not  be  proved  that  he  had  actual 
knowledge  of  the  falsity  of  the  state- 
ments in  regard  to  corporate  affairs, 
inasmuch  as  he  was  bound  to  know 
thereof.  Norvell  v.  Pye,  95  S.  W. 
Rep.  666  (Tex.  1906).  False  rep- 
resentations as  to  solvency  and  finan- 
cial condition  of  the  corporation  are 
material,  and  the  purchaser  may  testify 
that  he  would  not  have  purchased  the 
stock  except  for  the  representations. 
Pridham  v.  Weddington,  74  Tex.  354 


1067 


§  350.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


free  from  encumbrance ;  ^  or  that  the  corporation  would  guarantee  cer- 
tain dividends ;  -  or  any  false  statement  or  general  fraudulent  act,  or 
fraudulent  concealment  of  a  material  fact,  whereby  the  purchaser  is 
induced  to  complete  the  sale  of  stock.^     A  statement  that  a  certain 


(1889).  It  is  fraud  to  state  falsely 
that  the  company  is  prosperous,  that 
there  was  no  stock  for  sale,  and  that 
defendant  was  selling  stock  of  others 
and  not  his  own.  Miller  v.  Curtiss, 
13  N.  Y.  Supp.  604  (1891). 

1  It  is  fraudulent  to  represent  that 
the  corporation  is  free  from  debts 
where  it  appears  that  it  owns  land 
subject  to  a  very  large  mortgage  debt. 
Tinker  v.  Kier,  195  Mo.  183  (1906). 
Southwestern  R.R.  v.  Papot,  67  Ga. 
675,  693  (1881),  the  court  saying:  "It 
is,  we  think,  sufficient  to  show  that 
the  misrepresentation  or  suppression 
of  fact  was  of  such  a  nature  as  to 
prove  that  the  property  purchased 
was  of  no  value  to  the  purchaser  for 
the  purposes  for  which  it  was  bought, 
or  that  it  would  be  reasonable  to  sup- 
pose that  the  purchaser  would  not  have 
contracted  for  it  had  he  had  knowl- 
edge of  the  existence  of  this  defect." 
It  is  fraudulent  to  make  misstatements 
to  the  effect  that  the  corporation  is 
out  of  debt  and  is  making  certain 
profits.  It  is  no  defense  that  the 
defendant  might  have  ascertained 
the  facts  from  the  corporation.  Red- 
ding V.  Wright,  49  Minn.  322  (1892). 
A  misrepresentation  as  to  the  amount 
of  corporate  indebtedness  is  material. 
McElwee  v.  Chandler,  198  Pa.  St.  575 
(1901).  A  jury  decided  that  a  false 
representation,  on  the  part  of  corpo- 
rate officers,  that  the  company  was 
without  debt,  was  a  fraud  on  the  ven- 
dee, and  held  its  perpetrators  liable  in 
damages.  Faville  v.  Shehan,  68  Iowa, 
241  (1885).  Where  a  corporation  is- 
sues bonds  having  the  words  printed 
on  their  face  "first-mortgage  bonds," 
when,  as  a  matter  of  fact,  there  was 
an  underlying  mortgage  which  the 
party  to  whom  the  bonds  were  sold 
agreed  to  pay,  but  did  not  pay,  except 
in  part,  the  officers  and  directors  who 
took  part  in  the  issue  of  the  bonds  are 
liable  to  an  innocent  purchaser  who 
relied  on  the  statement  contained  on 
the  face  of  the  bonds.     His  measure  of 


damages  is  the  difference  between  the 
value  of  the  bonds  as  first-mortgage 
bonds,  and  second-mortgage  bonds. 
Bank  v.  Byers,  139  Mo.  627  (1897). 
A  purchaser  of  bonds  and  stock  may 
rescind  on  the  ground  that  the  vendor 
falsely  represented  that  there  was 
but  one  mortgage  on  the  property.  It 
is  immaterial  that  the  vendor  paid  off 
the  other  mortgage  after  suit  was 
brought.  Stevenson  v.  Marble,  84 
Fed.  Rep.  23  (1897).  A  purchaser  of  a 
majority  of  the  stock  of  the  corpora- 
tion from  a  stockholder  may  rescind 
where  a  misrepresentation  was  made 
that  the  corporation  had  practically  no 
debts.  Merritt  v.  Ehrman,  116  Ala. 
278  (1897).  A  misstatement  as  to  the 
amount  of  the  corporate  debt  is 
material,  even  though  the  vendor 
made  the  statement  in  good  faith. 
Lambert  v.  Elmendorf,  124  N.  Y. 
App.  Div.  758  (1908).  A  statement 
that  the  debts  are  only  $1,530  when 
they  are  §2,800  is  a  material  misrep- 
resentation. Davis  V.  Butler,  154 
Cal.  623  (1908).  A  corporation  can- 
not defend  against  a  debt  on  the  ground 
that  its  creditor  had  owned  the  entire 
capital  stock  and  had  sold  it  on  mis- 
representations that  the  company  was 
free  from  debt.  Erickson  v.  Revere, 
etc.  Co.,  110  Minn.  443  (1910).  A 
seller  of  stock  is  not  liable  for  false  rep- 
resentations where  he  merely  expressed 
an  opinion  and  belief  as  to  the  financial 
condition  of  the  company.  Cornish  v. 
Friedman,  94  Ark.  282  (1910). 

2  Gerhard  v.  Bates,  2  El.  &  Bl.  476 
(1853).  Representations  that  divi- 
dends would  soon  be  paid  are  not 
fraudulent,  but  statements  as  to  pres- 
ent condition  and  prospects  may  be 
for  the  jury.  Warner  v.  Benjamin,  89 
Wis.  290  (1895). 

5  See  further  illustrations  in  ch. 
IX,  supra.  A  vendor  of  stock  is  not 
obliged  to  mention  the  fact  that  the 
corporation  owes  debts.  Furber  v. 
Fogler,  97  Me.  585  (1903).  Even 
though  the  president  of  a  company  in 


ims 


CH.   XX.] 


CONTR.VCTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  350. 


amount  of  stock  has  been  contracted  to  be  issued  is  false  if  the  only  con- 
tract was  an  option  given  to  a  party  to  purchase  the  stock.^  It  may  or 
may  not  be  a  fraudulent  representation  to  state  that  the  stock  is  worth 
a  certain  sum,  according  to  the  circumstances  of  the  case.-     An  under- 


inducing  the  stockholders  to  sell  their 
stock  to  another  company  conceals  the 
fact  that  he  is  largely  interested  in 
the  latter  company,  this  does  not  con- 
stitute fraud.  Wann  v.  ScuUin,  210 
Mo.  429  (1908).  Declaring  a  divi- 
dend in  good  faith  and  sound  dis- 
cretion is  not  fraud  by  reason  of  its 
turning  out  to  have  been  ill-advised. 
Burnes  v.  Pennell,  2  H.  L.  Cas.  497 
(1849).  A  representation  that  the 
stock  "is  good  property  or  investment 
and  is  about  to  make  a  dividend"  is  a 
false  representation  when  untrue,  and 
where  the  person  taking  the  stock  as 
trustee  from  a  preceding  trustee  ob- 
jected to  receiving  it  on  account  of  his 
doubt  or  ignorance  as  to  its  character. 
Lawton  v.  Kittredge,  30  N.  H.  500 
(1855).  Representations  that  corpo- 
rate property  is  valuable  and  one  of  the 
best  properties  in  Colorado,  when  in 
fact  the  company  was  a  bubble  com- 
pany, raises  a  question  of  fraud  for  the 
jury  to  pass  upon.  Bradley  v.  Poole, 
98  Mass.  169  (1867).  The  payment  of 
an  excessive  and  speculative  price  for 
stock  is  not  fraud  and  is  no  ground  for 
setting  the  sale  aside.  Moffat  v. 
Winslow,  7  Paige  Ch.  124  (1838). 
The  vendor  warrants  the  title  to  the 
stock,  but  not  its  quality  or  value. 
Allen  V.  Pegram,  16  Iowa,  163  (1864). 
A  sale  of  stock  in  a  company  formed  to 
purchase  a  raihoad  cannot  be  set  aside 
merely  because  its  title  to  the  railroad 
fails.  State  v.  North  Louisiana,  etc. 
R.R.,  34  La.  Ann.  947  (1882).  In 
Wright's  Appeal,  99  Pa.  St.  425  (1882), 
it  was  held  that  the  corporation  was 
not  liable  for  the  conversion  of  stock  by 
its  president,  who  obtained  the  cer- 
tificates indorsed  in  blank  from  the 
owner  on  false  representations  that 
the  corporation  wished  to  use  them. 
Newlands  v.  National,  etc.  Assoc,  53 
L.  T.  Rep.  242  (1885);  March  v. 
Eastern  R.R.,  43  N.  H.  515  (1862) ; 
s.  c,  40  N.  H.  548,  holding  that  the  fact 
that  the  earnings  were  not  distributed 
by  dividends  until  after  a  sale  of  stock 


does  not  constitute  fraud.  A  con- 
fidential agent  who  uses  his  position  to 
obtain  stock  of  which  the  principal 
has  been  deprived  wrongfully  must 
turn  it  over  to  the  principal.  Harden- 
bergh  v.  Bacon,  33  Cal.  356  (1867). 
Statements  that  a  large  part  of  the 
capital  stock  had  been  taken  by  the 
parties  themselves,  and  that  the  parties 
themselves  would  continue  the  manage- 
ment of  the  concern,  and  conceal- 
ment of  the  fact  that  a  large  quantity 
of  the  stock  was  to  be  issued  for  the 
good-will  of  the  business,  and  state- 
ments leading  to  the  conclusion  that 
all  subscribers  for  stock  stood  on  an 
equal  footing,  constitute  material  mis- 
representations, and  will  sustain  a  re- 
scission of  the  subscription  if  untrue. 
Such  statements  and  concealments 
made  to  agents  or  brokers  who  are 
selling  stock  are  the  same  as  though 
made  to  the  subscribers  for  the  stock. 
Walker  v.  Anglo-Am.  etc.  Trust  Co., 
72  Hun,  334,  341  (1893). 

1  Downey  v.  Finucane,  205  N.  Y. 
251  (1912) ;  holding  also  that  a  state- 
ment that  a  certain  amount  of  stock 
had  been  issued  or  contracted  to  be 
issued  is  fraudulent  where  $41,000,000 
of  stock  was  issued  for  a  franchise 
which  had  been  purchased  by  the 
promoters  for  .$250,000.  Where  a 
party  takes  stock  on  the  representa- 
tion that  another  party  was  taking  the 
same  amount  at  the  same  time,  and 
the  other  transaction  was  fictitious, 
this  is  fraud.  Seaver  &  Snider,  122 
Pac.  Rep.  402  (Col.  1912). 

-  That  it  is  not,  see  Union  Nat. 
Bank  v.  Hunt,  .76  Mo.  4.39  (1882). 
Where  the  corporate  treasurer  in  selling 
his  stock  represents  it  to  be  worth  par 
when  in  fact  the  company  is  insolvent, 
the  purchaser  may  have  the  sale  set 
aside  by  a  suit  in  equity.  Haldiman 
V.  Taft,  143  S.  W.  Rep.  112  (Ark. 
1912).  A  purchaser  cannot  rely  on  a 
statement  that  the  stock  was  worth 
par  when  he  is  buying  it  for  fifteen 
cents    on    the    doUar.     Gunderson    v. 


1069 


§  350.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[cH.  XX. 


writer  is  not  liable  in  damages  to  a  person  to  whom  he  sells  some  of  the 
shares,  for  an  innocent  misrepresentation  that  the  company  is  a  rubber 
company,  whereas  it  turns  out  that  the  company  was  a  "  produce  "  as 
well  as  a  "  rubber  "  company,  there  being  no  warranty.^  Statements  of 
the  seller,  as  to  the  value  of  the  mining  stock  which  he  is  selling  and  the 
prospects,  are  not  fraud  unless  it  is  proved  that  he  knew  or  believed  to 
the  contrary .2    A  representation  by  the  vendor  of  bonds  that  the  bonds 


Havana,  etc.  Co.,  133  N.  W.  Rep.  554 
(N.  D.  1911).  Misrepresentations  as 
to  the  value  of  stock  and  the  con- 
dition of  the  business,  and  that  the 
stock  was  treasury  stock,  are  material. 
Ogden,  etc.  Co.  v.  Lewis,  125  Pac.  Rep. 
687  (Utah,  1912).     A  false  representa^ 


the  stock  is  worth  a  certain  price  and 
is  sold  to  plaintiff  at  a  reduced  price 
in  order  to  obtain  his  services.  Max- 
ted  V.  Fowler,  94  Mich.  106  (1892). 
False  statements  as  to  the  value  of 
stock  and  the  dividends  it  would  pay 
and  the  purpose  for  which  it  was  in- 


tioh  that  the  stock  sold  is  worth  eighty    eorporated    are    sufficient    to    sustain 


cents  on  the  dollar  —  it  being  worth 
but  forty  cents  —  will  not  sustain  an 
action  for  deceit.  Ellis  v.  Andrews,  56 
N.  Y.  83  (1874).  A  representation  as 
to  the  value  of  stock  is  material  where 
the  vendor  was  a  director,  and  evidence 


rescission.  Murray  v.  Tolman,  162  111. 
417  (1896).  Misrepresentations  as  to 
the  value  of  the  stock  and  the  condi- 
tion of  the  company  are  material. 
Blacknall  v.  Rowland,  116  N.  C.  389 
(1895).     The  statements  by  the  vendor 


may  be  introduced  to  show  that  the  of  what  piu-ports  to  be  a  certificate 
stock  was  issued  for  property  at  an  of  bank  stock,  that  the  bank  was  or- 
overvaluation  and  that  some  of  the  ganized  and  that  the  stock  was  worth 
stock  was  issued  without  being  paid  par,  and  that  the  vendor  knew  this 
for.  Shelton  v.  Healy,  74  Conn.  265  to  be  the  case  because  he  was  one  of 
(1901).  A  statement  that  the  stock  the  first  stockholders,  and  that  the 
is  worth  a  certain  value  which  is  false  stock  was  a  good  high  dividend-pay- 
will  sustain  a  suit  to  rescind,  especially  ing  stock,  constitute  a  warranty,  and 
where  the  corporation  was  insolvent  the  vendee  may  sue  for  damages  if 
and  that  fact  was  conceded.  Liland  the  facts  are  not  as  stated,  the  meas- 
ly. Tv/eto,  19  N.  D.  551  (1910).  ure  of  damages  being  the  difference 
Representations  by  a  director  as  to  the  between  the  value  of  the  stock  as  rep- 
value  of  stock  which  he  is  selling  are  resented  and  its  actual  value.     Titus 


material.  Long  v.  Douthitt,  142  Ky 
427  (1911).  Where  the  vendor  mis- 
states the  dividends  paid  and  repre- 
sents that  the  stock  is  worth  par,  it  may 
be  shown  that  at  the  same  time  he 
sold  similar  stock  to  others  at  fifty-five 
cents  on  the  dollar.  Gilluly  v.  Hos- 
ford,  45  Wash.  594  (1907).  It  is  fraud- 
ulent to  represent  that  the  stock  is 
worth  par  when  in  fact  it  is  worth- 
less. If  the  vendor  persuades  the 
vendee  to  make  no  inqunies,  the  lat 


V.  Poole,  73  Hun,  383  (1893);  aff'd, 
145  N.  Y.  414  (1895).  Where  an  hen- 
sells  stock  at  a  nominal  figure,  it  be- 
ing considered  worthless,  and  then 
learns  that  it  has  value  and  buys  it 
back  at  a  low  figure  on  his  statement 
that  it  had  no  value  and  that  he  wished 
to  keep  it  on  account  of  its  having 
been  held  by  his  father,  an  action  for 
damages  for  deceit  lies.  Edelman  v. 
Latshaw,  180  Pa.  St.  419  (1897).  Cf. 
s.  c,  159  Pa.  St.  644  (1894).    See  Lynch 


ter   may   recover,    although   he   made  v.  Murphy,  171  Mass.  307  (1898). 
none.     The  measure  of  damages  is  not  ^  Heilbut,  etc.  Co.  v.  Buckleton,  107 

the  value  of  the  land  given  for  the  L.  T.  Rep.  769  (1912). 
stock,  but  the  difference  between  the         ^  Crosby  v.  Emerson,  142  Fed.  Rep. 

actual   and    the   represented   value   of  713  (1900).     " 'Puffing'  mining  claims 

the  stock.     Nysewander   v.   Lowman,  or  making  glowing  predictions  as   to 

124  Ind.  584  (1890).     False  representa-  how  such  claims  will  'pan  out'  does 

tions  may  consist  of  statements  that  not  amount  to  such  false  representa- 

1070 


CH.  XX.]  CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC.  [§  350. 

are  good  and  will  be  paid  is  a  matter  of  opinion  merely.^  False  repre- 
sentations that  the  surplus  is  intact  and  the  securities  good  for  their  face 
value,  and  that  another  party  was  trying  to  buy  the  stock,  are  material.^ 
It  is  a  fraud  on  the  vendee  of  stock  to  sell  him  as  paid-up -stock  that 
which  is  not  paid-up,  although  issued  as  paid-up,  the  vendor  having 
participated  in  the  issue.^  It  is  fraud  in  the  vendor  to  represent  that 
property  is  to  be  turned  in  by  him  to  the  corporation  at  a  certain  price 
and  then  to  refuse  to  carry  out  the  latter  contract.'^  Where  the  vendor 
agrees  to  sell  at  a  value  to  be  ascertained  by  an  examination  of  the  cor- 
porate books  and  affairs,  it  is  fraud  for  the  vendee  to  cause  false  memo- 
randa to  be  made  by  the  employees  of  the  corporation.^  Where  the  offi- 
cers of  a  company,  which  has  paid  from  nine  to  fourteen  per  cent., 
"  freeze  out  "  minority  stockholders  by  reducing  the  dividends  and  in- 
creasing their  salaries  and  misrepresenting  the  condition  of  the  company, 
and  then,  after  buying  the  minority  stock,  increase  the  dividend,  the 
minority  stockholders  may  hold  them  liable  by  an  action  on  the  case  for 
damages,  even  though  they  might  have  brought  suit  in  behalf  of  the  cor- 
poration. If  the  stock  has  no  market  value,  the  value  may  be  proved 
by  estimating  the  good-will,  as  shown  by  the  net  profits,  and  it  is  for 
the  jury  to  decide  how  many  years'  net  profits  shall  be  considered  in 
obtaining  the  average.  The  balance  sheets  are  also  admissible.®  If  a 
director  buys  stock  by  representing  that  he  is  buying  it  for  himself,  the 
vendor  having  declined  to  sell  to  insiders,  and  immediately  the  pur- 

tions    as    will    authorize    a    court    of  corporation.     A  person  Avho  deeds  land 

chancery  to  set  aside  a  sale  of  stock  in  exchange  for  stock  which  is  repre- 

in  a  mining  company  when  the  parties  sented  to  be  full-paid  may  have    the 

are  compos  mentis  and  deal  at  arm's  sale  rescinded  where  only  $3  a  share 

length."    Burwash  v.  Ballon,  230  111.  34  had     been     paid     in     on     the     stock. 

(1907).  SeeVanSlochemr.Villard,  207  Coolidge  v.  Rhodes,  199  111.  24  (1902). 

N.  Y.  587  (1913).     155  S.  W.  Rep.  889.  The  purchaser  of  stock  may  maintain 

1  Kim  her  v.  Young,  137  Fed.  Rep.  a  suit  to  recover  back  the  price  on  the 
744  (1905);   s.  c,  157  Fed.  Rep.  199.  ground  that  the  vendor  sold  to  the  com- 

2  Hawley  v.  Wicker,  117  N.  Y.  App.  pany,  for  three  million  dollars  par  value 
Div.  638  (1907).  of  its  stock,  property  worth  not  more 

^  Stiu-ges    V.    Stetson,    1    Biss.    246  than  two  hundred  and  fifty  thousand 

(1858)  ;    s.  c,  23  Fed.  Cas.  311,  hold-  dollars  and  made  misrepresentations  in 

ing  that  the  vendee  is  not  liable  on  a  regard  to  it  and  also  misrepresented  the 

note  given  in  payment  thereof ;    Fos-  eapacitv  of  the  propertv.          Stern  v. 

dick   V.  Sturges,    1   Biss.   255    (1858) ;  Stern,  i22  N.  Y.  App.  Div.  821  (1907). 

s.  c,  9  Fed.  Cas.  501,  holding  that  the  See  Van  Slochem  v.  Villard,  207  N.  Y. 

vendee  may  recover  back  money  paid  ;  587  (1913). 

Reeve  v.  Dennett.  145  Mass.  23  (1887) ;  «  Seaman    v.    Low,    4    Bosw.    337 

s.  c,  141  Mass.  207,  where  the  capital  (1859). 

of  $1,000,000  was  issued  for  a  worth-  ^  Hager   v.  Thomson,    1    Black,   80 

less    patent;     holding    also    that    the  (1861).     See  Drucklier  v.  Harris,  209 

misrepresentations  may  invalidate  also  N.  Y.  211  (1913). 

a  second  and  subsequent  purchase  of  «  Von  Au  v.  Magenheimer,  126  N,  Y. 

stock,  even  though  in  the  meantime  the  App.     Div.    257     (1908) ;     aff'd,     196 

vendee  has  become  a  director  in  the  N.  Y.  510. 

1071 


§350. 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


CH.   XX. 


chaser  resells  the  stock  to  the  insiders  at  a  profit,  and  the  purchaser  also 
misrepresents  the  price  he  was  paying  others  for  similar  stock,  and  it 
appears  that  the  directors  had  issued  a  statement  indicating  doubt  as  to 
the  future  success  of  the  company,  the  purchaser  may  be  held  liable  in 
damages,  it  being  impossible  to  return  the  stock  itself.^  The  vendee  of 
stock  may  sue  for  damages  for  deceit,  where  the  vendor  fraudulently 
represented  the  dividends  that  had  been  paid  on  the  stock.^  A  misrep- 
resentation as  to  the  amount  of  property  held  by  the  corporation  is 
material.^  A  representation  that  the  company  has  a  franchise  to  in- 
stall a  telephone  plant  is  fraudulent  where  the  consent  of  the  common 
council  was  necessary  but  had  not  been  obtained.^  Where  a  person 
owns  a  majority  of  the  stock  of  the  corporation  and  sells  it,  and  agrees 
with  the  purchaser  to  obtain  the  stock  held  by  others  at  as  low  a  figure 
as  possible,  and  misstates  to  such  persons  the  price  which  he  obtained 
for  his  own  stock,  he  is  liable  in  an  action  for  deceit  to  parties  who  sell 
their  stock  relying  on  such  statements.^     In  a  suit  for  damages  for  mis- 

1  Stewart  v.  Joyce,  201  Mass.  301  mercantile  agency  as  follows:    "Cap- 
(1909).                     "  ital  stock  paid  in,  S500,000,"  is  false 

2  Handy  v.  Waldron,  18  R.  I.  567  as  to  a  creditor  relying  on  such  a 
(1894).  A  purchaser  of  stock  from  a  statement  where  a  large  part  was  paid 
director  in  a  bank  may  repudiate  the  in  by  supposed  profits,  consisting  of 
sale  if  the  director  represented  that  the  second  mortgages  which  turned  out 
bank  made  a  dividend  of  15%  which  to  be  worthless.  Bradley  v.  Seaboard 
it  had  paid  but  which  in  fact  it  had  not  Nat.  Bank,  167  N.  Y.  427  (1901).  If 
earned.  Hunt  v.  Davis,  98  Ark.  44  the  vendor  falsely  represents  that  the 
(1911).  A  misstatement  as  to  divi-  accounts  receivable  are  equal  to  the 
dends  which  have  been  paid  is  material,  debts,  it  is  no  defense  that  the  stock 
and  a  statement  that  most  of  the  stock  was  worth  all  that  was  paid  for  it. 
had  been  sold  is  fraudulent  if  the  stock  Drake  v.  Holbrook,  78  S.  W.  Rep.  158 
was  issued  for  a  mere  formula.  Cherry  (Ky.  1904).  In  the  case  Burnham 
V.  First  Texas,  etc.  Co.,  103  Texas,  i-.  Lutz,  8  Kan.  App.  361  (1898),  where 
82  (1910).  A  claim  by  a  purchaser  of  a  mercantile  corporation  had  been  or- 
stock  against  the  directors  for  falsely  ganized  and  twenty-six  shares  of  stock 
representing  that  the  stock  was  earn-  only  were  issued  to  supply  a  board  of 
ing  dividends,  when  in  fact  the  stock  dii-ectors,  but  not  paid  for,  the  court 
was  sold  to  raise  money  to  pay  illegal  held  that  a  vendor  of  goods  to  the 
dividends,  is  assignable.  Keeler  v.  corporation  might  show  that  such  an 
Dunham,  114  N.  Y.  App.  Div.  94  organization  of  the  corporation  was 
(1906).  See  Downey  v.  Finucane,  205  fraudulent,  and  hence  that  the  parties 
N.  Y.  (1912).  interested  were  liable  as  partners.     A 

3  Boddy   V.   Henry,    113   Iowa,   462    misstatement  as  to   the  value  of  the 
(1901).     A  representation  by  the  ven-    net  assets  of  the  company  is  material 


dor  of  a  bond  that  it  was  secured  by 
a  mortgage  on  real  estate  worth  half 
a  million,  when,  in  fact,  the  corpora- 
tion owned  no  real  estate,  is  sufficient 
to  support  an  action  for  false  repre- 
sentations, even  though  the  vendor  re- 


Hubbard  v.  Oliver,  139  N.  W.  Rep.  77 
(Mich.  1912). 

*  Downey  v.  Finucane,  205  N.  Y. 
251  (1912). 

5  Weaver  v.  Cone,  174  Pa.  St.  104 
(1896).     Where  the  president  induces 


ferred  to  other  people  as  authority  for  a  stockholder  to  give  up  his  stock  oa 
the  statement.  Whiting  v.  Price,  172  repayment  of  the  amount  paid  there- 
Mass.  240  (1898).     A  statement  to  a    on,  on  the  representation  that  another 

1072 


CH.  XX.]  CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  350. 


representations  inducing  the  purchase  of  bonds,  the  fact  that  the  in- 
terest has  been  paid  on  the  bonds  does  not  prevent  the  recovery  of  dam- 
ages, inasmuch  as  the  bonds  may  not  be  marketable  or  adequately  se- 
cured.^ It  is  fraud,  in  the  sale  of  bonds,  to  represent  falsely  that  they 
had  been  pledged  to  a  bank  for  a  certain  price,  and  that  they  were  a 
good  and  safe  investment,  and  a  broker  as  well  as  the  principal  may  be 
held  hable."  It  is  not  fraud,  however,  for  a  director  or  other  corporate 
officer  to  buy  or  sell  stock  at  a  profit,  due  to  his  official  knowledge  of 
the  condition  of  the  corporation ;  ^  not  to  obtain  the  stock  by  a  threat 
of  a  call.^  The  fact  that  a  check  given  in  payment  for  stock  is  not 
honored,  although  the  money  is  in  bank,  is  not  fraud  where  payment  was 
refused  because  of  other  frauds  of  the  vendor ;  ^  nor  is  it  fraud  to  issue 
certificates  before  anything  has  been  paid  thereon,  there  being  no  partic- 
ipation by  the  vendor.^  It  is  fraud,  however,  to  represent  the  company 
as  having  a  full-paid  capital  stock  when  in  fact  the  stock  was  wholly 
issued  in  payment  of  a  worthless  mine.  The  person  making  such  repre- 
sentation is  liable  to  the  vendee.^     It  is  fraudulent  for  a  vendor  to  repre- 


party  will  take  all  the  stock  and  com- 
plete the  enterprise,  and  the  fact  is 
that  the  president  himself  gets  some 
of  the  stock  so  surrendered,  a  stock- 
holder may  have  the  agreement  can- 
celed. Simrall  v.  Williamson,  35  S. 
W.  Rep.  632  (Ky.  1896). 

1  Currier  v.  Poor,  155  N.  Y.  344 
(1898). 

2  Adams  v.  Collins,  82  N.  E.  Rep. 
498  (Mass.  1907). 

*  Tippecanoe  County  v.  Reynolds,  44 
Ind.  509  (1873).  Where  one  of  the 
partners  in  the  building  of  railroads, 
and  in  owning  stocks,  bonds,  etc.,  dies, 
and  his  executor,  after  an  examination 
of  all  the  assets  by  means  of  experts, 
etc.,  makes  a  settlement  with  the 
other  partner,  such  settlement  is  bind- 
ing although  the  other  partner  did 
not  impart  all  the  knowledge  or  in- 
formation he  might  have  given.  The 
subsequent  rise  in  value  of  some  of 
the  securities  is  immaterial.  Colton 
V.  Stanford,  82  Cal.  351  (1890).  The 
purchaser  of  stock  from  the  secretary 
of  the  company  cannot  rescind  on  the 
ground  of  fraud,  the  secretary  having 
given  at  the  time  of  the  sale  all  the 
information  which  he  had  concerning 
the  company.  No  confidential  or 
fiduciary  relation  exists.  Krumbhaar 
V.  Griffiths,  151  Pa.  St.  223  (1892). 
Representations  made  by  the  manager 


of  the  company  in  purchasing  the 
stock  of  a  stockholder  do  not  entitle 
the  latter  to  a  rescission  on  the 
ground  of  fraud,  where  there  were 
no  personal  relations  between  them 
and  the  vendor  did  not  rely  upon  any 
statements  made,  but  on  his  own 
judgment,  and  received  a  price  nearly 
equal  to  the  actual  value  of  the  stock. 
Sullivan  v.  Pierce,  125  Fed.  Rep.  104 
(1903).     See  §  320. 

<  Grant  v.  Attrill,  11  Fed.  Rep.  469 
(1882).  As  to  other  cases  of  fraud  by 
the  vendee,  see  Johnson  v.  Kirby,  65 
Cal.  482  (1884);  Hempfling  v.  Burr, 
59  Mich.  294  (1886). 

5  Comins  v.  Coe,  117  Mass.  45 
(1875). 

«  Woodruff  V.  McDonald,  33  Ark.  97 
(1878). 

^  Cross  V.  Saekett,  2  Bosw.  617 
(1858).  See  also  §§  40,  48,  supra; 
Colt  V.  Woolaston,  2  P.  Wms.  154 
(1723).  Representations  by  the  offi- 
cers that  the  stock  had  been  fully  paid 
by  turning  in  property  equal  in  value 
to  the  par  value  of  the  stock  are 
material  and  sustain  an  action  against 
them  if  the  statements  were  false. 
Fall  V.  Hornbeck,  132  Mo.  App.  588 
(1908).  When  a  promoter  misrepre- 
sents to  a  subscriber  the  price  paid 
by  the  promoter  for  property  con- 
veyed by  him  to  the  company,  the  sub- 


(68) 


1073 


§  350.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[cH.  XX. 


sent  that  he  is  selUng  the  stock  of  others,  when  in  fact  he  is  seUing  his 
own  stock.i  Statements  that  the  stock  sold  is  treasury  stock,  and  that 
others  paid  the  same  price  to  the  treasury,  are  material. ^  A  represen- 
tation as  to  the  cost  of  the  stock,  with  an  agreement  to  sell  at  cost,  is 
different  from  an  agreement  to  sell  at  a  fixed  figure  which  is  represented 
to  be  cost.  A  misrepresentation  as  to  the  cost  of  the  stock  to  the  ven- 
dor is  not  actionable.^  Although  a  contractor,  taking  stock  and  bonds 
in  payment  for  work,  sub-contracts  the  work  for  the  stock  and  then  fore- 
closes the  mortgage  and  buys  in  the  property,  the  sub-contractor  cannot 
hold  him  liable  for  the  stock.^  The  fact  that  the  stock  is  worthless  or 
that  the  only  property  that  the  company  owns  consists  of  worthless 
patents,  being  infringements  on  other  patents,  is  no  defense  to  notes 
given  for  stock,  there  being  no  warranty  or  fraud.  The  value  is  im- 
material.^    A  vendor  of  stock  is  not  bound  to  tell  the  vendee  the  com- 


seriber  may  sue  him  for  damages, 
Teachout  v.  Van  Hoesen,  76  Iowa,  113 
(1888).  A  sale  or  pledge  of  stock 
stamped  "non-assessable,"  when  in 
fact  it  was  not  legally  paid  up,  ren- 
ders liable  for  false  representations 
the  president  and  secretary  v/ho  made 
such  sale  or  pledge  and  who  knew 
that  it  was  not  paid-up  stock.  Wind- 
ram  V.  French,  151  Mass.  .547  (1890). 
A  suit  by  the  purchaser  of  stock  for 
damages  for  fraud,  in  that  the  stock 
had  been  fraudulently  paid  up  by 
property  conveyed  to  the  corporation 
at  an  overvaluation,  is  barred  by  the 
statute  of  limitations  applicable  to 
frauds.  Smith  v.  Martin,  135  Cal.  247 
(1901).  A  statement  filed  with  the 
state  commissioner  as  required  by 
statute,  in  regard  to  the  amount  of 
the  paid-up  stock,  is  not  such  a  repre- 
sentation as  will  sustain  an  action 
for  damages  for  fraudulent  represen- 
tations inducing  a  person  to  take  the 
notes  of  the  company.  Hunnewell  v. 
Duxbury,  154  Mass.  286  (1901).  But 
see  Heard  v.  Pictorial  Press,  182  Mass. 
530  (1903). 

1  Mayo  V.  Knowlton,  134  N.  Y.  2.50 
(1892) ;  Maturin  v.  Tredinnick,  2  New 
Rep.  514  (1863).  Where  a  corporate 
agent  represented  that  he  was  selling 
treasury  stock  when  as  a  matter  of 
fact  he  was  selling  his  own  stock,  the 
person  may  hold  the  corporation  liable 
for  the  amount  paid  by  him.  New  hall 
V.  Enterprise,  etc.  Co.,  205  Mass.  585 
(1910).     The  misrepresentation  of  the 


vendor  that  he  is  selling  other  people's 
stock  and  not  his  own,  may  be  fraud. 
Davis  V.  Forman,  229  Mo.  27  (1910). 
Where  a  person,  upon  the  statement 
of  the  president  that  the  company  has 
no  stock  for  sale,  but  will  get  some, 
authorizes  the  president  to  buy  for 
him,  and  the  president  turns  out  stock 
which  the  company  already  has,  the 
contract  is  voidable  by  such  vendee. 
McDoel  V.  Ohio,  etc.  Co.,  36  S.  W.  Rep. 
175  (Ky.  1896). 

2  Caswell  V.  Hunton,  87  Me.  277 
(1895).  It  is  fraud  to  state  that  the 
proceeds  of  the  sale  will  go  to  the  com- 
pany instead  of  the  vendor,  where  such 
is  not  the  case.  Gray  v.  Reeves,  69 
Wash.  374  (1912). 

3  Gassett  v.  Glazier,  165  Mass.  473 
(1896).  A  false  statement  as  to  what 
the  stock  cost  the  vendor  is  material. 
Kohl  V.  Taylor,  62  Wash.  678  (1911). 

^McLane,  v.  King,  144  U.  S.  260 
(1892).  A  contractor  taking  payment 
in  stock  cannot  complain  that  the 
property  was  foreclosed  under  a  mort- 
gage wliich  he  assented- to.  Kelley  v. 
ColUer,  11  Tex.  Civ.  App.  353  (1895). 

s  Watts  V.  Stevenson,  165  Mass.  518 
(1896).  A  vendee  cannot  repudiate 
the  purchase  of  stock  on  the  ground 
that  he  purchased  the  stock  at  $160  a 
share,  even  though  it  turns  out  that 
the  stock  was  worthless,  the  vendor 
having  no  knowledge  of  that  fact. 
Field  V.  Turley,  120  S.  W.  Rep.  338 
(Ky.  1909.)  Where  a  note  is  given  for 
entirely   worthless   stock,   the  defense 


1074 


CH.  XX. 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  350. 


pany  is  insolvent,  even  though  the  former  knew  that  fact  at  that  time  ;  ^ 
nor  is  the  vendee  bound  to  tell  what  he  knows.-  A  misstatement  as  to 
what  the  corporation  received  for  the  stock  issued  by  it  is  material.^ 
A  statement  that  the  vendor  is  selling  at  the  same  price  to  others  is 
fraudulent  if  such  is  not  the  case.^  Where  several  subscribers  refused 
to  take  their  stock,  and  finally,  to  induce  them  to  do  so,  a  party  agrees 
secretly  with  one  of  them  to  purchase  his  holdings,  such  an  agreement 
may  be  enforced.^    A  person  who  contracts  to  purchase  stock  may  de- 


of  total  failure  of  consideration  may 
be  set  up  against  the  note,  even 
though  no  offer  to  return  stock  has 
been  made.  Taft  v.  Myerscough,  197 
lU.  600  (1902). 

1  Rothmiller  v.  Stein,  143  N.  Y.  581 
(1894) ;  Jones  v.  Garlington,  44  S.  C. 
533  (1895).  See  also  §  335,  supra.  A 
vendor  of  stock  may  collect  the  price 
although  the  stock  was  worthless  and 
known  so  to  be  by  the  vendor.  Hunt- 
ing V.  Downer,  151  Mass.  275  (1890). 
Where  worthless  stock  is  sold  by  an 
agent  on  false  representations,  the 
principal  may  be  held  liable  for  de- 
ceit and  the  stock  need  not  be  re- 
turned. Campbell  v.  Park,  128  Iowa, 
181  (1904).  A  person  who  sells 
worthless  stock  to  a  married  woman 
who  is  represented  by  her  husband, 
is  bound  to  know  that  the  husband 
misrepresented  the  matter  to  his  wife 
or  that  she  was  incompetent  in  a  busi- 
ness way  to  protect  herself,  and  hence 
cannot  enforce  a  note  given  in  pay- 
ment therefor.  Ditto  v.  Slaughter,  92 
S.  W.  Rep.  2  (Ky.  1906).  A  contract 
is  binding,  the  consideration  of  which 
is  the  issue  of  stock  which  is  valuable 
at  the  time,  even  though  it  subse- 
quently dechnes  in  value.  Pittsburg, 
etc.  Co.  V.  Pennsylvania,  etc.  Co.,  208 
Pa.  St.  37  (1904).  A  person  who  is 
under  contract  to  purchase  stock  can- 
not defeat  that  contract  by  the  fact 
that  the  corporation  was  insolvent  at 
the  time  the  contract  was  entered 
into.  Rudge  v.  Bowman,  L.  R.  3  Q.  B. 
689  (1868) ;  Gordon  v.  Parker,  10  La. 
56  (1836),  where  the  question  of 
whether  fraud  was  involved  was  sub- 
mitted to  the  jury.  Crabb  v.  Miller, 
19  W.  R.  419  (1871),  where,  by  reason 
of  a  winding  up,  a  transfer  on  the 
corporate  books  was  no  longer  possi- 
ble ;    Kerchner  v.  Gettys,  18  S.  C.  521 


(1882),  holding  that  a  loss  by  the 
corporation  of  its  property  is  no  de- 
fense. Damages  cannot  be  recovered 
for  the  breach  of  an  executory  con- 
tract to  purchase  stock,  if  at  the  time 
of  making  the  contract  the  corpora- 
tion had  been  dissolved  and  the  pur- 
chaser was  not  aware  of  that  fact. 
Kip  r.  Monroe,  29  Barb.  579  (1859). 
The  fact  that  stock  was  worthless  at 
the  time  of  the  sale  thereof  is  no 
defense  to  an  action  for  the  purchase 
price,  unless  there  was  fraud  or  a 
specific  warrantv.  Peck,  etc.  Co.  v. 
Stratton,  95  Fed.  Rep.  741  (1899).  A 
person  who  pays  for  land  by  trans- 
ferring worthless  mining  stock  is  not 
a  bona  fide  purchaser.  Sewell  v.  Nel- 
son, 113  Ky.  171  (1902).  The  vendor 
is  not  liable  in  an  action  for  deceit, 
even  though  the  stock  was  worthless, 
it  having  a  market  value  and  he  hav- 
ing no  knowledge  of  its  intrinsic 
value.  Kirtley's  Adm'x  v.  Shinkle,  69 
S.  W.  Rep.  723  (Ky.  1902).  Where 
the  stock  is  worthless  and  the  vendor 
conceals  facts  which  would  have  led 
the  vendee  to  investigate  it,  the  vendee 
may  rescind,  even  though  the  vendee 
was  already  a  stockholder.  Richey  v. 
Brinks,  140  S.  W.  Rep.  129  (Ark. 
1911). 

-A  sale  of  stock  July  6th,  "includ- 
ing all  dividends  due  or  to  become  due 
thereon,"  carries  a  stock  dividend  de- 
clared June  5th  and  payable  to  stock- 
holders of  record  July  1st,  and  the  sale 
is  not  fraudulent  although  the  seller 
did  not  know  of  such  stock-dividend 
and  the  buver  did  know.  Rose  v.  Bar- 
clay, 191  Pa.  St.  594  (1899). 

3  Hoxie  V.  Small,  86  Me.  23  (1893). 

*  Kilgore  v.  Bruce,  166  Mass.  136 
(1896). 

5  Traphagen  v.  Sagar,  63  Minn.  317 
(1895). 


1075 


§350. 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[CH.  XX. 


fend  against  an  action  for  the  price  by  setting  up  that  the  vendor  falsely 
represented  that  the  vendee  was  about  to  be  deprived  of  the  presi- 
dency of  the  company,  and  that  thereby  the  vendee  was  induced  to 
make  the  contract  of  purchase  at  an  unconscionable  price. ^  The  holders 
of  a  majority  of  the  stock  may  sell  such  majority  without  obligating 
the  purchaser  to  purchase  also  the  minority  stock  or  any  part  thereof.^ 
A  sale  may  be  illegal  by  reason  of  being  in  restraint  of  trade.^ 

There  are  various  facts  which  constitute  fraud  herein,  and  various 
principles  of  law  applicable  to  the  remedy  to  be  pursued.  Such  cases 
are  arising  constantly,  and  various  decisions  on  this  subject  are  given 
in  the  notes  below.* 


1  Delano  v.  Rice,  23  N.  Y.  App.  Div. 
327  (1897). 

2  See  §  662,  infra.  A  stockholder 
in  a  railroad,  the  majority  of  the  stock 
of  which  is  held  by  another  alleged 
competing  railroad,  cannot  enjoin  the 
latter  from  selling  such  majority  of  the 
stock.  Hunnewell  v.  New  York,  etc. 
Ry.,  196  Fed.  Rep.  543  (1911).  See 
154  N.  Y.  App.  Div.  8. 

'  See  §  503a,  infra.  Minority  stock- 
holders in  a  corporation  engaged  in 
manufacturing  telephone  supplies,  a 
business  impressed  ^ath  a  public 
character,  may  cause  to  be  set  aside 
a  sale  of  a  majority  of  the  stock  to  a 
competing  telephone  supply  company 
where  the  purchase  is  for  the  purpose 
of  establishing  a  monopoly.  Even 
though  the  purchaser  is  a  foreign  cor- 
poration with  a  charter  giving  it 
express  power  to  piu-chase  stock,  yet 
it  cannot  exercise  that  power  in  Illi- 
nois where  no  corporation  can  pur- 
chase stock  unless  it  is  necessary  to 
carry  into  effect  the  objects  of  the 
corporation.  The  decree  will  not 
merely  enjoin  the  purchaser  from 
voting  the  stock  and  receiving  divi- 
dends, but  may  order  the  stock  to  be  re- 
turned to  the  vendors  and  the  money 
repaid.  The  monopoly  may  be  proved 
by  proving  that  the  purchaser  owned 
the  stock  of  a  competing  manufactur- 
ing company.  Dunbar  v.  American 
Tel.  etc.  Co.,  2.38  111.  4.56  (1909). 

■*  Representations  as  to  how  the 
lousiness  would  be  conducted  are  not 
material.  Lowry  Nat.  Bank  v.  Haz- 
ard, 223  Pa.  St.  520  (1909).  A  state- 
ment as  to  the  dividends  the  stock 
would  pay  are  not  material.     Wegerer 


V,  Jordan,  10  Cal.  App.  362  (1909). 
An  expression  of  opinion  as  to  future 
dividends  even  on  alleged  "inside 
information"  does  not  constitute  mis- 
representation. Stalnaker  v.  Janes, 
68  W.  Va.  176  (1910).  A  representa- 
tion that  the  stock  which  the  plaintiff 
bought  was  treasury  stock,  when  in 
fact  it  was  not,  is  not  such  a  misrepre- 
sentation as  sustains  an  action  for 
damages  for  fraud,  the  basis  of  damages 
being  wholly  speculative.  Findlater 
V.  Dorland,  152  Mich.  301  (1908). 
It  is  no  defense  to  a  note  that  it  was 
issued  in  payment  for  stock  and  that 
the  transaction  on  both  sides  was 
nominal.  First  Nat.  Bank  v.  Asel, 
154  Mo.  App.  228  (1911).  Where  a 
debtor  turned  over  to  his  creditor,  as 
trustee,  the  controlling  stock  of  a 
corporation  for  the  latter  to  manage, 
and  the  latter  afterwards,  by  threats 
of  abandoning  the  enterprise,  forced 
the  debtor  to  sell  him  the  stock  out- 
right, a  court  of  equity  will  set  aside 
such  sale  and  hold  the  creditor  hable 
as  a  trustee.  Ryle  v.  Ryle,  41  N.  J. 
Eq.  582  (1886).  A  failure  of  the 
vendor  to  state  that  the  company  is 
a  joint-stock  association  and  not  a 
corporation  is  not  fraud  avoiding  the 
sale  of  the  stock.  Curtiss  v.  Hurd, 
30  Fed.  Rep.  729  (1887).  It  is  a 
question  for  the  jury  whether  it  was 
fraud  in  representing  that  the  stock 
was  paid-up,  when  in  fact  the  first 
payment  only  had  been  made,  and  the 
balance  had  been  paid  by  dividends. 
Kryger  v.  Andrews,  65  Mich.  405 
(1887).  Fraud  may  be  by  directors 
in  fraudulently  making  dividends. 
See     ch.     XXXII,     infra.     Where     a 


1076 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  350. 


Fraud  in  the  sale  of  stock  frequently  arises  in  the  organization  of 
the  company.     The  parties  who  cause  the  company  to  be  organized 


person  owning  all  the  stock  of  a  cor- 
poration sells  it  under  circumstances 
which  induce  the  purchaser  to  believe 
that  the  former  has  no  claim  against 
the  corporation,  he  may  be  enjoined 
from  enforcing  any  such  claim.  Given 
V.  Times-Republican,  etc.  Co.,  114  Fed. 
Rep.  92  (1902).  Where,  after  an 
agreement  to  sell  land  for  stock,  the 
owner  of  the  stock  attends  a  corpo- 
rate meeting  and  votes  to  sell  all  cor- 
porate property  at  sixty  cents  on  the 
dollar,  which  is  done,  the  purchaser 
of  the  stock  may  have  the  land  re- 
turned. Harris  v.  Piatt,  64  Mich.  105 
(1887).  Money  paid  for  an  option 
on  stock  in  a  company  to  be  organized 
cannot  be  recovered  on  the  ground  of 
fraud  on  the  part  of  other  parties 
which  prevented  the  corporation  ever 
being  formed.  Clark  v.  McManus, 
105  Minn.  Ill  (1908).  Where  two 
stockholders  who  have  sold  land  to  the 
company  and  received  stock  in  paj^- 
ment,  de\'ise  a  reorganization  plan 
and  cause  a  third  stockholder  to  agree 
to  it  on  condition  that  a  bank  discount 
certain  notes  for  him  and  receive  the 
stock  as  collateral  and  renew  the  notes 
from  time  to  time,  and  such  latter 
agreement  is  repudiated,  such  outside 
stockholder  may  bring  suit  to  set  the 
whole  transaction  aside  as  a  fraud. 
Baker  v.  Berry  Hill,  etc.  Co.,  109  Va. 
776  (1909).  A  sale  of  stock  of  a  land 
company  which  does  no  land  business 
but  carries  on  a  cooperative  scheme  is 
void  as  between  parties  who  partici- 
pated therein.  Todd  v.  Ferguson, 
161  Mo.  App.  624  (1912).  A  false 
statement  that  the  company  is  solvent 
and  paying  is  material.  Van  De  Wiele 
V.  Garbade,  60  Greg.  585  (1912).  A 
false  representation  of  the  vendor  that] 
the  vendee  would  be  made  director,' 
treasurer,  and  business  manager  on  a 
salary  is  material.  Schwab  v.  Esben- 
shade,  139  N.  W.  Rep.  420  (Wis. 
1913).  Cases  of  fraud  on  the  part 
of  the  vendee  sometimes  occiu*,  where 
the  vendee  is  given  a  majority  of 
the  stock,  and  then  uses  his  control 
of  the  corporation  to  defraud  the 
vendor  in  the  execution  of  his  con- 


tract to  pay  for  the  stock.  Harden- 
bergh  v.  Bacon,  33  Cal.  356  (1867); 
Johnson  v.  Kirby,  65  Cal.  482  (1884). 
Where  a  stockholder  sells  a  control- 
ling interest  to  a  person  who  is  to  pay 
therefor  by  improving  the  corporate 
property,  but  who  elects  a  board  of 
directors  and  defrauds  the  vendor,  the 
latter's  remedy  is  a  difficult  one. 
Cates  V.  Sparkman,  etc.  Co.,  73  Tex. 
619  (1889).  The  vendor  cannot  re- 
scind on  the  ground  that  the  vendee 
said  that  he  was  buying  for  himself 
alone  and  such  was  not  the  case. 
Downs  V.  Self,  28  Tex.  Civ.  App.  356 
(1902).  The  fraud  or  mistake  must 
have  been  such  that  the  agreement 
would  not  have  been  made  in  its  ab- 
sence, where  a  rescission  of  the  con- 
tract is  sought  by  decree.  Means  v. 
Rees,  26  Fed.  Rep.  210,  216  (1886). 
Even  though  an  inventor  is  persuaded 
to  turn  in  his  inventions  to  a  corpora- 
tion for  stock  on  an  oral  assurance 
that  plenty  of  money  would  be  forth- 
coming to  take  the  stock  of  the  com- 
pany and  make  the  business  successful, 
and  even  though  the  parties  making 
such  representations  do  not  advance 
the  money,  but  allow  the  company 
to  become  insolvent  and  buy  in  the 
assets,  including  the  patents,  yet  the 
inventor  cannot  maintain  an  action 
for  fraud  in  failing  to  furnish  money 
according  to  promise.  Smith  v. 
Parker,  148  Ind.  127  (1897).  Where 
a  promoter  induces  an  owner  of  timber- 
land  to  convey  it  to  a  corporation  for 
stock,  one  quarter  to  go  to  the  owner 
and  three  quarters  to  the  promoter, 
for  which  the  promoter  pays  nothing, 
the  owner  may  cause  the  whole  trans- 
action to  be  set  aside.  Cranor  Co.  v. 
Miller,  147  Ala.  268  (1906).  Where 
a  corporation  has  issued  stock  for 
services  which  have  never  been  per- 
formed it  may  maintain  a  bill  in 
equity  to  cancel  such  stock.  Hillside, 
etc.  Ass'n  v.  Holmes,  97  Minn.  261 
(1906).  An  older  brother  who  buys 
for  $70,000  stock  from  his  younger 
brother  which  is  worth  $95,000,  the 
latter  being  a  drunkard,  may  be  com- 
pelled    to     rescind     the     transaction. 


1077 


§  350.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


CH.  XX. 


are  called  the  "  promoters  "  of  it.     As  such  they  are  disqualified  from 
making  a  profit  by  selling  property  to  the  company  at  a  much  larger 


Shevlin    v.     Shevlin,    96    Minn.    398 
(1905).     A    purchaser    of    stock   in   a 
company  which  both  the  vendor  and 
the  vendee  believe  to  be  incorporated, 
and  which  has  not  been  incorporated, 
may  rescind,  where  the  vendor  stated 
that   the  company   was  incorporated, 
and  it  is  no  defense  that  the  property 
of  the  company  has  since  depreciated 
in  value.     In  this  ease   the  attorney 
was  instructed   to   procure  a  charter, 
but  made  no  attempt  to  do  so.     Bolton 
V.    Prather,    35    Tex.    Civ.    App.    295 
(1904).     In  the  case  Donnelly  v.  Bal- 
timore, etc.  Co.,  102  Md.  1   (1905)  'a 
suit  by  a  purchaser  of  bonds  against  a 
trust  company  that  has  offered  them 
for   sale  and   made   various  represen- 
tations,  failed,    the   deceit   not   being 
clearly    proven,    and    the    representa- 
tions having  been  practically  correct. 
A  fraud  upon  a  vendee  of  stock  may 
consist  in  the  defendant  saying  to  the 
former    that    the    latter    had    investi- 
gated the  stock  enough  to  know  that 
he  wanted  some  of  it.     The  fact  that 
the  vendee  already  owned  some  of  the 
stock  was  not  material.     McDonald  ;•. 
Smith,   139  Mich.  211    (1905);    hold- 
ing also   that  it   may  be  shown  that 
the  vendor  promised  that  the  corpora- 
tion   would    employ    the    vendee    as 
secretary  and  treasurer  at  a  specified 
salary,  and  that  this  promise  was  not 
carried   out,   such   promise   not   being 
the    main    fraud    complained    of.     A 
promise  of  employment  is  not  fraud, 
even  though  not  performed.     Hubbard 
V.  Long,  105  Mich.  442  (1894).     Fraud 
may  be  by  the  agent's  representations 
as  to  the  cost  of  mining  the  coal,  of 
transportation,    and     of     the    market 
price.     Booth   v.   Smith,    117   111.    370 
(1886).     On  a  question  of  testimony 
by  the  defendant,  see  Reeve  v.  Den- 
nett, 141  Mass.  207  (1886) ;    s.  c,  145 
Mass.  23.     It  has  been  held  that  one 
who  was  induced  by  fraud  to  purchase 
stock  in  an  insolvent  corporation  may 
bring  suit  to  have  his  part  of  the  cor- 
porate assets  ascertained,   to  the  ex- 
clusion of  a  debt   due  from   the  cor- 
poration to  the  person  inducing  him 
to  purchase.     Poole  v.  West  Point,  etc. 


Assoc,  30  Fed.   Rep.  513   (1887).     A 
lawyer  who  sells  to  his  client  mining 
stock  at   a   dollar  a   share   when  the 
company  is  selling  it  at  fifty  cents  a 
share,    and    does    not    tell    the    client 
that  he  is  selling  his  own  stock,  may 
be  compelled  to  rescind  the  sale,  even 
though   the   client   attended   a   stock- 
holder's  meeting    after    the    suit    was 
commenced.     Landis    v.    Wintermute, 
40  Wash.  673  (1905).     The  mere  fact 
that  a  man  purchases  stock   through 
his  brother,  as  his  agent,  and  allows 
the   stock    to   stand   in   his   brother's 
name  and    thereby  gives   him    credit, 
is  not  fraud  on  the  part  of  the  former. 
Shields  v.  City  Nat.  Bank,  138  N.  C. 
185  (1905).     A  corporation  itself  can- 
not claim  that  a  sale  of  stock  was  for 
its   benefit,   even   though   the   vendor 
fraudulently    misrepresented     to     the 
vendee   that   he   was   selling   treasury 
stock  belonging   to   and   for   the   cor- 
poration.    Chilkat,  etc.  Co.  v.  Fos,  42 
Wash.  201    (1906).     False  statements 
as  to  the  character  of  the  officers  and 
the  financial  basis  of  the  company  and 
its    ownership    of    land    are    material. 
Gurney    v.    Tenney,    197    Mass.    457 
(1908).     If     both     the     vendor     and 
vendee  of  stock  are  ignorant  that  the 
charter    has    expired,    this    does    not 
invaHdate  the  sale.     Brooks  v.  Camak, 
130  Ga.  213   (1908).     A  person  mak- 
ing sales  of  stock  by  false  representa- 
tions  may   be   indicted   for   obtaining 
money  by  false  representations.     Com- 
monwealth  V.   Wood,    142   Mass.   459 
(1886).     The    statute    of    frauds    as 
to  the  answering  to  the  debt,  defaults, 
etc.,  of  another  person  has  no  appli- 
cation to  a  sale  of  stock  herein.     The 
fact  that  the  corporate  property  sold 
several  years  later  for  a  small  amount 
is     immaterial     and     not     admissible. 
French  v.  Fitch,  67  Mich.  492  (1887). 
A    misstatement    as    to    the    reason  i 
why    the    vendee    purchases    is    not 
material.     BjTd  v.  Rautman,  85  Md, 
414      (1897).     Where      an     insolvent 
pledgor  sells  the  pledge  to  the  pledgee 
for  the  debt  itself,  $7,000,  the  trans- 
action is  legal,  even  though  a  jury  find 
that  the  stock  was  worth  $1,500  more. 


1078 


CH.  XX.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[§  350. 


price  than  they  gave  for  the  property.  The  promoters  act  in  a  fiduciary 
capacity.  Hence,  when  they  have  made  a  profit  at  the  expense  of  the 
Wachovia  L.  &  T.  Co.  v.  Vorbes,  120    suit  for  damages  if  he  does  not  eon- 


N.  C.  355  (1897).  See  §  479,  infra. 
Where  an  agent  to  sell  a  mine  induces 
his  principals  to  place  in  his  name  all 
their  stock,  and  he  sells  the  property 
and  accounts  to  them  for  part  only 
of  the  price,  and  refuses  to  return  the 
stock,  they  may  sue  him  for  an  ac- 
counting without  previously  tender- 
ing back  the  amount  they  received  or 
demanding  the  stock.  Wooster  v. 
NeviUs,  73  Cal.  58  (1887). 

False  representations  as  to  the  corpo- 
rate property,  business,  and  prospects, 
and  the  use  of  a  corporate  prospectus 
which  the  vendee  knows  contains 
false  statements,  sustain  rescission  of 
a  transfer  of  land  for  stock.  A 
person  purchasing  the  land  with  full 
knowledge  of  the  fraud  is  not  pro- 
tected. The  certificates  may  be  filed 
■nath  the  clerk  of  the  court,  awaiting 
the  retransfer  of  the  land.  Ormsby  v. 
Budd,  72  Iowa,  80  (1887).  The  vendee 
of  stock  cannot  rescind  or  collect  dam- 
ages on  the  ground  that  the  corpora- 
tion was  not  legally  incorporated.  If 
it  is  a  de  facto  corporation  the  vendor 
is  not  liable.  Harter  v.  Eltzroth,  111 
Ind.  159  (1887).  The  vendee  of  stock 
for  which  he  gave  real  estate  may 
have  a  reconveyance  of  the  real  estate 
decreed,  where  the  sale  of  stock  was 
induced  by  fraudulent  representations. 
Gray  v.  Robbins,  11  Atl.  Rep.  860 
(N.  J.  1887).  A  managing  director  who 
buys  stock  on  credit,  and  then  aids  in 
levying  an  attachment  on  the  stock 
against  the  vendor,  and  conceals  the 
same  from  the  vendor,  and  buys  in 
the  stock  at  a  low  price,  and  then 
repudiates  his  debt  to  the  vendor,  is 
guilty  of  fraud.  Young  v.  Fox,  37 
Fed.  Rep.  385  (1888).  Where  the 
president  in  selling  stock  makes  false 
representations,  the  vendee  is  not 
bound  to  investigate  them.  He  may 
defeat  a  note  given  in  payment.  Wan- 
nell  V.  Kern,  57  Mo.  478  (1874).  A 
representation  that  a  bond  is  an  "A 
No.  1 "  bond  is  not  a  material  represen- 
tation. Deming  v.  Darling,  148  Mass. 
504  (1889).  See  also  instances  in 
§  334,  supra.     The  vendee  fails  in  his 


tradiet  the  defendant's  testimony  that 
the  plaintiff  vendee  knew  all  the  facts 
at  the  time  of  the  sale.  Nelson  v. 
Luling,  62  N.  Y.  645  (1875),  aff'g  36 
N.  Y.  Super.  Ct.  544. 

A  statement  on  April  10  that  the 
last  semi-annual  dividend  was  seven 
per  cent,  and  that  the  fiscal  year  ended 
on  June  1,  is  a  fraudulent  suppres- 
sion of  the  truth  where  but  one  divi- 
dend had  been  declared,  and  that 
twenty-two  months  before  the  date  of 
the  statement.  Tyler  v.  Savage,  143 
U.  S.  79  (1892).  Where  the  contract 
of  sale  contains  express  warranties, 
parol  representations  as  warranties 
are  not  admitted  to  prove  false  repre- 
sentations. Humphrey  v.  Merriam,  46 
Minn.  413  (1891).  The  fact  that 
statements  as  to  the  affairs  of  the 
company  are  not  filed  as  required  by 
statute  does  not  amount  to  fraud  in 
the  sale  of  stock ;  nor  do  representa- 
tions that  the  stock  will  pay  twenty 
per  cent,  dividends  amount  to  fraud. 
The  question  as  to  the  validity  of 
stock  haidng  once  been  litigated  can- 
not be  again  raised  in  an  action  for 
deceit  in  the  sale  of  the  stock.  The 
mere  act  of  conspiracy  is  not  sufficient 
to  sustain  the  action  unless  damage 
is  shown.  Robertson  v.  Parks,  76 
Md.  118  (1892).  A  representation  in 
a  transaction  involving  water-com- 
pany stock,  as  to  the  amount  of  water 
that  can  be  obtained,  is  material.  A 
tender  of  the  certificate  is  sufficient 
where  there  has  been  no  transfer  on 
the  books.  Hill  v.  Wilson,  88  Cal.  92 
(1891).  Expressions  of  opinion  as  to 
the  future,  although  exaggerated,  are 
not  representations.  Columbia  Elec- 
tric Co.  V.  DLxon,  46  Minn.  463  (1891). 
Notes  given  in  the  purchase  of  stock 
in  a  corporation  whose  sole  business 
is  to  carry  on  an  infringing  telephone 
business  are  without  consideration 
and  void.  Clemshire  v.  Boone  County 
Bank,  53  Ark.  512  (1890).  Under  the 
New  York  statute  it  may  be  legal  for 
an  insurance  company  to  transfer  its 
business  and  liquidate  its  affairs  by 
dissolution  proceedings,  in  accordance 


1079 


§350. 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[CH.  XX. 


company,  they  may  be  compelled  to  turn  over  that  profit  to  the  company  ; 
or,  if  they  have  sold  stock  of  the  company,  the  purchasers  of  the  stock 

with  the  statute,  and  hence  a  pur- 
chaser of  the  business  may  maintain 
a  suit  for  false  representations  as  to 
the  condition  of  the  company.  L.  D, 
Garrett  Co.  v.  Morton,  65  N.  Y.  App, 
Div.  366   (1901). 

Where  stock  is  issued  to  several 
persons  for  a  patent,  and  they  retiu"n 
part  of  it  to  a  trustee  for  the  com- 
pany to  sell  for  working  capital,  and 
a  subscriber  to  the  company's  stock 
gives  his  note  to  the  company,  and  the 
company  indorses  the  note  to  one  of 
the  firs1>named  parties,  who  turns  out 
his  own  stock  to  fill  the  subscription, 
the  latter  may  recover  on  the  note, 
and  is  not  liable  for  false  representa- 
tions of  one  of  his  associates  and  an 
agent  of  the  company.  King  v.  Doane, 
139  U.  S.  166  (1891).  A  sale  of  stock 
will  not  be  set  aside  on  the  ground  of 
inadequacy  of  price  unless  so  gross  as 
to  shock  the  conscience  and  give 
decisive  evidence  of  fraud.  Perry  t'. 
Pearson,  135  111.  218  (1890).  It  is  not 
sufficient  to  prove  that  defendants 
managed  the  manufactiiring  business 
of  the  company,  to  sustain  an  action 
for  fraud  in  stating  that  the  company 
was  doing  a  good  business  and  mak- 
ing ten  per  cent.,  it  appearing  that 
the  business  was  new,  and  defendants 
did  not  state  that  they  knew  of  the 
financial  condition.  Hatch  v.  Spooner, 
13  N.  Y.  Supp.  642  (1891) ;  s.  c,  on 
second  appeal,  1  N.  Y.  App.  Div.  408. 
A  statement  that  drill  holes  in  coal- 
fields showed  certain  results  are  mate- 
rial, and  not  matters  of  opinion.  Mar- 
tin V.  Hill,  41  ^linn.  337  (1889). 
Where  a  banker  sells  stock  to  a  lawyer 
and  informs  the  latter  that  the  com- 
pany, the  owner  of  land  in  Mexico, 
had  a  right,  though  an  alien  to  Mexico, 
to  own  land  therein,  as  the  banker 
had  been  informed  by  his  attorney, 
a  note  of  the  vendee  in  payment  of 
the  stock  cannot  be  defeated  on  the 
ground  that  such  corporation  could  not 
legally  hold  the  land.  Daly  v.  Bren- 
nan,  87  Wis.  .36  (1894).  It  is  not 
fraud  on  the  vendee  that  his  vendor 
took  the  stock  from  the  corporation 
and  paid  for  it  with  funds  embezzled 


from  another  party.  The  corporation 
is  not  liable  for  the  fraud  of  the  presi- 
dent in  selling  his  own  stock.  Dunn 
V.  State  Bank,  59  Minn.  221  (1894). 
A  sale  of  bonds  is  not  revocable  even 
though  bonds  are  invalid  and  the 
vendor  innocently  stated  that  they 
were  valid.  Ruohs  v.  Third  Nat. 
Bank,  94  Tenn.  57  (1894).  Cf.  §  296, 
supra.  False  statements  as  to  the 
condition  of  the  company  constitute 
fraud.  Carruth  v.  Harris,  41  Neb. 
789  (1894).  In  Ritchie  v.  McMuUen, 
79  Fed.  Rep.  522  (1897),  the  court 
held  that  if  a  pledgee,  being  in  control 
of  the  corporation,  refuses  to  develop 
the  property  and  to  accept  subsidies 
which  are  offered,  and  to  accept  prof- 
its under  a  contract  which  are  pos- 
sible, and  to  sell  the  property  at  a 
large  price,  all  for  the  pm-pose  of  depre- 
ciating the  pledged  stock  and  thus 
obtain  the  stock  himself,  the  pledgor 
may  call  the  pledgee  to  account  for 
the  loss  suffered  from  this  conspiracy 
and  wrong.  The  court  held  also  that 
although  the  damage  was  directly  to 
the  corporation,  yet  that  indirectly 
it  was  a  damage  to  the  pledgor,  and 
that  hence  the  pledgor  could  sue  in 
his  own  behalf  alone,  and  that  the 
measure  of  damage  is  the  difference 
between  the  market  value  at  the  time 
of  suit  and  what  it  would  have  been 
if  the  conspiracy  had  not  been  set  on 
foot.  The  court  held,  however,  in 
the  ease  before  it,  that  the  proofs 
did  not  sustain  the  allegations.  The 
purchasers  of  stock  which  they  sup- 
pose is  the  original  stock,  but  which  is 
really  increased  capital  stock,  cannot 
sustain  a  bill  to  cancel  the  original 
capital  stock,  even  though  the  latter 
is  held  by  the  parties  who  issued  the 
increased  stock  without  amending  the 
charter  as  required  by  statute.  Byers 
V.  Rollins,  13  Colo.  22  (1889).  The 
fact  that  the  company  has  not  paid 
dividends  does  not  prove  that  a  rep- 
resentation that  it  was  making  ten 
per  cent,  profit  was  false.  Hatch  v. 
Spooner,  1  N.  Y.  App.  Div.  408  (1896). 
In  Kountze  t-.  Kennedy,  147  N.  Y.  124 
(1895),  an    action  was   brought  by  a 


1080 


CH.  XX.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[§  350. 


from  them  may  rescind  the  purchase  and  hold  them  personally  liable 
therefor.^    The  vendors  of  a  mining  property  of  a  corporation  are  not 


vendee  of  stock  and  bonds  against  an 
officer  of  the  company,  who,  upon  the 
application  of  the  vendee,  before  the 
purchase  was  made,  made  a  false 
statement  of  the  liabilities  of  the  com- 
pany. The  suit,  being  at  law,  failed, 
because  no  fraudulent  intent  was 
proved.  Where  two  parties  exchange 
securities  of  various  kinds,  and  in  the 
contract  to  that  effect  place  a  value 
upon  the  same,  there  is  no  fraud  arising 
from  the  fact  that  the  value  given  to 
particular  stocks  is  greater  than  their 
actual  value,  the  transaction  really 
being  one  of  barter.  Rockefeller  v. 
Merritt,  76  Fed.  Rep.  909  (1896). 
Where  an  agent  or  broker  is  employed 
to  buy  stock  for  a  "pool,"  and  agrees 
to  do  so  for  a  compensation  consisting 
of  a  part  of  the  profits,  he  is  liable  in 
damages  for  fraud  if  he  charges  the 
"pool"  more  than  the  stock  cost  him. 
Manville  v.  Lawton,  19  N.  Y.  Supp. 
587  (1892),  The  purchaser  of  bank 
stock  may  rely  upon  the  statement  of 
its  president  as  to  the  bank's  condi- 
tion, and,  the  purchase  having  been 
from  the  bank  itself,  it  may  be 
rescinded.  Merrill  v.  Florida,  etc.  Co., 
60  Fed.  Rep.  17  (1893).  An  action 
for  fraud  in  inducing  plaintiff  to  buy 
stock  of  defendant  is  defeated  by  proof 
that  the  stock  was  sold  by  the  corpo- 
ration itself.  Hubbard  v.  Long,  105 
Mich.  442  (1895).  Misrepresentations 
as  to  the  value  of  stock  as  investment 
and  relating  chiefly  to  the  future  mtII 
not  sustain  an  action  of  deceit.  Lynch 
V.  Murphy,  171  Mass.  307  (1898).  No 
fraud  is  proved  by  sho"ning  that  the 
certificate  of  stock  recited  the  capital 
stock  as  being  $25,000  when  it  was 
claimed  to  be  $50,000,  nor  by  a  general 
statement  that  the  company's  affairs 
were  in  good  shape  and  that  it  was 
making  money,  such  statement  being 
practically  correct.  Hoeft  v.  Koch, 
119  Mich.  458  (1899) ;  s.  c,  123  Mich. 
171.  It  is  no  defense  to  notes  given  in 
payment  for  stock  that  the  agent  of 
the  vendor  stated  that  he  would  not 
sell  the  notes  and  that  thej'  could  be 
paid  out  of  future  dividends.  State 
Bank  v.  Gates,  114  Iowa,  323  (1901). 


A  stockholder  cannot  prevent  other 
stockholders  from  selling  their  stock 
on  the  ground  that  the  purchaser  may 
manage  the  company  to  the  detriment 
of  minority  stockholders,  and  the  fact 
that  the  plaintiff's  stock  was  on  de- 
posit with,  the  trust  company  and  that 
he  cannot  get  the  stock  and  thus  accept 
the  order  to  purchase  his  stock  also 
is  no  ground  for  an  injunction.  Ingra- 
ham  V.  National  Salt  Co.,  72  N.  Y. 
App.  Div.  582  (1902);  appeal  dis- 
missed, 172  N.  Y.  642.  A  purchaser 
of  stock  who  makes  a  partial  payment 
and  gives  back  the  stock  as  collateral 
security  cannot  abandon  the  contract 
and  claim  such  part  of  the  stock  as 
the  payment  already  made  would  pay 
for,  on  the  ground  that  the  seller  has 
again  obtained  control  of  the  corpora- 
tion and  is  guilty  of  a  breach  of  trust. 
The  fact  that  the  seller  as  pledgee 
has  sold  the  stock  and  bought  it  in 
himself  is  immaterial,  inasmuch  as 
such  a  sale  is  illegal.  Reid  v.  Cald- 
weU,  110  Ga.  481  (1900) ;  114  Ga.  676. 
1  See  §  651,  infra.  Thus  where  a 
person  purchases  property  for  the  sole 
purpose  of  creating  a  corporation  to 
take  it  over  from  him  and  to  pay  him 
therefor  an  excessive  price  in  cash 
and  stock,  netting  a^  large  profit  to 
him,  the  stock  being  offered  to  the 
public,  and  he  causes  the  incorporation 
to  be  made  and  directors  to  be  named, 
who  are  his  dummies,  he  is  a  promoter 
and  can  be  held  liable  by  such  cor- 
poration for  the  profit  he  has  made, 
unless  he  fully  disclosed  in  a  pro- 
spectus the  fact  that  he  had  formed 
the  corporation  and  that  he  had  made 
such  profit.  Especially  is  this  the 
rule  where  the  prospectus  gave  a  false 
impression.  He  occupies  a  fiduciary 
relation  towards  the  purchasers  of 
the  stock.  It  is  immaterial  that  the 
directors  approved  of  the  transaction 
with  full  knowledge.  Non-disclosure 
in  such  a  case  is  a  misfeasance  in  the 
nature  of  a  breach  of  trust.  Re 
Leeds,  etc.  Co.,  [1902]  2  Ch.  809.  In 
the  case  Home,  etc.  Co.  v.  Barber,  67 
Neb.  644  (1903),  where  the  purchaser 
of  stock   sued   to   hold  former  stock- 


1081 


§  350.]  CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC.  [cH.  XX. 

liable  for  the  misstatements  of  such  corporation  in  selling  its  stock,  in 
order  to  pay  for  the  mine,  even  though  they  knew  that  a  prospectus 
had  been  issued  and  they  accepted  payment  from  the  corporation.^ 
Where  brokers  and  promoters  issue  bonds  greatly  in  excess  of  the  value 
of  the  corporate  property  and  by  fictitious  sales  give  a  high  market 
quotation  of  the  bonds  and  borrow  money  thereon,  the  lender  may  hold 
them  liable  in  a  suit  for  loss  due  to  a  conspiracy.^ 

It  may  be  fraudulent  for  the  directors  to  issue  to  themselves  shares 
of  the  company's  unissued  stock  in  order  to  control  elections  or  to  make 
a  profit.^ 

An  agent  is  not  liable  for  misrepresentations  made  by  his  principal, 
but  it  may  be  a  question  of  fact  whether  the  vendor  is  a  principal  or 
agent.^  A  contract  in  regard  to  stock  may  be  illegal  in  itself,  as,  for 
instance,  a  contract  to  use  stock  to  rob  a  railroad  and  bribe  a  judge. ^ 
Where  a  stockholder  receives  an  offer  for  his  stock,  and  is  persuaded  not 
to  sell  by  fraudulent  representations  of  a  director,  he  may  hold  the  latter 
liable  in  damages.^  False  representations  made  by  a  committee  of  the 
directors  inducing  parties  to  purchase  a  majority  of  the  stock  are  not 
binding  on  stockholders  and  directors  who  knew  nothing  about  such 
representations.  Representations  of  an  agent  do  not  bind  the  seller 
unless  the  agent  was  authorized  to  make  representations.'^  A  mis- 
representation by  an  agent  of  a  corporation  as  to  the  property  held  by  it, 
made  to  a  purchaser  of  stock,  not  from  the  corporation  but  from  a  stock- 
holder, does  not  render  the  vendor  of  the  stock  personally  liable.^  But 
a  purchaser  of  stock  may  rely  upon  representations  and  is  not  bound  to 

holders     liable    for    corporate    assets  See    also     §  39,     supra.     Although     a 

appropriated     by     them,     the     court  person     transfers     stock     to     another 

found  that  such  use  of  assets  had  been  in    order    to    evade    a    statute    which 

taken  into  consideration  in  fixing  the  prohibits    any    one    stockholder    from 

price  at  which  the  stock  had  been  sold,  voting  on    any  more  than  one  eighth 

and  hence  refused  to  hold  the  parties  of  the  capital   stock,   yet   the  person 

liable.  to  whom  it  is  transferred  may  make 

^  Wiser    v.    Lawler,    189    U.   S.   260  a   valid   agreement    to   retransfer   the 

(190.3).  same,  and  the  court  will  enforce  this 

i^McElroy  v.  Harnack,  213  Pa.  St.  agreement.     Scott  v.  Scott,  68  N.  H. 

444  (1906).  7  (1894). 

3  See  §  70,  supra.  «  Rothmiller  v.  Stein,  143  N.  Y.  581 
^  See  §  334,  supra.  (1894).  See  also  §  3.55,  infra.  A  party 
'  Tobey  v.  Robinson,  99  III.  222  making  a  false  representation  may  be 
(1881).  Although  a  stockholder  has  liable  even  though  the  stock  was  pur- 
transferred  certain  stock  to  the  presi-  chased  from  another.  Hindman  v. 
dent  to  be  used  to  bribe  governmental  First  Nat.  Bank,  112  Fed.  Rep.  931 
officials    in    obtaining    a    renewal    of  (1902). 

governmental   contracts  with  the  cor-  ''  Garrett  Co.  v.  McComb,  58  N.  Y. 

poration,     yet    the    stockholder    may  App.  Div.  419  (1901). 

recover  back  the  stock,  it  not  having  *  Boddy   v.   Henry,    113   Iowa,   462 

been    used    for    that    purpose.     Mul-  (1901). 
vane  v.  O'Brien,  58  Kan.  463  (1897). 

1082 


CH.  XX.]  CONTRACTS  TO   SELL  —  GAMBLING   SALES,    ETC.  [§  350. 

investigate,  and  the  representations  may  be  by  an  agent  of  the  seller.^ 
A  director  selUng  stock  cannot  be  defeated  in  his  action  for  the  price 
by  reason  of  fraudulent  representations  of  the  corporate  treasurer  in- 
ducing defendant  to  purchase.^  Where  the  president  of  a  bank  is  act- 
ing as  the  agent  of  a  person  and  sells  to  the  latter  securities  of  the  bank 
by  means  of  false  representations,  the  bank  is  liable,  even  though  the 
purchaser  did  not  know  that  the  sale  was  in  behalf  of  the  bank.^  A 
broker  is  liable  for  fraudulently  inducing  a  customer  to  cancel  an  order 
to  sell  stock,  even  though  the  decline  in  value  is  due  to  causes  not  con- 
templated at  the  time.^  Misrepresentations  made  to  others  to  induce 
them  to  buy  the  stock  are  immaterial  where  no  sale  had  resulted  there- 
from and  no  fraud  actually  perpetrated.^  Where  the  vendor  making 
fraudulent  representations  as  to  the  financial  condition  of  the  company 
is  secretary  and  treasurer,  he  cannot  claim  that  he  was  ignorant  of  the 
facts.®  A  statute  to  the  effect  that  a  person  making  a  representation 
as  to  the  trade  or  dealings  of  another  person  shall  not  be  liable  therefor, 
unless  they  are  made  in  writing  signed  by  him  or  by  his  agent,  does  not 
apply  to  representations  as  to  a  corporation,  in  selling  stock  in  such 
corporation.^  In  Michigan  it  is  held  that  a  statute  that  a  person  shall 
not  be  liable  for  representations  as  to  the  credit  of  another  person,  unless 
the  representations  are  written,  applies  to  representations  by  a  director 
in  regard  to  the  corporation,  which  lead  to  a  person  subscribing  to  its 
stock,^  but  the  weight  of  authority  seems  to  be  to  the  contrary.^    A 

1  Brandt  v.  Krogh,  14  Cal.  App.  39  the  profits  existed.  Nash  v.  Rosesteel, 
(1910).     131  Pae.  Rep.  1126.  76  Cal.  App.  504  (1908). 

2  Doane  v.  King,  30  Fed.  Rep.  106  '  Walker  v.  Russell,  186  Mass.  69 
(1887).  (1904). 

3  Carr  v.  National  Bank  &  L.  Co.,  ^  Getehell  v.  Dusenbury,  145  Mich. 
167  N.  Y.  375  (1901).  A  bank  may  197  (1906).  The  Michigan  statute 
be  liable  for  falsely  representing  the  that  a  person  is  not  liable  for  represen- 
condition  of  a  company,  thereby  indue-  tations  as  to  the  financial  status  of 
ing  a  party  to  purchase  stock  in  the  another  person  unless  the  representa- 
latter.  Hindman  v.  First  Nat.  Bank,  tions  are  in  writing  and  signed,  does 
112  Fed.  Rep.  931  (1902).  not  apply  to  representations  by  cor- 

*  Fottler  V.  Moseley,  185  Mass.  563  porate  officers  inducing  a  person  to  sub- 

(1904).  scribe  to  its  stock.     Massey  v.  Luce, 

s  Darling  v.  Kloek,  33  N.  Y.  App.  158  Mich.  128  (1909). 
Div.    270    (1898) ;    aff'd,    165    N.    Y.  "  The  statute  that  a  person  shall  not 

623.     61  S.  Rep.  907.  be    liable    for    representations    as    to 

fi  Drake  v.  Holbrook,  66  S.  W.  Rep.  the    credit,    etc.,    of    another    person 

512  (Ky.  1902).     A  purchaser  of  stock  unless  such  statements  are  in  writing, 

from   the   president   cannot   hold   him  applies  to  representations  by  corporate 

liable  for   misrepresentation   that   the  officers  inducing  subscriptions  to  stock, 

company's  last  dividend  was  six  per  McKee  v.  Rudd,  222  Mo.  344  (1909) ; 

cent.,  it  appearing  that   the  dividend  Hunnewell    v.    Duxbury,     157    Mass. 

was  actually  paid,   even  though  it  is  1    (1892).     A    misrepresentation  by  a 

proved   that   it  was   not   paid   out  of  director  as  to  the  value  of  the  corpo- 

profits,  the  president,  however,  having  ration  and  its  stock,   with  a  view  to 

acted  in  good  faith,  and  supposed  that  selling  the  stock,  is  not  affected  by  a 

1083 


§  350.]  CONTKACTS   TO   SELL  —  GAMBLING   SALES,    ETC.  [cH.  XX. 

vendee  who  is  in  the  employ  of  the  company  and  has  opportunity  to 
know  all  about  it  cannot  claim  that  he  was  deceived  as  to  the  value  of 
the  stock.^  A  manager  who  buys  stock  cannot  complain  of  misrepre- 
sentations, he  being  more  familiar  with  the  company's  affairs  than  the 
defendants,  and  he  cannot  claim  that  the  organization  was  invalid,  be- 
cause it  did  not  acquire  all  the  property  mentioned  in  the  articles,  and 
overstated  the  amount  of  its  cash.^  Misrepresentations  as  to  matters 
which  did  not  affect  the  purchaser's  judgment  are  immaterial,  especially 
where  the  purchaser  is  invited  to  look  at  all  the  books  and  papers.* 
Although  a  statement  is  made  that  a  certain  amount  of  money  had  been 
paid  in,  yet  where  other  statements  show  clearly  that  this  was  not  so,  no 
cause  for  complaint  exists.^ 

Misrepresentations  as  to  the  amount  of  ore  in  sight,  and  its  value, 
where  the  party  has  full  opportunity  afterwards  to  inspect  the  mine 
and  visits  the  mine  and  buys  more  stock,  and,  after  knowing  all  the  facts, 
negotiates  for  machinery  for  the  company,  are  no  defense.^  A  purchaser 
cannot  rescind  for  fraud  where  he  has  investigated  for  himself  or  had 
the  means  at  hand  to  ascertain  the  truth  or  falsehood  of  any  represen- 
tation.® A  purchaser  is  not  bound  to  investigate  the  truth  of  a  repre- 
sentation where  it  is  shown  that  even  if  he  had  investigated  he  would 
not  have  become  aware  of  the  facts.'^  A  purchaser  of  bonds  in  an  insol- 
vent corporation  cannot  rescind  on  the  ground  that  he  relied  on  the  mas- 
ter's report  as  to  the  amount  of  liens  and  that  the  court  had  modified 
that  report.^  A  provision  in  a  contract  of  subscription  to  the  stock  of 
the  company,  whereby  the  subscriber  waives  notice  of  all  contracts 
between  the  promoters  and  the  company,  is  not  binding  on  the  stock- 
holder, if  such  waiver  is  tricky  and  fraudulent.^    Where  the  various 

statute  that  a  person  is  not  liable  for  on  the  ground  that  the  franchises  were 

making  representations  as  to  the  char-  fraudulent  and  invalid  while  they  were 

acter,  etc.,  of   another   person,  unless  represented    to   be   valid.      Eppley    v. 

they  are  in  writing.     Grover  v.  Cava-  Kennedy,   198  N.   Y.  348   (1910).     A 

naugh,  40  Ind.  App.  340  (1907).     See  stockholder  in  one  company  which  is 

also  §  157,  supra.  consolidated  with  another  cannot  hold 

1  Weaver   v.   Shriver,    79   Md.    530  a  stockholder  in  the  latter  liable  for 
(1894).  misrepresentations  that  the  latter  was 

2  Andrews  v.  Brace,   154  Mich.  126  in  a  prosperous  condition  where  there 
(1908).  was   no   concealment   and    the   stock- 

'  Garrison  v.  Technic,  etc.   Works,  holder  could  have  examined  into  the 

59  N.  J.  Eq.  440  (1900).  condition    of   the   latter   and   perhaps 

^McEacheran   v.  Western   Transp.,  did  so.     Pigott  v.  Graham,  48  Wash. 

etc.  Co.,  97  Mich.  479  (1893).  348  (1908). 

6  Eldridge   v.    Young  America,   etc.  ^  Dow  v.  Swain,  125  Cal.  674  (1899). 

Co.,  27  Wash.  297  (1902).  «  Kerin   v.   Mercantile   T.   Co.,   226 

6  Grindrod  v.  Anglo-American,  etc.  Pa.  St.  557  (1910). 

Co.,    34    Mont.    169    (1906).     A   pur-  ^  Greenwood   v.    Leather,   etc.    Co., 

chaser   of   the   stock  and   bonds  of  a  Ltd.,  [1900]  1  Ch.  421. 
railway  company  may  refuse  payment 

1084 


CH.  XX.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  351. 


stockholders  of  a  corporation  join  in  a  contract  for  the  sale  of  their 
stock,  but  secretly  one  of  them  receives  a  bonus  from  the  purchaser,  the 
others  may  compel  him  to  account  therefor  proportionately.^ 

A  person  who  buys  stock  knowing  that  it  has  already  been  sold  to 
another  person  is  not  protected  in  his  purchase,  even  though  delivery 
of  the  stock  was  made  to  him  first. ^  But  a  person  contracting  to  buy 
stock  may  complete  the  transaction  even  though  before  completing  it  he 
learns  that  another  person  had  an  option  on  the  stock  prior  in  time  to 
his  contract.^  Even  though  a  person  purchases  bonds  with  knowledge 
that  the  vendor  had  already  made  a  contract  for  the  sale  of  the  bonds 
to  another  person,  the  former  cannot  be  compelled  to  account  to  the 
latter.^ 

§  351.  Fraudulent  sale  by  agent,  etc.,  in  breach  of  trust.  —  A  bona 
fide  purchaser  for  value  and  without  notice  of  stock  from  a  vendor 
who  delivers  the  certificates  therefor  indorsed  in  blank  by  another, 
or  indorsed  by  the  vendor  himself,  is  protected  and  entitled  to  the 
stock,  although  it  afterwards  transpires  that  the  agent  was  selling 
as  agent  of  another  and  had  been  guilty  of  a  breach  of  trust. ^    But 


1  See  §  320,  supra,  and  §§  351,  650, 
662,  infra.  Where  a  party  desires  to 
purchase  a  majority  of  the  stock  of  a 
corporation  and  makes  an  offer  to  all 
the  stockholders  to  purchase  their 
stock,  provided  a  majority  in  interest 
will  sell,  and  agrees  to  pay  for  the 
amount  so  offered  a  specified  sum  per 
share,  he  may  legally  pay  more  than 
that  price  for  a  portion  of  the  stock, 
and  need  not  divulge  that  fact  to  the 
others  who  sell  at  the  price  first  men- 
tioned. Newman  v.  Mercantile  T.  Co., 
189  Mo.  423  (1905). 

2  Doherty  &  Co.  v.  Rice,  186  Fed. 
Rep.  204  (1910).  Where  the  pledgee 
knows  at  the  time  of  the  pledge  that 
the  securities  should  have  been  placed 
under  a  mortgage,  he  is  liable  to  the 
mortgagee,  and  if  the  pledgee  sells 
his  security,  he  is  liable  to  the  mort- 
gagee for  the  amount  realized,  even 
though  thereafter  the  securities  became 
valueless.  Central  T.  Co.  v.  West, 
etc.  Co.,  144  N.  Y.  App.  Div.  560 
(1911).  A  person  purchasing  stock 
with  knowledge  that  there  was  an 
agreement  that  it  would  be  held  as  a 
pledge  for  a  certain  debt,  cannot 
claim  the  stock  free  from  the  pledge. 
Birch,  etc.  Bank  v.  Brown,  152  Mo. 
App.    589    (1911).     See    also    §§  468, 


472,  766,  c.  852.  Where  one  promoter 
claims  an  interest  in  stock  which  his 
co-promoter  has  placed  in  the  name  of 
a  third  person,  and  the  latter  is  aware 
of  the  claim,  the  latter  is  liable  if  he 
turns  over  the  stock  to  the  co-promoter 
after  suit  has  been  brought  for  a  spe- 
cific performance.  Warner  v.  Wood, 
200  Fed.  Rep.  542  (1912). 

'  Ouderkirk  v.  Bayless,  etc.  Co., 
199  N.  Y.  366  (1910). 

*  Sweeney  v.  Smith,  171  Fed.  Rep. 
645  (1909).  A  person  purchasing 
bonds  is  not  liable  in  damages  to 
another  person  who  already  had  a 
contract  for  the  purchase  of  the  same 
bonds.  Sweeney  v.  Smith,  .167  Fed. 
Rep.  385  (1909). 

5  McNeil  V.  Tenth  Nat.  Bank,  46 
N.  Y.  325  (1871).  This  is  not  only  the 
leading  ease  on  the  estoppel  of  a  prin- 
cipal from  repudiating  the  sale  or 
pledge  of  his  stock  by  his  agent,  whom 
he  intrusted  with  the  certificates 
indorsed  in  blank,  but  it  is  one  of  the 
leading  eases  on  the  law  of  the  quasi- 
negotiability  of  stock.  See  also  Hon- 
old  .  Meyer,  36  La.  Ann.  .585  (1884) ; 
Strange  v.  Houston,  etc.  R.  R.,  53 
Tex.  162  (1880);  Dovey's  Appeal,  97 
Pa.  St.  153  (1881).  Fraudulently  issued 
warehouse  receipts  pledged  can  be  en- 


1085 


§  351.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[cH.  XX. 


the  transferee  is  not  protected  where  he  is  not  a  bona  fide  purchaser.^ 
Where  forgery  is  involved  the  purchaser  takes  nothing.-    A  person  buy- 


foreed  only  to  the  extent  of  the  loan  and 
interest.  Corn,  etc.  Bank  v.  American, 
etc.  Co.,  163  N.  Y.  332  (1900).  A  per- 
son who  signs  the  blank  transfer  on  the 
back  of  a  certificate  of  stock  running 
to  him  and  delivers  it  to  another  per- 
son cannot  claim  the  stock  as  against 
a  bona  fide  piu-chaser  from  the  latter, 
even  though  the  latter  retains  the  cer- 
tificate for  thirteen  years  and  then 
sells  it.  O'Neil  v.  Wolcott  Mining 
Co.,  174  Fed.  Rep.  527  (1909).  Even 
though  a  bank  sells  securities  to  a 
broker  with  a  request  for  a  certified 
cheek  therefor,  yet  if  the  broker  sends 
an  uncertified  check  and  the  bank  holds 
it  until  the  next  day  and  in  the  mean- 
time the  broker  pledges  the  securities, 
the  pledgee  is  protected.  Re  Tracy, 
185  Fed.  Rep.  844  (1911).  Lloyds  Bk. 
V.  Swiss,  etc.,  108  L.  T.  Rep.  143  (1913). 
A  bill  in  equity  filed  by  a  partner  to 
hold  his  co-partners  and  third  persons 
liable  for  a  misappropriation  of  stock 
owned  by  the  firm  cannot  be  sustained 
where  it  is  not  alleged  that  the  third 
persons  knew  of  such  misappropria- 
tion at  the  time  of  such  misappropria- 


tion. Wall  V.  Old  Colony,  etc.  Trust 
Co.,  174  Mass.  340  (1899).  Even 
though  the  agent  of  a  corporation 
represents  to  it  that  a  party  owns 
certain  property  and  will  sell  it  to  the 
corporation  for  $7,500  in  bonds  and 
$30,000  in  stock,  and  the  purchase  is 
made  on  those  terms,  and  the  vendor 
keeps  the  bonds  and  gives  the  stock  to 
such  agent,  and  the  agents  sells  a 
portion  of  the  stock  to  a  bona  fide 
purchaser,  yet  the  latter  cannot  re- 
scind the  sale  on  the  ground  of  fraud. 
Foushee  v.  Snyder,  54  S.  W.  Rep.  730 
(Ky.  1900).  Where  four  shares  of 
stock  are  transferred  to  a  person  by 
the  corporation  to  qualify  him  as  a 
director,  and  he  agrees  to  return  the 
same  to  the  corporation  when  ceasing 
to  be  a  director,  but  thereafter  and 
before  he  ceases  to  be  a  director  he 
agrees  with  the  indorsers  of  his  note 
that  they  shall  have  the  stock  as  col- 
lateral security,  they  are  protected, 
even  though  the  stock  was  actually 
delivered  to  them  after  they  had  notice 
of  the  first  agreement,  it  being  shown, 
however,  that  they  had  no  notice  of 


1  Talmage  v.  Third  Nat.  Bank,  91 
N.  Y.  531  (1883) ;  Crocker  v.  Crocker, 
31  N.  Y.  507  (1865) ;  Weaver  v.  Bar- 
den,  49  N.  Y.  286  (1872),  where  the 
agent  fraudulently  bought  in  his  own 
name  and  then  fraudulently  sold ; 
Williamson  v.  Mason,  12  Hun,  97 
(1877).  A  purchaser  from  an  agent 
with  notice  of  the  fact  that  he  held  as 
agent,  and  that  he  had  sold  to  himself, 
is  not  protected.  Bank  of  Louisville 
V.  Gray,  84  Ky.  565  (1886).  Where  a 
person  holds  stock  under  an  agree- 
ment with  another  that  after  the  prof- 
its have  repaid  the  cost  of  the  stock 
the  further  profits  should  be  divided 
equally  between  them,  such  agreement 
is  binding  upon  a  person  who  buys 
such  stock  with  notice  of  the  agree- 
ment. Morris  v.  Shepard,  53  Atl.  Rep. 
172  (N.  J.  1902).  Where  a  street 
railway  company  employs  a  person  as 
its  agent  to  purchase  a  majority  of  the 
stock  of  another  street  railway  com- 
pany, and  he  does  so,  and  the  former 


pays  him  for  the  stock  and  for  his 
services,  he  cannot  refuse  to  deliver 
the  stock  on  the  ground  that  the  com- 
pany had  no  power  to  purchase,  or  on 
the  ground  that  it  had  passed  no  reso- 
lutions authorizing  him  to  purchase, 
and  the  former  may  recover  the  stock 
from  a  transferee  with  notice  from 
the  agent.  Manchester  St.  Ry.  v. 
Williams,  71  N.  H.  312  (1902). 

2  See  §§  365-370,  infra.  Where  an 
agent  of  a  stockholder  forges  his 
name  to  the  certificates  of  stock  and 
pledges  them  with  a  party  to  secure  a 
loan  to  the  agent's  principal,  such  loan 
cannot  be  collected,  even  though  the 
proceeds  went  to  the  credit  of  the  prin- 
cipal and  were  afterwards  embezzled 
by  the  agent  under  a  power  of  attor- 
ney to  check  out  the  principal's  money, 
the  party  loaning  the  money  on  the 
certificates  of  stock  not  having  any 
knowledge  of  such  power  of  attorney 
at  the  time.  Fay  v.  Slaughter,  194 
111.  157  (1901). 


1086 


CH.  XX.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[§  351. 


ing  stock  from  an  agent,  with  knowledge  that  the  latter  is  acting  as 
agent,  is  bound  to  inquire  into  the  scope  of  his  authority,^  and  if  the 
agent  is  authorized  only  to  sell  for  cash  his  agreement  to  sell  on  time 
cannot  be  enforced  by  the  purchaser.^    Where  the  same  person  acts  as 


such  agreement  at  the  time  they 
became  sureties.  Dueber,  etc.  Co. 
V.  Daugherty,  62  Ohio  St.  589  (1900). 
Where  a  stockholder  indorses  a  certifi- 
cate of  stock  in  blank  and  delivers 
it  to  an  agent,  and  the  agent  pledges 
it  for  his  own  purposes,  the  pledgee, 
if  he  took  without  notice  of  the  breach 
of  trust,  is  protected.  The  court  held 
also  that  the  statute  of  1884  applied 
to  such  a  case.  Russell  v.  American, 
etc.  Co.,  180  Mass.  467  (1902).  To 
same  effect  :  see  National  Safe  De- 
posit Co.  V.  Hibbs,  229  U.  S.  391 
(1913).  Garvin  v.  Pettee,  15  S.  Dak. 
266  (1901).  Where  certificates  of 
stock  are  deposited  with  the  broker, 
duly  transferred  in  blank,  a  bona 
fide  holder  of  such  certificates  from 
the  broker  is  not  protected  as  against 
the  real  owner,  where  the  facts  were 
sufficient  to  give  him  notice.  Ryman  v. 
Gerlach,  153  Pa.  St.  197  (1893).  Where 
the  vendor  of  stock  sends  the  certifi- 
cates indorsed  in  blank  to  a  supposed 
bank  by  mail,  and  the  vendee,  who 
has  organized  the  bank  for  fraudulent 
purposes,  thereby  obtains  possession 
of  the  certificates  and  sells  them  with- 
out the  draft  attached  to  the  stock 
being  paid,  a  bona  fide  purchaser  of  the 
certificates  is  protected.  Beckwith  v. 
Galice,  etc.  Co.,  50  Greg.  542  (1908). 
Where  the  owner  of  a  certificate  of 
stock  indorsed  in  blank  puts  it  in  his 
safe-deposit  box  and  allows  a  clerk 
to  have  a  key  of  the  box  and  the  clerk 
abstracts  the  certificate  and  sells  it  to 
a  bona  fide  purchaser,  it  is  a  question 
for  the  jury  as  to  who  stands  the  loss. 
AuU  V.  Colket,  2  W.  N.  Cas.  322  (1875). 
And  see  many  cases  in  ch.  XXV, 
infra,  where  this  principle  of  law  is 
often  involved.  The  books  are  full 
of  cases  wherein  an  agent  has  com- 
mitted a  breach  of  trust  in  the  sale  of 
stock.  For  many  instances  of  this  kind 
of  fraud  and  the  various  principles  of 
law  applicable  thereto,  see  ch.  XIX, 
supra,  and  chs.  XXII  and  XXIV,  infra. 
An  assignee  in  insolvency  of  the  agent 


does  not  take  the  stock.  See  §  320, 
supra.  Moodie  v.  Seventh  Nat.  Bank, 
3  W.  N.  Cas.  118  (1876),  holds  that  if 
the  purchaser  takes  partly  for  an  ante- 
cedent debt  he  is  not  a  bona  fide  holder 
to  that  extent.  See  also  Dovey's 
Appeal,  97  Pa.  St.  153  (1881).  An 
agent  to  collect  dividends  who  loans 
the  stock  at  a  profit  is  liable  for  its  loss, 
even  though  he  informed  the  owner 
of  the  loan  and  she  did  not  object. 
Persch  v.  Quiggle,  57  Pa.  St.  247 
(1868).  A  bona  fide  purchaser  from 
the  agent  is  protected.  State  Bank 
V.  Cox,  11  Rich.  Eq.  (S.  C.)  344 
(1860) ;  West  Branch,  etc.  Co.'s  Appeal, 
*81  Pa.  St.  19  (1870) ;  Otis  v.  Gardner, 
105  111.  436  (1883) ;  Zulick  v.  Markham, 
6  Daly,  129  (1875);  Martin  v.  Sedg- 
wick, 9  Beav.  333  (1846) ;  Linnard's 
Appeal,  6  East.  Rep.  877  (Pa.  1886). 
In  England  certificates  of  stock  are  not 
negotiable  in  any  sense,  and  hence 
the  English  decisions  on  the  point  now 
under  consideration  have  no  weight 
in  America.  See  §§  377,  412,  infra, 
and  §  325,  supra.  Where  a  stock- 
holder delivers  his  stock  to  the  presi- 
dent to  be  used  to  induce  a  person  to 
loan  money  to  the  corporation,  and 
the  president  instead  of  so  using  it 
converts  it  to  his  own  use,  the  stock- 
holder may  maintain  a  suit  in  equity 
to  recover  back  the  stock,  and  the 
statute  of  limitations  does  not  begin 
to  run  until  he  has  discovered  or  should 
have  discovered  the  facts.  Slaybaek 
V.  Raymond,  93  N.  Y.  App.  Div.  326 
(1904).  Even  though  brokers  in  send- 
ing stock  to  a  customer  indorse  it  in 
blank  and  intrust  it  to  a  messenger, 
and  the  messenger  converts  it  to  his 
use  by  having  other  brokers  sell  it  in 
good  faith,  yet  such  latter  brokers  are 
liable  to  the  customer  for  the  value 
of  the  stock.  Hall  v.  Wagner,  111 
N.  Y.  App.  Div.  70  (1906).     155  id.  646. 

1  Quoted  and  approved  in  Sloan  v. 
Brown,  228  Pa.  St.  495  (1910). 

2  Norton  v.  Nevills,  174  Mass.  243 
(1899).     See  also  §  321,  supra. 


1087 


§  351.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


CH.  XX. 


agent  for  both  the  transferrer  and  the  transferee,  and  absconds  with 
the  purchase  price  after  the  certificates  have  been  dehvered,  but  before 
registry  on  the  corporate  books,  the  transferee  is  protected.^  Thus, 
where  an  intermediate  party  between  two  brokers  brings  about  a  sale 
by  one  broker  to  the  other  by  false  representations,  this  does  not  enable 
the  vendee  to  rescind  and  recover  the  money  back.^  Where  the  cor- 
poration knows  that  the  vendor  is  selling  as  the  agent  of  the  stockholder, 
who  has  given  to  the  agent  the  certificates  indorsed  in  blank,  it  must 
see  to  it  that  the  agent  has  full  power  to  sell  the  stock,  and  is  liable  for 
allowing  a  registry  where  the  agent  has  not  such  power .^  A  stockholder 
whose  stock  has  been  wrongfully  pledged  may  enjoin  the  corporation 
from  allowing  a  transfer  by  the  pledgee  who  has  applied  for  the  same."* 
If  the  principal  authorized  the  sale  or  ratified  it,  he  of  course  cannot 
afterwards  complain. °  WTiere  an  agent  to  sell  is  able  to  sell  for  more 
than  he  accounts  for  to  his  principal,  the  latter  cannot  recover  the  dif- 
ference unless  the  sale  was  actually  made.^  Even  though  the  seller's 
broker  divides  a  secret  profit  with  the  purchaser's  broker  without  the 
purchaser  knowing  thereof,  yet  the  purchaser  cannot  hold  the  seller's 
broker  liable  for  his  profits.  The  remedy  is  rescission.^  Where  a 
stockholder  in  an  insolvent  corporation  turns  over  his  stock  to  another 


1  Ex  parte  Shaw,  L.  R.  2  Q.  B.  D. 
463  (1877). 

2BaU  V.  Shepard,  202  N.  Y.  247 
(1911). 

'  Woodhouse  v.  Crescent  Mut.  Ins. 
Co.,  35  La.  Ann.  2.38  (1883),  holding 
that  the  transferee  who  is  charged 
with  receiving  with  notice  may  be 
joined  as  a  party  defendant.  St. 
Romes  v.  Levee,  etc.  Co.,  127  U.  S. 
614  (1888).     See  also  §  .321,  supra. 

^  The  owner  need  not  allege  that 
the  pledgee  took  with  notice.  It  is 
for  the  pledgee  to  intervene  and  prove 
that  the  pledge  was  bona  fide.  Rey- 
nolds V.  TouzaUn  Imp.  Co.,  62  Neb. 
236  (1901). 

^  As  to  the  admissibility  in  evidence 
of  a  receipt  showing  that  the  agent 
was  authorized  to  sell  by  order  of  the 
principal's  brother,  see  Dwyer  v. 
Fuller,  144  Mass.  420  (1887).  A 
pledge  of  stock  by  an  agent  is  not  a 
conversion,  where  the  principal  re- 
ceived without  objection  and  retains 
a  receipt  from  the  agent  setting  forth 
such  pledge.  Metcalf  v.  WilUams,  144 
Mass.  452  (1887). 

« Edison  v.  GilUland,  42  Fed.  Rep. 


205  (1890).  An  agent  may  of  course 
be  held  Uable  for  misrepresenting  the 
price  which  he  received  on  the  sale  of 
stock  and  for  retaining  the  differ- 
ence. Horner  v.  Perry,  112  Fed.  Rep. 
906  (1901).     See  130  Pac.  Rep.  1186. 

"  lUingworth  v.  De  Mott,  59  N.  J. 
Eq.  8  (1900).  See  also  §  320,  supra. 
An  agent  who  secretly  takes  a  com- 
mission from  a  party  dealing  with  his 
principal  cannot  enforce  a  contract  by 
which  he  was  to  share  in  the  stock 
purchased  bv  the  principal.  York  v. 
Searles,'97N.  Y.  App.  Div.  331  (1904) ; 
aff'd,  189  N.  Y.  573.  Where  the  gen- 
eral manager  acts  as  an  intermediary 
in  selhng  all  the  stock  of  the  company 
and  he  makes  a  secret  profit,  the  stock- 
holders may  compel  him  to  pay  it 
over.  Barbar  v.  Martin,  67  Neb. 
445  (1903).  Where  three  persons 
own  all  the  stock  of  a  corporation  and 
one  of  them  represents  all  three  in 
selling  the  stock,  but  secretly  takes  an 
additional  price  for  his  sole  benefit, 
the  others  may  hold  him  Uable  for 
their  portion  thereof  in  an  action  at 
law.  Graham  v.  Cummings,  208  Pa. 
St.  516  (1904). 


1088 


CH.  XX.]  CONTKiCTS   TO    SELL  —  GAMBLING   SALES,    ETC.  [§351. 

person  to  deposit  under  a  reorganization  agreement,  the  latter  agree- 
ing to  pay  the  assessment  on  the  stock  and  to  deliver  to  the  stockholder 
the  new  securities  upon  repayment  of  such  assessment,  and  he  refuses 
so  to  do  thereafter,  he  is  guilty  of  a  conversion  and  of  a  fraud  upon  the 
stockliolder.^  And  where  a  customer  may  rescind  a  purchase  of  stock 
made  for  him  by  his  broker,  upon  discovering  that  the  broker  sold  him 
stock  owned  by  such  broker,  the  customer,  if  he  has  exchanged  such  stock 
for  reorganization  stock,  may  tender  back  old  stock  which  he  borrows 
for  that  purpose. 2  If  an  agent  to  purchase  stock  sells  to  the  principal 
stock  which  the  agent  himself  owns,  and  keeps  the  secret  profit,  the  prin- 
cipal may  compel  him  to  account,  even  though  the  principal  himself 
had  not  dealt  fairly  with  other  people  in  regard  to  those  stocks.^  Where 
stockholders  authorize  one  of  their  number  to  sell  the  stock,  they  agree- 
ing to  pay  proportionately  the  expense,  they  are  entitled  to  a  secret 
profit  made  by  him."*  In  England  the  courts  do  not  protect  a  purchaser 
of  certificates  of  stock  unless  the  latter  has  not  only  purchased,  but 
has  obtained  a  registry  on  the  corporate  books. ^ 

An  agent's  power  to  sell  stock  does  not  authorize  him  to  pledge  it.^ 
A  person  who  knows,  or  has  the  means  of  knowing,  that  another  person 
holds  stock  as  an  agent  to  sell  only,  cannot  take  such  stock  in  pledge 
from  the  agent,  although  the  latter  represents  that  the  money  is  to  be 
used  for  his  principal.  The  principal  may  recover  the  stock  if  he  has 
not  authorized  the  pledge.'^  A  bona  fide  purchaser  of  certificates  of 
stock  from  a  pledgee  is  protected.^  Where  no  certificates  of  stock  have 
been  issued,  a  purchaser  of  a  subscriber's  right  to  the  stock  is  not  pro- 
tected as  a  purchaser  of  a  certificate  of  stock  is  protected.^    When  an 

1  Miller  v.  Miles,  58  N.  Y.  App.  Div.  liable  if  the  stock  was  not  worth 
103  (1901);   aff'd,  171  N.  Y.  675.  more  than  the  debt  secured.     Brittan 

2  Mayo  V.  Knowlton,  134  N.  Y.  250  v.  Oakdale,  etc.,  124  Cal.  282  (1899). 
(1892).  *  See  §  473,  infra.     A  bank  taking 

3  Primeau  v.  Granfleld,  180  Fed.  a  pledge  of  negotiable  bonds  in  good 
Rep.  847  (1910)  ;  s.  c,  184  Fed.  Rep.  faith  may  hold  them,  though  it  turn 
480.  out    that    the    pledgor    was    not    the 

♦  Merrill    v.    Sax,    141    Iowa,    386  owner    of    them,    but    held    them    as 

(1908).     '  security  that  a  mortgage  would  be  can- 

6  See  §  412,  infra.  celed.     Saloy  v.  Hibernia  Nat.  Bank, 

6  Merchants' Bank  t).  Livingston,  74  39   La.   Ann.   90    (1887).     Where   the 

N.   Y.   223    (1878).     See   §§  321,   326,  pledgee  of  stock  transfers  it  into  his 

supra.  own  name  on  the  books  of  the  eom- 

'  Fisher  v.  Brown,    104  Mass.   259  pany  and  takes  out  new  certificates,  a 

(1870).     A  bona  fide  pledgee  of  a  cer-  bona  fide   purchaser   or   pledgee   from 

tificate  of  stock  from  an  agent  hav-  him    is    protected.     Westinghouse    v. 

ing  power  to  pledge,  but  who  had  so  German,  etc.  Bank,   196  Pa.   St.  249 

pledged    the    stock   for    purposes    not  (1900).     As  to  sales  by  trustees,  etc., 

authorized  by  the  owner,  is  neverthe-  see  ch.  XIX,  supra. 

less  protected,  and  even  though  such  »  Manchester  St.  Ry.  v.  Williams,  71 

pledgee    sells    the    stock    at    private  N.  H.  312  (1902).     Cf.  §  373,  infra. 
sale  without  notice  he  cannot  be  held 

(69)  1089 


§352.]  CONTRACTS   TO    SELL — GAMBLING   SALES,    ETC.  [cH.  XX. 

agent  has  an  option  on  stock  and  sells  it  to  his  principal,  who  thinks  he 
is  purchasing  from  an  outsider,  the  principal  may  rescind.^  An  agent 
who  makes  representations  in  good  faith  is  not  personally  liable  if  made 
on  behalf  of  his  principal.-  Where  the  president  is  also  the  controlling 
stockliolder  and  fraudulently  purchases  other  stock  from  the  executor 
of  a  deceased  stockholder  at  a  very  small  price,  a  court  of  equity  will 
rescind  the  transaction.^ 

§  352.  Fraud  may  he  hy  corporate  reports  or  prospectus.  —  A  re- 
port of  corporate  officers  to  the  stockholders,  setting  forth  the  condi- 
tion of  the  affairs  of  the  corporation,  is  deemed  to  be  a  statement  to  the 
public  also,  and  it  may  be  relied  upon  by  any  one  in  purchasing  shares. 
This  principle  of  law  was  first  clearly  established  in  England  in  1860, 
in  the  case  of  Davidson  v.  Tulloch.^  It  was  there  held  that  there  need 
be  no  privity  between  the  officers  issuing  the  report  and  the  person  pur- 
chasing shares  of  stock  from  third  persons.  If  such  purchaser  made  his 
purchase  relying  upon  material  statements  in  corporate  reports  which 
were  false,  he  has  his  remedy  against  all  persons  who  knowingly  made  or 
issued  the  report.^  The  leading  case  in  this  country  on  the  liability 
of  corporate  directors  for  fraudulent  representation  as  to  the  condition 
of  the  company,  not  made  to  a  purchaser  of  stock  personally,  but  to  the 
public  generally,  is  Cross  v.  Sackett,®  decided  in  1858,  where  fraudulent 

1  Montgomery  v.  Hundley,  205  Mo.  and  the  manager,  secretary,  and  other 
138  (1907).  officers  of  the  bank  supply  the  detailed 

2  Englesfield  v.  Londonderry,  H.  L.  statements  for  such  report,  knowing 
26  W.  R.  540  (1878).  them   to   be   false  and   that   they  are 

'  Smith    V.  Moore,    199    Fed.   Rep.  to  be  used  for  purposes  of  deceit,  and 

689  (1912).     See  also  §  320,  supra.  a  third  party,  acting  on  such  reports, 

^6  Jur.  (N.  S.)  543;   s.  c,  3  Macq.  purchases  shares  in  the  company  and 

(H.  L.)  783.  suffers  loss  thereby,  each  of  the  offi- 

^  Scott  V.  Dixon,  29  L.  -J.   (Exeh.)  cers   of  the  company  who  knowingly 

62,    n.    (1859),    explained   in   Peek   v.  assisted  in  the  fraud  is  personally  lia- 

Gurney,  L.  R.  6  H.  L.  398  (1873),  as  ble  to  such  third   party  for  the  loss 

follows:     "The   report,   though   origi-  caused   by   such   misrepresentation  in 

nally  made  to  the  shareholders,   was  the    report,    though    the    report    was 

intended    for    the   information   of   all  signed  only  by  the  directors  and  not 

persons  who  were  disposed  to  deal  in  by  the  subordinate  oificers. 
shares;    and  the  representation  must  ^  2  Bosw.  617;   6  Abb.  Pr.  247;    16 

be  regarded  as  having  been  made  not  How.  Pr.  62,  the  court  saying:  "When 

indirectly,  but  directly  to  each  person  an  instrument  is  made  to  deceive  the 

who  obtained  the  report  from  the  bank  public   generally,   and   is   adapted,   as 

where   it    was    publicly  announced   it  well    as    intended,    to    deceive    some 

was  to  be  bought,  in  the  same  manner  portion  of  the  public,  and  as  well  one 

as   if   it    had    been    personally   deliv-  person  as  another,  and  is  used  as  it 

ered   to   him  by  the  director;"     Ger-  was  designed  it  should  be,  and  fraudu- 

hard  v.  Bates,  2  El.  &  Bl.  476  (1853) ;  lently  induces  some  one  to  act  to  his 

CuUen  V.  Thomson,  6  L.  T.  Rep.  870  prejudice    by  acting    in    the  mode  it 

(1862),  holding  that,   where  directors  was  intended  to  influence  them  to  act 

of  a  joint-stock  company   issue  false  who  might  be  deceived  by  it,  the  per- 

and  fraudulent  reports  to  the  public,  son    who    made    the    instrument    and 

1090 


XX.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


352. 


dividends  and  representations  based  thereon  were  made.     A  corpora- 
tion may  be  held  Hable  for  false  representations  in  a  prospectus  issued  by 

Div.  407  (1904).  A  claim  by  a  pur- 
chaser of  stock  against  the  directors 
for  falsely  representing  that  the  stock 
was  earning  dividends,  when  in  fact 
the  stock  was  sold  to  raise  money  to 
pay  illegal  dividends,  is  assignable. 
Keeler  v.  Dunham,  114  N.  Y.  App. 
Div.  94  (1906).  A  person  buying  stock 
in  what  was  supposed  to  be  a  cor- 
poration, but  is  a  partnership,  cannot 
recover  back  his  money  from  all  of 
the  participants.  Perry  v.  Hale,  143 
Mass.  540  (1887).  A  corporation  is 
not  liable  for  misrepresentations  of 
the  president  in  selling  stock  belong- 
ing to  himself.  Prosser  v.  First  Nat. 
Bank,  106  N.  Y.  677  (1887).  Where 
stockholders  in  an  apartment-house 
corporation  are  entitled  to  rent  apart- 
ments at  a  rental  to  be  fixed  by  a 
majority  vote  of  the  stockholders,  an 
increased  rental  so  voted  is  legal.  The 
by-laws  providing  for  such  a  vote 
override  a  general  statement  in  a  pro- 
spectus to  the  contrary,  the  stock- 
holders knowing  of  the  by-law.  Comp- 
ton  V.  Chelsea,  128  N.  Y.  537  (1891). 
The  fact  that  the  false  statements  as 
to  the  condition  of  the  corporation  are 
made  to  a  director,  who  is  acting  as 
agent  for  the  vendee,  is  not  fatal  to 
the  suit  for  fraud.  Trimble  v.  Ward, 
97  Ky.  748  (1895).  A  person  loaning 
money  to  an  individual  and  taking 
bank  stock  as  collateral  security  can- 
not hold  the  bank  liable  in  an  action 
for  damages  for  deceit,  on  the  ground 
that  its  published  statements  were 
false  and  fraudulent,  and  that  he 
relied  on  those  statements.  Mer- 
chants' Nat.  Bank  v.  Armstrong,  65 
Fed.  Rep.  932  (1895).  A  vendor  who 
sells  knowing  that  the  corporation  has 
issued  a  false  report  that  it  was  earn- 
ing two  per  cent,  a  month,  and  that  the 
vendee  relied  on  this  report,  is  guilty 
of  fraud,  and  the  sale  may  be  rescinded. 
Foley  V.  Holtry,  43  Neb.  133  (1894). 
A  person  who  purchases  bank  stock 
from  the  bank  itself  may  hold  the 
bank  liable  for  damages  where  the 
public  statement  of  the  bank  which  he 
relied  on  in  piirchasing  was  false. 
The  measure  of   damages   is   the  dif- 


caused  it  to  be  thus  fraudulently  used 
is  liable  to  the  person  who  has  been 
defrauded  by  it.  In  such  a  case  the 
person  injured  has  been  subjected  to 
damage  by  his  fraudulent  acts,  and 
the  fraudulent  wrong-doer  is  liable  for 
the  consequences."  In  Cazeaux  v. 
Mali,  25  Barb.  578  (1857),  the  court 
said :  ."It  is  not  essential  that  the  rep- 
resentation should  be  addressed  di- 
rectly to  the  plaintiff ;  if  it  were  made 
with  the  intent  of  its  influencing  every 
one  to  whom  it  might  be  communi- 
cated, or  who  might  read  or  hear  of 
it,  the  latter  class  of  persons  would 
be  in  the  same  position  as  those  to 
whom  it  was  directly  communicated, 
but  they  must  have  come  to  a  knowl- 
edge of  it  before  their  purchase."  In 
Morse  v.  Swits,  19  How.  Pr.  275 
(1859),  a  bank  officer  was  held  liable 
for  false  statements  in  a  report  pub- 
lished in  accordance  with  the  require- 
ments of  a  statute,  the  court  saying : 
"Being  published,  the  public,  or  any 
individual  of  the  public,  has  a  right 
to  believe  it.  .  .  .  And  if,  believing 
it,  any  one  of  the  public  acts  on  that 
belief,  the  makers  and  publishers  of 
this  falsehood  are  to  be  held  liable 
for  the  consequences  they  have 
caused."  (See  cases  cited  in  Report- 
er's note  to  the  foregoing.)  See  also 
Salmon  v.  Richardson,  30  Conn.  360 
(1862) ;  Fenn  v.  Curtis,  23  Hun,  384 
(1881),  holding  the  secretary  liable  to 
a  purchaser  of  shares  from  an  indi- 
vidual, the  secretary  ha\ing  signed 
the  certificate  of  stock  and  also  a  cir- 
cular stating  that  the  corporation  was 
a  corporation,  when  in  fact  it  was 
not.  And  see  §§  40,  48,  supra.  The 
treasurer  may  be  liable  in  an  action 
for  fraud  and  deceit  to  a  purchaser  of 
stock  who  bought  relying  on  false 
statements  made  by  him  to  the  public 
as  to  profits.  Keeler  v.  Seaman,  47 
N.  Y.  Misc.  Rep.  292  (1905).  A  com- 
mon-law action  for  damages  due  to  a 
purchase  of  stock  induced  by  a  false 
report  made  by  the  defendant  as  treas- 
urer may  be  joined  with  the  remedy 
given  by  the  New  York  statutes. 
Hutchinson  v.  Young,  93  N.  Y.  App. 


1091 


§  352.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[cH.  XX. 


it  to  sell  stock  of  another  corporation.^  A  purchaser  of  stock  in  an  in- 
surance company,  however,  cannot  hold  a  bank  liable  on  a  misstatement 
by  the  bank  to  the  insurance  commissioner  as  to  the  cash  which  the 
insurance  company  has  on  deposit  with  it.^  An  officer  of  a  bank  is 
personally  liable  to  a  purchaser  of  its  stock  who  relied  on  the  published 
statement  signed  by  the  officers  in  which  overdrafts  are  described  as 
loans  and  discounts.^     A  director  who  deliberately  refuses  to  examine 

disappeared  and  it  went  into  liquida- 
tion, is  proof  of  such  misrepresenta- 
tion. It  may  be  shown  that  at  the 
time  of  the  misrepresentation  the 
company  owed  its  officers  and  em- 
ployees a  large  sum  of  money.  It  may 
be  shown  that  the  corporate  books 
and  statements  overvalued  the  assets. 
The  treasurer — secretary — bookkeeper 
is  a  competent  witness  to  prove  that 
at  a  certain  time  the  company  was 
not  solvent.  In  an  action  against 
the  president  for  damages  for  false 
representations  it  need  not  be  proved 
that  he  had  actual  knowledge  of  the 
falsity  of  the  statements  in  regard  to 
corporate  affairs,  inasmuch  as  he  was 
bound  to  know  thereof.  Norvell  v. 
Pye,  95  S.  W.  Rep.  666  (Tex.  1906). 

1  Such  a  cause  of  action  is  assign- 
able under  the  New  York  statute.  Ben- 
edict V.  Guardian  T.  Co.,  58  N.  Y.  App. 
Div.  302  (1901).  A  trust  company 
which  issues  a  prospectus  offering  for 
sale  stock  in  a  mining  corporation, 
and  making  in  the  prospectus  mis- 
statements as  to  the  earnings,  is  liable 
to  purchasers  of  stock  for  the  differ- 
ence between  its  actual  value  and 
what  its  value  would  have  been  if 
the  representations  had  been  true. 
Benedict  v.  Guardian  T.  Co.,  91  N.  Y. 
App.  Div.  103  (1904) ;  aff'd,  180  N.  Y. 
558. 

2  Hindman  v.  First  Nat.  Bank,  86 
Fed.  Rep.  1013  (1898). 

3  Gerner  v.  Yates,  61  Neb.  100 
(1900).  A  purchaser  of  stock  in  a 
national  bank  cannot  hold  the  direc- 
tors liable  for  a  false  statement  in 
their  report  to  the  comptroller  of  the 
currency  unless  they  knew  it  to  be 
false  or  by  ordinary  care  and  pru- 
dence would  have  so  known.  Mason 
r.  Moore,  73  Ohio  St.  275  (1906).  A 
person  who  buys  stock  in  a  national 
bank  relying  on  a  report  of  the  con- 


ference between  the  value  of  the  stock 
if  the  statement  had  been  true  and  its 
actual  value.     Exchange  Bank  v.  Gait- 
skill,  37  S.  W.  Rep.  160  (Ky.   1896). 
A   statement    in   a   report    putting   a 
value  on  oil  wells,  is  not  a  representa- 
tion rendering  the  directors  liable  to  a 
person  who  purchases  his  stock  rely- 
ing   thereon.     Craig     v.     Wade,     159 
Cal.  172  (1911).     Where  the  manager 
makes  a  written  statement  to  a  person 
to   use   in   selling   the   stock   he    (the 
manager)  may  be  held  liable  in  damages 
for    fraudulent    representations    con- 
tained in  it  leading  to  such  purchase, 
and  the  statute  against  a  person  being 
charged  with  representations  as  to  the 
credit    of    another    person    unless    in 
writing   and    signed   does   not    apply. 
Diel  V.  Kellogg,  163  Mich.  162  (1910). 
A  brokerage  corporation  is  liable  for 
the  fraud  of  its  officers  in  selling  stock 
by  misrepresentations.     Brite  v.  Penny, 
157   N.    C.    110   (1911).      A   corpora- 
tion may  be  liable  in  damages  for  a 
fraudulent    prospectus    issued    by    it 
causing  a  party  to  purchase  its  stock 
from  a  director.    Gunderson  v.  Havana, 
etc.  Co.,  133  N.  W.  Rep.  554  (N.  D. 
1911).     A  stockholder  sued  by  a  cor- 
poration on  an  ordinary  debt,  and  who 
sets  up  in  defense  that  he  was  induced 
to  buy  stock  from  outside  parties  by 
fraudulent    statements    made    by    the 
company,  cannot  have  a  mandamus  to 
compel  the  company  to  allow  him  to 
examine  its  books.     His  application  in 
such  a  case  is  as  a  creditor  and  not 
as  a  stockholder.     Investment  Co.  v. 
Eldridge,  2  Pa.  Dist.  394  (1903) ;  aff'd, 
175   Pa.   St.   287.     Plaintiff  need   not 
allege  that  he  relied  solely  on  the  mis- 
representations.    A     false     statement 
that  the  company  is  perfectly  solvent 
is    a    material    misrepresentation    and 
the  fact  that  two  or  three  years  there- 
after  all    the    corporate    assets   have 


1092 


CH.   XX.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  352. 


bank  accounts  which  it  is  his  duty  to  examine,  and  signs  a  bank  state- 
ment which  is  false,  is  hable  to  a  person  who  purchased  stock  in  the  bank 
relying  on  such  statement  and  the  form  of  action  is  immaterial,  even 
though  no  common  action  of  deceit  will  lie.^  Although  a  corporate  credi- 
tor may  hold  the  incorporators  liable  for  a  false  statement  in  their  sworn 
statement  obtaining  incorporation  in  regard  to  the  amount  of  capital 
stock  that  has  been  paid  in,  yet  the  action  is  in  tort  and  an  assignee  of 
the  claim  cannot  maintain  it.^  The  president  is  liable  in  an  action  of 
deceit  where  he  sells  stock  after  referring  the  purchaser  to  a  published 
statement  of  the  corporation  signed  by  him,  which  statement  was  false. 
Where,  however,  the  sale  is  to  a  director,  such  a  director  is  bound  to 
show  that  he  did  not  know  the  statement  was  untrue,  and  he  may  show 
that  fact  although  he  also  signed  the  statement.^    In  a  suit  by  a  pur- 


dition  of  the  bank  signed  by  directors, 
in  accordance  with  the  acts  of  con- 
gress, may  hold  the  directors  so  sign- 
ing the  report  personally  liable  in 
damages  if  it  transpire  that  the  re- 
port was  absolutely  false  and  that  the 
stock  was  worthless,  but  he  cannot 
hold  liable  the  directors  who  did  not 
sign  the  report.  Gerner  v.  Mosher,  58 
Neb.  135  (1899).  See  also  Stuart  ;;. 
Bank  of  Staplehurst,  57  Neb.  569 
(1899).  Directors  of  a  bank  are  not 
liable  in  an  action  for  deceit  to  a 
purchaser  of  stock,  although  they 
signed  the  cashier's  annual  statement, 
which  was  false,  there  being  proof 
that  they  believed  it  to  be  true.  Fos- 
ter V.  Gibson,  38  S.  W.  Rep.  144  (Ky. 
1896).  Directors  of  a  national  bank 
are  at  common  law  liable  for  false  re- 
ports to  any  party  injured  thereby. 
Yates  V.  Jones  Nat.  Bank,  74  Neb.  734 
(1905).  At  common  law  a  purchaser 
of  national  bank  stock  may  hold  the 
directors  liable  for  his  loss  in  purchas- 
ing the  stock  in  reliance  on  a  report 
of  the  directors  to  the  comptroller  of 
the  currency,  which  report  stated  the 
''loans  and  discounts"  by  including 
the  par  value  of  paper  which  was  worth 
much  less  than  its  face  value.  Smalley 
V.  McGraw,  148  Mich.  384  (1907). 

1  Thomas  v.  Taylor,  224  U.  S.  73 
(1912). 

2  Haines  v.  Franklin,  87  Fed.  Rep. 
139  (1898). 

3  Ward  r.  Trimble,  103  Ky.  153 
(1898).  Where  one  director  sells  his 
stock  to  another  relying  on  a  corpo- 


rate statement  prepared  by  a  clerk  of 
the  company,  he  cannot  hold  the  ven- 
dee liable  in  damages,  even  though 
the  statement  was  false.  Goodwin  v. 
Daniel,  93  S.  W.  Rep.  534  (Tex.  1906). 
A  purchaser  of  stock  relying  on  a 
prospectus  cannot  hold  liable  for 
deceit  the  persons  whose  names  are 
signed  to  the  prospectus  unless  he 
proves  that  the  prospectus  did  not 
state  the  information  which  they  had, 
even  though  such  information  was 
false.  Proof  must  be  given  of  intent 
to  deceive,  and  if  the  defendants  be- 
lieved the  information  given  to  them 
or  had  reasonable  cause  to  believe  it, 
they  are  not  liable.  Duryea  v.  Zim- 
merman, 121  N.  Y.  App.  Div.  560 
(1907).  Under  the  Kentucky  statutes 
making  directors  personally  liable  for 
knowingly  causing  to  be  published 
false  statements  causing  damage,  a 
director  may  be  held  liable,  where  by 
ordinary  diligence  he  would  have  dis- 
covered that  the  published  statement 
was  incorrect.  Allen  v.  Neale,  134 
Ky.  690  (1909).  A  person  buying 
stock  relying  on  the  published  state- 
ment of  the  corporate  condition,  and 
who  then  becomes  a  director  and  learns 
that  the  corporation  is  insolvent  may 
continue  to  be  a  director  and  endeavor 
to  save  the  company  and  still  sue 
another  director  for  damages  for 
deceit,  even  though  such  other  direc- 
tor did  not  know  that  the  published 
statement  was  false.  The  damages 
are  the  difference  between  the  price 
paid  and  the  actual  value  of  the  stock. 


1093 


§353. 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


chaser  of  national  bank  stock  against  the  directors  for  fraudulent  pub- 
lished reports,  the  recovery  rests  entirely  on  the  national  bank  law,  if 
that  is  the  same  as  the  New  York  common  law.  The  measure  of  dam- 
ages is  the  price  paid  for  the  stock  less  its  actual  value. ^  Where  both 
the  vendor  and  vendee  of  stock  relied  upon  a  published  statement  of  the 
corporate  affairs  showing  the  stock  to  be  worth  par,  when  in  fact  the 
statement  was  grossly  false  and  the  stock  was  worthless,  the  sale  may  be 
rescinded  for  mutual  mistake.^ 

§  353.  A  somewhat  different  rule  prevails  in  England  as  to  false 
statements  contained  in  a  prospectus  of  a  corporation.  A  prospec- 
tus is  issued  for  the  purpose  of  inducing  persons  to  subscribe  for  stock. 
Its  object  is  not  to  promote  the  sale  of  that  stock.  Accordingly,  it  was 
decided  in  Peek  v.  Gurney,^  in  1873,  that  "  the  purchaser  of  shares  in 
the  market,  upon  the  faith  of  a  prospectus  which  he  has  not  received 
from  those  who  are  answerable  for  it,  cannot,  by  action  upon  it,  so  con- 
nect himself  with  them  as  to  render  them  liable  to  him  for  the  misrep- 
resentation contained  in  it,  as  if  it  had  been  addressed  personally  to 
himself."  In  New  York  a  directly  opposite  rule  prevails.  In  the  case 
of  Morgan  v.  Skiddy,^  in  1875,  the  court  of  appeals  held  that,  "  if  the 


Ligon  V.  Minton,  12.5  S.  W.  Rep.  304 
(Ky.  1910).  The  president  is  liable 
in  an  action  for  deceit  where  he  sells 
stock  of  the  bank  of  which  he  is 
president,  and  which  has  published 
a  false  statement  of  its  condition  by 
order  of  the  president  and  others. 
Trimble  v.  Reid,  41  S.  W.  Rep.  319 
(Ky.  1897).  In  an  action  at  law  the 
directors  are  not  liable  to  a  person 
who  purchases  stock,  relying  on  the 
directors'  report,  unless  fraudulent  in- 
tent is  proved.  Parker  v.  McQuesten, 
32  Q.  B.  Rep.  (Can.)  273  (1872). 

1  Taylor  v.  Thomas,  124  N.  Y.  App. 
Div.  53  (1908) ;    aflf'd,  195  N.  Y.  590. 

2Neale  v.  Wright,  130  Ky.  146 
(1908).  See  also  §  354,  infra.  Fraud- 
ulent representations  of  the  seller  of 
bonds  as  to  the  condition  of  the 
company  cannot  be  proved  by  finan- 
cial reports  of  the  company,  which 
the  defendant  did  not  know  about  at 
the  time  of  the  sale.  Willets  v.  Poor, 
141  N.  Y.  App.  Div.  743  (1910).  A 
bank  loaning  money  to  a  paper  com- 
pany to  purchase  its  own  stock,  may 
hold  liable  the  vendor  for  the  loan  if 
the  vendor's  secretary  made  a  false 
report  to  the  secretary  of  state  as  to 
the   financial    condition   of   the  paper 


company  as  a  director  thereof.  Dime 
Savings  Bank  v.  Fletcher,  158  Mich. 
162  (1909). 

3  L.  R.  6  H.  L.  377,  overruling  Bag- 
shaw  V.  Seymour,  18  C.  B.  903  (1856), 
and  Bedford  v.  Bagshaw,  4  H.  &  N. 
538  (1859) ;  explaining  Scott  v.  Dixon, 
29  L.  J.  (Exch.)  62,  n.  (1859),  and 
Gerhard  v.  Bates,  2  El.  &  Bl.  476 
(1853),  and  itself  explained  in  Car- 
gill  V.  Bower,  L.  R.  10  Ch.  D.  502 
(1878).  In  Bellairs  v.  Tucker,  L.  R. 
13  Q.  B.  D.  563  (1884),  the  court 
seems  to  have  assumed  a  different 
position,  and  to  have  treated  the  pro- 
spectus the  same  as  any  other  method 
of  misrepresentation. 

^  62  N.  Y.  319.  In  Kountze  v.  Ken- 
nedy, 147  N.  Y.  124  (1895),  it  was 
held  that  the  fact  that  an  officer,  in 
a  statement  of  the  liabilities  of  the 
company,  omitted  a  claim  which  was 
afterwards  established,  was  not  guilty 
of  such  fraud  as  would  sustain  a  suit 
at  law  for  damages  for  deceit.  Officers 
or  directors  who  issue  a  prospectus  to 
induce  persons  to  buy  treasury  stock 
from  the  corporation  at  par,  are  not 
liable  to  a  person  who  buys  stock  from 
another  stockholder  at  par,  even 
though    he   relied    on   the   prospectus 


1094 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[§  354. 


plaintiff  purchased  his  stock  relying  upon  the  truth  of  the  prospectus, 
he  has  a  right  of  action  for  deceit  against  the  persons  who,  with  knowl- 
edge of  the  fraud  and  with  intent  to  deceive,  put  it  in  circulation.  The 
representation  was  made  to  each  person  comprehended  within  the 
class  of  persons  who  were  designed  to  be  influenced  by  the  prospectus ; 
and  when  a  prospectus  of  this  character  has  been  issued,  no  other  rela- 
tion or  privity  between  the  parties  need  be  shown  except  that  created 
by  the  wrongful  and  fraudulent  act  of  the  defendents  in  issuing  or  cir- 
culating the  prospectus,  and  the  resulting  injury  to  the  plaintiff." 
A  statement  in  a  prospectus  that  dividends  have  been  paid  may  be 
fraudulent  if  the  dividends  were  not  paid  out  of  profits.^  Under  the 
English  statute,  where  a  person  purchases  stock  in  the  open  market, 
being  induced  to  do  so  by  a  prospectus  and  published  telegram,  both 
of  which  are  fraudulent,  he  may  hold  the  promoters  personally  respon- 
sible, although  the  stock  was  not  purchased  from  them  nor  from  the  cor- 
poration.^ 

§  354.  Remedies  for  the  fraud.  —  There  are  three  methods  by 
which  a  person  who  has  been  fraudulently  induced  to  buy  or  sell  stock 
may  remedy  the  wrong.'    He  may  bring  an  action  at  law  for  the  con- 

and  it  contained  misrepresentations,  come  the  purchaser  of  property,  has, 
Cheney  v.  Dickinson,  172  Fed.  Rep. 
109  (1909).  A  director  voting  for  a 
mortgage  and  the  president  executing 
it,  relying  on  statements  that  it  covered 
certain  property,  are  liable  to  a  pur- 
chaser of  the  bonds  secured  thereby  if 
it  turns  out  that  the  mortgage  did 
not  cover  that  property,  a  prospectus 
having  been  issued  misrepresenting 
the  value  of  the  property.  Lynch  v. 
Southern,  etc.  Co.,  135  Mo.  App.  672 
(1909). 

1  Downey  v.  Finucane,  205  N.  Y. 
251  (1912). 

2  Andrews  v.  Mockford,  [1896]  1 
Q.  B.  372.  Where  a  party  purchases 
stock,  relying  on  a  prospectus  which 
states  that  reports  had  been  "pre- 
pared for  the  directors"  by  the  engi- 
neers and  giving  extracts  therefrom, 
the  directors  are  not  personally  liable 
in  an  action  for  deceit,  even  if  it  is 
shown  that  the  reports  were  prepared 
on  instructions  not  from  the  directors, 
but  from  the  vendors  of  the  property 
to  the  company.  It  is  necessary  to 
prove  that  the  reports  were  untrue. 
Angus  V.  Clifford,  [1891]  2  Ch.  449. 

'  ''A  person  who  has  been  induced 
by  fraudulent  representations   to   be- 


upon  discovery  of  the  fraud,  three 
remedies  open  to  him,  either  of  which 
he  may  elect.  He  may  rescind  the 
contract  absolutely  and  sue  in  an 
action  at  law  to  recover  the  considera- 
tion parted  with  upon  the  fraudulent 
contract.  To  maintain  such  action 
he  must  first  restore,  or  offer  to  re- 
store, to  the  other  party,  whatever 
may  have  been  received  by  him  by 
virtue  of  the  contract.  He  may  bring 
an  action  in  equity  to  rescind  the  con- 
tract, and  in  that  action  have  full 
relief.  Such  an  action  is  not  founded 
upon  a  rescission,  but  is  maintained 
for  a  rescission,  and  it  is  sufficient, 
therefore,  for  the  plaintiff  to  offer  in 
his  complaint  to  return  what  he  has 
received  and  make  tender  of  it  on 
the  trial.  Lastly,  he  may  retain  what 
he  has  received  and  bring  an  action 
at  law  to  recover  the  damages  sus- 
tained. This  action  proceeds  upon 
an  affirmance  of  the  contract,  and  the 
measure  of  the  plaintiff's  recovery  is 
the  difference  between  the  article  sold 
and  what  it  should  be  according  to 
the  representations."  Vail  v.  Rey- 
nolds, 118  N.  Y.  297  (1890).  Where 
the   sale   of   stock   has   been   induced 


1095 


§354. 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


sideration,  or  an  action  at  law  for  damages  for  the  deceit,  or  he  may  file 
a  bill  in  equity  to  have  the  transaction  set  aside.  The  second  remedy  is 
the  most  difficult  and  the  last  the  most  easy  to  maintain.  At  common 
law  an  action  to  recover  back  the  whole  of  the  purchase-money  upon  a 
rescission  for  fraud  is  virtually  a  suit  for  money  had  and  received.^ 

In  special  cases  other  remedies  are  open  to  the  purchaser.  He 
may  compel  the  defrauding  party  to  abide  by  the  statements  that 
were  made.  Thus,  where  the  vendor  represented  that  the  corporate 
property  was  unincumbered,  equity  may,  at  the  instance  of  the  pur- 
chaser of  stock,  enjoin  the  vendor  from  enforcing  a  lie'n  which  he  has 
on  such  property.^    If  the  contract  is  executory  it  may  be  canceled  by 


by  fraud,  the  vendee  may  follow  the 
money  paid  by  him  and  recover  it 
back  if  the  identity  of  the  fund  can 
be  shown.  Moore  v.  Williams,  62 
Hun,  55  (1891). 

1  Gassett  v.  Glazier,  165  Mass.  473 
(1896).     See  also  §  353,  supra. 

2  Jones  V.  BoUes,  9  Wall.  364  (1869). 
See  also  §§  334,  3.54,  and  771.  Where 
a  person  organizes  a  railroad  corpora- 
tion and  takes  a  contract  for  its  con- 
struction, and  causes  all  the  stock 
and  a  large  quantity  of  bonds  to  be 
issued  to  himself,  and  then  sells  these 
stocks  and  bonds  and  has  knowl- 
edge of  representations  made  by  cor- 
porate oflfieers  to  his  vendee  that  the 
company  owes  nothing  except  the 
bonds,  he  cannot  afterwards  enforce  a 
claim  for  doing  extra  work  under  a 
contract,  where  such  contract  did  not 
appear  on  the  books  of  the  company. 
The  transaction  is  a  fraud  on  his  part. 
Chicago,  etc.  Ry.  v.  Miller,  91  Mich. 
166  (1892).  Where  the  vendor  of  a 
majority  of  the  stock  of  a  corporation 
agrees  that  the  company  owes  no 
debts  except  certain  specific  ones,  the 
vendee  may  recover  back  any  excess 
of  debts  over  those  specified.  Where 
the  debts  of  one  class  were  not  to 
exceed  a  certain  sum,  but  did  exceed 
that  sum,  the  vendee  may  recover  the 
difference,  even  though  the  debts  of 
another  class  were  less  than  a  sum 
specified  in  the  contract  of  sale.  Chi- 
cago, etc.  Ry.  V.  Hoyt,  89  Wis.  314 
(1895).  See  German  State  Bank  v. 
Northwestern,  etc.  Co.,  104  Iowa,  717 
(1898).  Although  a  purchaser  of 
stock  cannot  rescind,  he  having  been 


guilty  of  delay,  yet  he  may  sue  the 
vendor  upon  a  warranty  that  the  stock 
wiU  be  worth  more  than  what  it  was 
sold  for.  Maxted  v.  Fowler,  94  Mich. 
106  (1892).  Stockholders  cannot  de- 
feat a  vendor's  lien  on  the  ground  that 
the  vendor,  before  they  bought  their 
stock,  represented  that  he  had  no  lien, 
where  they  do  not  set  up  that  defense 
in  a  suit  by  him  to  establish  his  lien. 
Wilson  V.  Seymour,  76  Fed.  Rep.  678 
(1896).  Where  a  person  owning  all 
the  stock  of  a  corporation  sells  it 
under  circumstances  which  induce 
the  purchaser  to  believe  that  the  former 
has  no  claim  against  the  corpora- 
tion, he  may  be  enjoined  from  enforc- 
ing any  such  claim.  Given  v.  Times- 
Republican,  etc.  Co.,  114  Fed.  Rep.  92 
(1902).  Where  the  stockholders  in  a 
power  company  seU  their  stock  and 
then  obtain  control  of  water  rights 
on  which  the  company  had  an  op- 
tion, which  option  has  expired,  the 
party  purchasing  the  stock  may  by 
a  suit  in  equity  compel  them  to  turn 
over  such  water  rights.  Valentine  v. 
Berrien,  etc.  Co.,  128  Mich.  280 
(1901).  Where  a  majority  stockholder 
who  also  controls  the  board  of  directors 
induces  subscription  on  representa- 
tions that  the  corporate  expense  would 
not  exceed  a  certain  amount  a  month, 
and  he  then  votes  himself  a  salary  in 
excess  of  that  amount,  the  court  may 
compel  him  to  repay  the  excess  and 
may  order  a  dividend  to  be  paid  there- 
from. Ritchie  v.  People's  Tel.  Co., 
22  S.  D.  598  (1909).  Where  pro- 
moters issue  stock  for  land  on  which 
they  have  an  option,  and  then  sell  un- 


1096 


CH.  XX.]       CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC.        [§  354. 

mutual  agreement.^  Where  a  consolidation  is  brought  about  by  the 
fraudulent  representations  of  a  stockholder  in  one  of  the  corporations, 
the  remedy  of  the  consolidated  company  against  him  is  not  a  suit  for 
money  received  by  him  as  a  stockholder,  but  is  an  action  for  damages  for 
fraud  or  a  suit  to  rescind.-  Trover  cannot  be  maintained  by  a  vendor 
of  stock,  even  though  he  claims  that  he  was  fraudulently  induced  to  sell, 
inasmuch  as  he  is  no  longer  the  owner  of  the  stock  and  is  not  entitled 
to  possession  thereof.^  Misrepresentations  may  sustain  an  action  for 
breach  of  warranty  in  the  sale  of  stock,  even  though  not  sufficient  to 
sustain  an  action  for  deceit  or  for  the  recovery  of  money  had  and  re- 
ceived. In  an  action  foi  breach  of  warranty  the  stock  need  not  be  ten- 
dered back.^  A  person  induced  by  fraudulent  representations  to  sell 
his  stock  may  recover  damages  for  the  fraudulent  conversion  thereof 
and  for  fraudulent  conspiracy,  the  fraud  consisting  in  representations 
that  the  purchaser  was  responsible  and  that  security  given  by  him  was 
good.^  Where  the  secretary  and  treasurer  of  the  corporation  by  fraudu- 
lently misrepresenting  the  condition  induces  a  stockliolder  to  sell  his 
stock  to  the  former,  the  latter  may  maintain  a  suit  in  equity  to  set 
aside  the  sale  and  may  have  an  injunction  restraining  any  transfer 
and  may  join  the  corporation  in  order  to  obtain  a  retransfer.^  A  per- 
son whose  stock  has  been  sold  as  a  part  of  a  conspiracy  to  deprive  him 
of  his  interest,  may  maintain  a  stockholder's  suit  to  set  aside  an  alleged 
illegal  issue  of  increased  stock.^     In  a  suit  by  the  pledgee  of  stock  against 

issued  stock  to  the  public  for  cash  on  lie.      Norton  v.  Bohart,   105  Mo.  615 

representations  that  all  the  stockhold-  (1891). 

ers  entered  on  the  same  basis,  they  may  ^  Anderson,  etc.  Co.  v.  Pungs,   134 

be  held  liable  for  such  an  amount  as  Mich.  79  (1903).     See  s.  c,  134  Mich, 

would  put  them  on  the  same  basis  as  475. 

the     other     stockholders.     Torrey     v.  '  Newman  v.  Mercantile  T.  Co.,  189 

Toledo,  etc.  Co.,  L58  Mich.  348  (1909).  Mo.  423  (1905). 

A  trust  company  is  not  bound  by  the  ^  Phillips  v.  Crosby,  69  N.  J.  L.  612 

representations    of   its   vice    president  (1903).     A   representation    as    to    the 

that  a  mortgage  running  to  the  trust  financial    condition    of    the    company 

company  to  secure  bonds  is  a  first  hen,  may  constitute  an  express  warranty, 

it  turning  out  that  there  was  a  prior  Her  v.  Jennings,  87   S.   C.  87   (1910). 

lien.     Davidge    v.    Guardian    T.    Co.,  A  purchaser  of  stock  may  sue  the  seller 

203  N.  Y.  331  (1911).  for  breach  of  warranty  where  the  latter 

1  A   subscription   may  be    canceled  warranted  that  the  stock  was  worth  its 

by  and  with  the  consent  of  the  direc-  par  value.     The  measure  of  damages 

tors    when   fraud    is    involved.     Four  is  the  difference  between  such  value  and 

years    afterwards    corporate    creditors  the    actual     value.     Hull     v.     Geary, 

cannot  attack  it.     McDermott  r.  Harri-  76  S.  E.  Rep.  960  (W.  Va.  1912). 

son,  9  N.  Y.  Supp.   184   (1890).     See  ^  MeNaughton  v.  Smith,  136  Mich, 

ch.   X,    supra.     If   there   has   been   a  368  (1904). 

mutual    mistake    in    regard    to   what  ^  Morrison  v.  Snow,  26  Utah,  247 

the  stock  really  represented  in  prop-  (1903). 

erty,  an  action  for  money  had  and  re-  ^  Witherbee  v.  Bowles,  201   N.   Y. 

ceived  or  a  suit  to  cancel  the  sale  will  427  (1911). 

1097 


§  355.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


the  pledgor  and  corporate  officers  for  damages  for  combining  to  stop  the 
pledgee  transferring  the  stock  on  the  books  of  the  company  on  a  sale 
by  the  pledgee,  the  plaintiff  may  examine  the  defendants  before  trial 
to  show  that  they  combined  to  have  "  wash  sales  "  on  the  market  in 
order  to  cause  greater  damage  to  the  pledgee.^  A  statement  by  the 
vendor  that  he  is  selling  treasury  stock  when  in  fact  he  is  selling  his  own 
stock  does  not  give  the  corporation  a  right  to  complain.-  The  pleadings 
in  enforcing  the  remedies  which  the  vendee  has,  vary,  of  course,  according 
to  the  remedy  which  is  pursued.^ 

§  355.  Action  for  deceit.  —  In  order  to  sustain  an  action  for  dam- 
ages for  deceit,  whereby  plaintiff  was  induced  to  buy  or  sell  shares  of 
stock,  it  is  necessary  for  the  plaintiff  to  prove  that  statements  were 
made  or  acts  done  which  were  fraudulent,  that  the  person  guilty  of 
them  knew  that  they  were  fraudulent,  and  that  the  plaintiff  acted  on 
such  statements  or  acts  in  buying  or  selling  the  stock.'*  "  Fraud  with- 
out damage  or  damage  without  fraud  gives  no  cause  of  action."  ^  In 
England  a  statement  made  recklessly,  or  without  regard  as  to  whether 
it  is  true  or  untrue,  may  constitute  a  fraudulent  intent.®     In  New  York 


1  Bioren  v.  Canadian  Mines  Co.,  140 
N.  Y.  App.  Div.  523  (1910). 

2  Turner  v.  Markham,  155  Cal.  562 
(1909). 

3  In  the  case  of  Smith  v.  Tracy,  36 
N.  Y.  79  (1867),  the  vendee  sued 
the  vendor  for  a  breach  of  warranty, 
alleging  that  the  vendor's  agent  made 
certain  representations  as  to  the  con- 
dition of  the  corporation.  The  action 
failed  on  the  ground  that  the  vendor 
did  not  authorize  the  agent  to  make 
a  warranty.  In  Ajrres  v.  French,  41 
Conn.  142  (1874),  the  court  held  that 
fraud,  inducing  the  owner  of  stock  to 
part  with  it,  may  be  remedied  by  the 
action  of  trover,  with  a  count  in  case 
for  a  fraudulent  procurement  and  con- 
version of  the  stock.  In  National 
Exch.  Co.  V.  Drew,  2  Macq.  (H.  L.) 
103  (1855),  it  was  held  that  where 
a  person  is  induced  by  the  fraudulent 
reports  and  representations  of  corpo- 
rate officers  to  purchase  stock,  and 
the  corporation  loans  him  money  to 
do  so,  it  cannot  recover  back  the 
money  so  loaned.  See  Lightfoot  v. 
Creed,  8  Taunt.  268  (1818),  holding 
that  the  vendee  should  declare,  not 
for  money  paid,  but  specially  on  the 
contract.  Fraud  in  the  purchase  of 
stock  is  not  a  good  defense  to  a  note 


given  for  such  stock  for  the  purchase 
price,  unless  it  is  averred  that  the 
purchase  was  induced  by  the  fraud 
and  that  the  purchaser  was  ignorant 
of  the  truth  of  the  misrepresentations 
made.  Spencer  v.  Johnston,  58  Neb. 
44  (1899). 

^  Quoted  and  approved  in  Trimble 
V.  Reid,  97  Ky.  713  (1895) ;  aff'd,  41 
S.  W.  Rep.  319  (1897),  where  a  vendee 
sued  the  president  for  publishing  a 
false  statment  as  to  the  condition  of 
a  bank. 

5  Stratton's  Independence  v.  Dines, 
135  Fed.  Rep.  449,  458  (1905). 

^  In  the  important  case  of  Derry  v. 
Peek,  L.  R.  14  App.  Cas.  337  (1889), 
the  House  of  Lords  decided  that  in 
order  to  sustain  an  action  of  deceit 
there  must  be  proof  of  fraud,  and 
nothing  short  of  that  wiU  suffice. 
Fraud  is  proved  when  it  is  shown  that 
a  false  statement  has  been  made  (1) 
knowingly ;  (2)  without  beUef  in  its 
truth ;  (3)  recklessly.  But  if  a  man 
make  a  false  statement  honestly  be- 
lieving it  to  be  true  it  is  not  sufficient, 
to  support  an  action  of  deceit,  to  show 
that  he  had  no  reasonable  grounds  for 
his  belief.  The  directors  of  a  tram- 
way company  issued  a  prospectus  in 
which  they  stated  that  they  were  au- 


1098 


CH.  XX. j 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[§  355. 


the  rule  is  more  stringent.  The  case  of  Wakeman  v.  Dalley  ^  appUes 
to  this  class  of  cases  the  rule  that  "  an  action  founded  upon  the  deceit 
and  fraud  of  the  defendant  cannot  be  maintained  in  the  absence  of 
proof  that  he  believed,  or  had  reason  to  believe,  at  the  time  he  made 
them,  that  the  representations  made  by  him  were  false,  and  that  they 
were  for  that  reason  fraudulently  made,  or  that  he  assumed  or  intended 
to  convey  the  impression  that  he  had  actual  knowledge  of  their  truth, 
though  conscious  that  he  had  no  such  knowledge."  This  case  held  that 
a  director  is  not  liable  for  false  representations  on  the  company's  printed 
business  cards,  of  which  he  was  ignorant,  even  though  his  name  was 
attached  thereto.     The  same  rule  has  been  applied  in  other  jurisdictions.^ 


thorized  to  use  steam  power,  and  that 
by  this  means  a  great  saving  in  work- 
ing would  be  effected.  The  special 
act  incorporating  the  company  con- 
ferred this  authority,  subject  to  the 
consent  of  the  board  of  trade ;  but 
at  the  time  of  making  the  statement 
they  had  not  in  fact  obtained  consent 
to  use  steam  power  although  they  hon- 
estly believed  that  they  would  obtain 
it  as  a  matter  of  course.  Held  (re- 
versing the  judgment  of  the  court  be- 
low), that  they  were  not  liable  in  an 
action  of  deceit  brought  by  a  share- 
holder who  had  been  induced  to  apply 
for  shares  by  the  statement  in  the 
prospectus.  In  an  action  for  deceit  by 
a  misrepresentation  in  a  prospectus  as 
to  the  net  profit  on  the  capital  em- 
ployed, the  action  being  against  one 
who  was  a  promoter  and  also  one  of 
the  vendors,  and  whose  name  appeared 
in  the  prospectus  and  who  became  a 
director,  the  plaintiff  must  prove 
(1)  that  the  defendant's  statement  was 
untrue ;  (2)  that  it  was  dishonest ; 
(3)  that  he  believed  it  to  be  untrue. 
See  also  Glasier  v.  Rolls,  L.  R.  42  Ch. 
D.  436  (1889),  following  the  House  of 
Lords  in  Derry  v.  Peek,  L.  R.  14  App. 
Cas.  337.  In  Peek  v.  Gurney,  L.  R.  6 
H.  L.  377,  391  (1873),  the  court  said: 
."It  is  said  that  the  prospectus  is  true 
as  far  as  it  goes,  but  half  a  truth  will 
sometimes  amount  to  a  real  falsehood." 
See  also  ch.  IX,  §  148,  supra.  In 
BeUairs  v.  Tucker,  L.  R.  13  Q.  B.  D. 
562,  579  (1884),  however,  the  court 
said:  I'The  action  is  one  for  deceit. 
It  is  necessary  .  .  .  not  only  to  prove 
that  the  statements  in  a  prospectus  or 
any  other  document  are  not  true,  but  it 


must  be  proved  that  they  are  fraudu- 
lently put  forward  with  intent  to 
d-GcoivG.' 

1  51  N.  Y.  27,  35  (1872) ;  Nelson  v. 
Luling,  36  N.  Y.  Super.  Ct.  544  (1873) ; 
aff'd,  62  N.  Y.  645  ;  Schwenck  v.  Nay- 
lor,  102  N.  Y.  683  (1886).  Misjudg- 
ment  or  negligence  is  not  fraud  sus- 
taining an  action  for  deceit.  It  must 
be  proved  that  the  statements  were 
false  and  for  the  purpose  of  producing 
a  fraudulent  result.  Bell  v.  James,  128 
N.  Y.  App.  Div.  241  (1908);  aff'd, 
198  N.  Y.  513.  The  case  Holmes  v. 
Moffat,  120  N.  Y.  159  (1890),  was  an 
action  for  false  representations  and 
deceit  in  the  sale  of  stock,  but  the 
decision  turned  upon  technical  rules 
relative  to  the  trial.  The  action  for 
deceit  does  not  lie  against  the  corpora- 
tion, at  least  where  no  fraudulent  in- 
tent is  proved.  Pinedo  v.  Germania, 
etc.  Co.,  N.  Y.  D.  Reg.,  July  29,  1885 
(Supreme  Ct.).     See  also  §  157,  supra. 

2  In  an  action  of  tort  for  deceit 
against  a  director  for  inducing  a  per- 
son to  purchase  stock,  "the  plaintiff 
must  prove  representations  of  mate- 
rial facts  which  are  false,  and  which 
induce  him  to  act ;  and  either  that  the 
defendant  knew  them  to  be  false,  or 
that,  the  facts  being  facts  susceptible 
of  knowledge,  he  represented  as  of  his 
own  knowledge  that  they  were  true, 
when  in  fact  he  had  no  such  knowl- 
edge." Cole  V.  Cassidy,  138  Mass.  437 
(1885).  In  an  action  for  deceit  intent 
must  be  alleged  and  evidence  of  fraud 
not  alleged  is  inadmissible.  McComb 
V.  Brewer,  etc.  Co.,  184  Mass.  276 
(1903).  A  misrepresentation  is  not 
alone  sufficient  to  sustain  an  action 


1099 


§  355.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


In  New  York  a  vendee  of  stock  and  bonds  who  sues  at  law  to  recover 
damages  for  fraud  and  deceit  inducing  the  purchase  of  the  stock,  the  fraud 


for  deceit.  Boulden  v.  Stilwell,  100 
Md.  54.3  (1905).  In  an  action  of  de- 
ceit, fraud,  and  not  negligence,  must 
be  proved,  and  hence  it  cannot  be 
shown  that  a  party  by  the  exercise 
of  ordinary  care  would  have  known 
that  his  statements  were  false.  Ca- 
hill  V.  Applegarth,  98  Md.  49.3  (1904). 
An  allegation  that  the  vendee  relied 
on  or  was  induced  to  purchase  by 
reason  of  false  representations  is 
necessary.  Dahlman  v.  Antes,  109 
N.  W.  Rep.  784  (Iowa,  1906).  A  vendor 
is  not  liable,  even  though  his  state- 
ments are  not  true,  if  he  acted  in  good 
faith  and  stated  that  he  had  received 
the  statements  from  somebody  else 
and  that  he  did  not  know  whether  they 
were  true.  Krause  v.  Cook,  144 
Mich.  365  (1906).  In  an  action  for 
fraud  inducing  the  purchase  of  stock 
scienter  must  be  proved.  It  is  suflfi- 
eient  that  the  defendant  has  no  good 
reason  to  believe  that  material  repre- 
sentations made  by  him  were  true. 
A  statement  that  -SI, 500,000  worth  of 
ore  was  lying  on  the  ground  around 
the  mine  is  a  material  representation. 
Barndt  v.  Frederick,  78  Wis.  1  (1890). 
In  Wisconsin,  in  a  suit  by  a  vendee 
of  stock  against  the  vendor  for  dam- 
ages for  obtaining  money  and  prop- 
erty by  false  and  fraudulent  represen- 
tations, the  defendant  may  be  arrested. 
Warner  v.  Bates,  75  Wis.  278  (1889), 
giving  the  complaint  and  affidavit. 
See  also  Clark  v.  Edgar,  84  Mo.  106 
(1884);  Gee  v.  Moss,  68  Iowa,  318 
(1886). 

An  allegation  that  the  plaintiff  was 
induced  by  the  false  and  fraudulent 
misrepresentations  of  the  defendant 
to  buy  from  the  latter  certain  stock 
which  was  valueless,  and  that  the  de- 
fendant knew  that  the  statements  were 
untrue,  and  that  the  plaintiff  relied 
on  the  statements  and  bought  the 
stock,  constitutes  a  cause  of  action  in 
tort.  Freeman  v.  Trickett,  6  Kan. 
App.  83  (1897).  A  person  who  makes 
false  statements  in  regard  to  a  corpo- 
ration, and  then  advises  the  party  to 
whom  the  statements  are  made  to  buy 
the  stock,  is  liable,  in  an  action  for 

1 


deceit  to  such  party.  Heintz  v.  Muel- 
ler, 19  Ind.  App.  240  (1898) ;  s.  c,  59 
N.  E.  Rep.  414  (1901);  Arkwright  v. 
Newbold,  L.  R.  17  Ch.  D.  301  (1881) ; 
Arthur  v.  Griswold,  55  N.  Y.  400,  410 
(1874),  the  court  saying:  "The  rules 
of  law  require  a  reasonable  degree  of 
certainty  as  to  each  requisite  neces- 
sary to  constitute  the  cause  of  ac- 
tion, viz.,  representations,  falsity,  sci- 
enter,  deception,   and   injury." 

In  a  sale  of  stock  by  a  director,  a 
misstatement  made  by  him  in  good 
faith,  as  to  the  property  owned  by  the 
corporation,  does  not  render  him  lia- 
ble in  an  action  for  deceit.  Boddy  v. 
Henry,  113  Iowa,  462  (1901).  To  sus- 
tain an  action  for  deceit  it  must  be 
proved  that  the  representation  was 
false  and  that  the  party  making  it 
knew  it  to  be  false,  but  if  such  party 
had  means  of  knowledge,  but  actually 
had  no  knowledge,  this  is  sufficient  to 
hold  him  liable.  Hindman  v.  First 
Nat.  Bank,  112  Fed.  Rep.  931  (1902). 
A  bank  which,  as  pledgee,  causes  by 
its  statements  a  party  to  purchase  the 
stock  held  in  pledge,  may  be  held  liable 
in  damages  if  such  statements  were 
false.  Hindman  v.  First  Nat.  Bank, 
etc.,  98  Fed.  Rep.  562  (1899).  Where 
a  purchaser  of  goods  misrepresents 
the  value  of  stock  which  is  to  be  given 
as  a  pledge  for  the  purchase  price  and 
refers  the  vendor  to  a  bank,  which  bank 
repeats  the  misrepresentations,  the 
pledgee  may  sue  the  bank  for  damages 
and  may  show  that  the  bank  at  that 
time  held  such  stock  in  pledge  and  that 
the  goods  so  purchased  were  sub- 
stituted for  the  stock  of  the  bank  upon 
the  transaction  being  closed.  Am. 
Nat.  Bank,  etc.  v.  Hammond,  25  Colo. 
367  (1898).  In  an  action  for  deceit 
it  is  not  necessary  to  allege  that  the 
plaintiffs  would  not  have  purchased 
but  for  the  false  representations. 
Drake  v.  Holbrook,  66  S.  W.  Rep. 
512  (Ky.  1902).  In  a  suit  by  a  sub- 
scriber against  persons  inducing  him 
to  subscribe  by  fraudulent  misrepresen- 
tations, the  corporation  is  not  a  neces- 
sary party  defendant.  Austin  v.  Mur- 
dock,  127  N.  C.  454  (1900).  Even 
100 


CH.  XX.]  CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC.  [§  355. 

and  deceit  consisting  of  a  misstatement  by  an  officer  of  the  liabilities  of  the 
company,  must  prove  that  the  officer  did  not  believe  the  statement  to 
be  a  true  exhibit  of  the  company's  affairs  and  was  guilty  of  dishonesty. 
It  is  insufficient  to  prove  that  the  statement  was  grossly  inaccurate, 
and  largely  understated  the  actual  liabilities  of  the  company.     Actual 
fraud  must  be  proved.     It  must  be  shown  that  the  representation  was 
not  only  false  and  material,  but  was  known  by  the  defendant  when  he 
made  it  to  be  false,  or,  not  knowing  whether  it  was  true  or  false,  and  not 
caring  what  the  fact  might  be,  that  the  defendant  made  it  recklessly, 
paying  no  heed  to  the  injury  which  might  ensue.     "  Misjudgment,  how- 
ever gross,  or  want  of  caution,  however  marked,  is  not  fraud.     Inten- 
tional fraud,  as  distinguished  from  a  mere  breach  of  duty  or  the  omission 
to  use  due  care,  is  an  essential  factor  in  an  action  for  deceit."  ^    The 
supreme  court  of  the  United  States,  however,  holds  that  a  director  who 
deliberately  refuses  to  examine  bank  accounts  which  it  is  his  duty  to 
examine,  and  signs  a  bank  statement  which  is  false,  is  Hable  to  a  person 
who  purchased  stock  in  the  bank  relying  on  such  statement  and  the 
form  of  action  is  immaterial,  even  though  no  common  action  of  deceit 
will  lie.^     When  a  stockholder  receives  an  offer  for  his  stock,  and  is 
persuaded  not  to  sell  by  fraudulent  representations  of  a  director,  he 
may  hold  the  latter  liable  in  damages.^     So  also  where  the  principal 
gives  an  order  to  the  broker  to  sell  certain  stock,  which  the  principal 
owns,  and  the  broker,  by  fraudulent  representations,  dissuades  him 
from  selling,  the  principal  may  hold  the  broker  liable  in  damages."* 
The  vendee  of  stock  may  sue  for  damages  for  deceit  where  the  vendor 
fraudulently  misrepresented  the  dividends  that  had  been  paid  on  the 
stock.^     Where  a  person  owns  a  majority  of  the  stock  of  a  corporation, 
and  sells  it,  and  agrees  with  the  purchaser  to  obtain  the  stock  held  by 
others  at  as  low  a  figure  as  possible,  and  misstates  to  such  persons  the 

though  a  mortgage  purports  to  cover  124   (1895).     In  an  action  for  deceit 

land  when  in  fact  it  merely  covers  the  a  buyer  must  prove  that  the  vendor 

coal  underlying  the  land,  yet  the  presi-  knew   the  representations   were  false, 

dent  who  executes  the  mortgage  and  Cantwell  f.  Harding,  249  111.  354  (1911). 

the  stockholders  who  authorize  it  are  Allegations  of  misrepresentations,  etc., 

not  liable  for  deceit  to  a  bondholder,  causing  plaintiff  to  purchase  may  sus- 

although   they   knew   the   facts   when  tain  a  suit  as  on  an  express  warranty 

they  acted ;    neither  can  they  be  held  without     an     allegation     of     scienter, 

liable  in  equity  to  make  the  represen-  Her  v.  Jennings,  87  S.  C.  87  (1910). 

tations    good    or    on    the    ground    of  ^  Thomas  v.  Taylor,   224  U.   S.  73 

rescission,   inasmuch  as   they  are  not  (1912). 

parties  to  the  transaction  as  Individ-  '  Rothmiller  v.  Stein,  143  N.  Y.  581 

uals  and  did  not  receive  the  considera-  (1894). 

tion  paid  for  the  bonds.     Slater  Trust  *  Fottler  v.  Moseley,  179  Mass.  295 

Co.    V.    Gardiner,    183    Fed.  Rep.  268  (1901). 

(1910).  5  Handy  v.  Waldron,  18  R.  I.  567 

iKountze  v.   Kennedy,   147  N.   Y.  (1894). 

1101 


§  355.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


price  which  he  obtained  for  his  own  stock,  he  is  Hable  in  an  action  for 
deceit  to  parties  who  sell  their  stock  relying  on  such  statements.^ 

The  purchaser  of  stock  who  has  given  a  note  in  payment  cannot 
defeat  an  action  on  the  note  by  setting  up  that  the  purchase  was  in- 
duced by  fraud.  He  must  first  disaffirm  the  contract  and  return  the 
certificate,  and  such  return  must  be  made  before  the  trial.-  One  pro- 
moter may  sue  another  at  law  for  damages  for  fraud  inducing  the  former 
to  enter  into  the  contract  he  having  offered  to  rescind.^  But  where  the 
purchaser  brings  an  action  for  deceit  he  need  not  return  the  considera- 
tion nor  rescind  the  contract.^  His  injury  is  to  be  duly  measured,  and 
credit  may  be  given  for  the  real  value  of  the  stock.^  A  director  is  not 
liable  for  the  misrepresentations  and  frauds  of  his  co-directors,  unless 
he  has  expressly  authorized  or  tacitly  permitted  commission  thereof.^ 
The  mere  fact  of  being  a  director  "  is  not  per  se  sufficient  to  hold  a  party 
Hable  for  the  frauds  and  misrepresentations  of  the  active  managers  of  a 
corporation.  Some  knowledge  of  and  participation  in  the  act  claimed 
to  be  fraudulent  must  be  brought  home  to  the    person  charged."  ^ 


1  Weaver  v.  Cone,  174  Pa.  St.  104 

(1896). 

2  Gifford  V.  Carvill,  29  Cal.  589 
(1866).  A  transferee  claiming  to  be 
defrauded  is  nevertheless  liable  on 
the  statutory  liability  where  he 
brought  a  suit  for  damages  for  the 
fraud  and  recovered  judgment.  Such 
a  suit  is  a  ratification  of  the  transfer. 
Stuart  V.  Hayden,  72  Fed.  Rep.  402 
(1895);  aff'd,  169  U.  S.  1.  The 
defense  of  fraud  and  deceit  in  a  sale 
is  not  a  bar  unless  a  rescission  of  the 
contract  is  pleaded  or  an  entire  failure 
of  consideration  alleged.  McMillan 
V.  Batten,  52  Oreg.  218  (1908). 

3  O'Shea  v.  Vaughn,  201  Mass.  412 
(1909). 

*  Miller  v.  Barber,  66  N.  Y.  558, 
564  (1876);  Newbery  v.  Garland,  31 
Barb.  121  (1860).  See  Parsons  v. 
Johnson,  28  N.  Y.  App.  Div.  1  (1898). 

^  See  §  586,  infra.  In  an  action  for 
false  representations  inducing  the  pur- 
chase of  stock,  the  defendant  may 
show  that  the  stock  was  worth  as 
much  as  it  would  have  been  had  the 
representations  been  true.  Doran  v. 
Eaton,  40  Minn.  35  (1889). 

«  Weir  V.  Barnett,  L.  R.  3  Exeh.  D. 
32  (1877).  Where  a  person,  induced 
to  purchase  stock,  claims  that  it  was 
on  account  of  fraudulent  representa- 
tions of  some  of  the  directors,  and  sues 


to  hold  all  the  directors  liable,  she 
may  be  compelled  to  state  in  her  com- 
plaint which  of  the  defendants  were 
directors  at  the  time  of  the  statements. 
Viner  v.  James,  92  N.  Y.  App.  Div. 
542  (1904).  Where  a  dividend  has 
lyeen  paid  out  of  capital  stock  in  vio- 
lation of  the  statute,  a  person  pur- 
chasing stock  by  reason  of  such  divi- 
dend can  hold  a  director  liable  if  he 
took  part  in  declaring  it  or  made 
representations  in  regard  to  it,  and  a 
statute  rendering  directors  liable  for 
the  amount  of  illegal  dividends  in 
case  of  insolvency  sustains  such  a 
suit,  although  the  company  is  still 
solvent.  Ottinger  v.  Bennett,  203 
N.  Y.  554  (1911),  rev'g  144  N.  Y.  App. 
Div.  525.  A  person  buying  stock 
relying  on  the  published  statement  of 
the  corporate  condition,  and  who  then 
becomes  a  director  and  learns  that  the 
corporation  is  insolvent  may  continue 
to  be  a  director  and  endeavor  to  save 
the  company  and  still  sue  another 
director  for  damages  for  deceit,  even 
though  such  other  director  did  not 
know  that  the  published  statement 
was  false.  The  damages  are  the  dif- 
ference between  the  price  paid  and  the 
actual  value  of  the  stock.  Ligon  v. 
Minton,  125  S.  W.  Rep.  304  (Ky. 
1910). 

?  Arthur  v.  Griswold,  55  N.  Y.  400, 


1102 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  355. 


But  the  vendor  of  bank  stock  is  liable  for  deceit  in  misrepresenting  the 
deposits  where  the  books  were  falsely  kept,  even  though  he  was  not 
aware  of  that  fact.^  The  secretary  of  a  company  cannot  sustain  an 
action  for  deceit  against  the  president  and  vice-president  on  the  ground 
of  fraud  inducing  him  to  sell  them  his  stock,  even  though  they  misrep- 
resented the  condition  of  the  business,  especially  where  he  waited  five 
months  before  selling  and  where  the  only  damage  was  future  contin- 
gent profits.'^  Where,  however,  proof  is  given  tending  to  show  that  the 
defendants  were  jointly  engaged  in  a  common  scheme  to  defraud  the 
plaintiff,  the  acts  and  declarations  of  one  are  admissible  in  proof  against 
all ;  ^  and  fraud  of  a  similar  nature,  at  or  near  the  same  time  as  the  one 
complained  of,  may  be  shown."*  The  fraud  practiced  need  not  have 
been  the  sole  inducement  to  the  purchase.^  A  party  may  be  liable  herein 
although  he  was  neither  a  corporate  officer  nor  the  vendor  of  the  stock. 
If,  with  intent  to  cheat  and  defraud  the  vendee,  he  induces  him,  by 
fraudulent  means,  to  purchase  for  value  stock  which  he  knows  to  be 
worthless,  he  is  liable  for  the  damage  sustained,  although  the  purchase 
is  actually  made  from  another.^    A  person  who  purchases  stock  induced 


406  (1874);  Morgan  v.  Skiddy,  62 
N.  Y.  319  (1875).  The  allegations  and 
proof  in  an  action  by  a  stockholder 
against  directors  for  deceit  in  persuad- 
ing him  not  to  sell  his  stock  were  con- 
sidered in  Thayer  v.  Schley,  137  N.  Y. 
App.  Div.  166  (1910),  and  it  was  held 
that  the  directors  are  not  in  such  an 
action  chargeable  with  knowledge  of 
all  the  entries  in  the  corporate  books 
or  proceedings  at  a  director's  meeting 
at  which  they  were  not  present  and  of 
which  they  have  no  knowledge,  and 
that  they  are  not  liable  by  reason  of 
dividends  from  capital  when  the  com- 
plaint alleges  only  false  representa- 
tions and  there  is  no  proof  of  conspiracy. 

1  Barclay  v.  Deyerle,  53  Tex.  Civ. 
App.  236  (1909).  A  promoter  sued  for 
false  representations  may  show  the 
source  of  his  information.  Given  v. 
Powell,  145  N.  Y.  App.  Div.  .559  (1911). 

^Boulden  ;;.  StilweU,  100  Md.  543 
(1905). 

3  Miller  v.   Barber,   66  N.   Y.   558, 

567  (1876). 

^Miller   v.    Barber,   66   N.   Y.  558, 

568  (1876).  See  also  note  4,  p.  465, 
and  note  1,  p.  1110. 

5  Morgan  v.  Skiddy,  62  N.  Y.  319, 
328  (1875) ;  Exparte  Carling,  56  L.  T. 
Rep.  115  (1887).     Even  a  director  and 


vice  president  of  a  bank  may  hold 
the  cashier  liable  for  false  representa- 
tions inducing  the  former  to  purchase 
stock  from  the  cashier  where  such 
director  and  vice  president  had  no 
actual  knowledge  of  the  condition  of 
things,  and  could  not  ascertain  it 
except  by  an  extended  examination  of 
the  books.  Snider  v.  McAtee,  165 
Mo.  App.  260  (1912).  In  an  action 
for  false  representations  in  the  sale 
of  stock  the  vendee  need  not  prove  that 
he  relied  solely  on  the  representations 
of  the  vendor,  provided  he  shows  he 
would  not  have  made  the  purchase 
except  for  those  representations.  Baker 
V.  Mathew,  137  Iowa,  410  (1908). 
Plaintiff  need  not  prove  that  he  relied 
solely  upon  the  misrepresentations. 
Hatch  V.  Spooner,  13  N.  Y.  Supp.  642 
(1891);  s.  c,  on  second  appeal,  14 
N.  Y.  App.  Div.  408;  Hindman  v. 
First  Nat.  Bank,  112  Fed.  Rep.  931 
(1902). 

6  Hubbell  V.  Meigs,  50  N.  Y.  480, 
490  (1872).  Concerning  the  effect  of 
false  and  fraudulent  representations 
on  an  action  for  damages,  see  Tocker- 
son  V.  Chapin,  52  N.  Y.  Super.  Ct.  16 
(1885).  It  is  no  defense  to  such  an 
action  that  the  original  conversion 
was    by    some    one    else.     Kuhn    v. 


1103 


§355. 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


CH.  XX. 


by  misrepresentations  may  recover  full  damages  in  an  action  for  deceit, 
even  though  he  sells  the  stock  or  causes  a  portion  of  the  stock  to  be 
transferred  to  members  of  his  family.^  A  sale  of  stock  does  not  trans- 
fer a  right  of  action  for  damages  caused  by  false  representations  made  to 
the  vendor  by  the  party  from  whom  the  vendor  purchased.^  In  an 
action  by  a  purchaser  of  stock  against  the  company  and  two  directors 
for  deceit,  the  verdict  may  be  against  one  or  more  of  the  defendants,  and 
may  be  sustained  by  one  or  more  of  the  misrepresentations  alleged.^ 
In  an  action  for  fraud  and  deceit  in  a  prospectus  inducing  the  purchase 
of  corporate  securities,  all  the  members  of  a  syndicate  which  promoted 
the  corporation  and  sold  its  securities  are  liable  in  damages  for  the  fraud 
of  an  agent  employed  to  effect  the  sale,  without  reference  to  their  own 
moral  guilt  or  innocence.^ 

Even  though  in  an  action  for  deceit  against  several  a  conspiracy  is 
charged,  yet  a  recovery  may  be  had  against  one,  the  basis  of  the  suit 
being  false  and  fraudulent  representations.^  A  charge  of  conspiracy  in 
a  suit  by  a  customer  against  brokers  is  only  important  to  connect  all 
of  them  with  the  transaction  and  render  each  liable  for  the  acts  of  the 
others.^  A  suit  to  hold  the  directors  liable  for  declaring  a  dividend  out 
of  the  capital  stock,  and  thereby  inducing  the  plaintiff  to  purchase  the 


McAUister,  1  Utah,  273  (187.5)  ;  s.  c, 
sub  nom.  McAllister  v.  Kuhn,  96 
U.  S.  87  (1877).  See  also  §  350,  supra. 
1  Boddy  V.  Henry,  113  Iowa,  462 
(1901).  A  person  defrauded  does  not 
waive  his  right  to  damages  even 
though  he  turns  in  the  stock  to  the 
company  on  an  exchange  of  other 
stock.  McKay  v.  McCarthy,  146 
Iowa,  546  (1909).  In  a  suit  against 
a  corporation  for  damages  for  fraud 
inducing  a  subscription  to  stock,  the 
stock  need  not  be  tendered  back,  and 
the  subscriber  may  maintain  a  suit 
even  though  he  has  sold  the  stock. 
Gaylord  v.  Brown,  128  N.  Y.  App. 
Div.  340  (1908).  In  a  suit  at  law  by 
the  vendee  of  stock  for  damages  for 
fraud  and  deceit  it  is  no  defense  to 
allege  that  the  vendee  ratified  the 
purchase  and  kept  the  stock.  Potts 
V.  Lambie,  138  N.  Y.  App.  Div.  144 
(1910).  A  person  induced  to  pur- 
chase stock  under  false  statements 
of  two  stockholders  that  the  capital 
stock  had  been  paid  in  full  when  in 
fact  they  had  received  half  of  it  with- 
out paying  anything,  does  not  waive 
his  right  to  sue  them  for  damages 
even   though   he   votes   in   the   stock- 


holders' meeting  to  accept  a  return 
from  them  of  part  of  their  stock  and 
he  also  himself  receives  a  part  of  their 
stock.  Kennedy  v.  Bender,  135  S.  W. 
Rep.  .524  (Tex.  1911). 

2  Kennedy  v.  Benson,  .54  Fed.  Rep. 
836  (1893).  Where  fraudulent  repre- 
sentations are  made  inducing  a  party 
to  sell  his  stock,  and  then  the  pur- 
chaser wrecks  the  corporation,  the 
vendor  may  hold  the  latter  liable  for 
damages.  The  assignee  of  the  cause 
of  action  may  sue  in  trover  for  con- 
version, but  cannot  sue  for  damages 
for  fraudulent  representations,  inas- 
much as  the  latter  cause  of  action  is 
not  assignable.  Smith  v.  Thompson, 
94  Mich.  381  (1892). 

^  Lare  v.  Westmoreland  Specialty 
Co.,  155  Pa.  St.  33  (1893),  holding  also 
that  the  party  purchasing  the  stock 
may  rescind  or  may  retain  the  stock 
and  sue  for  damages.  See  Van  Slochem 
V.  Villard,  207  N.  Y.  587  (1913). 

*  Downey  v.  Pinueane,  205  N.  Y. 
251  (1912). 

5  Gurney  v.  Tenney,  197  Mass. 
457  (1908). 

«  Lee  V.  Brown,  139  N.  Y.  App. 
Div.  669  (1910). 


1104 


CH.  XX.]  CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC.  [§  355. 

stock,  cannot  at  the  same  time  seek  to  hold  the  directors  liable  to  the 
corporation  for  the  dividend  so  declared.^  Several  persons  defrauded  of 
their  contract  whereby  they  were  to  receive  stock  cannot  sue  jointly. 
Each  must  sue  separately.^  In  a  suit  for  damages  for  fraud  inducing 
the  sale  of  stock  the  court  will  be  liberal  in  admitting  evidence  showing 
the  full  nature  of  the  transaction,  and  it  is  for  the  jury  to  decide  whether 
the  fraud  was  intentional  and  whether  there  was  any  fraud.^  Where  the 
officers  of  a  company,  which  has  paid  from  nine  to  fourteen  per  cent., 
"  freeze  out  "  minority  stockholders  by  reducing  the  dividends  and 
increasing  their  salaries  and  misrepresenting  the  condition  of  the  com- 
pany, and  then  after  buying  the  minority  stock  increase  the  dividend, 
the  minority  stockliolders  may  hold  them  liable  by  an  action  on  the  case 
for  damages,  even  though  they  might  have  brought  suit  in  behalf'  of 
the  corporation.  If  the  stock  has  no  market  value,  the  value  may  be 
proved  by  estimating  the  good-will,  as  shown  by  the  net  profits,  and  it  is 
for  the  jury  to  decide  how  many  years'  net  profits  shall  be  considered  in 
obtaining  the  average.  The  balance  sheets  are  also  admissible.^  The 
corporation  itself,  all  of  whose  stock  has  been  issued  in  payment  for  a 
mine,  cannot  hold  a  vendor  liable  for  misrepresentations  as  to  the  value 
of  the  property.^  In  a  suit  by  a  vendor  of  stock  for  fraud  inducing  the 
sale,  the  value  of  the  stock  should  include  a  proportionate  part  of  the 
good-will,  and  the  good-will  may  be  valued  by  multiplying  the  average 
profits  by  a  number  of  years,  depending  upon  the  nature  and  character 
of  the  business,  all  of  which  is  a  question  for  the  jury.^ 

The  measure  of  damages  for  fraud  inducing  the  purchase  of  stock 
"  is  the  difference  between  the  value  of  the  stock  at  the  time  it  was 
purchased  and  the  price  paid  for  it,"  ^  Another  rule  is  that  the  measure 
of  damages  is  the  difference  between  the  actual  value  and  the  repre- 
sented value  of  the  stock.*     A  representation  that  the  stock  which  the 

1  Stroud  V.  Lawson,  [1898]  2  Q.  B.  stock  need  not  be  alleged,  because  the 
44.  plaintiff's  damage  may  be  the  depre- 

2  Summerlin  v.  Fronteriza,  etc.  Co.,  ciated  value  of  the  stock  from  what  it 
41  Fed.  Rep.  249  (1890).  would  have  been  if  the  representations 

5  Townsend  v.  Felthousen,  156  N.  Y.  had  been  true.  Mills  v.  Knudson,  54 
618  (1898).  Wash.  614  (1909). 

*  Von    Au    V.     Magenheimer,     126  '  See  §  586,  infra. 

N.    Y.  App.  Div.    257    (1908);    aff'd,  « Chapman    v.    Bible,    137    N.    W. 

196  N.  Y.  510.  Rep.  533  (Mich.  1912).     In  a  suit  for 

*  Stratton's,  etc.  v.  Dines,  126  Fed.  damages  for  fraud  inducing  the  pur- 
Rep.  968  (1904) ;  aff'd,  135  Fed.  Rep.  chase  of  bonds,  the  measure  of  damages 
449.  is   the  difference   between   the   actual 

^  Von  Au  i).  Magenheimer,  115  N.  Y.  value  and  the  price  paid  and  not 
App.  Div.  84  (1906) ;  s.  c,  126  N.  Y.  between  the  price  paid  and  the  value 
App.  Div.  257.  In  a  suit  against  a  cor-  as  represented.  Chandler  v.  Andrews, 
porate  of&cer  for  fraud  in  inducing  192  Fed.  Rep.  543  (1911).  In  an 
plaintiff  to  buy  stock,  the  value  of  the  action  for  damages  for  fraud  inducing 
(70)  1105 


§  355.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[CH.  XX. 


plaintiff  bought  was  treasury  stock,  when  in  fact  it  was  not,  is  not  such 
a  misrepresentation  as  sustains  an  action  for  damages  for  fraud,  the 
basis  of  damages  being  wholly  speculative.^  An  agreement  by  which  a 
suit  for  damages  for  fraud  inducing  the  purchase  of  stock  is  discontinued 
does  not  prevent  a  subsequent  suit  on  the  same  cause  of  action.^  A 
vendor  of  stock  who  completes  the  transaction  after  he  has  knowledge 
of  the  facts  which  he  claims  were  misrepresented,  cannot  then  maintain 
a  suit  for  damages.^  The  statute  of  limitations  begins  to  run  against  a 
suit  for  damages  for  fraud  inducing  the  plaintiff  to  buy  stock,  when  he 
learns  of  facts  which  put  him  upon  inquiry,  such  as  the  fact  that  the 
company  had  become  insolvent.^  A  party  defrauded  in  a  stock  trans- 
action may  rescind  and  then  sue  to  recover  the  money  already 
paid.^ 

the  purchase  of  stock  the  measure  of    the  stock  but  knowing  of  the  fraud 

he  cannot  recover  damages.  Kennedy 
V.  Bender,  140  S.  W.  Rep.  491  (Tex. 
1911).  A  vendee  who  is  induced  to 
purchase  by  fraud  may  recover  dam- 
ages, even  though  jhe  has  resold  at  a 
higher  price.  Clark  v.  Morgan,  etc. 
Bank,  196  Fed.  Rep.  709  (1912). 

^Coffin  V.  Barber,  115  N.  Y.  App. 
Div.  713  (1906).  As  to  the  mode  of 
pleading  the  statute  of  limitations 
of  another  state  against  an  action  for 
fraud  in  inducing  the  purchase  of 
stock,  see  Tudor  v.  Ebner,  104  N.  Y. 
App.  Div.  562  (1905) ;  aflf'd,  182  N.  Y. 
562.  The  principle  that  a  cause  of 
action  for  fraud  does  not  accrue  until 
the  fraud  is  discovered  does  not  apply 
to  a  suit  at  law  where  the  statute  of 
limitations  applies,  even  though  the 
defendant  by  various  promises  had 
caused  the  plaintiff  to  delay  action. 
McKay  v.  McCarthy,  146  Iowa,  546 
(1909). 

^  A  member  of  a  syndicate  may  hold 
a  promoter  liable  for  payments  made 
by  the  former  to  the  corporation  for 
stock  in  the  corporation  wliich  has  pur- 
chased the  promoter's  properties,  where 
the  promoter  was  secretly  interested  in 
the  properties  before  the  corporation 
purchased  them,  there  being  construc- 
tive fraud,  and  hence  three  remedies 
being  available  to  plaintiff.  Heckseher 
V.  Edenborn,  203  N.  Y.  210  (1911). 
A  member  of  a  syndicate  to  buy  stock 
cannot  rescind  and  maintain  a  suit 
at  law  for  tort  against  the  promoter 
for  fraudulent  misrepresentations,  his 


damages  is  the  difference  between  the 
actual  value  of  the  stock  and  what  it 
would  have  been  worth  if  the  repre- 
sentations had  been  true.  Ginn  v. 
Almy,  212  Mass.  486  (1912).  Under 
the  national  bank  act  a  purchaser 
of  stock  in  a  national  bank  may  sue 
the  directors  for  a  false  report  of  the 
bank's  condition  authorized  by  such 
directors  inducing  him  to  purchase. 
The  measure  of  damages  is  the  dif- 
ference between  the  market  price 
with  bad  accounts  charged  off  and  the 
market  price  with  such  accounts  made 
good.  Chesbrough  v.  Woodworth,  195 
Fed.  Rep.  875  (1912).  Where  the 
vendor  represents  the  corporate  assets 
to  be  worth  a  certain  figure  and  agrees 
to  indemnify  the  vendee  from  loss 
from  any  deficiency,  he  is  liable  to  the 
extent  that  the  guaranteed  value 
exceeds  the  actual  value  of  the  cor- 
porate assets  at  the  time  of  the  sale 
of  the  stock.  Marchant  v.  Hughlett, 
84  Atl.  Rep.  380  (Md.  1912). 

1  Findlater  v.  Borland,  152  Mich. 
301  (1908). 

2  Jacobs  V.  Marks,  182  U.  S.  583 
(1901). 

'  McDonough  v.  Williams,  77  Ark. 
261  (1905).  Where  a  person  attends 
a  stockholders'  meeting  and  learns 
the  condition  of  the  company,  and 
then  buys  stock,  he  cannot  complain 
of  representations  by  the  vendor  as 
to  its  value,  etc.  Shores  v.  Hutchin- 
son, 69  Wash.  329  (1912).  Where  a 
defrauded  vendee  accepts  a  bonus  of 


1106 


CH.   XX.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  356. 


§  356.  Remedy  in  equity.  —  A  court  of  equity  has  concurrent  ju- 
risdiction with  a  court  of  law  in  enabling  a  purchaser  of  stock  to  re- 
cover back  money  paid,  where  the  purchase  was  induced  by  fraud 
chargeable  to  the  vendor.^    The  remedy  in  equity,  for  a  sale  or  pur- 


remedy  being  in  a  suit  in  equity  to 
rescind,  in  which  case  the  other  mem- 
bers of  the  syndicate  must  be  joined 
or  else  a  suit  at  law  for  damages  based 
on  the  difference  between  the  actual 
value  of  the  stock  and  its  value  as 
represented.  Sim  v.  Edenborn,  163 
Fed.  Rep.  655  (1908).  A  vendee  of 
an  interest  in  a  mine  and  stock  in 
another  mine  cannot  maintain  a  suit 
for  damages  for  fraudulent  represen- 
tations as  to  the  former  mine,  or  on 
the  ground  that  the  consideration  has 
totally  failed,  his  remedy  being  total 
rescission,  and  he  cannot  apportion 
the  price  between  the  two  promoters, 
where  he  gives  no  proof  of  the  dif- 
ference between  the  actual  value  of  the 
mine  and  what  it  would  have  been 
worth  if  the  representations  had  been 
true.  Perry  v.  Ayers,  159  Cal.  414 
(1911). 

1  See  §  155,  supra.  Where  a  person 
is  induced  to  subscribe  for  stock  on 
the  fraudulent  representations  of  the 
president  that  the  company  is  in  a 
prosperous  condition,  the  person  may 
file  a  bill  in  equity  to  recover  back 
the  money,  and  equity  has  jurisdic- 
tion on  the  grounds  of  discovery, 
account,  fraud,  misrepresentation,  and 
concealment.  Both  the  company  and 
the  president  individually  were  made 
defendants  and  held  liable.  Tyler  v. 
Savage,  143  U.  S.  79  (1892).  See  also 
Hill  V.  Lane,  L.  R.  11  Eq.  215  (1870), 
where  the  court  said:  "It  is  so  well 
settled  that  this  court  will  entertain 
jurisdiction  in  such  cases  that  it 
would  be  a  misfortune  indeed  to  the 
public  if  there  were  any  sufficient 
ground  for  considering  that  the  juris- 
diction is  doubtful.  .  .  .  Although 
courts  of  common  law  may  have  jm-is- 
dietion  in  some  such  cases,  there  is 
clearly  concurrent  jurisdiction  in  this 
court,"  doubting  Ogilvie  v.  Currie,  37 
L.  J.  (Ch.)  541  (1868);  Campbell  v. 
Fleming,  1  Ad.  &  El.  40  (1834).  A 
bin  in  equity  is  a  proper  remedy  for 
fraud  inducing  a  sale  of  stock.  Andries- 


sen's  Appeal,  123  Pa.  St.  303  (1889). 
Evatt  V.  Hudson,  97  Ark.  265  (1911). 
Southern  States,  etc.  v.  Whatley,  173 
Ala.  101  (1911).  A  person  induced  to 
purchase  stock  and  bonds  from  a  cor- 
poration, by  fraudulent  statements  in 
a  prospectus  as  to  the  value  of  prop- 
ertj^  for  which  the  bonds  and  stock 
have  been  issued  by  a  Pennsylvania 
corporation  at  a  fraudulent  overvalu- 
ation, may  maintain  a  bill  in  equity 
to  cancel  a  note  given  in  payment, 
and  to  enjoin  a  suit  at  law  on  such 
note  in  the  hands  of  a  purchaser  with 
notice.  Manning  v.  Berdan,  135  Fed. 
Rep.  159  (1905).  A  bill  in  equity 
does  not  lie  at  the  instance  of  a  pur- 
chaser of  stock,  who  has  paid  for  the 
stock,  to  rescind  on  the  ground  that  he 
was  defrauded.  The  remedy  is  at  law. 
Moreover,  such  a  bill  is  multifarious 
if  it  asks  also  for  a  discovery.  Price 
V.  Hurley,  201  Pa.  St.  606  (1902). 
"Equity  does  not  now  take  jurisdic- 
tion in  cases  of  fraud  where  the  relief 
properly  obtainable  on  that  ground 
can  be  obtained  in  a  court  of  law,  and 
where,  so  far  as  necessary,  discovery 
may  be  obtained  as  well  as  in  equity." 
Equitable,  etc.  v.  Brown,  213  U.  S.  25, 
50  (1909).  A  person  making  misrep- 
resentations inducing  another  person 
to  purchase  stock  from  a  third  party 
can  be  held  liable  only  in  an  action  at 
law.  Ginn  v.  Almy,  212  Mass.  486 
(1912) ;  holding,  however,  in  general 
that  a  court  of  equity  has  jurisdiction 
to  rescind  a  sale  of  stock  induced  by 
fraud,  the  court  reviewing  at  length 
the  necessary  allegations.  Where  a 
corporation  organized  to  do  a  jewelrj- 
business  is  really  a  scheme  to  carry 
on  an  illegal  and  fraudulent  invest- 
ment business,  a  person  defrauded 
may  file  a  bill  in  equity  to  hold  the 
corporation  and  its  officers  and  stock- 
holders personally  liable  and  enjoin 
them  from  disposing  of  the  assets  and 
for  discovery.  Edwards  v.  Michigan, 
etc.  Co.,  132  Mich.  1  (1902).  Where 
the    president    of    a    national    bank 


1107 


§356. 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


chase  of  stock  induced  by  fraud,  is  by  a  bill  to  set  aside  the  whole  trans- 
action.    This  remedy  follows  the  rules  usually  prescribed  in  such  suits. 


induces  a  person  who  lives  several 
hundred  miles  away  from  the  bank  to 
purchase  stock  in  the  bank  by  fraudu- 
lent representations,  and  within  thirty- 
six  days  the  bank  is  closed,  the  pur- 
chaser may  have  the  sale  rescinded. 
Stufflebeam  v.  De  Lashmutt,  101  Fed. 
Rep.  367  (1900).  Where  a  corporation 
issues  several  million  dollars  of  bonds, 
secured  by  a  mortgage  that  represents 
that  it  covers  many  thousand  acres  of 
land,  although,  in  fact,  the  company 
owned  but  a  few  hundred  acres  of 
land,  a  purchaser  of  such  bonds  may 
maintain  a  bill  in  equity  in  behalf  of 
himself  and  other  bondholders  to  hold 
the  directors  liable  for  false  represen- 
tations, and  the  corporation  itself  is 
not  a  necessary  party  defendant,  a 
request  to  the  trustee  of  the  mortgage 
having  first  been  made  to  bring  suit. 
A  provision  in  the  mortgage  against 
individual  bondholders  maintaining  a 
suit  before  offering  indemnity  to  the 
trustee  is  no  bar  to  such  a  suit,  that 
provision  being  applicable  to  remedies 
under  the  mortgage  only.  The  suit 
may  be  maintained  in  the  United 
States  circuit  coiu-t  in  New  York, 
even  though  the  corporation  was 
organized  in  Missouri,  it  appearing 
that  the  directors  reside  in  New  York. 
Slater  Trust  Co.  v.  Randolph-Macon 
Coal  Co.,  166  Fed.  Rep.  171  (1908). 
Where  the  president  sells  stock  for 
$120  per  share  after  he  has  indorsed 
a  false  statement  of  the  company's 
affairs,  the  stock  being  really  worth 
but  $70  per  share,  the  vendee  may 
have  the  sale  rescinded.  Prewitt  v. 
Trimble,  92  Ky.  176  (1891).  A  lower 
court  in  New  York  held  that  in  a 
suit  to  rescind  for  fraud  the  plaintiff 
must  prove  that  the  stock  was  not 
worth  what  he  paid  for  it  or  could  not 
be  sold  for  that  sum.  Aron  v.  De 
Castro,  13  N.  Y.  Supp.  372  (1891); 
affirmed,  131  N.  Y.  648,  but  a  contrary 
rule  is  laid  down  in  Harlow  v.  La 
Brum,  1.51  N.  Y.  278  (1897).  In  an 
action  in  equity  to  rescind  a  sale  of 
stock  for  fraud  the  corporation  is  not 
a  necessary  party.  The  value  of  the 
stock   need    not    be   shown,    and    the 


amount  paid  with  interest  may  be 
recovered.  But  six  years'  delay  after 
discovering  the  fraud  is  a  bar.  Hig- 
gins  V.  Crouse,  63  Hun,  134  (1892). 
In  an  action  to  rescind  for  fraud  the 
defrauded  subscribers  need  not  join 
as  plaintiffs,  although  they  all  pur- 
chased at  the  same  time  and  on  the 
same  terms.  Moore  v.  Robertson,  11 
N.  Y.  Supp.  798  (1890).  Where  the 
vendors  represent  that  the  money  will 
be  used  to  buy  a  secret  process,  and 
the  purchasers  pay  over  the  money  to 
the  company  for  that  purpose,  and  it 
is  mingled  with  other  funds  and  is 
not  used  to  purchase  the  process 
because  the  process  is  a  fraud,  the  ven- 
dees may  rescind  as  to  the  vendors, 
but  cannot  make  the  receiver  of  the 
company  pay  over  the  money.  Moore 
V.  Robertson,  11  N.  Y.  Supp.  798 
(1890).  The  vendor  may  tender  back 
the  stock  and  file  a  bill  in  equity  to 
cancel  the  sale  on  the  ground  that 
he  was  induced  to  purchase  by  false 
statements  that  the  corporation  owned 
the  secret  process ;  that  a  patent  had 
been  applied  for ;  that  it  was  ready 
to  commence  business,  and  that  com- 
plainant would  be  made  president  and 
manager.  Benton  v.  Ward,  47  Fed. 
Rep.  253  (1891).  To  same  effect, 
Stainbank  v.  Fernley,  9  Sim.  556 
(1839),  where  a  sale  by  a  director 
who  has  issued  false  reports  and 
declared  illegal  dividends  was  set  aside. 
The  corporation  is  a  proper  party  to 
such  actions,  if  a  registry  has  been 
obtained  by  the  person  who  has 
obtained  the  stock  by  fraud,  since  a 
retransfer  on  the  corporate  books  is 
asked  for.  See  also  Bradley  v.  Luce, 
99  111.  234  (1881).  A  person,  who  is 
induced  by  another  to  allow  the  latter 
to  buy  1,000  shares  of  stock  at  two 
dollars  per  share,  each  paying  one 
half,  and  the  latter  really  buys  the 
stock  at  one  dollar  a  share,  may  com- 
pel him  to  turn  over  all  the  stock  or 
else  he  may  rescind  and  recover 
back  his  $1,000.  Smith  v.  Elderton, 
16  Cal.  App.  424  (1911).  In  an  action 
to  rescind  a  subscription  for  stock  and 
for  the  recovery  of  money  paid,   the 


1108 


CH.   XX.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  356. 


It  is  not  necessary  for  the  complainant  to  prove  a  fraudulent  intent. 
Innocent  acts  or  misrepresentations  suffice  for  this  purpose,  although 


plaintiff  may  for  the  purpose  of  fram- 
ing his  complaint  examine  one  of  the 
defendants  who  is  alleged  to  have 
made  the  misrepresentations  and  to 
have  defrauded  the  company  of  its 
property.  In  such  an  action  the  cor- 
poration and  the  individual  are  both 
proper  party  defendants.  Heeken- 
dorn  V.  Romadka,  138  Wis.  416  (1909). 
Where  an  estate  has  a  majority  of 
the  stock  in  a  bank  and  the  executor 
who  is  cashier  of  the  bank  conspires  to 
sell  enough  of  the  stock  to  carry  the 
control,  such  sale  not  being  necessary 
to  pay  the  debts  of  the  estate,  the 
court  may  set  the  sale  aside  and  enjoin 
any  transfer  pending  the  suit.  Brown 
V.  Strom,  113  Minn.  1  (1910).  Where 
a  promoter  so  manipulates  a  sale  of  a 
person's  property  to  the  corporation 
for  stock  that  he  fraudulently  acquires 
a  large  majority  of  the  stock  without 
paying  anything  for  it  and  practically 
controls  the  property  of  the  individual, 
a  receiver  may  be  appointed.  Ken- 
nedy Drug  Co.  V.  Keyes,  60  Wash. 
337  (1910).  An  owner  of  real  estate 
who  deeds  it  in  payment  for  stock  on 
an  agreement  that  the  seller  of  the 
stock  shall  cause  such  owner  to  be 
elected  secretary  and  attorney  of  the 
company  at  a  lucrative  salary  can- 
not rescind  for  fraud,  such  a  contract 
being  contrary  to  public  policy.  Gil- 
christ V.  Hatch,  100  N.  E.  Rep.  473 
(Ind.  1913).  See  also  §622,  a,  infra. 
A  stockholder  who  by  fraud  has  been 
induced  to  exchange  his  stock  for 
bonds  in  another  company  may  by 
suit  in  equity  rescind  the  transaction. 
Williams  v.  Billington,  150  N.  Y.  App. 
Div.,  439  (1912).  A  judgment  cred- 
itor of  a  foreign  corporation  cannot 
enjoin  it  from  transferring  stocks  and 
bonds  owned  by  it.  The  remedy 
sought  must  be  something  in  addition 
to  the  injunction.  Rogers  v.  Michigan, 
etc.  R.  R.,  28  Barb.  539  (1858).  An 
equitable  suit  does  not  lie  to  rescind 
a  sale  of  worthless  bonds,  A  suit  at 
law  is  the  proper  remedy.  U.  S.  Bank 
V.  Lyon  County,  48  Fed.  Rep.  632 
(1892).  A  purchaser  of  stock  who 
was    induced    to    purchase    by    fraud 


cannot  maintain  a  suit  in  equity  when 
he  fails  to  show  more  than  a  right  to 
pecuniary  damages  for  misrepresen- 
tations. Whitney  v.  Fairbanks,  54 
Fed.  Rep.  985  (1893).  A  contract 
between  the  owner  of  property  and  a 
promoter  by  which  the  former  agrees 
to  sell  his  property  to  a  corporation 
to  be  formed  by  the  latter,  with  a 
specified  capital  stock,  cannot,  a 
year  after  the  transaction  has  been  car- 
ried out,  be  made  the  basis  of  a  suit 
in  equity  to  compel  the  promoter  to 
cancel  excessive  stock  which  was 
issued  to  the  promoter,  there  being  no 
allegation  that  the  promoter  still  had 
the  stock.  The  remedy  of  the  vendor 
is  at  law  Even  though  several  ven- 
dors to  the  corporation  had  a  similar 
claim,  yet  one  of  them  cannot  file  such 
a  bill  in  equity  in  behalf  of  himself 
and  others.  Brehm  v.  Sperry,  92 
Md.  378  (1901).  Where  both  the 
purchaser  and  seller  of  stock  in  a 
mining  company  know  at  the  time 
that  there  is  a  report  that  the  mine 
has  been  "salted,"  the  sale  cannot 
be  rescinded,  inasmuch  as  neither 
party  has  clean  hands.  Bearden  v. 
Jones,  48  S.  W.  Rep.  88  (Tenn.  1897). 
A  creditor  holding  an  unpaid  promis- 
sory note  cannot  by  bill  in  equity 
bring  in  the  directors  to  hold  them 
liable  for  false  representations  and  also 
claim  that  the  company  was  not  duly 
incorporated  ;  and  further  bring  in  a 
subsequent  corporation  that  took  all 
the  assets  of  the  first,  and  also  bring 
in  those  persons  who  finally  obtained 
such  assets, —  all  in  one  bill  brought  to 
collect  the  debt.  Jefferson  Nat.  Bank 
V.  Texas  Inv.  Co.,  74  Tex.  421  (1889). 
See  to  the  effect  that  a  court  of  equity 
has  jurisdiction.  City,  etc.  Corp.  v. 
Central  Trust  Co.  (N.  Y.  L.  J.,  June 
12,  1891).  Where  bank  stock  is  sold 
by  fraudulent  and  false  representa- 
tions, the  bank  being  aware  thereof 
and  receiving  indirectly  the  money 
paid  for  the  stock,  the  sale  may  be 
rescinded  and  the  money  recovered 
back  from  it,  even  though  it  is  insol- 
vent. Florida,  etc.  Co.  v.  Merrill,  52 
Fed.    Rep.    77    (1892).     Several    sub- 


1109 


§356. 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


they  would  be  insufficient  to  sustain  an  action  for  deceit.  A  vendee 
may  often  have  rehef  in  equity  by  reason  of  misrepresentation  based 
upon  mistake  or  innocent  misstatements,  where  the  common-law  ac- 
tion of  deceit  would  require  much  more  stringent  proof.^     Thus,  where 


scribers  who  have  been  induced  by  the 
same  misrepresentations  contained  in 
a  prospectus  to  subscribe  for  stock  may 
join  in  a  suit  in  equity  for  the  benefit 
of  themselves  and  others  similarly 
deceived  to  set  aside  their  subscrip- 
tions. Bosher  v.  Richmond,  etc.  Co., 
89  Va.  455  (1892).  See  also  §  156, 
supra.  A  bill  in  equity  lies  to  rescind 
a  fraudulent  sale  of  stock.  Merrill  v. 
Florida,  etc.  Co.,  60  Fed.  Rep.  17 
(1893).  A  stockholder  in  a  national 
bank  who  transfers  his  stock  in  order 
to  avoid  the  statutory  liability  may 
be  held  liable,  and  this  liability  may 
be  enforced  by  the  receiver  of  the 
bank.  In  such  a  suit  a  transferee  can- 
not be  held  liable  also,  nor  can  the 
transferee's  claim  that  he  was  defrauded 
be  tried  in  that  suit.  Stuart  v.  Hay- 
den,  72  Fed.  Rep.  402  (1895);  aff'd, 
169  U.  S.  1.  If  the  suit  is  in  equity 
and  the  money  went  to  the  corpora- 
tion, an  officer  cannot  be  held  person- 
ally liable,  inasmuch  as  rescission  is 
the  essence  of  the  suit.  Zimmele  v. 
American,  etc.  Co.,  1  N.  Y.  App.  Div. 
327  (1896).  A  promoter  who  has 
taken  a  contract  to  purchase  a  prop- 
erty at  a  certain  price,  based  upon 
reports  and  representations  that  the 
business  had  not  decreased  since  the 
reports,  may,  upon  discovering  that 
the  business  has  largely  decreased, 
refuse  to  carry  out  the  contract,  and 
may  hold  the  party  liable  for  his  dis- 
bursements, but  not  for  profits  which 
he  would  have  made  if  his  plans  had 
been  carried  out.  Loewer  v.  Harris, 
57  Fed.  Rep.  368  (1893).  Where  a 
person  turns  over  stock  and  bonds  to 
another  in  order  that  the  latter  may 
act  for  the  former  in  carrying  out  a 
reorganization,  the  former  may  file  a 
bill  against  the  latter  for  an  account 
and  need  not  resort  to  an  action  at 
law.  Benedict  v.  Moore,  76  Fed.  Rep. 
472  (1896).  See  also  §321,  supra. 
The  vendee  may  rescind  where  false 
and  material  representations  were 
made    and    the    plaintiff    relied  upon 


them  and  was  injured,  even  though 
he  might  have  made  investigations 
which  would  have  shown  their  falsity. 
Oleott  V.  Bolton,  50  Neb.  779  (1897). 
Several  purchasers  of  stock  may  con- 
tribute to  the  bringing  of  a  test  case 
to  decide  whether  representations  in- 
ducing the  purchase  were  fraudulent. 
Da  vies  v.  Stowell,  78  Wis.  334 
(1890). 

Where  negotiable  bonds  are  stolen 
from  the  owners  and  they  pass  into 
bona  fide  hands,  and  then  the  thief  ob- 
tains them  by  fraud  from  such  bona 
fide  hands  and  returns  them  to  the 
first  owners,  the  latter  are  entitled  to 
keep  them.  London,  etc.  Co.  v.  Lon- 
don, etc.  Bank,  L.  21  R.  Q.  B.  D.  535 
(1888).  In  England  this  remedy  by 
bill  in  equity  is  held  to  be  "precisely 
analogous  to  the  common-law  action 
for  deceit,"  in  that  damages  may  be 
awarded.  See  also  Peek  v.  Gurney, 
L.  R.  6  H.  L.  377,  390  (1873),  the 
court  saying :  "There  can  be  no  doubt 
that  equity  exercises  a  concurrent 
jurisdiction  in  cases  of  this  descrip- 
tion, and  the  same  principles  applica- 
ble to  them  must  prevail  both  at  law 
and  in  equity." 

1  Kountze  v.  Kennedy,  147  N.  Y. 
124  (1895);  Arkwright  v.  Newbold, 
L.  R.  17  Ch.  D.  301  (1881).  See  also 
Boggs  V.  Wann,  58  Fed.  Rep.  681 
(1893).  A  sale  of  stock  may  be  set 
aside  by  a  suit  in  equity  for  fraud, 
without  proving  fraudulent  intent. 
Tucker  v.  Osbourn,  101  Md.  613 
(1905).  A  suit  in  equity  lies  to  re- 
scind a  sale  of  stock  induced  by  fraud- 
ulent representations.  Intent  to  de- 
fraud need  not  be  proved.  Martin 
V.  Hill,  41  Minn.  337  (1889);  Freer 
V.  Denton,  61  N.  Y.  492  (1875).  Ac- 
tual intent  to  defraud  need  not  be 
shown  in  a  suit  in  equity  to  rescind. 
In  such  a  suit  similar  frauds  prac- 
ticed on  others  cannot  be  shown  in 
evidence.  Johnson  v.  Gulick,  46  Neb. 
817  (1896).  The  rule  in  New  York 
is  otherwise.     Chisholm  v.  Eisenhuth, 


1110 


CH.   XX.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  356. 


a  promoter  organizes  a  syndicate  to  buy  the  stock  of  a  company  to  be 
organized  to  take  over  certain  properties,  and  conceals  the  fact  that  he 
is  interested  in  the  seUing  company,  and  in  fact  intends  to  pay  his  sub- 
scription from  his  interest  in  the  selling  company,  the  other  members 
of  the  syndicate  may  rescind  and  on  tendering  to  him  their  stock  in  the 
new  company  recover  back  the  moneys  they  have  paid.^  Again,  where 
one  promoter,  under  threat  of  destroying  the  value  of  the  stock,  compels 
another  promoter  to  give  up  a  large  part  of  his  rights,  a  court  of  equity 
may  set  the  contract  aside.-  Actual  fraud  need  not  be  proved  in  an 
action  for  rescission  where  the  falsity  of  material  representations  is 
clearly  proved.^  Moreover,  the  contract  of  sale  may  be  canceled  by  a 
court  of  equity  on  the  ground  of  a  mutual  mistake  where  the  misrepre- 
sentations were  innocently  made.^  A  person  who  has  been  induced  by 
fraudulent  misrepresentations  to  exchange  stock  for  other  stock  may 
have  rescission  without  proving  damage,  the  suit  being  very  similar 
to  one  for  specific  performance,  and  it  being  alleged  that  the  actual  value 
of  the  stock  cannot  be  shown. ^     In  England  it  is  held  that  to  rescind 


69  N.  Y.  App.  Div.  134  (1902).  Cj. 
§  165,  note.  In  an  action  to  rescind 
on  the  ground  of  fraud  scienter  must 
be  alleged  and  proved,  but  this  may 
arise  by  a  false  statement  made  know- 
ingly with  intent  to  deceive,  or  by 
representing  actual  knowledge  of  a 
fact  which  did  not  exist  or  of  a  fact 
which  the  seller  did  not  know,  and 
which  was  not  true.  Garrett  Co.  v. 
Appleton,  101  N.  Y.  App.  Div.  507 
(1905) ;  aff'd,  184  N.  Y.  557.  A  court 
of  equity  will  not  entertain  a  suit  to 
enforce  the  statutory  liability  of  di- 
rectors for  paying  di\idends  in  vio- 
lation of  the  statute,  even  though 
there  is  no  remedy  in  any  other  court, 
where  the  money  is  not  needed  to  pay 
the  company's  debts  and  a  judgment 
would  not  promote  justice,  but  would 
produce  inequitable  results.  A  stock- 
holder cannot  maintain  such  a  suit 
in  behalf  of  himself  or  other  stock- 
holders, even  though  he  was  induced 
to  purchase  his  stock  by  reason  of 
such  dividends.  In  this  case  the  court 
carefully  re\'iewed  many  precedents. 
Siegman  v.  Maloney,  63  N.  J.  Eq.  422 
(1902) ;  aff'd,  Siegman  v.  Maloney 
65  N.  J.  Eq.  372  (1903). 

i  Heckscher  v.  Edenborn,  203  N.  Y. 
210  (1911). 

^  Harris  v.  Gary,  112  Va.  362  (1911). 

11 


'  Carr  v.  Nat.  Bank,  etc.  Co.,  167 
N.  Y.  375  (1901).  If  rescission  is 
sought,  not  on  the  ground  of  mistake, 
but  of  fraudulent  representations,  it 
must  be  shown  that  such  representa- 
tions were  made  with  knowledge  of 
their  falsity  and  with  intent  to  deceive, 
and  that  they  had  that  effect ;  in  other 
words,  scienter  must  be  proved.  Jones 
V.  AUan,  35  N.  Y.  Supp.  527  (1895) ; 
Mason  v.  Wheeler,  24  N.  Y.  Supp.  879 
(1893).  In  a  suit  by  a  vendee  to  re- 
scind a  sale  of  stock  on  the  ground  of 
fraud,  it  must  be  alleged  that  the  mis- 
representations were  known  to  the 
vendor  to  be  false.  Garrett  Co.,  v. 
Astor,  67  N.  Y.  App.  Div.  595 
(1902). 

<  Garrett  Co.  v.  Halsey,  38  N.  Y. 
Misc.  Rep.  438  (1902).  See  also  §  354, 
swpra. 

^  Jahn  V.  Reynolds,  115  N.  Y.  App. 
Div.  647  (1906).  A  person  induced 
by  fraud  to  subscribe  for  stock  may 
have  the  subscription  canceled,  even 
though  he  does  not  show  that  he  has 
been  damaged.  Stern  v.  Kirby,  etc. 
Co.,  134  Fed.  Rep.  509  (1904).  Equity 
has  jurisdiction  to  rescind  a  sale  of 
stock  at  the  instance  of  the  vendee, 
but  the  misrepresentations  must  be 
material,  inducing,  damaging,  and  cal- 
culated to  deceive.  Farwell  v.  Colo- 
11 


§356. 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[CH.  XX. 


a  purchase  of  stock  on  the  ground  of  misrepresentations,  fraud  must 
be  alleged  where  the  transaction  has  been  completed.^  Although  the 
buyer  of  stock  purchased  it  at  a  small  nominal  price  by  reason  of  fraudu- 
lent misrepresentations,  yet  the  seller  cannot  maintain  a  bill  in  equity 
to  rescind,  where  the  stock  has  no  special  value  other  than  its  money 
value,  and  the  latter  can  readily  be  shown. ^  One  promoter  cannot  hold 
another  one  liable  for  an  accounting  where  the  transactions  were  to 
defraud  the  public  by  the  sale  of  mining  stocks.^  Purchasers  of  stock 
in  a  gambling,  book-making,  racing  corporation,  who  know  the  purposes 
of  the  company,  cannot  rescind  by  a  suit  in  equity  on  the  ground  of 
fraud. ^ 

The  fraud  may  be  waived  by  the  acts  of  the  vendee.^  The  right  to 
rescind  the  contract  for  fraud  is  waived  by  taking  a  bond  of  indemnity 
against  liability  on  the  stock,  such  bond  being  taken  upon  discovery 
of  the  fraud. ^  A  party  cannot  rescind  a  purchase  of  stock  on  the  ground 
of  false  representations  as  to  the  company's  having  a  secret  process, 


nial  T.  Co.,  147  Fed.  Rep.  480  (1906). 
A  vendee  cannot  have  rescission  in  a 
court  of  equity  on  the  ground  that 
dividends  had  not  been  paid  as  agreed, 
this  being  in  the  nature  of  breach  of 
contract ;  neither  does  the  failure  to 
pay  dividends  show  damages  at  law 
unless  the  value  of  the  shares  is  shown 
to  have  been  affected.  Forster  v. 
Flack,  140  Wis.  48  (1909). 

1  Seddon  v.  North-Eastern,  etc.  Co. 
[1905]  1  Ch.  326. 

2  Edelman  v.  Latshaw,  159  Pa.  St. 
644  (1894),  holding  also  that  the  bill 
will  not  he  where  the  defendant  pur- 
chaser has  already  sold  the  stock  to 
a  bona  fide  purchaser.  An  action  for 
deceit  was  afterwards  sustained.  See 
8.  c,  ISO  Pa.  St.  419  (1897). 

3  Primeau  v.  Granfield,  193  Fed.  Rep. 
911   (1911),  rev'g  184  Fed.  Rep.  480. 

^  Ryan  v.  Miller,  236  Mo.  496  (1911), 
the  court  saying:  "These  parties  saw, 
or  thought  they  saw,  big  interest  on 
their  investment.  They  were  willing 
that  the  public  should  be  fleeced  for 
their  gain,  and  yet,  if  by  good  fortune 
the  public  bettors  succeeded  in  fleecing 
them,  then  they  ask  their  associates  in 
the  business  to  return  their  money 
and  they  keep  the  profits.  '  A  court  of 
equity  should  wash  its  hands  of  a  deal 
of  this  kind.  .  .  .  The  scheme  was  to 
get  money  enough  together  through 
this  corporation  to  operate  the  horse- 

11 


racing  and  book-making  business,  to 
the  end  that  the  stockholders  through 
the  corporation  might  fleece  the  general 
public." 

*  Kingman  &  Co.,  v.  Stoddard,  85 
Fed.  Rep.  740  (1898).  Where  a  pur- 
chaser of  a  majority  of  the  stock  of 
a  manufacturing  corporation  becomes 
general  manager  and  ascertains  that 
he  was  defrauded  by  misrepresenta- 
tions as  to  the  company's  condition, 
but  concludes  to  go  on  with  the  busi- 
ness, believing  he  can  make  its  suc- 
ceed, but  finally  makes  a  failure  of  it, 
he  cannot  then  complain.  Speicher 
V.  Thompson,  141  Mich.  654  (1905). 
A  person  who  has  brought  mining 
stock  and  afterwards  examines  the 
mine  and  deals  in  the  stock  and  sells 
it  on  commission  cannot  then  claim 
that  his  original  purchase  was  in- 
duced by  fraudulent  representations. 
Irby  V.  Tilsley,  41  Wash.  211  (1905). 
A  purchaser  of  bonds  may  rescind  for 
fraud,  even  though  he  has  sold  the 
bonds,  where  he  sold  on  the  advice  of 
his  vendor.  Findlay  v.  Baltimore, 
etc.  Co.,  97  Md.  716  (1903).  Where 
the  vendee  files  a  bill  for  fraud  and 
yet  asks  that  the  vendor  be  required 
to  deliver  the  stock,  he  thereby  af- 
firms the  transaction.  Chicago,  etc. 
Bank  v.  Ball,  208  111.  256  (1904). 

6  Bridge    v.    Penniman,    51    N.    Y. 
Super.  Ct.  183  (1885). 
12 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[§  356. 


where  he  learned  about  the  process  before  completing  his  purchase, 
and  had  held  the  stock  a  year,  and  endeavored  to  sell  the  process.^ 
Wliere  the  purchaser  after  discovering  the  facts  which  he  claims  con- 
stituted fraud  became  a  director  and  took  an  active  part  in  conducting 
the  corporate  affairs  and  had  full  access  to  the  books,  he  cannot  rescind 
although  he  may  have  a  right  to  damages.^  A  person  cannot  rescind 
for  fraud  a  purchase  of  stock  from  the  corporation  itself,  where,  subse- 
quently to  discovering  the  fraud,  he  attended  a  stocldiolders'  meeting, 
and  voted  to  assess  the  stock,  and  afterwards  attended  another  stock- 
holders' meeting  and  paid  the  assessment.^ 

Where  a  party  has  a  right  to  return  the  stock  and  receive  back  his 
money,  he  may,  after  making  a  tender,  do  any  acts  in  regard  to  the 
stock  reasonably  necessary  to  protect  his  interest,  and  yet  not  lose  his 
right  to  rescind.  But  where  he  directs  a  sale  of  the  stock  and  gives  a 
proxy  thereon  and  attends  meetings,  he  waives  his  right  to  rescind.* 


1  Benton  v.  Ward,  59  Fed.  Rep.  411 
(1894).  Even  though  a  person  is 
induced  by  fraud  to  purchase  ten  shares 
of  stock  and  later  receives  forty  shares 
in  lieu  of  the  ten,  this  is  no  bar  to  his 
suit  to  cancel  the  transaction.  Hub- 
bard V.  Oliver,  139  N.  W.  Rep.  77 
(Mich.  1912).  Where  the  purchaser 
has  full  knowledge  of  the  facts,  and 
served  as  a  director,  and  sold  some  of 
the  stock,  he  cannot  rescind  on  the 
ground  of  fraud.  Dassler  v.  Rowe, 
136  N.  W.  Rep.  846  (Neb.  1912). 

2  Rosenberg  v.  McKinney,  138  Wis. 
381  (1909). 

3  Marten  v.  Paul,  etc.  Co.,  99  Cal. 
355  (1893).  Acting  as  a  shareholder 
is  a  waiver  of  the  right  to  rescind  for 
promoter's  misrepresentations.  Petrie 
V.  Guelph,  etc.  Co.,  11  S.  C.  Rep. 
(Can.)  450  (1885).  Where  a  corpora- 
tion issues  stock  and  thereafter  per- 
mits a  transfer  of  the  stock  and  sale 
thereof  to  another  person,  cannot 
get  the  stock  back  on  the  ground  of 
fraud  on  the  part  of  the  party  to  whom 
it  first  issued  the  stock.  Tecumseh, 
etc.  Bank  v.  Russell,  50  Neb.  277  (1897). 
Delay  in  rescinding,  in  hopes  that  the 
stock  will  be  more  valuable,  is  fatal. 
Weisiger  v.  Richmond  Ice  Mach.  Co., 
90  Va.  795  (1894).  Where  the  vendee 
of  stock  becomes  a  director  and  has 
access  to  the  books,  and  complains  of 
fraud  in  the  sale,  and  then  takes  a  sum 
of  money  from  the  vendor  in  settle- 

1 


ment,  he  cannot  again  complain  upon 
the  failure  of  the  company.  Powell  v. 
Adams,  98  Mo.  598  (1889).  A  vendee 
who,  after  the  purchase,  becomes  a  di- 
rector and  signs  statements  similar 
to  the  representations  made  to  him, 
and  waits  two  years  before  repudiat- 
ing the  stock,  cannot  repudiate.  An- 
derson V.  Black,  32  S.  W.  Rep.  468 
(Ky.  1895).  A  person  may  defeat 
notes  given  for  stock  which  he  was 
induced  fraudulently  to  purchase 
from  the  corporation,  even  though  he 
became  and  remained  cashier  for  the 
corporation  for  over  a  year  after  the 
sale  and  before  he  set  up  the  defense, 
and  was  a  director  and  voted  the 
stock.  He  did  not  necessarily  learn 
the  facts  from  occupying  these  posi- 
tions, nor  from  the  fact  that  he  made 
official  reports  of  the  condition  of  the 
company.  He  was  not  bound  to  inves- 
tigate. He  tendered  the  stock  back  as 
soon  as  he  discovered  the  facts.  Espe- 
cially do  these  rules  apply  where 
no  creditors'  or  other  stockholders' 
rights  have  intervened.  Nat.-  Bank  v. 
Taylor,  5  S.  D.  99  (1894). 

*  Jessop  V.  Ivory,  158  Pa.  St.  71 
(1893) ;  s.  c,  172  Pa.  St.  44.  A  pay- 
ment after  repudiating  the  subscrip- 
tion for  fraud  is  not  a  waiver  if  made 
expressly  to  save  money  already  paid. 
Fear  v.  Bartlett,  81  Md.  435  (1895). 
A  vendee  who  has  resold  the  stock  at 
the  same  price  cannot  complain  unless 
113 


§  356.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[CH.  XX. 


Where  the  vendee  sues  to  obtain  the  stock  after  he  knows  of  the  fraud, 
he  ratifies  the  sale.^ 

Laches  is  a  bar.  And  yet  where  a  person  buys  stock  in  1865  on 
the  faith  of  false  representations,  and  discovers  in  1871  that  the  stock 
is  worthless,  and  is  told  by  one  of  the  conspirators  in  1889  that  the 
representations  were  false,  he  may  file  a  bill  in  equity  for  rescission  of 
the  sale  and  for  recovery  of  the  money  paid.-  Ordinarily,  however, 
delay  is  fatal. ^     Under  some  circumstances  a  bill  in  equity  to  rescind 


he  is  in  the  business  of  buying  and 
seUing  stock  for  profit.  McMillan  v. 
Batten,  .52  Oreg.  218  (1908). 

1  Anderson  v.  Chicago,  etc.  Bank, 
195  111.  341  (1902). 

2  Higgins  V.  Grouse,  147  N.  Y.  411 
(1895),  rev'g  71  Hun,  615.  Even 
though  by  the  statutes  of  a  state 
(Arizona)  a  transfer  of  the  stock  is 
not  good  until  recorded  except  as  be- 
tween the  parties,  yet  where  various 
stockholders  have  pooled  their  stock 
by  turning  in  their  certificates  of 
stock  to  one  person  to  hold,  and  one 
of  the  parties  so  pooling  has  sold  his 
pool  certificate,  and  the  manager  of 
the  pool  knowing  that  fact  refuses  to 
permit  the  stock  itself  to  be  corre- 
spondingly transferred  on  the  books 
of  the  company,  and  later  fraudulently 
obtains  a  judgment  against  the  party 
who  originally  entered  the  pool,  and 
sells  out  his  stock  under  such  judgment, 
he  may  be  compelled  by  a  court  of 
equity  to  transfer  the  stock  to  the 
purchaser  of  the  pool  certificate, 
even  though  the  stock  has  advanced 
in  value  and  two  years  have  inter- 
vened. Brissell  v.  Knapp,  155  Fed. 
Rep.  809  (1907).  Where  a  certificate 
of  stock  is  stolen  from  a  pledgee  and 
the  transfer  on  the  back  is  insufficient 
in  that  the  pledgor's  name  was  writ- 
ten not  at  the  end  of  the  transfer  but 
at  the  beginning,  the  pledgor  may  by 
a  bill  in  equity  redeem  the  stock  from 
a  person  who  purchased  it  from  the 
thief.  A  suit  in  equity  lies  inasmuch 
as  an  act  is  involved  as  to  the  amount 
due  and  the  dividends  received.  The 
ten-years  statute  of  limitations  applies, 
there  being  no  acquiescence  or  un- 
reasonable delay.  Treadwell  v. 
Clark,  190  N.  Y.  51  (1907).  Even 
though  the  vendee  of  stock  and  bonds 

11 


had  the  property  and  business  exam- 
ined by  an  expert  and  was  informed 
of  the  condition  of  the  property  before 
he  purchased,  and  even  though  he 
took  control  of  the  corporation  and 
managed  it  for  twelve  months  before 
complaining  of  misrepresentations,  yet 
unless  the  defendant  proves  that  the 
plaintiff  did  not  act  on  the  representa- 
tions or  that  he  discovered  the  fraud,  or 
should  have  discovered  it  while  he  was 
in  possession  of  the  property,  the  plain- 
tiff may  recover.  Graybill  v.  Drennen, 
150  Ala.  227  (1907).  Even  though  the 
vendee  does  not  discover  the  fraud  for 
three  years,  yet  he  may  rescind,  and 
even  though  he  thereafter  receives 
dividends  he  may  credit  them  on  the 
rescission.  Davis  v.  Forman,  229  Mo. 
27  (1910).  Three  months'  delay  if 
explained  is  not  fatal.  Rock  v. 
Joseph,  60  Wash.  531  (1901).  Even 
though  fraud  is  not  discovered  until 
two  months  after  the  purchase  and  the 
vendor  has  not  offered  to  return  the 
stock  until  nearly  two  months  later 
when  he  is  sued  for  the  price,  this  is 
not  laches.  Archibald  v.  Hahn,  53 
Wash.  602  (1909). 

'  A  year's  delay  by  the  vendor  of 
stock  after  being  advised  by  his  attor- 
ney that  he  had  a  good  case  of  fraud 
is  fatal.  Perry  v.  Pearson,  135  111.  218 
(1890).  Where  a  purchaser,  after 
learning  of  a  fraud,  delays  for  nearly 
a  year  before  commencing  suit  to  set 
it  aside,  his  remedy  is  barred  by 
laches.  Burwash  v.  Ballou,  230  111. 
34  (1907).  A  delay  of  six  years 
after  knowledge  of  the  fraud  induc- 
ing a  purchase  of  stock  is  fatal. 
Andriessen's  Appeal,  123  Pa.  St.  303 
(1889).  Three  years'  delay  in  tender- 
ing back  the  bonds  is  not  fatal,  nor 
is  the  fact  that  the  vendee  resold  the 
14 


CH.   XX.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  356. 


a  fraudulent  sale  of  stock  by  a  corporation  lies,  even  against  the  receiver 


bonds  on  the  same  terms,  and  the 
sub-vendee  returned  them  to  the  first 
vendee.  Wooster  v.  Sage,  67  N.  Y.  67 
(1876),  aff'g  6  Hun,  285.  Eight  years' 
delay  in  commencing  suit  to  cancel  a 
transfer  of  stock  for  fraud  is  a  bar, 
the  party  charged  with  the  fraud  hav- 
ing died  in  the  meantime.  Ripple  v. 
Kuehne,  100  Md.  672  (1905).  The 
question  of  laches  may  be  submitted 
to  a  jury.  Mayo  v.  Knowlton,  134 
N.  Y.  250  (1892).  See  also  §§  160-162, 
supra.  Where  the  vendee  acquiesces 
or  remains  silent  after  discovering  the 
alleged  fraud,  his  remedy  is  barred. 
Latrobe  v.  Dietrich,  114  Md.  8  (1910). 
Eleven  years'  delay  in  complaining  of 
misrepresentation  in  inducing  the  pur- 
chase of  stock  is  fatal.  Thompson 
t'.  McKee,  119  S.  W.  Rep.  229  (Ky. 
1909).  Where  a  purchaser  of  stock 
retains  it  for  over  a  year  after  he  has 
become  aware  of  the  facts  he  is  guilty 
of  laches,  especially  where  the  corpora- 
tion has  become  insolvent  in  the  mean- 
time. Elgin  V.  Snyder,  60  Oreg.  297 
(1911).  Silence,  delay,  vacillation,  ac- 
quiescence, or  the  retention  and  use 
of  any  of  the  fruits  of  a  fraudulent 
sale  or  trade  that  are  capable  of  res- 
toration, for  any  considerable  length 
of  time  after  the  discovery  of  the 
fraud,  are  fatal  to  the  right  to  rescind 
the  same.  Stuart  v.  Hayden,  72  Fed. 
Rep.  402  (1895);  aff'd,  169  U.  S.  1. 
Where,  six  months  after  the  fraud, 
the  purchaser  has  every  opportunity 
to  investigate  the  truth  of  the  state- 
ments and  fails  to  do  so,  he  cannot, 
after  seventeen  years'  delay,  complain, 
even  though  he  alleges  concealment, 
no  dividends  ha\'ing  been  paid  in  the 
meantime.  McEacheran  v.  Western 
Transp.  etc.  Co.,  97  Mich.  479  (1893). 
Two  years'  delay  in  disaffirming  is 
fatal.  Zimmele  v.  American,  etc.  Co., 
1  N.  Y.  App.  Div.  327  (1896).  A  delay 
of  three  years  after  discovery  of  the 
false  statements,  and  one  year  after 
full  knowledge  of  all  the  facts,  is 
fatal.  Byrd  v.  Rautman,  85  Md.  414 
(1897).  In  the  case  Krueger  v.  Armi- 
tage,  58  N.  J.  Eq.  357  (1899),  the 
court  of  chancery  held  that  the  rem- 
edy of  a  stockholder  for  fraud  induc- 

11 


ing  him  to  buy  stock  was  at  law  alone, 
where  the  vendee  after  discovering 
the  fraud  instituted  insolvency  pro- 
ceedings against  the  corporation  as  a 
stockholder  and  also  delayed  in  filing 
his  bill  for  rescission.  Where  a  cred- 
itor of  an  insolvent  corporation  re- 
organizes it,  and  then  by  fraudulent 
representations  induces  another  com- 
pany to  sell  its  property  to  the  reor- 
ganized company  in  exchange  for 
stock  of  the  latter,  and  a  mortgage  is 
at  the  same  time  placed  upon  the 
combined  properties  and  default  takes 
place  and  foreclosure  is  commenced, 
the  parties  so  selling  the  property  in 
the  said  mortgage  may  still  rescind 
unless  innocent  bondholders'  rights 
have  intervened,  in  which  case  money 
damages  may  be  had  against  the 
parties  bringing  about  the  reorgan- 
ization and  making  the  misrepresenta- 
tions. Such  misrepresentations  may 
consist  of  statements  as  to  what  will 
be  done  in  the  way  of  improvements 
out  of  the  bonds,  as  well  as  state- 
ments as  to  the  current  net  profits. 
Old  Colony  Trust  Co.  v.  Dubuque,  etc. 
Co.,  89  Fed.  Rep.  794  (1898).  The 
question  of  what  constitutes  prompt- 
ness in  tendering  back  the  stock  for 
fraud  may  be  a  question  of  fact  de- 
pending on  the  circumstances  and  con- 
ditions, especially  where  the  stock 
was  worthless.  Heintz  v.  Mueller,  27 
Ind.  App.  42  (1901).  A  suit  by  one 
signer  of  a  reorganization  agreement 
to  enforce  it  prevents  laches  being 
charged  against  other  signers  who  do 
not  commence  suit  until  a  long  time 
subsequently.  Cox  v.  Stokes,  156 
N.  Y.  491  (1898).  In  a  suit  by  a  stock- 
holder to  hold  a  corporation  liable  for 
his  stock  and  dividends,  by  reason  of 
its  allowing  a  transfer  by  an  unauthor- 
ized agent  of  the  stockholder,  the 
subsequent  owners  of  the  stock  are 
not  necessary  parties.  The  defense 
of  prescription  may  prevail.  St.  Romes 
V.  Levee,  etc.  Co.,  127  U.  S.  614  (1888). 
Where  the  government  has  been 
defrauded  by  one  of  its  officials  and 
it  files  a  bill  in  equity  to  recover  the 
securities  in  which  the  defaulter  has 
invested  the  money,  and  enjoins  his 
15 


§  356.] 


CONTRACTS  TO  SELL  —  GAMBLING  SALES,  ETC. 


[CH.  XX. 


of  the  corporation.^  But  a  purchaser  of  national  bank  stock  from  the 
bank  itself  cannot,  after  the  bank  has  passed  into  the  hands  of  a  re- 
ceiver, defend  against  the  statutory  liability  on  the  ground  of  fraud  in- 
ducing him  to  purchase,  unless  he  proves  acts  of  diligence  which  negative 
any  charge  of  negligence,  and  also  proves  that  no  debt  was  created  nor 
credit  given  the  bank  after  he  became  such  stockholder.^     In  order  to 


lawyer  as  well  as  the  corporation  from 
transferring  the  stock,  the  stock  being 
in  the  possession  of  the  lawyer,  and  he 
being  made  a  party  defendant,  it  is  not 
too  late,  four  years  after  the  suit  has 
been  commenced,  for  a  person  who 
has  given  a  bond  of  indemnity  to  the 
official,  to  claim  that  the  lawyer  held  the 
stock  in  pledge  to  secure  him.  Leary 
V.  United  States,  224  U.  S.  567  (1912). 
154  S.  W.  Rep.  886  ;  131  Pac.  Rep.  1126. 
1  Merrill  v.  Florida,  etc.  Co.,  60  Fed. 
Rep.  17  (1893).  The  vendee  may  re- 
scind even  after  the  corporation  has 
been  foreclosed,  if  he  sues  within  a 
reasonable  time  after  he  learns  of 
the  fraud.  Barron  v.  Myers,  146  Mich. 
510  (1906).  Under  the  Kentucky  stat- 
ute a  subscriber  may  repudiate  for 
fraud,  even  after  the  corporation  has 
made  an  assignment  for  the  benefit 
of  creditors,  if  due  care  was  used  to 
discover  the  fraud.  Kentucky,  etc.  v. 
Schaefer,  120  Ky.  227  (1905),  the 
court  stating  that  the  decision  in  Dep- 
pen  V.  German- American,  etc.  Co.,  70 
S.  W.  Rep.  868  to  the  contrary  was 
modified  on  the  rehearing  in  72  S.  W. 
Rep.  768.  Even  after  the  corporation 
has  passed  into  the  hands  of  a  re- 
ceiver, a  subscriber  for  stock  may 
rescind  and  sue  for  money  paid,  fraud- 
ulent representations  having  been 
made  as  to  the  condition  of  the  com- 
pany, the  subscription  being  for  in- 
creased stock,  and  the  increase  not 
having  been  made  until  some  time  after 
the  subscription.  Newbegin  v.  New- 
ton Nat.  Bank,  66  Fed.  Rep.  701 
(1895);  aff'd,  Newton  Nat.  Bank  v. 
Newbegin,  74  Fed.  Rep.  135  (1896). 
Even  though  the  purchasers  of  in- 
creased capital  stock  were  defrauded 
by  false  statements  of  the  oflSeers, 
and  even  though  the  certificates  filed 
with  the  secretary  of  state  in  con- 
nection with  the  increase  of  the  stock 
were  false  and  fraudulent,  yet  after  the 

11 


company  becomes  insolvent  two  years 
thereafter,  it  is  too  late  for  them  to 
repudiate  their  purchase  of  the  stock, 
even  though  the  purchasers  had  not 
discovered  the  facts  in  the  meantime. 
Scott  V.  Abbott,  160  Fed.  Rep.  573 
(1908).  Two  years'  delay  and  the 
receiving  of  dividends  is  a  bar  to  repu- 
diation after  corporate  insolvency. 
Alsop  V.  Conway,  188  Fed.  Rep.  568 
(1911).  A  stockholder  in  a  national 
bank  who  was  induced  to  become  such 
by  fraud  may  have  his  name  taken 
from  the  list  of  stockholders,  except  as 
against  creditors  of  the  bank  who 
became  such  after  he  became  a  stock- 
holder and  without  notice  of  the  fraud. 
Stuflflebeam  v.  De  Lashmutt,  83  Fed. 
Rep.  449  (1897).  Eleven  months 
after  an  insolvent  bank  issues  new 
stock,  concealing  the  facts,  a  subscriber 
or  purchaser  cannot  repudiate  for 
fraud,  a  receiver  having  gone  in,  even 
though  the  subscriber  had  just  ascer- 
tained the  facts.  Dunn  v.  State  Bank, 
59  Minn.  221  (1894).  Even  after  the 
appointment  of  a  receiver  of  a  bank,  a 
person  who  was  induced  to  buy  stock 
of  the  bank  by  fraudulent  statements 
that  the  stock  was  worth  par  can 
rescind  by  suit.  Robinson  v.  Dickey, 
14  Tex.  Civ.  App.  70  (1896).  See 
§  164,  supra,  and  Wallace  v.  Bacon,  86 
Fed.  Rep.  553  (1898). 

2  Wallace  v.  Hood,  89  Fed.  Rep.  11 
(1898) ;  aff'd,  182  U.  S.  555.  See  also 
§  163,  supra.  A  subscriber  to  the 
stock  of  a  national  bank  cannot,  after 
the  bank  has  become  insolvent,  avoid 
his  statutory  liability  on  the  stock  by 
the  defense  that  he  was  induced  by 
fraudulent  representations  of  the 
bank  and  its  officers  to  become  a  stock- 
holder. Scott  V.  Deweese,  181  U.  S. 
202  (1901).  In  a  suit  at  law  brought 
by  the  receiver  of  a  national  bank 
against  a  stockholder  on  his  statutory 
liabihty,  he  cannot  set  up  fraud  on 
16 


CH.  XX.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[§  356. 


rescind  a  fraudulent  sale  of  stock,  the  stock  and  also  all  other  property 
received  must  be  tendered  back.^     In  a  suit  in  equity  by  a  purchaser  of 


the  part  of  the  bank  in  inducing  him 
to  subscribe.  That  defense,  if  good 
at  all,  is  available  only  by  a  suit  in 
equity.  Neither  can  the  defendant  set 
up  a  counterclaim  for  the  money  so 
paid  by  him  for  the  stock.  Lantry  v. 
Wallace,  182  U.  S.  536  (1901). 

1  Wainwright  v.  Weske,  82  Cal.  193 
(1889) ;  Francis  v.  New  York,  etc.  R.  R., 
108  N.  Y.  93  (1888) ;  aff'g,  17  Abb. 
N.  Cas.  1 ;  holding  also  that  where  the 
vendee  has  transferred  said  stock  to 
another  his  action  fails.  An  owner  of 
land  who  has  received  stock  for  a 
deed  of  the  land  cannot  have  the  deed 
canceled  on  the  ground  of  fraud  un- 
less he  returns  the  stock.  Clint  v. 
Eureka,  etc.  Co.,  3  Cal.  App.  463 
(1906).  The  defrauded  vendee  must 
tender  back  the  stock  unconditionally. 
If  he  has  used  the  stock  in  another 
transaction,  even  with  the  vendor,  his 
right  to  rescind  for  fraudulent  repre- 
sentations is  barred.  Bridge  v.  Penni- 
man,  105  N.  Y.  642  (1887).  But 
where  the  vendee  has  sold  part  of  the 
stock,  he  cannot  maintain  a  suit  in 
equity  to  collect  money  damages  for 
loss  occasioned  by  misrepresentations 
inducing  him  to  purchase.  His  rem- 
edy is  at  law.  No  cancellation  of  the 
contract  is  involved.  White  v.  Boyce, 
21  Fed.  Rep.  228  (1884).  Selling  some 
of  the  stock  before  repudiating  for 
fraud  is  no  bar  to  repudiation.  1 
Ry.  &  Corp.  L.  J.  434.  Rescission  is 
not  barred  although  the  vendee  has 
lost  the  stock  by  forfeiture,  the  ven- 
dor having  knowledge  thereof.  Ma- 
turin  V.  Tredinnick,  4  New  Rep.  15 
(1864)  and  2  New  Rep.  514.  If  the 
party  selling  the  stock  states  that  he 
is  selling  stock  owned  by  the  corpora- 
tion, when  as  a  matter  of  fact  he  is 
selling  his  own  stock,  the  vendee,  upon 
discovering  the  fraud,  may  rescind 
the  sale,  and  recover  back  the  pur- 
chase price  paid.  He  need  not  tender 
the  same  stock  which  he  received,  in- 
asmuch as  stock  has  no  "ear-mark." 
If  he  has  exchanged  the  stock  for  the 
stock  of  another  company  into  which 
his  company  has  been  merged,  he  may 
borrow  stock  of  the  first  company  and 


make  a  tender  of  that.  He  must,  how- 
ever, rescind  promptly  upon  the  dis- 
covery of  the  fraud.  Although  he 
does  not  discover  the  fraud  for  four 
years  he  may  then  rescind.  Mayo  v. 
Knowlton,  134  N.  Y.  250  (1892).  A 
suit  to  cancel  a  sale  of  stocks  and 
bonds,  on  the  ground  of  fraud  on  the 
part  of  the  purchaser,  will  not  lie 
where  the  money  paid  at  the  sale  has 
not  been  returned  or  tendered,  even 
though  the  seller  spent  the  money  be- 
fore he  discovered  the  alleged  fraud, 
and  is  unable  to  obtain  the  amount  of 
money  necessary  for  a  tender.  Such 
is  the  rule  even  though  the  amount  to 
be  distributed  will  be  due  to  the  plain- 
tiff in  case  he  succeeds  in  the  suit. 
Rigdon  V.  Walcott,  141  111.  649  (1892). 
A  stockholder  who  has  been  induced 
to  purchase  stock  by  fraudulent  rep- 
resentations, the  stock  remaining  in 
the  hands  of  the  vendor,  may  file  a 
bill  in  equity  to  rescind.  The  vendee's 
offer  to  surrender  all  claim  on  the 
stock,  together  with  a  demand  for  the 
return  of  the  money,  is  sufficient. 
Zimmele  v.  American,  etc.  Co.,  21 
N.  Y.  Supp.  846  (1893).  Where  part  of 
the  consideration  in  the  sale  of  stock 
is  that  the  vendor  resign  an  office  in 
the  company  and  the  vendee  be  elected 
in  his  place  and  this  has  been  carried 
out,  the  vendee  cannot  rescind  for 
fraud  unless  he  resigns  the  position 
or  does  something  towards  restoring 
the  vendor  to  his  former  position. 
Gassett  v.  Glazier,  165  Mass.  473 
(1896).  In  rescinding  for  fi'aud  the 
vendee  of  stock  must  return  or  tender 
the  dividends  back  to  the  vendor,  but 
cannot  demand  repayment  of  assess- 
ments paid  after  discovery  of  the 
fraud.  Marten  v.  Paul,  etc.  Co.,  99 
Cal.  355  (1893).  Where  a  party  has 
given  a  note  in  purchase  of  stock  in 
two  corporations  he  cannot  rescind 
unless  he  tenders  back  the  stock  in 
both.  Rohrbacher  v.  Kleebauer,  119 
Cal.  260  (1897).  Where,  according  to 
contract,  stock  sold  to  the  corporation 
is  appraised  by  the  corporation  and 
the  appraised  price  is  actually  paid 
to  and  received  by  the  stockholder, 


1117 


§  356.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


stock  to  cancel  a  sale  for  fraud  and  to  recover  money  paid  back  on  ac- 
count, no  tender  prior  to  the  suit  need  be  made,  if  the  plaintiff  in  his 
complaint  offers  to  return  the  stock,  and  the  decree  requires  a  deposit 
of  it  with  the  clerk  of  the  court  for  the  benefit  of  the  defendants.^  It  has 
been  held  in  Indiana  that  the  vendee  must  allege  that  he  was  damaged 
by  the  misrepresentations  and  was  ignorant  of  the  falsity  of  the  same 
when  made,  and  if  he  wishes  to  rescind  must  offer  to  return  the  stock, 
or  must  allege  that  it  is  worthless,  especially  where  he  is  sued  upon  a 
note  given  in  payment.^  A  subscriber  for  bonds  who  repudiates  for 
fraud  and  holds  the  promoters  liable  cannot  claim  a  lien  on  the  bonds, 
because  that  would  involve  affirmance.^  After  the  purchaser  of  stock 
has  instituted  an  action  for  deceit  he  can  no  longer  rescind.^  Two 
vendors  of  stock  may  join  in  a  suit  to  rescind  the  sale  for  fraud  where 
false  representations  were  made  to  one  of  them  with  the  view  of  influ- 


he  cannot  maintain  a  bill  to  obtain  a 
larger  price,  but  must  either  rescind 
or  sue  at  law.  Tuttle  v.  Batchelder, 
etc.  Co.,  170  Mass.  315  (1898). 

1  Chisholm  v.  Eisenhuth,  69  N.  Y. 
App.  Div.  134  (1902),  holding  also 
that  even  though  the  misrepresenta- 
tions were  made  by  the  husband  in 
selling  the  wife's  stock,  yet  this  is 
sufficient.  Rescission  can  only  be  had 
where  an  offer  to  return  the  property 
has  been  made  and  kept  good  and 
the  offer  is  repeated  on  the  trial.  Ciir- 
rier  v.  Poor,  84  Hun,  45  (1895) ;  rev'd 
on  another  point  in  155  N.  Y.  344. 
See  also  §  335,  supra. 

2  Long  V.  Johnson,  15  Ind.  App.  498 
(1896).  Under  the  California  code 
the  stock  need  not  be  tendered  back  if 
it  is  worthless.  Avery  v.  Cullen,  15 
Cal.  App.  413  (1911).  Where  the 
vendee  has  disposed  of  some  of  the 
stock  before  he  discovered  the  fraud, 
he  need  not  tender  back  all  the  stock, 
but  he  must  allege  that  he  sold  it 
before  he  discovered  the  fraud,  and 
set  forth  the  price  and  other  facts. 
Hill  V.  Harriman,  95  Tenn.  300  (1895). 
A  misrepresentation  that  large  divi- 
dends and  profits  are  being  made  by  a 
coal  company,  whereas  in  fact  they 
were  made  by  fraud  practiced  upon  a 
railroad  company,  is  good  ground  for 
a  rescission  of  the  sale.  No  tender  back 
of  the  stock  need  be  made  if  the  prop- 
erty is  worthless.  If  there  was  a 
partial  failure  of  consideration,  the 
defendant  could  reduce  the  recovery 

1118 


pro  tanto.  A  court  of  equity  may  set 
aside  the  sale  on  grounds  which  would 
not  be  sufficient  at  law.  The  court  so 
held  in  an  action  at  law  for  the  pur- 
chase price,  the  answer  setting  up 
fraud  as  a  defense.  Boggs  v.  Wann, 
58  Fed.  Rep.  681  (1893).  Where  a 
corporation  sells  its  property  through 
misrepresentations,  and  in  deeding 
the  property  causes  all  its  outstanding 
capital  stock  to  be  delivered  to  the 
vendee,  the  vendee  in  suing  to  recover 
back  the  money  need  not  allege  that 
the  stock  was  valueless,  there  being 
an  allegation  that  the  property  was 
valueless.  Keener  v.  Baker,  93  Fed. 
Rep.  377  (1899).  A  suit  to  cancel  a 
note  given  in  payment  for  stock,  pur- 
chased by  reason  of  fraudulent  mis- 
representations, must  not  be  based 
also  on  an  alleged  agreement  that  the 
note  would  not  be  enforced.  Bass  v. 
Sanborn,  119  Mo.  App.  103  (1906). 

3  Donnelly  v.  Missouri-Lincoln, 
etc.  Co.,  239  Mo.  370  (1911).  In  a 
pledgor's  suit  to  enjoin  the  pledgee 
from  selling  the  pledge  on  the  ground 
that  the  pledgor  had  purchased  the 
stock  from  the  pledgee  by  fraudulent 
representations  and  had  given  a  note 
in  payment  of  the  stock  as  pledged, 
the  suit  being  to  reduce  the  amount  of 
the  note,  clear  proof  of  fraud  is  neces- 
sary. Brooks  V.  Culver,  168  Mich. 
436  (1912). 

4  Hanrahan  v.  National,  etc.  Assoc, 
66  N.  J.  L.  80  (1901). 


CH.   XX. 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  356. 


encing  both,  and  had  that  effect.^  The  bill  is  not  multifarious,  even 
though  it  asks  for  rescission  and  also  for  damages  against  the  guilty 
parties."  But  in  a  suit  by  a  trustee  in  bankruptcy  to  set  aside  a  sale 
of  stock  by  the  bankrupt  as  fraudulent,  the  court  in  setting  the  sale 
aside  cannot  give  a  judgment  for  the  value  of  the  stock,  even  though  it 
has  depreciated  in  the  meantime,  it  appearing  that  the  defendant  still  has 
the  stock  on  hand  and  is  able  to  deliver  it  back.^  In  a  suit  by  the  seller 
to  rescind  for  fraud  he  may  have  damages  if  the  buyer  has  already  sold 
the  stock,  and  the  measure  of  damages  depends  upon  the  time  of  the 
sale  but  not  on  the  time  of  filing  the  bill.^  But  a  suit  by  a  stockholder 
against  a  promoter  in  behalf  of  the  corporation,  to  require  him  to  pay 
for  his  stock,  and  also  to  recover  damages  for  false  representations  in- 
ducing the  plaintiff  to  purchase  stock,  and  also  to  enjoin  a  proposed 
sale  of  plaintiff's  stock,  in  order  to  pay  an  assessment,  is  multifarious.^ 
In  a  suit  by  a  vendor  of  stock  to  the  corporaton  to  cancel  the  sale  for 
fraud,  the  court  cannot  in  the  same  suit  order  the  officers  to  repay  to 
the  corporation  funds  illegally  taken  by  them  for  salaries.®  A  purchaser 
of  stock  through  a  broker  may  defend  against  a  suit  brought  by  the 
broker  for  the  price  on  the  ground  that  the  vendor,  a  customer  of  the 
broker,  was  guilty  of  fraud ;  but  such  defense  is  not  good  so  far  as  the 
broker  advanced  money  to  his  customer  on  such  stock. ^     If  the  person 


1  Bradley  v.  Bradley,  165  N.  Y.  183 
(1900).  Several  persons  induced  by 
the  same  fraudulent  representations 
to  purchase  stock  may  unite  in  filing 
a  bill  in  equity  to  set  aside  the  pur- 
chase and  compel  repayment  of  the 
money  paid.  Hamilton  v.  American, 
etc.  Co.,  143  Mich.  277  (1906).  Per- 
sons who  have  been  induced  by  fraud 
to  purchase  the  debentures  of  a  com- 
pany which  has  become  insolvent  may 
file  a  bill  in  equity  to  wind  up  its 
affairs  and  to  prevent  the  officers 
illegally  taking  its  assets,  even  though 
the  debentures  are  not  yet  matured. 
Christian  v.  Michigan,  etc.  Co.,  134 
Mich.  171  (1903).  Slater  Trust  Co. 
V.  Randolph,  etc.  Co.  166  Fed.  Rep. 
171  (1908).  A  purchaser  of  stock 
cannot  bring  suit  for  himself  and 
ninety-five  other  purchasers,  even 
though  they  have  assigned  their  claims 
and  their  stock  to  him  for  that  pur- 
pose. Ryan  v.  Miller,  236  Mo.  496 
(1911). 

2  Subscribers  to  stock  may  rescind 
the  same  on  the  ground  that  pro- 
moters who  sold  property  to  the  com- 
pany   had    misrepresented    the    ehar- 

11 


acter  of  the  property.  This  suit  may 
be  in  equity  and  is  not  multifarious, 
although  the  relief  demanded  is  a  can- 
cellation of  the  sale  of  the  property 
and  for  damages  against  the  vendors 
and  co-eourfpirators  and  also  for  re- 
scission of  the  subscription.  Such  a 
suit  lies,  although  the  subscribers 
paid  in  only  $150,000  of  cash  for 
$450,000  of  stock.  Rule  94  of  the 
federal  courts  does  not  apply  to  such  a 
case.  Barcus  v.  Gates,  89  Fed.  Rep. 
783  (1898).  An  action  to  set  aside  a 
sale  of  stock  cannot  be  joined  with  an 
action  to  hold  the  vendee  liable  as  an 
officer  in  the  corporation.  Niven  v. 
Peoples,  136  N.  W.  Rep.  73  (N.  D. 
1912). 

^Wasey  v.  Holbrook,  141  N.  Y. 
App.  Div.  336  (1910). 

*  Stewart  v.  Joyce,  205  Mass.  371 
(1910). 

sPietsch  V.  Krause,  116  Wis.  344 
(1903). 

6  Pellio  V.  Bulls  Head,  etc.  Co.,  224 
Pa.  St.  379  (1909). 

'  Leo  V.  McCormack,  186  N.  Y.  330 
(1906). 


19 


§356. 


CONTILA.CTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


fraudulently  obtaining  stock  has  transferred  it  to  another  party,  or  is 
about  to  transfer  it,  an  injunction  may  be  obtained.^  The  corporation 
should  then  be  made  a  party .^ 

A  purchaser  of  "  watered  "  stock  has  various  remedies  if  he  has 
actually  been  defrauded.^  The  remedy  against  promoters  who  have 
absorbed  the  corporate  property  is  considered  elsewhere.^ 

Where  the  fraud  is  chargeable  to  the  corporate  officers  or  third  per- 
sons, and  the  vendor  of  the  stock  is  innocent,  the  vendee  cannot  rescind 
the  sale  unless  such  corporate  officers  or  third  persons  acted  as  agents  for 
the  vendor.-^  A  person  induced  by  fraud  to  subscribe  for  stock  may 
maintain  a  suit  in  equity  to  cancel  the  subscription  and  to  hold  liable 


1  See  §§  363,  364,  infra.  Where  by 
fraud  a  corporation  has  been  induced 
to  sell  the  stock  and  it  sues  to  recover 
back  the  same,  it  may  have  an  in- 
junction against  the  defendant  assign- 
ing or  transferring  the  stock,  but  can- 
not enjoin  him  from  voting  it.  Maine, 
etc.  Co.  V.  Alexander,  Xo.  2,  115  N.  Y. 
App.  Div.  112  (1906).  Even  though 
the  questions  of  fact  are  disputed, 
yet  a  preliminary  injunction  may  be 
granted  to  prevent  the  transfer  of 
stock  pending  a  suit  to  recover  it  back 
on  the  ground  of  fraud  and  duress. 
Hoy  V.  Altoona,  etc.  Co.,  136  Fed.  Rep. 
483  (1905). 

2  Although  the  party  seeking  the 
stock  of  which  he  has  been  deprived 
by  fraud  makes  the  party  complained 
of  and  the  corporation  itself  parties 
defendant,  yet  if  the  certificates  are 
not  obtained  from  the  party  holding 
them  the  court  will  not  order  the  cor- 
poration to  issue  new  certificates.  The 
outstanding  certificates  may  pass  into 
the  hands  of  a  bona  fide  purchaser. 
Joslyn  V.  St.  Paul  Distilling  Co.,  44 
Minn.  183  (1890).  Where  a  citizen 
of  Wisconsin  claims  stock  in  a  Wis- 
consin corporation  as  against  a  citi- 
zen of  Illinois,  in  whose  name  the 
stock  stands  on  the  corporate  books, 
the  corporation  is  a  necessary  party 
defendant,  and  the  case  cannot  be 
removed  to  the  federal  courts.  Rogers 
V.  Van  Xortwick,  45  Fed.  Rep.  513 
(1891).  See  also  §  338,  supra,  and 
§  579,  infra.  Where  stock  is  deposited 
with  a  trustee  for  purposes  of  reor- 
ganization, and  transferable  certifi- 
cates are  issued  therefor,  by  the  trus- 
tee, a  claimant  of  stock  which  another 

1120 


person  has  deposited,  and  for  which 
such  other  person  has  the  trustee's 
certificate,  cannot  compel  the  trustee 
to  deliver  up  the  stock  until  the  trus- 
tee's certificate  is  returned,  even 
though  the  party  holding  it  is  a  party 
defendant.  Bean  v.  American  L.  & 
T.  Co.,  122  N.  Y.  622  (1890). 

3  See  ch.  Ill,  supra. 

*  See  §  651,  infra.  Where  a  pro- 
moter to  whom  nearly  the  entire 
stock  has  been  issued  sells  a  part  of 
it  on  the  fraudulent  representation 
that  the  stock  belongs  to  the  com- 
pany, and  then  causes  the  com- 
pany to  be  wound  up,  and  himself  to 
be  released  from  certain  subscriptions, 
and  the  property  to  be  sold  by  a  trus- 
tee named  by  him,  the  court  will 
appoint  a  receiver  at  the  instance  of 
the  party  so  defrauded,  for  the  purpose 
of  recovering  back  the  property  of 
the  company.  Du  Puy  v.  Transportar- 
tion,  etc.  Co.,  82  Md.  408  (1896). 

6  Moffat  V.  Winslow,  7  Paige,  124 
(1838).  Where  the  executive  com- 
mittee of  the  corporation  represents 
the  stockholders  in  selling  their  stock 
and  makes  fraudulent  representations, 
the  sale  may  be  rescinded  even  though 
the  seller  did  not  know  or  authorize 
the  representations.  Garrett  Co.  v. 
Clark,  42  N.  Y.  Misc.  Rep.  610  (1904). 
Benjamin  on  Sales  (Bennett's  ed., 
1888),  §  467a,  says  "the  only  remedy 
of  a  shareholder  in  a  joint-stock  com- 
pany, who  has  been  induced  to  pur- 
chase shares  by  the  fraud  of  the 
agent  of  the  company,  is  rescission 
of  his  contract  and  restitutio  in  integ- 
rum." 


CH.  XX.] 


CONTRACTS   TO    SELL  —  GAMBLING   SALES,    ETC. 


[§  357. 


for  the  purchase  price  the  corporation  and  the  officers  who  made  the 
representations,  and  hence  such  officers  are  proper  parties  defendant.^ 

Equity  will  sometimes  compel  the  vendor  to  make  good  his  repre- 
sentations.- 

§  357.  Fraud  in  selling  stock  may  he  criminal.  —  A  combination 
of  persons  fraudulently  to  raise  the  price  of  a  stock  by  misrepresenta- 
tions and  fraudulent  practices  may  amount  to  a  criminal  conspiracy.' 
A  vendor  of  stock  may  be  prosecuted  criminally  for  obtaining  money 
under  false  and  fraudulent  representations  where  he  induced  the  vendee 
to  purchase  thereby.'  In  some  states  there  is  a  statute  making  it  a  crim- 
inal offense  for  a  director  or  officer  to  make  or  concur  in  making  any 
written  false  statement  with  intent  to  deceive.'*  It  is  a  criminal  offense 
in  England  for  any  director,  manager  or  officer  of  a  corporation  to  pub- 
lish false  statements  with  intent  to  induce  persons  to  purchase  stock. 


iMack  V.  Latta,  178  N.  Y.  52.5 
(1904). 

2  See  §  354,  supra.  A  company  in- 
duced to  enter  a  consolidation  by 
misrepresentations  of  defendant  may 
enforce  his  promise  to  asign  to  it 
certain  patents  which  would  make  the 
business  profitable.  Anderson  Car- 
riage Co.  V.  Pungs,  134  Mich.  474 
(1903).  Where  the  purchaser  of  half 
the  capital  stock  claims  that  there 
was  fraud,  and  a  compromise  is  made  by 
which  the  company  is  to  be  dissolved 
and  the  property  sold  and  the  price 
paid  by  him  for  the  stock  is  to  be 
first  paid  out  of  the  proceeds,  he  may 
compel  the  carrying  out  of  this  agree- 
ment. Burne  v.  Lee,  156  Cal.  221 
(1909). 

'  Where  two  persons  conspire  to 
induce  a  third  to  purchase , stock  from 
one  of  them  who  represents  that  he  can 
sell  it  at  an  advance  to  the  other, 
and  they  thus  swindle  him  out  of  his 
money,  they  may  be  convicted  of  a 
conspiracy.  People  v.  Poinde.xter,  243 
111.  68  (1909).  A  criminal  conviction 
of  the  manager  and  secretary  of  an  oil 
company  for  fraudulent  representations 
in  the  prospectus  published  inducing 
purchases  of  stock,  was  sustained  in 
People  V.  Merritt,  18  Cal.  App.  58 
(1912).  A  corrupt  agreement  of  sev- 
eral parties,  to  sell  stock  for  more  than 
its  worth  by  false  representations  in 
regard  to  its  value,  renders  them  lia- 
ble to  a  criminal  prosecution  for  eon- 
(71)  1 


spiracy.  People  v.  Summerfield,  48 
N.  Y.  Misc.  Rep.  242  (1905).  Where 
brokers  and  promoters  issue  bonds 
greatly  in  e-xcess  of  the  value  of  the 
corporate  property  and  by  fictitious 
sales  give  a  high  market  quotation  of 
the  bonds  and  borrow  money  thereon, 
the  lender  may  hold  them  liable  in  a 
suit  for  loss  due  to  a  conspiracy.  Mc- 
Elroy  V.  Harnack,  213  Pa.  444  (1906). 

*  State  V.  Keyes,  196  Mo.  136  (1906). 
A  sale  of  stock  by  false  represen- 
tations may  be  a  criminal  offense  as 
obtaining  money  by  false  pretenses. 
State  V.  Donaldson,  243  Mo.  460 
(1912).  A  fraudulent  sale  of  stock 
may  be  a  criminal  offense  as  obtaining 
checks  under  false  pretenses.  State 
V.  Nord,  230  Mo.  6.55  (1910). 

5  State  V.  Ware,  71  N.  J.  L.  53 
(1904).  Even  though  the  capital  stock 
of  a  West  Virginia  corporation  is  paid 
by  giving  notes  and  one  of  its  officers 
in  filing  a  statement  with  a  county 
clerk  in  Montana  under  the  Montana 
statutes  in  order  to  do  business  in 
that  state,  sets  forth  in  that  statement 
that  "the  amount  of  the  capital  stock 
actually  paid  in  is  $100,000,"  yet  he  is 
not  liable  under  the  criminal  statutes 
of  Montana  for  making  a  false  report. 
State  V.  Clements,  37  Mont.  314 
(1908).  In  the  case  State  v.  Paulsen, 
21  Idaho,  686  (1912)  a  director  of  a 
bank  was  indicted  for  making  a  false 
report  in  violation  of  the  criminal 
statutes  of  the  state. 
121 


§  357.] 


CONTRACTS   TO   SELL  —  GAMBLING   SALES,    ETC. 


[CH.  XX. 


Under  this  statute  a  person  is  liable  as  a  manager  for  such  acts,  if  he 
acted  as  manager,  even  though  he  was  never  appointed.^  In  England 
there  is  a  statute  under  which  the  court  has  power,  on  the  application  of 
creditors,  to  direct  the  official  receiver  to  prosecute  criminally  a  director 
for  alleged  offenses  as  director,  such  prosecution  to  be  carried  on  at  the 
expense  of  the  assets  of  the  company .^  In  England,  in  1858,  the  di- 
rectors of  a  joint-stock  bank  were  found  guilty  of  a  conspiracy  to  de- 
fraud, where,  knowing  the  bank  to  be  insolvent,  they  issued  a  balance 
sheet  showing  a  profit,  and  declared  a  dividend,  and  issued  advertise- 
ments inviting  the  public  to  invest  on  such  representations.^  Under 
the  New  York  statutes  a  person  who  sells  stock  on  misrepresentations 
may  be  guilty  of  grand  larceny.^  An  indictment  of  a  person  for  the  un- 
lawful obtaining  of  money  by  selling  worthless  gold-mining  stock  is  not 
good  when  the  stock  was  paid  for  not  in  money,  but  by  check.^  The 
latest  and  most  effective  way  of  dealing  with  swindling  promoters,  who 
sell  stock  broadcast,  by  means  of  advertisements  and  the  mails,  is  an 
indictment  at  the  instance  of  the  United  States  government.  A  fraudu- 
lent sale  of  stock  by  means  of  the  United  States  mails,  the  fraud  con- 
sisting of  misrepresentations  known  to  be  such  by  the  party  so  using  the 
mails,  is  a  criminal  offense  under  the  revised  statutes  of  the  United 
States.® 


1  Rex  V.  Lawson,  [1905]  1  K.  B.  541. 

2  Re  London,  etc.  Corp.  Ltd.,  [1903] 

1  Ch.  728. 

"  Regina  v.  Brown,  7  Cox,  Cr.  Cas. 
442  (1858) ;  Regina  v.  Esdaile,  1  F.  & 
F.  213  (1858);  Regina  v.  Gumey,  11 
Cox,  Cr.  Cas.  414.  See  Hurrell  & 
Hyde  on  Directors  and  Officers,  3d 
(Eng.)  ed.,  pp.  176-182,  citing  cases; 
Burnes  v.  Pennell,  2  H.  L.  Cas.  497 
(1849).  There  cannot  be  such  an 
offense  against  the  United  States  by 
the  directors  of  a  national  bank,  since 
the  offense  is  not  recognized  by  statute. 
United  States  v.  Britton,  108  U.  S. 
199  (1883).  By  the  National  Bank 
Act  false  reports  by  national  banks 
constitute  a  criminal  offense  punish- 
able by  fine  and  imprisonment.  It 
is  difficult  for  a  corporate  creditor  to 
seek  Qolleetion  by  making  out  a  con- 
spiracy. Brackett  v.  Griswold,  13 
N.  Y.  Supp.  192  (1891). 

*  People  V.  Garrahan,  19  N.  Y.  App. 
Div.  347  (1897) ;  aff'd,  1.54  N.  Y.  769. 
The  vendor  of  stock  may  be  guilty  of 


grand  larceny  where  he  brought  about 
the  sale  by  fraudulently  causing  an- 
other person  to  represent  to  the  ven- 
dee that  such  other  person  would  buy 
the  stock  at  a  higher  price,  the  stock 
itself  being  of  no  value.  People  v. 
Putnam,  90  N.  Y.  App.  Div.  125 
(1904);  aff'd,  179  N.  Y.  518.  The 
agent  of  a  corporation  organized  for 
fraudulent  piirposes,  who  fraudulently 
induces  a  person  to  purchase  stock  of 
the  corporation,  may  be  guilty  of 
grand  larceny.  People  v.  Walker,  85 
N.  Y.  App.  Div.  5.56  (1903) ;  aff'd,  178 
N.  Y.  563.  See  In  re  London,  etc. 
Corp.  [1903]  1  Ch.  728. 

5  Lory  V.  People,  229  111.  268  (1907). 

6  Horn  V.  United  States,  182  Fed. 
Rep.  721  (1910).  In  the  case  Wilson 
V.  United  States,  190  Fed.  Rep.  427 
(1911),  the  court  affirmed  the  convic- 
tion of  the  promoters  of  a  wireless 
telegraph  company  for  using  the  United 
States  mails  for  fraudulent  represen- 
tations inducing  a  purchase  of  stocks. 


1122 


CHAPTER  XXL 


SALES  OF  STOCK  — SALES  WHILE  SUITS  ARE  PENDING  AFFECT- 
ING THAT  STOCK;  FORGERY;  LOST  AND  STOLEN  CERTIF- 
ICATES OF  STOCK;  CONFISCATION  OF  STOCK. 


A.  STOLEN     AND      LOST      CERTIFICATES, 

AND    PURCHASES    WITHOUT    A    CER- 
TIFICATE   OF    THE    STOCK. 

§  358.  Stolen    or    lost    certificates    of 
stock  indorsed  in  blank. 

359.  Owner  of  a  lost   certificate   of 

stock  may  obtain  a  new  cer- 
tificate. 

360.  Rights  of  a  purchaser  of  a  cer- 

tificate of  stock  where  the 
corporation  has  registered  a 
transfer  to  another  without 
a  surrender  of  tl^e  certifi- 
cate. 

361.  Liability     of     the     corporation 

herein. 

362.  Rights   of   purchaser   of   stock, 

without  certificates. 

B.  SALES    OF   STOCK    WHILE    SUITS    ARE 
PENDING    AFFECTING    THAT    STOCK. 

363.  Legal  proceedings  as  affecting  a 

sale  of  an  outstanding  cer- 
tificate of  stock. 


364.  Lis  pendens  as  affecting  a  pur- 
chase of  stock. 


C.    FORGERY. 

365.  Forgery  as  affecting  a  sale  of 

stock. 

366.  Rights   and   liability   of   trans- 

ferees of  forged  certificates 
of  stock,  there  being  no  in- 
tervening registry  on  corpo- 
rate books. 

367-369.  Liability  of  corporation  to 
real  owner  of  stock  for  al- 
lowing registry  of  forged 
transfer  —  Rights  of  the  cor- 
poration in  such  cases. 

370.  Rights  of  transferees  who  pur- 
chase after  a  registry  has 
been  obtained. 


37L    D.    CONFISCATION    OP    STOCK. 


A.     STOLEN   AND   LOST   CERTIFICATES,    AND   PURCHASES  WITHOUT    A  CERTIFICATE 

OF   THE   STOCK. 

§  358.  Stolen  or  lost  certificates  of  stock  indorsed  in  blank.  —  One 
of  the  most  important  elements  of  the  negotiabihty  of  promissory 
notes  is  that,  if  the  holder  of  such  note  loses  it  or  it  is  stolen  from  him 
when  it  is  indorsed  in  blank,  a  subsequent  bona  fide  purchaser  of  such 
note  is  protected  as  against  the  person  who  lost  it.  A  different  rule 
prevails  as  to  certificates  of  stock  indorsed  in  blank  and  then  lost  or 
stolen.  In  this  respect  certificates  of  stock  are  not  negotiable.  It  has 
been  clearly  held  that  a  purchaser  from  a  thief  of  certificates  of  stock 
indorsed  in  blank  is  not  protected,  nor  is  any  subsequent  purchaser  of 
that  identical  certificate  allowed  to  claim  the  stock,  unless  the  owner 
has  been  guilty  of  negligence.  The  real  owner  of  the  certificate  may 
compel  the  corporation,  which  has  refused  to  recognize  the  thief's  trans- 
feree's title,  to  register  the  stock  as  his,  or  he  may  have  damages  against 
a  bona  fide  transferee  of  the  thief  where  such  transferee  has  sold  the 

1123 


§  358. 


FORGERY  —  STOLEN  STOCK. 


[CH.  XXI. 


stock.^  Where  stock  in  a  bank  stands  in  the  name  of  a  person  for  sixty- 
five  years  without  the  identity  of  the  stockholder  being  known  and  with- 
out dividends  being  claimed  by  him,  although  the  bank  annually  ad- 
vertised   the  unclaimed  dividends,  clear  proof  of  the  identity  of  such 


»  Anderson  v.  Nicholas,  28  N.  Y.  600 
(1864),  where  the  purchaser  of  the 
stolen  certificate  was  not  a  bona  fide 
purchaser.  The  court  said  that  even 
if  he  had  been  a  bona  fide  purchaser 
he  would  not  be  protected.  Barstow  v. 
Savage  Min.  Co.,  64  Cal.  388  (1883), 
substantially  overruling  Winter  v. 
Belmont  Min.  Co.,  53  Cal.  428  (1879). 
The  mere  fact  of  losing  it  is  no  proof 
of  negligence.  Biddle  v.  Bayard,  13 
Pa.  St.  150  (1850).  The  purchaser  of 
a  certificate  indorsed  in  blank  and 
stolen  is  not  protected.  Given's  Ap- 
peal, 16  Atl.  Rep.  75  (Pa.  1888).  The 
bona  fide  purchaser  of  a  certificate  of 
stock  indorsed  in  blank,  but  which 
was  stolen  from  the  owner,  is  not 
protected.  East  Birmingham  Land 
Co.  V.  Dennis,  85  Ala.  565  (1888).  A 
stockbroker  is  liable  to  the  owner  for 
the  value  of  mining  shares  received  for 
sale  from  one  who  had  stolen  them, 
although  he  acted  in  good  faith,  with- 
out notice,  and  paid  the  proceeds  to 
the  thief,  relying  on  his  representa- 
tions of  ownership.  Swim  v.  Wilson, 
90  Cal.  126  (1891).  Cf.  §  452,  infra. 
In  Knox  v.  Eden  Musee,  etc.  Co.,  148 
N.  Y.  441,  456  (1896),  the  court  said 
that  there  was  "no  case  entitled  to  be 
regarded  as  authority  which  denies  to 
the  owner  of  a  stock  certificate  which 
has  been  lost  without  his  negligence, 
or  stolen,  the  right  to  reclaim  it  from 
the  hands  of  any  person  in  whose  pos- 
session it  subsequently  comes,  al- 
though the  holder  n;ay  have  taken  it 
in  good  faith  and  for  value."  .  .  . 
"The  title  of  the  true  owner  of  a  lost 
or  stolen  certificate  may  be  asserted 
against  any  one  subsequently  obtain- 
ing its  possession,  although  the 
holder  may  be  a  bona  fide  purchaser." 
Where  a  certificate  of  stock  is  stolen 
from  a  pledgee  and  the  transfer  on 
the  back  is  insufficient  in  that  the 
pledgor's  name  was  written  not  at 
the  end  of  the  transfer  but  at  the 
beginning,  the  pledgor  may  by  a  bill  in 
equity  redeem  the  stock  from  a  person 


who  purchased  it  from  the  thief.  A 
suit  in  equity  lies  inasmuch  as  an 
act  is  involved  as  to  the  amount  due 
and  the  dividends  received.  The  ten 
years'  statute  of  limitations  applies, 
there  being  no  acquiescence  or  un- 
reasonable delay.  Treadwell  v.  Clark 
190  N.  Y.  51  (1907).  Even  though  a 
stockholder  loses  two  certificates  of 
stock  and  another  person  finds  two  of 
the  same  amount,  nevertheless  it  is 
for  a  jury  to  decide  whether  it  is  the 
same  stock.  MeFadden  v.  Goettert, 
131  Cal.  333  (1901).  In  a  suit  against 
a  corporation  for  refusing  to  transfer 
stock,  the  fact  that  the  certificates 
had  been  lost  since  the  refusal  need 
not  be  alleged.  Blair  Co.  v.  Rose,  26 
Ind.  App.  487  (1901).  Where  th6 
owner  of  a  certificate  of  stock  in- 
dorsed in  blank  puts  it  in  his  safe- 
deposit  box  and  allows  a  clerk  to 
have  a  key  of  the  box  and  the  clerk 
abstracts  the  certificate  and  sells  it 
to  a  bona  fide  piirchaser,  it  is  a  ques- 
tion for  the  jury  as  to  who  stands  the 
loss.  Aull  V.  Colket,  2  W.  N.  Cas.  322 
(1875).  Where  the  vendor  of  stock 
sends  the  certificates  indorsed  in  blank 
to  a  supposed  bank  by  mail,  and 
the  vendee,  who  has  organized  the 
bank  for  fraudulent  purposes,  thereby 
obtains  possession  of  the  certificates 
and  sells  them  without  the  draft  at- 
tached to  the  stock  being  paid,  a  bona 
fide  purchaser  of  the  certificates  is  pro- 
tected. Beckwith  v.  Galice,  etc.  Co., 
50  Oreg.  542.  Even  though  a  woman 
who  owns  stock  indorses  it  in  blank 
and  puts  it  in  a  safe-deposit  box  to 
which  her  husband  also  has  a  key,  and 
he  steals  and  sells  it,  she  may  recover 
it  back  by  a  suit  in  equity  making  the 
corporation  also  a  party  defendant ; 
and  even  though  the  lower  court 
decides  against  her  and  thereupon  the 
corporation  allows  a  transfer,  yet  if 
on  appeal  she  succeeds  in  her  suit  the 
corporation  is  liable  to  her.  Miller 
V.  Doran,  151  111.  App.  527  (1909).  See 
156  N.  Y.  App.  Div.  268  (1913). 


1124 


CH.  XXI.] 


FORGERY 


STOLEN  STOCK. 


[§  3.58. 


stockholder  must  be  given  by  his  alleged  descendants,  who  do  not  pro- 
duce the  certificate  of  stock, ^  If  certificates  of  stock  indorsed  in  blank 
are  deposited  in  a  bank,  and  the  cashier  fraudulently  abstracts  and  dis- 
poses of  them,  he  is  guilty  of  embezzlement  at  common  law,  and  there 
can  be  no  bona  fide  purchaser  of  such  stock.^  In  Nevada  it  is  held  that 
the  purchaser  and  vendor  of  the  stolen  certificate  is  liable  in  damages 
to  its  real  owner,  although  the  former  acted  as  a  broker  and  without 
notice,^  The  bona  fide  purchaser  of  a  stolen  certificate  of  stock  in- 
dorsed in  blank  cannot  compel  the  corporation  to  register  him  as  a 
stockholder.^  The  person  stealing  certificates  of  stock  is  guilty  of  lar- 
ceny, and  may  be  convicted  for  the  same.^    A  person  receiving  a  stolen 


1  Moss  V.  Manhattan  Co.,  48  N.  Y. 
App.  Div.  561  (1900).  Where  stock 
is  issued  in  1838,  one  certificate  to 
"Morris  Robinson"  and  one  to 
"Morris  Robinson,  Agent"  and  after 
his  death  the  company  declared  divi- 
dends beginning  in  1864  and  a  stock 
dividend  of  100  %  in  1903,  but  the 
estate  of  Morris  Robinson  never  col- 
lected or  demanded  the  dividends  until 
1909,  and  the  certificates  of  stock  have 
been  lost,  the  administrator  is  entitled 
to  a  new  certificate  for  the  first  named 
certificate  with  dividends  thereon,  but 
not  the  second.  Tyson  v.  George's 
Creek,  etc.  Co.,  115 Md.  564  (1911).  Cf. 
Baltimore  T.  Co.  v.  George's  Creek,  etc. 
Co. ,  85  Atl.  Rep.  949  (Md.  1912) ;  Glover 
V.  Natl.  Bk.  of  Com.,  156  N.  Y.  App. 
Div.  247  (1913) ;  §§  61,  169,  192,  supra; 
202  Fed.  Rep.  251. 

2  O'Herron  v.  Gray,  168  Mass.  573 
(1897).  A  person  who  pledges  stock 
with  a  bank  may  recover  it  back  from 
a  person  to  whom  the  cashier  of  the 
bank  has  sold  the  stock,  the  cashier 
having  stolen  it  from  the  bank. 
Schumacher  v.  Greene,  etc.  Co.,  117 
Minn.  124  (1912). 

^  Bercich  v.  Marye,  9  Nev.  312 
(1874) ;  Barstow  v.  Savage  Min.  Co., 
64  Cal.  388  (1883).  According  to  the 
California  decisions  the  same  rule 
would  be  applied  to  negotiable  instru- 
ments. In  another  case,  where  a 
broker  innocently  sold  for  a  principal 
a  stolen  negotiable  government  bond, 
the  broker  was  held  liable  to  the  true 
owner.  Kimball  v.  Billings,  55  Me. 
147  (1867).  The  court  expressly  re- 
fused, in  this  case,  to  place  the  broker 
in  the  same  position  as  an  innocent 


purchaser  for  value.  In  Zulick  v. 
Markham,  6  Daly,  129  (1875),  it  was 
sought  to  extend  this  doctrine  to  the 
sale  of  certificates  of  stock  which  had 
only  been  misapplied.  Here  defend- 
ant, a  broker,  had  innocently  sold  for  a 
fraudulent  principal  indorsed  certifi- 
cates of  stock,  which  had  not  been  stolen 
from  the  owner,  but  had  been  delivered 
by  him  to  defendant's  fraudulent  prin- 
cipal, who  had  sold  the  certficates  to 
defendant  through  another  innocent 
broker.  The  New  York  court  held  the 
broker  in  this  case  to  stand  on  the  same 
footing  as  an  innocent  purchaser  and 
not  liable  to  the  owner  for  the  proceeds ; 
but  no  opinion  was  expressed  as  to  the 
rule  of  liability  if  the  stock  had  been 
stolen  instead  of  misapplied. 

*  Sherwood  v.  Meadow  Valley  Min. 
Co.,  50  Cal.  412  (1875).  Although 
two  persons  have  a  safety-deposit  box 
in  common,  and  one  of  them  steals 
therefrom  a  certificate  of  stock  owned 
by  the  other  and  indorsed  in  blank  by 
the  latter,  yet  a  purchaser  even  in 
good  faith  of  such  stolen  certificate  is 
not  protected.  Bangor,  etc.  Co.  v. 
Robinson,  52  Fed.  Rep.  520  (1892). 
See  also  Knox  v.  Eden  Musee,  etc.  Co., 
148  N.  Y.  441  (1896),  where  certifi- 
cates of  stock  which  had  been  re- 
turned to  the  corporation  were  stolen 
before  they  had  been  canceled.  This 
case  came  before  the  court  again  in 
17  N.  Y.  App.  Div.  365. 

5  People  V.  Griffin,  38  How.  Pr.  475 
(1869).  A  criminal  statute  against 
fraudulently  issuing  stock  does  not 
apply  to  a  transaction  where  the  treas- 
urer obtained  a  certificate  which  he 
as    an    individual    had    pledged,    and 


1125 


§  359.]  FORGEKY  —  STOLEN   STOCK.  [cH.  XXI. 

certificate  of  stock,  knowing  it  was  stolen,  and  who  then  pledges  it,  may 
be  convicted  of  receiving  stolen  property.^  The  corporation  cannot 
obtain  an  injunction  against  a  possible  action  by  the  purchaser  of 
stolen  certificates  who  has  applied  for  registry  and  been  refused  it,^ 
although  doubtless  it  may  interplead  when  sued  for  refusing  a  transfer.^ 
Where  an  agent  fraudulently  sells  stock  which  has  been  intrusted  to 
him,  the  purchaser,  if  bona  fide,  is  protected,  inasmuch  as  this  is  not 
a  theft,  but  a  breach  of  trust.^ 

Where  certificates  of  stock  indorsed  in  blank  have  been  stolen,  and 
the  thief  or  his  transferee  has  obtained  a  registry  on  the  corporate 
books  and  obtained  new  certificates  of  stock,  and  these  new  certificates 
have  been  sold,  the  purchaser  is  protected  in  his  possession  of  the  stock. ^ 
In  Michigan  this  is  held  to  be  the  rule,  even  though  such  purchaser 
took  the  stock  with  full  knowledge  of  all  the  facts.^  This  decision 
may  have  gone  too  far,  but  it  is  in  accordance  with  the  general  rule 
that  the  rights  and  equities  of  all  holders  of  stock  back  of  the  registry 
and  issue  of  the  certificates  in  existence  are  not  allowed  to  affect  the 
stocklioldership  or  rights  of  purchasers  of  these  new  certificates.  In 
England  it  has  been  held  that  a  certificate  of  fully  paid-up  stock 
running  to  "  bearer "  is  negotiable,  and  if  stolen  and  then  sold 
to  a  bona  fide  holder  for  value  without  notice,  the  latter  may 
compel  the  company  to  pay  subsequent  dividends  to  him  in  respect 
to  such  a  share  warrant.^ 

§  359.  Owner  of  a  lost  certificate  of  stock  may  obtain  a  new  cer- 
tificate. —  An  owner  of  a  certificate  of  stock  who  has  lost  it  or  had 
it  stolen  from  him  may,  by  taking  proper  proceedings  or  by  giving  proper 
security  to  the  corporation,  have  a  new  certificate  issued  to  him.  In 
Louisiana  it  is  held  that,  upon  satisfactory  proof  of  the  loss  of  certificates 

after  obtaining  it  canceled  it  as  treas-  property    of    husband    and   wife    and 

urer  and  issued  a  new  certificate  to  upon  her  death  the  corporation  allows 

himself    in    place    thereof.     State    v.  him  to  transfer  it  to  a  third  person  and 

Moore,    69    N.    H.    99    (1896).     The  issues  a  new  certificate  to  the  latter,  a 

statute  does  not  begin  to  run  in  favor  bona,  fide   purchaser   from   such   third 

of  the  thief  of  bonds  until  his  identity  person  is  protected.     State  v.  Bank  of 

is  discovered.     Lightfoot  v.  Davis,  198  Baton    Rouge,    125    La.    138    (1910). 

N.  Y.  261  (1910).  A    purchaser   of   certificates   of   stock 

1  People  V.  Cosmides,  133  N.  Y.  need  not  look  back  of  the  last  registry 
App.  Div.  103  (1909) ;  aff'd,  198  of  transfer  on  the  corporate  books. 
N.  Y.  566.  A  breach  of  trust  back  of  that  does  not 

2  Buffalo  Grape  Sugar  Co.  v.  Alber-  invalidate  his  title.  Winter  v.  Mont- 
ger,  22  Hun,  349  (1880).  gomery    Gaslight    Co.,    89    Ala.    544 

» See  §  387,  infra.  (1889).     See    also    note    2,    p.    1149, 

*  See  §  351,  supra.  and  §  387,  infra. 

*  Approved  in  Scarlett  v.  Ward,  52  «  Mandelbaum  v.  North  Am.  Min. 
N.  J.  Eq.  197  (1893) ;   Mandlebaum  v.  Co.,  4  Mich.  465  (1857). 

North   Am.    Min.    Co.,    4   Mich.    465  '  Webb,  etc.  Co.  v.  Alexandria,  etc. 

(1857).     Where    stock   is    community    Co.,  Led.,  93  L.  T.  Rep.  339  (1905). 

1126 


CH.   XXI.] 


FORGERY  —  STOLEN   STOCK. 


[§  359. 


of  stock,  a  writ  of  mandamus  will  issue  to  compel  the  corporation  to 
issue  new  certificates,  and  that  no  bond  of  indemnity  need  be  given. ^ 
But  the  better  rule  is  that,  except  in  cases  of  the  clearest  proof  of  loss, 
the  corporation  shall  not  be  required  to  issue  new  certificates  unless  a 
bond  of  indemnity  against  its  liability  to  possible  legal  holders  of  the 
lost  certificate  be  given. ^  In  New  York,  by  statute,  security  may  be 
required  in  all  such  cases.^    A  stockholder  may  file  a  bill  in  equity  to 


1  State  V.  New  Orleans  Gas  Light 
Co.,  25  La.  Ann.  413  (1873).  Where 
sixteen  years  have  elapsed  since  a 
stockholder  lost  his  certificate  of 
stock  and  gave  notice  to  that  effect 
to  the  corporation,  the  court  may 
grant  mandamus  for  the  issue  of  a 
new  certificate  in  lieu  thereof  without 
security  being  given.  State  v.  New 
Orleans,  etc.  R.  R.,  51  La.  Ann.  909 
(1899).  In  the  ease,  State  v.  New 
Orleans,  etc.  Exchange,  114  La.  324 
(1905),  the  court  made  a  decree  in 
regard  to  a  lost  certificate  of  stock 
that  a  new  one  be  issued  upon  the 
giving  of  a  bond  with  a  good  surety 
for  the  value  of  the  lost  certificate,  or 
in  lieu  thereof,  the  issue  of  a  dupli- 
cate certificate  so  marked  upon  its  face. 

2  Galveston  City  Co.  v.  Sibley,  56 
Tex.  269  (1882),  where  one  who 
became  a  stockholder  in  1841  died  in 
1865,  and  his  heirs  applied  for  a  new 
certificate  in  1878.  Societe  Generale 
V.  Walker,  L.  R.  11  App.  Cas.  (H.  L.) 
20  (1885),  afl&rming  Societe  Generale 
V.  Tramways  Union  Co.,  L.  R.  14  Q. 
B.  D.  424 ;  Butler  v.  Glen  Cove  Starch 
Co.,  18  Hun,  47  (1879).  A  corpora- 
tion need  not  issue  new  certificates  of 
stock  in  place  of  those  which  are  lost 
unless  a  bond  of  indemnity  be  given. 
Guilford  v.  Western  U.  Tel.  Co.,  43 
Minn.  434  (1890).  No  bond  of  in- 
demnity will  be  required  where  twelve 
years  have  elapsed  since  the  certifi- 
cate of  stock  was  lost.  A  citizen  of 
Minnesota  may  sue  in  its  courts  to 
compel  a  foreign  corporation  to  issue 
a  new  certificate  if  proper  service  can 
be  had.  The  fact  that  two  prior  judg- 
ments in  New  York  and  Minnesota 
required  an  indemnity  bond  to  be  given 
is  no  bar  to  a  third  suit  five  years 
later.  Guilford  v.  Western  U.  Tel. 
Co.,  59  Minn.  332  (1894).  Citizens 
of  Idaho  may  bring  suit  in  Washington 


to  compel  a  North  Dakota  corporation 
to  issue  original  stock  to  him  although 
the  company  has  already  issued  it  to 
another  promoter,  it  appearing  that 
the  president  and  secretary  reside  in 
Washington,  and  that  a  money  judg- 
ment may  be  entered  if  the  stock  be  not 
transferred  as  required  by  the  decree. 
Lively  v.  Husebye,  60  Wash.  47  (1910). 
Where  a  person  buys  stock  at  a  bank- 
rupt sale,  but  does  not  get  the  certifi- 
cates, and  ten  years  elapse,  such  pur- 
chaser is  entitled  to  a  mandamus 
requiring  the  corporation  to  issue  new 
certificates  to  him.  State  v.  Southern, 
etc.  Co.,  108  La.  24  (1902). 

3  N.  Y.  Stock  Corp.  Law  §§  67,  68. 
Where  an  application  is  made  under 
the  New  York  statute  for  a  new  cer- 
tificate, in  place  of  one  that  has  been 
lost  or  destroyed,  and  there  is  no 
direct  proof  of  the  destruction,  the 
court  should  require  publication  of  the 
notice  of  the  proceeding,  and  where  the 
value  of  the  stock  is  $20,000,  although 
the  par  value  is  but  $5,000,  a  bond  in 
the  sum  of  $25,000  is  reasonable.  Mat- 
ter of  Speir,  69  N.  Y.  App.  Div.  149 
(1902).  Where  two  one-hundred-year 
coupon  railroad  bonds  payable  to 
bearer  are  lost  in  the  registered  mail, 
the  company  will  not  be  ordered  to 
issue  duplicate  bonds,  but  the  court 
will  order  the  company  to  issue  a 
certificate  of  indebtedness  reciting 
the  loss  of  the  bonds  and  stating  that 
the  certificate  was  to  replace  them,  the 
certificate  to  bear  interest  the  same  as 
the  coupons  and  to  become  void  if  the 
bonds  appear  in  bona  fide  hands. 
The  owner  will  be  required  to  give  a 
bond  of  indemnity.  Switzerland,  etc. 
Co.  V.  New  York  Central,  etc.  R.  R., 
152  N.  Y.  App.  Div.  70  (1912).  Be- 
fore proceedings  under  the  New  York 
statute  to  obtain  a  new  certificate 
for   a   lost    certificate   of   stock   may 


1127 


§  360.] 


FORGERY  —  STOLEN  STOCK. 


[cH. 


compel  the  corporation  to  issue  to  him  a  new  certificate  of  stock  in  place 
of  one  that  is  lost,  even  though  the  statute  gives  an  additional  remedy.^ 
It  Avould  seem  reasonable  that  a  bond  of  indemnity  should  be  given 
to  the  corporation,  since,  in  case  the  old  certificate  has  not  been  lost, 
but  has  been  sold  by  its  owner,  the  corporation  is  liable  in  damages 
to  the  purchaser  for  issuing  new  certificates  without  a  surrender  of  the 
old.-  Where  certificates  of  stock  have  been  lost,  and  a  party  turns  up 
with  them  and  applies  for  transfer  on  the  corporate  books,  the  real  owner 
may  enjoin  a  transfer  of  the  certificate,  and  also  any  transfer  by  the 
corporation  on  its  books,  pendente  lite.^  In  North  Carolina  there  is  a 
statute  to  the  effect  that  an  indemnity  bond  must  be  given  in  order  to 
obtain  a  new  certificate  for  one  that  has  been  lost,  and  the  company's 
treasurer  is  entitled  to  retain  the  new  certificate  for  five  years."^  The 
administrator  of  a  bankrupt  who  filed  a  schedule  in  bankruptcy  omitting 
the  stock  owned  by  him  cannot  thereafter  compel  the  corporation  to 
issue  a  new  certificate  for  the  old  certificate  which  has  been  lost.^  Ques- 
tions relative  to  the  issue  of  a  certificate  of  stock,  where  for  many  years 
none  has  been  demanded,  are  considered  elsewhere.^ 

§  360.   Rights  of  a  purchaser  of  a  certificate  of  stock  where  the 
corporation  has  registered  a  transfer  to  another  without  a  surrender 

be  instituted,  a  demand  on  the  cor- 
poration must  be  made.  The  court 
may  require  publication  of  the  appli- 
cation and  also  the  giving  of  notice  to 
the  stockholder  of  record.  Matter  of 
Coats,  75  N.  Y.  App.  Div.  469  (1902). 
This  statute  does  not  give  a  remedy  to 
a  purchaser  of  stock  at  a  receiv&r's 
sale.  If  he  is  unable  to  obtain  the 
outstanding  certificates  his  remedy  is 
different.  Re  Biglin  v.  Friendship 
Assoc,  46  Hun,  22.3  (1887). 

'  Kinnan  v.  Forty-second,  etc.  Ry., 
140  N.  Y.  183  (1893). 

2  See  §§  360-362,  infra.  Persons  re- 
ceiving a  duphcate  certificate  on  the 
ground  of  loss  of  the  original  may  be 
compelled  by  the  company  to  return 
it  where  the  original  turns  up  in  an- 
other person's  hands,  the  certificate 
having  been  sold  to  the  latter  by  the 
former  owner.  New  York  Central,  etc. 
R.  R.  V.  Stokes,  N.  Y.  L.  J.,  Nov.  16, 
1888,  p.  1091.  In  Keller  v.  Eureka, 
etc.  Co.,  43  Mo.  App.  84  (1890),  the 
court  held  that  the  corporation  need 
not  issue  an  ordinary  certificate  in 
place  of  one  that  was  lost,  but  might 
write  upon  the  new  certificate  the 
word    "duplicate."     The   issue    by    a 

1 


corporation  of  new  certificates  of 
stock  in  place  of  lost  certificates  does 
not  constitute  an  overissue  of  stock. 
ICinnan  v.  Fortv-second,  etc.  R.  R.,  21 
N.  Y.  Supp.  789  (1893);  aff'd,  140 
N.  Y.  183. 

'  Sierra  Nevada,  etc.  Co.  v.  Sears,  10 
Nev.  346  (1875).  Where  the  treasurer 
of  a  corporation  is  in  debt  to  it  and 
pledges  his  stock  as  security  therefor, 
and  the  president  puts  it  away,  and 
afterwards  the  president  buys  the 
stock  from  the  treasurer,  but  the  cer- 
tificate cannot  be  found,  and  a  new 
certificate  is  issued  for  it  and  deliv- 
ered to  the  president,  and  two  years 
thereafter  the  treasurer  finds  the  old 
certificate  of  stock  and  pledges  it,  the 
president  is  protected  in  his  purchase, 
there  ha\ing  been  no  culpable  negli- 
gence on  his  part.  Farmers'  Bank  v. 
Diebold,  etc.  Co.,  66  Ohio  St.  367, 
(1902). 

^  Hendon  v.  North  Carolina  R.  R., 
125  N.  C.  124  (1899).  See  s.  c,  127 
N.  C.  110  (1900). 

*  Hughes  V.  Northampton,  etc.  Ry.,. 
210  Mass.  206  (1911). 

6  See  §§61,  169,  192,  sujrra. 

128 


CH.   XXI. 


FORGERY  —  STOLEN   STOCK.  [§  360. 


of  the  certificate.  —  It  sometimes  happens  that  an  owner  of  stock, 
after  selling  his  stock,  and  delivering  to  the  vendee  the  certificate 
therefor  indorsed  in  blank,  has  gone  to  the  corporation  before  such 
transfer  is  registered,  and  by  misrepresentation  or  other  fraudulent 
means  induced  the  corporation  to  issue  to  another  purchaser  a  new 
certificate  of  stock  without  a  surrender  of  the  old  one.  It  is  the  duty 
of  the  corporation  to  refuse  to  register  a  transfer  unless  the  old  certif- 
icate is  delivered  up.  The  outstanding  certificate  is  a  continuing 
affirmation  by  the  corporation  that  no  registry  of  a  transfer  of  the 
stock  represented  by  that  certificate  will  be  allowed  until  the  certifi- 
cate itself  is  presented  and  surrendered.  Tliis  affirmation  is  sometimes 
declared  in  a  by-law,^  and  sometimes  it  is  printed  on  the  face  of  the 
certificate  itself.-  The  obligation  of  the  corporation,  however,  to  re- 
quire a  surrender  of  the  old  certificate  upon  obtaining  a  registry  is 
the  same  whether  there  is  a  by-law  or  a  statement  on  the  certificate, 
or  neither  of  these.  It  exists  without  any  express  declaration.^  Where 
stock  is  transferred  without  a  transfer  of  the  certificate,  and  the  trans- 
ferrer afterwards  transfers  the  certificate  to  another  party,  the  former 
is  liable  to  the  first  transferee.^  A  bona  fide  purchaser  of  a  certificate 
of  stock  is  protected  as  against  the  prior  assignee  of  the  stock  without 
the  delivery  of  the  certfficate,  even  though  the  corporation  has  accepted 
such  prior  assignee  as  the  owner  of  the  stock  and  has  made  an  entry 
to  that  eftect  in  the  corporate  books. ^  But  even  though  the  president 
sells  and  transfers  a  part  of  his  stock  to  another  person  and  then  obtains 
from  the  corporation  a  new  certificate  to  himself  representing  the  stock 
so  sold  and  transferred,  thereby  making  an  overissue,  he  is  not  liable  as 
for  a  conversion  at  the  instance  of  the  first  transferee.^  So  also  if  the 
vendor  afterwards  obtains  the  certificates  and  sells  them  again  to  others, 
he  is  liable  to  the  first  person  to  whom  he  sold  his  interest.^  ^\Tlere  the 
treasurer  of  a  corporation  is  in  debt  to  it  and  pledges  his  stock  as  se- 
curity therefor,  and  the  president  puts  it  away,  and  afterwards  the 
president  buys  the  stock  from  the  treasurer,  but  the  certificate  cannot 
be  found,  and  a  new  certificate  is  issued  for  it  and  delivered  to  the  presi- 
dent, and  two  years  thereafter  the  treasurer  finds  the  old  certificate  of 

1  Bridgeport  Bauk  v.  New  York,  etc.  *  Alahaney  v.  Walsh,  16  N.  Y.  App. 

R.  R.,  30  Conn.  231   (1861);    Strange  Div.  601  (18*97). 

V.  Houston,  etc.   R.   R.,  53  Tex.   162  ^  ironstone  Ditch  Co.  v.  Eqmtable, 

(18S0) ;      New    York,    etc.    R.   R.    v.  etc.  Co.,  52  Colo.  268  (1911). 

Schuyler,  3-4  X.  Y.  30  (1865).  «  Q'D^Ter  v.  Verdon,  115  N.  Y.  App. 

=  Cushman  v.  Thayer  Mfg.  Co.,  76  Div.  37   (1906) ;  aff'd,  190  N.  Y.  505. 

N.  Y.  365  (1879).  '  Beckitt  v.  Bilbroxigh,  8  Hare,  188 

^Factors',  etc.  Ins.  Co.  v.  INIarine,  (1850).     But  the  latter  is  not  liable  to 

etc.  Co.,  31  La.  Ann.  149  (1879).     As  take  the  shares  nor  to  indemnify  his 

regards    the    English  rule    herein,   see  vendor  even  if  the  company  is  formed. 

2  Ry.  &  Corp.  L.  J.  577  and  625.  Jackson  v.  Cocker,  4  Beav.  59  (1841). 

1129 


§361.] 


FORGERY  —  STOLEN  STOCK. 


[CH.  XXI. 


stock  and  pledges  it,  the  president  is  protected  in  his  purchase,  there 
having  been  no  culpable  negligence  on  his  part.^  Where  a  stockholder 
pledges  his  certificate  and  thereafter  causes  the  corporation  to  issue  a 
new  certificate  to  other  parties  without  the  old  certificate  being  sur- 
rendered, and  such  new  parties  cause  the  company  to  be  reorganized 
by  their  vote,  the  holder  of  the  original  certificate  may  set  aside  such 
reorganization.^  Even  though  a  new  certificate  is  issued,  under  a 
statute,  on  the  affidavit  of  a  stockholder  of  record  that  he  has  lost  the 
old  certificate,  and  such  new  certificate  is  issued  to  a  purchaser  of  his 
rights  thereto,  yet  if  as  a  matter  of  fact  the  stockholder  had  prior  thereto 
pledged  the  old  certificate,  the  pledgee  may  file  a  bill  in  equity  against 
such  purchaser  to  cancel  the  new  certificate.^ 

§  361.  Liability  of  the  corporation  herein.  —  It  is  the  duty  and 
right  of  a  corporation  to  refuse  to  allow  a  registry  of  a  transfer  of  stock 
unless  the  outstanding  certificate  representing  the  stock  is  delivered  up 
and  canceled.  If  it  allows  a  transfer  to  be  registered  without  the  old 
certificate  being  produced  and  surrendered,  it  is  liable  to  any  person 
who,  without  notice,  purchases  or  has  purchased  the  outstanding  certifi- 
cate,^ except  where  the  old  certificate  of  stock  was  stolen  or  lost.     This 

fide  holders,  was  guilty  of  a  breach 
of  corporate  duty,"  and  is  liable ;  New 
York,  etc.  R.  R.  v.  Schuyler,  34  N.  Y. 
30,  81  (1865) ;  Holbrook  v.  New  Jersey 
Zinc  Co.,  57  N.  Y.  616  (1874),  the 
court  saying:  "It  cannot  be  denied 
that,  if  a  corporation  having  power  to 
issue  stock  certificates  does  in  fact 
issue  such  a  certificate,  in  which  it 
affirms  that  a  designated  person  is  en- 
titled to  a  certain  number  of  shares 
of  stock,  it  thereby  holds  out  to  per- 
sons who  may  deal  in  good  faith  with 
the  person  named  in  the  certificate 
that  he  is  an  owner  and  has  capacity 
to  transfer  the  shares.  This  proposi- 
tion does  not  rest  on  any  view  of  the 
negotiability  of  stock,  but  on  general 
principles  appertaining  to  the  law  of 
estoppel;"  Moores  v.  Citizens'  Nat. 
Bank,  111  U.  S.  156  (1883),  where  the 
court  seemed  to  hold  that  the  person 
receiving  new  certificates  without  re- 
quiring a  surrender  of  the  old  ones 
is  not  such  a  bona  fide  transferee  of 
stock  as  may  hold  the  corporation  lia- 
ble;  Brisbane  v.  Delaware,  etc.  R.  R., 
94  N.  Y.  204  (1883),  aff'g  25  Hun,  438, 
and  holding  that,  until  the  purchaser 
of  the  outstanding  certificates  pre- 
sents   them,    the    corporation    is    pro- 


1  Farmers'  Bank  v.  Diebold,  etc.  Co., 
66  Ohio  St.  367  (1902). 

2  First  Nat.  Bank,  etc.  v.  Stribling, 
16  Okla.  41  (1906). 

*  Downing  v.  Thompson,  103  Va.  58 
(1904). 

*  Factors',  etc.  Ins.  Co.  v.  Marine, 
etc.  Co.,  31  La.  Ann.  149  (1879),  where 
a  pledgee  recovered  damages  against 
the  corporation  for  issuing  new  certifi- 
cates without  a  surrender  of  the  one 
which  the  plaintiff  held ;  Smith  v. 
American  Coal  Co.,  7  Lans.  317 
(1873),  where  an  unrecorded  trans- 
feree recovered  damages  against  a 
corporation  for  issuing  a  certificate 
to  a  piu-chaser  at  execution  sale  on 
an  attachment  against  the  transferrer. 
An  issue  by  the  corporation  of  a  new 
certificate  without  requiring  the  deliver- 
ing up  of  the  old  one,  is  at  the  risk  of 
the  corporation.  Campbell  v.  Perth 
Amboy,  etc.  Assoc,  74  Atl.  Rep.  144 
(N.  J.  1909).  See  also  §  486  et  seq.,  in- 
fra; Cushman  v.  Thayer  Mfg.  Co.,  76 
N.  Y.  365  (1879);  Bank  v.  Lanier,  11 
Wall.  369  (1870),  the  court  saying  :  "It 
is  equally  clear  that  the  bank,  in  allow- 
ing this  stock  to  be  transferred  to 
other  parties  while  the  certificates 
were  outstanding  in  the  hands  of  bona 


1130 


CH.   XXI.] 


FORGERY  —  STOLEN   STOCK. 


[§  361. 


rule  is  well  established,  and  is  based  on  the  usages  and  requirements  of 
trade,  and  on  public  policy,  which  favor  the  protection  of  those  who 
invest  their  money  in  certificates  of  stock,  relying  upon  the  corporation 
to  protect  the  holder  of  such  certificates.^  Thus,  the  corporation  has 
been  held  liable  even  though  seventeen  years  have  elapsed  since  a  new 
certificate  was  obtained,  the  latter  having  been  obtained  on  the  ground 
that  the  outstanding  certificate  had  been  lost.^  The  corporation  need 
not  assume  any  risk,  but  may  refuse  to  permit  a  registry  on  its  books 
of  the  transfer  unless  the  old  certificate  is  produced  and  surrendered.^ 


teeted  in  paying  dividends  to  the 
transferee  without  the  certificates.  If 
no  certificate  has  been  issued  the  rule 
does  not  apply.  First  Nat.  Bank  v. 
Gifford,  47  Iowa,  575  (1877).  The  un- 
registered holder  of  the  certificates  is 
protected,  since,  if  he  were  obliged  to 
notify  the  corporation  at  the  time  he 
purchases  the  stock,  "the  value  of 
these  certificates  as  a  basis  of  credit 
would  be  greatly  impaired,  particu- 
larly where  the  pledge  is  made  at  a 
distance  from  the  domicile  of  the  cor- 
poration." Smith  V.  Crescent  City, 
etc.  Co.,  30  La.  Ann.  1378  (1878).  See 
also  Bridgeport  Bank  v.  New  York, 
etc.  R.  R.,  30  Conn.  231  (1861),  the 
court  saying:  "The  bona  fide  holders 
of  such  certificates  had  a  right  to  rely 
upon  the  certificates,  under  the  cir- 
cumstances, as  securing  to  them  the 
stock  which  they  represented,  against 
aU  transfers  to  other  parties." 
Strange  v.  Houston,  etc.  R.  R.,  53  Tex. 
162  (1880),  to  the  same  effect,  on  the 
ground  that  the  non-production  of  the 
original  certificate  "is  notice  to  the 
company  that  a  superior  title  may  be 
in  a  third  party."  In  Cady  v.  Potter, 
55  Barb.  463  (1869),  a  corporation 
sustained  its  bill  of  interpleader  as 
between  a  person  to  whom  it  had  is- 
sued stock  on  a  transfer  without  a 
surrender  of  the  old  certificate  and 
a  person  to  whom  it  afterwards  is- 
sued the  stock  on  a  surrender  of  the 
old  certificate.  If  a  corporation  al- 
lows a  transfer  to  be  made  on  its 
books  without  the  transfer  on  the  old 
certificate  being  signed,  it  is  liable  to 
the  owner  of  the  old  certificate,  even 
though  the  old  certificate  is  delivered 
up  and  the  attorney  in  fact  of  the 
owner  shows  his  power  of  attorney  at 


the  time  of  the  transfer  on  the  books. 
Tafft  V.  Presidio,  etc.  R.  R.,  84  Cal. 
131  (1890);  Lee  v.  Citizens'  Nat. 
Bank,  2  Cin.  Super.  Ct.  (Ohio),  298 
(1872),  holding  that  the  holder  of  the 
old  certificates  is  entitled  to  have  the 
illegal  registry  canceled.  In  England 
there  seems  to  be  no  decision  directly 
in  point. 

'  Factors',  etc.  Ins.  Co.  v.  Marine, 
etc.  Co.,  31  La.  Ann.  149  (1879),  the 
court  saying  :  "We  think  that,  by  thus 
making  stocks  transferable  by  mere 
delivery  of  the  certificate,  the  law  has 
intended  to  interdict  corporations 
from  transferring  stocks  on  their 
books,  except  upon  surrender  of  the 
certificate  or  upon  proof  of  its  loss 
or  destruction.  These  certificates  of 
stock  have  become  such  important  fa^?- 
tors  in  trade  and  credit  that  the  law 
has  intended  to  surround  those  who 
take  them  with  the  safeguards  it 
accords  to  the  holders  of  the  other 
great  agencies  of  commerce  —  bills, 
notes,  bills  of  lading,  etc." 

2  Cleveland,  etc.  R.  R.  v.  Robbins, 
35  Ohio  St.  483  (1880).  But  the  cor- 
poration is  not  liable  for  dividends  paid 
in  the  meantime.  It  was  held,  fm-ther, 
that  a  by-law  allowing  such  issue  of 
new  certificates  in  case  of  loss  had  no 
effect  as  regards  the  plaintiff,  and  that 
the  statute  of  limitations  ran  against 
the  plaintiff  only  from  the  time  he  had 
notice  of  the  new  certificate.  As  to 
subrogation  by  the  owner  of  a  certifi- 
cate of  stock  to  a  bond  given  to  the 
corporation,  see  Greenleaf  v.  Ludington, 
15  Wis.  558  (1862).  Cf.  §§  61,  169, 
192,  supra. 

'  The  corporation  may  refuse  to  is- 
sue stock  to  the  heirs  of  a  stockholder 
unless  they  surrender  the  old  certifi- 


1131 


§361.] 


FORGERY 


STOLEN   STOCK. 


[cH.  XXI. 


Where  a  stockholder  claims  that  his  certificate  indorsed  in  blank  has 
been  stolen  and  notifies  the  corporation  not  to  allow  transfer,  the  cor- 
poration may  interplead  between  the  stockholder  and  the  claimant, 
but  if  the  corporation  takes  the  risk  and  allows  the  transfer  to  the 
claimant  it  is  liable  to  the  owner  if  he  proves  that  he  was  entitled  to  the 
stock.^  On  the  other  hand,  where  a  person  makes  a  blank  assignment 
of  a  certificate  of  stock  standing  in  his  name  and  delivers  it  to  another 
person,  and  thereafter  notifies  the  company  not  to  allow  any  transfer 
because  the  certificate  has  been  lost,  and  thirteen  years  afterwards  a 
recent  bona  fide  purchaser  of  the  certificate  presents  it  for  transfer, 
the  company  cannot  legally  return  the  old  certificate  to  the  original 
stockholder  of  record  without  any  proof  of  ownership  being  offered  by 
the  latter,  and  if  it  does  so  the  corporation  may  be  liable  to  the  pur- 
chaser.^ Where,  however,  the  corporation  is  compelled  to  make  the 
registry  by  legal  proceedings,  it  cannot  be  held  liable  to  the  holder  of 
the  outstanding  certificate.^  And  where  the  certificate  which  is  sur- 
rendered to  the  corporation  is  stolen  from  the  corporation  before  its 
cancellation,  the  purchaser  thereof  is  not  protected."*     In  England  a 


cates.  State  v.  New  Orleans,  etc.  R.  R., 
30  La.  Ann.  308  (1878);  New  Lon- 
don Nat.  Bank  v.  Lake  Shore,  etc.  Ry., 
21  Ohio  St.  221  (1871),  where  the  cor- 
poration refused  to  allow  registry  by 
a  purchaser  at  an  execution  sale,  al- 
though it  was  quite  plain  that  the 
judgment  debtor's  sale  of  the  certifi- 
cates had  been  in  fraud  of  creditors. 
As  between  two  unregistered  trans- 
ferees, the  one  with  the  certificate  is 
entitled  to  the  stock,  especially  where 
he  purchased  first.  Maybin  v.  Karby, 
4  Rich.  Eq.  (S.  C.)  105  (1851);  So- 
ciete  Generale  v.  Walker,  L.  R.  11 
App.  20  (1885),  aff'g  L.  R.  14  Q.  B. 
D.  424.  So,  also,  as  between  a  bona 
fide  purchaser,  to  whom  the  certifi- 
cates are  transferred,  and  a  third 
party,  to  whom  the  vendor  had  given 
the  stock  previous  to  the  sale,  the 
vendee  with  the  certificates  is  pro- 
tected. Crawford  v.  Dox,  5  Hun,  507 
(1875).  In  Wilson  v.  Atlantic,  etc. 
R.  R.,  2  Fed.  Rep.  459  (1880),  where 
an  assignee  in  bankruptcy  applied 
for  registry,  the  bankrupt  having  fled 
with  the  certificates,  it  was  held  that 
the  corporation  was  bound  to  allow 
transfer  and  to  issue  new  certificates 
upon  a  bond  of  indemnity  being 
given.     However,  a  sale  of  a  certificate 


of  stock  to  a  bona  fide  purchaser  is  to 
be  upheld,  even  as  against  a  receiver 
who  has  been  appointed  and  been 
given  legal  ownership  of  the  stock. 
Dudley  v.  Gould,  6  Hun,  97  (1875). 

^  Cooper  V.  Spring,  etc.  Co.,  16 
Cal.  App.  17  (1911). 

2  O'Neil  V.  Woleott  Mining  Co., 
174  Fed.  Rep.  527  (1909). 

'  Friedlander  v.  Slaughterhouse 
Co.,  31  La.  Ann.  523  (1879).  Where 
a  corporation  makes  a  transfer  in 
accordance  with  the  order  of  the  court 
it  is  protected  against  outstanding  cer- 
tificates. Gamble  v.  Dawson,  67  Wash. 
72  (1912).  See  also  ch.  XXII,  §  388, 
infra.  Where  stock  deposited  with 
a  trustee  for  purposes  of  reorganization, 
and  transferable  certificates  are  issued 
therefor  by  the  trustee,  a  claimant  of 
stock  which  another  person  has  de- 
posited, and  for  which  such  other 
person  has  the  trustee's  certificate, 
cannot  compel  the  trustee  to  deliver 
up  the  stock  until  the  trustee's  certifi- 
cate is  returned,  even  though  the 
party  holding  it  is  a  party  defendant. 
Bean  v.  American  Loan,  etc.  Co.,  122 
N.  Y.  622  (1890).  But  see  §  330, 
supra. 

*  In  Knox  v.  Eden  Musee,  etc.  Co., 
148  N.   Y.  441    (1896),  certificates  of 


1132 


CH.  XXI.] 


FORGERY  —  STOLEN  STOCK. 


[§  362. 


certificate  of  stock  has  few  of  the  elements  of  quasi  negotiabihty  which 
it  has  in  America,  and  hence  not  so  much  importance  is  attached,  in 
most  cases,  to  the  deUvery  up  of  the  old  certificate  when  on  a  transfer 
a  new  certificate  is  issued.^ 

§  362.  Rights  of  purchaser  of  stock  without  certificates.  —  A  pur- 
chaser of  stock  who  does  not  receive  the  certificates  of  the  stock  he  has 
purchased,  but  who  nevertheless  obtains  a  registry  on  the  corporate 
books,  and  receives  new  certificates  without  a  surrender  of  the  old,  and 
who  sells  the  new  certificates,  is  not  liable  in  damages  to  the  holder  of 


stock  had  been  delivered  to  the  cor- 
poration for  transfer  and  the  new  cer- 
tificates had  been  duly  issued.  The 
old  certificates  were  put  in  a  safe  un- 
canceled, and  were  illegally  abstracted 
by  an  employee  and  sold.  The  court 
held  that  the  company  was  not  liable 
on  such  certificates  to  a  person  who 
took  them  in  pledge  from  such  em- 
ployee. The  court,  however,  based  its 
decision,  not  on  the  fact  that  the 
pledgee  took  with  notice,  but  on  the 
principle  of  law  that  no  one  could  ac- 
quire title  to  stolen  certificates  of  stock. 
A  transferee  who  receives  new  certifi- 
cates of  stock  is  not  affected  by  the  fact 
that  the  old  certificates  are  fraudulently 
reissued  by  a  corporate  officer.  See 
§  292,  supra;  101  N.  E.  Rep.  620. 

^  See  Shaw  v.  Goebel  Brew.  Co. 
202  Fed.  Rep.  408  (1912).  In  Shrop- 
shire Union,  etc.  Co.  v.  Queen,  L.  R. 
7  H.  L.  496,  509  (1875),  the  court 
said :  Whether  a  transfer  of  shares 
in  a  company  can  or  cannot  be  made 
without  the  production  of  the  cer- 
tificates of  the  shares  is  "entirely 
within  the  discretion  of  the  directors. 
They  were  not  bound  to  permit  a 
transfer  without  the  production  of  the 
certificates  ;  but,  though  not  bound  to 
permit  a  transfer,  I  apprehend  they 
would  not  be  in  any  way  answerable 
if  the  transfer  should  be  in  any  case 
made  without  the  production  of  the 
certificates  of  the  shares."  The  case 
Hart  V.  Frontino,  etc.  Min.  Co.,  L.  R. 
5  Exch.  Ill  (1870),  holds,  however, 
that  where  the  corporation  cancels 
the  stockholdership  of  one  who  pur- 
chased after  registry  without  a  sur- 
render of  the  old  certificates  having 
been  obtained,  he  may  hold  it  liable 
in    damages.     As    between    two    un- 

1 


recorded  transfers,  one  having  the  cer- 
tificate, and  the  other  —  a  subsequent 
purchaser  —  not  ha\'ing  it,  the  former 
prevails.  Societe  Generale  v.  Tram- 
ways Union  Co.,  L.  R.  14  Q.  B.  D.  424 
(1884).  See  also  cases  in  §  325,  supra, 
and  §§  377,  412,  infra.  In  Canada  the 
outstanding  certificate  of  stock  need 
not  be  surrendered  in  order  to  trans- 
fer the  stock  on  the  corporate  books ; 
and  hence,  where  the  registered  holder 
makes  two  transfers  to  different  per- 
sons, the  company  is  not  liable  for 
allowing  transfer  to  the  one  who 
first  presents  his  transfer,  even  though 
he  has  not  the  old  certificate.  Smith 
V.  Walkerville,  etc.  Co.,  23  App.  Rep. 
(Can.)  95  (1896). 

In  England,  even  if  the  secretary 
by  mistake  delivers  the  old  certifi- 
cates back  to  the  transferrer  and  he 
pledges  them,  the  pledgee  is  not  pro- 
tected, the  basis  of  this  decision  being 
that  the  proximate  cause  of  the  loss 
was  the  transferrer  and  not  the  sec- 
retary, but  in  England  the  transfers 
are  made  by  instruments  separate 
from  the  certificates.  Longman  v. 
Bath,  etc.  Ltd.,  [1905]  1  Ch.  646.  In 
England  shares  of  the  capital  stock 
cannot  be  transferred  without  the  pro- 
duction of  the  certificate,  where  the 
certificate  recites  on  its  face  that  no 
transfer  can  be  registered  without  its 
production,  and  hence  the  company  is 
liable  to  a  pledgee  of  the  certificate, 
even  though  he  does  not  apply  for  a 
transfer  until  after  the  owner  has 
transferred  the  shares  to  a  third  per- 
son, without  producing  the  original 
certificate.  Rainford  v.  Keith,  etc. 
Co.,  Ltd.,  [1905]  2  Ch.  147;  rev'g 
[1905]  1  Ch.  296. 


133 


§362. 


FORGERY  —  STOLEN  STOCK. 


the  old  certificates/  unless  he  obtained  registry  with  knowledge  that 
his  vendor  had  already  sold  the  old  certificates  to  another.^  The  remedy 
of  the  latter  is  against  the  corporation  or  he  may  sue  the  corporate 
officer  who  allowed  the  transfer.^  The  purchaser  of  the  stock  may 
insist  on  the  old  certificate  being  produced  and  surrendered  at  the  time 
of  registration,  but  if  he  waives  this  right,  and  a  registry  is  made,  he 
cannot  afterwards  refuse  to  accept  the  stock  on  that  account.^  The 
corporation  is  not  liable  to  the  person  who  is  registered  as  a  stockholder 
without  the  surrender  of  the  old  certificate,  at  least  not  where  the  regis- 
try is  by  the  secretary,  without  special  authority  from  the  board  of 
directors.^  Where,  however,  the  purchaser  of  stock,  without  the  certifi- 
cates, obtained  registry  on  the  corporate  book,  the  corporation  cannot 
afterwards  remove  his  name  in  favor  of  the  purchaser  of  the  old  cer- 
tificate. The  former  may  compel  the  corporation  to  replace  his  name.® 
The  pledgee  who  does  not  receive  the  certificate  of  stock,  but  takes  a 
separate  written  assignment  thereof  and  files  that  with  the  company 
and  obtains  from  the  company  a  certificate  that  the  shares  have  been 
transferred  on  the  books,  may  hold  the  company  liable  if  subsequently 
the  company  on  presentation  of  the  original  certificate  of  stock  duly 
indorsed  transfers  the  same  to  a  purchaser  thereof.^     If  the  corporation 


1  Baker  v.  Wasson,  53  Tex.  150 
(1880).  Cf.  s.  c,  59  Tex.  140.  Even 
though  a  new  certificate  is  issued,  un- 
der a  statute,  on  the  affidavit  of  a 
stockholder  of  record  that  he  has  lost 
the  old  certificate,  and  such  new  cer- 
ticate  is  issued  to  a  purchaser  of  his 
rights  thereto,  yet  if  as  a  matter  of 
fact  the  stockholder  had  prior  thereto 
pledged  the  old  certificate,  the  pledgee 
may  file  a  bill  in  equity  against  such 
purchaser  to  cancel  the  new  certifi- 
cate. Downing  v.  Thompson,  103  Va. 
58  (1904). 

2  Scripture  v.  Franeestown  Soap- 
stone  Co.,  50  N.  H.  571  (1871). 

3  Baker  v.  Wasson,  59  Tex.  140 
(1883). 

■•  Boatmen's  Ins.  etc,  Co.  v.  Able,  48 
Mo.  136  (1871).  A  bank  cashier  may 
transfer  bank  stock  standing  in  his 
name  in  the  stock  register,  even 
though  he  does  not  turn  back  the  cer- 
tificates. Finn  v.  Brown,  142  U.  S. 
56  (1891).  In  Indiana,  where  an  ad- 
ministrator cannot  sell  personal  prop- 
erty except  in  a  certain  way,  the  cor- 
poration is  liable  to  the  estate  if  it 
allows  a  transfer  of  stock  on  its  books 
under    a    sale    by    the    administrator. 


who  has  not  complied  with  the  law. 
The  purchaser,  however,  who  does  not 
see  the  old  certificates,  but  takes  new 
certificates  issued  by  the  corporation, 
is  protected.  Citizens'  St.  Ry.  v.  Rob- 
bins,  128  Ind.  449  (1891). 

5  Hall  V.  Rose  Hill,  etc.  Co.,  70  111. 
673  (1873) ;  Houston  Ry.  v.  Van  Al- 
styne,  56  Tex.  439  (1882),  holding 
that  the  corporation  is  not  bound 
to  recognize  as  a  stockholder  one  who 
obtains  registry  without  a  surrender 
of  the  old  certificates,  a  regular  registry 
with  a  surrender  of  such  certificates 
having  previously  been  obtained  by 
another.  Cf.  Hart  v.  Frontino,  etc. 
Co.,  L.  R.  5  E.xch.  Ill  (1870). 

« Cady  V.  Potter,  55  Barb.  463 
(1869).  In  Piatt  v.  Birmingham  Axle 
Co.,  41  Conn;  255  (1874),  the  corpora- 
tion was  protected  by  its  lien,  and  the 
fact  that  it  bought  the  stock  with- 
out the  certificates  was  not  the  es- 
sential point  of  the  case.  The  cor- 
poration cannot  interplead  after  it 
has  allowed  the  transfer,  but  it  may 
interplead  if  it  has  refused  to  trans- 
fer to  any  one.     See  also  §  387,  infra. 

7  Equitable,  etc.  Co.  v.  Johnson,  36 
Colo.  377  (1906). 


1134 


CH.  XXI.]  FORGERY  —  STOLEN   STOCK.  [§  363. 

issues  a  new  certificate  to  a  bona  fide  pledgee  without  the  surrender  of 
the  old  certificate,  it  thereby  waives  the  by-law  requiring  such  bi^.rr^Ji- 
der.i  Where  the  company  by  mistake  allows  a  transfer  arid  issues, new 
stock  to  a  party  after  the  vendor  has  already  sold  t4ie  stock  to  another 
party,  and  after  the  latter  has  obtained  {^  transfer,  the  company-  is 
liable  to  the  second  purchaser.^  It  has  be^n  held  that  a  pledge  aj^^de' by 
a  separate  written  assignment  of  the  .stock,  the  certifi68>i?S  jemaining 
in  the  pledgor's  possession  and  contipuing  to  stand  in  his  name  on  the 
corporate  books,  is  not  good  as  agaiit^t  the  pledg<*'s  receiver  who  takes 
possession  of  the  certificates.^  Where  nts  cefitificates  of  stock  are  issued 
and  a  stockholder  delivers  an  assignment  of  her  stock  for  a  specified 
sum,  delay  in  paying  the  sum  does  not  enable  the  vendor  to  sell  the  • 
stock  in  the  meantime  to  some  one  else.'^ 

B.    SALES   OF    STOCK   WHILE   SUITS   ARE   PENDING  AFFECTING   THAT   STOCK. 

§  363.  Legal  proceedings  as  affecting  sales  of  outstanding  certifi- 
cates of  stock.  —  It  is  a  well-established  principle  of  law  that  shares 
of  stock  may,  for  certain  purposes,  have  a  situs  at  two  separate  places 
at  the  same  time.  For  the  purposes  of  suits  concerning  rights  to  its 
title,  for  taxation,  and  for  a  few  other  purposes,  shares  of  stock  follow 
the  domicile  of  the  stockholder.^  On  the  other  hand,  it  has  at  the  same 
time  a  situs  where  the  corporation  exists,  and  this  situs  may  be  for  the 
purposes  of  suits  concerning  the  title  to  the  stock,  for  attachment  and 
execution,  and  for  various  other  similar  purposes.  Great  difficulty 
arises  in  many  instances  of  legal  proceedings  affecting  the  title  to  stock, 
by  reason  of  the  fact  that,  where  the  defendant  has  in  his  possession 
the  certificates  of  stock,  and  is  not  enjoined  from  transferring  them,  he 
may  transfer  them,  either  before  or  after  suit  has  been  commenced 
against  him  to  obtain  possession  of  the  stock  represented  by  such  cer- 
tificates, or  to  subject  it  to  his  debts.  The  question  then  arises  whether 
the  bona  fide  transferee  of  such  certificate  is  to  be  allowed  to  retain 
the  stock,  or  whether  the  successful  plaintiff  in  the  suit  against  the 
defendant  who  has  transferred  the  stock  may  follow  such  stock  and  take 

1  Richardson  v.  Longmont,  etc.  Co.,  senting  it.  Winslow  v.  Fletcher  53 
19  Colo.  App.  483  (1904).  Conn.  390  (1886).     Though  prevented 

2  Balkis  Consol.  Co.  v.  Tomkinson,  by  injunction  from  transferring,  the 
[1893]  A.  C.  396.  corporation   must   preserve   the  rights 

'  Atkinson  v.  Foster,    134    111.    472  of  a  party  who  notifies  it  of  his  rights. 

C^^^O)-  Purchase  v.  New  York  Exch.  Bank,  3 

^  Judson  V.  Stonnington  Min.  Co.,  Rob.  (N.  Y.)  164  (1865).     As  regards 

128  Mich.  103  (1901).  the  rights  and  duties  of  the  corporation 

nt  is  important  here  to  distinguish  herein   when   stock   is   sold    under   an 

shares  of  stock  from   the  certificates  execution    or   is   attached,    see    §  489, 

for  those  shares.     The  stock  itself  is  infra. 
not  the  same  as  the  certificate   repre- 

1135 


§363.]  FORGERY  —  STOLEN   STOCK.  [cH.  XXI. 

it  from  the  transferee.  This  conflict  of  right  between  the  purchaser  of 
the  outstariding  certificates  and  the  purchaser  whose  title  is  based  on 
■  jbdjci^l  proceedings  ^arises  most  often  in  cases  of  attachment  or  execu- 
"■tiori  issued  against,  ghares- of  stock  at  the  domicile  of  the  corporation. 
In  «iich  cases  the  bette?  rule  seems  to  be  that  transferees  of  the  certifi- 
cate Keld  by  the  defendant  acQ  protected  and  entitled  to  protection  at 
the  hands  «f;tl>e.  corporation,  if  their  purchase  was  made  before  the  at- 
tachment or-*^-xecutio}i  was  leviefl ;.  but  that  transfers  made  after  the 
levy  are  not  bindmg-s/^  far  as  the  corporation  and  the  plaintiff's  to  the 
suit  are  concerned,  pro,vkled  .the.  suit  itself  is  successful.^  The  same 
difficulty  and  conflict  of  righis  arise  in  suits  to  reclaim  stock  which  has 
been  taken  from  the  plaintiff  by  fraud,  or  by  the  torts  of  an  agent  or 
pledgee,  or  by  the  breach  of  trust  of  an  executor,  administrator,  guardian, 
or  trustee.^  The  plaintiff  seeking  to  recover  his  stock,  certificates  for 
which  are  in  the  hands  of  the  defendant,  seems  to  have  but  two  modes 
of  procedure  whereby  he  may  prevent  the  defendant  from  transferring 
the  certificates.  The  suit  should  be  brought  in  the  state  of  the  domicile 
of  the  corporation  and  attachment  against  the  stock  issued,^  or  an  in- 
junction obtained  against  any  transfer.^  The  court  will  enjoin  a  party 
from  voting  upon  or  disposing  of  his  stock  in  a  corporation  pendente  lite 
where  the  plaintiffs  show  that  they  transferred  the  stock  to  the  defendant 
on  the  latter's  agreement  not  to  sell  the  same,  except  with  the  consent 
of  the  former,  and  that  when  he  did  sell  the  stock  three  fourths  of  the 
proceeds  should  belong  to  the  former,  and  it  appearing  further  that  the 
defendant  had  given  the  stock  to  his  sister  without  consideration.^ 

A  stockholder  whose  stock  has  been  wrongfully  pledged  may  enjoin 
the  corporation  from  allowing  a  transfer  by  the  pledgee  who  has  applied 

1  Smith  V.  American  Coal  Co.,  7  etc.  Co.,  136  Fed.  Rep.  483  (1905). 
Lans.  317  (1873) ;  Smith  v.  Crescent  Where  by  fraud  a  corporation  has  been 
City,  etc.  Co.,  30  La.  Ann.  1378  induced  to  sell  stock  and  it  sues  to 
(1878) ;    and  ch.  XXVII,  infra.  recover  back  the  same,  it  may  have  an 

2  Holbrook  v.  New  Jersey  Zinc  Co.,  injunction  against  the  defendant  as 
57  N.  Y.  616  (1874) ;  Leitch  v.  Wells,  signing  or  transferring  the  stock,  but 
48  N.  Y.  585  (1872).  cannot    enjoin    him    from    voting    it. 

3Quarl    V.    Abbett,    102    Ind.    233  Maine,  etc.  Co.  ?;.  Alexander,  115  N.  Y. 

(1885).     By   a   statute   in   Rhode   Is-  App.  Div.  112  (1906).     Even  though  a 

land  in  suits  in  equity  a  writ  of  at-  stockholder    has    been    enjoined  from 

tachment  may  be   levied  upon   stock  selling    his    stock    or    exercising    any 

the  same  as  in  suits  at  law.     Ladd  v.  rights   in   regard    to   it,   he   may   join 

Franklin,  etc.  Co.,  24  R.  I.  311  (1902).  with  other  stockholders  in  compelling 

*  Sierra  Nevada,  etc.  Co.  v.  Sears,  directors  to  restore  to  the  corporation 

10  Nev.  346  (1875).     Even  though  the  property   which   they   had   converted, 

questions    of    fact    are    disputed,    yet  Maine,  etc.  Co.  ?^.  Alexander,  115  N.  Y. 

a  preliminary  injunction  may  begran ted  App.  Div.  475  (1906).     See  also  §  579, 

to  prevent  the  transfer  of  stock  pending  infra. 

a  suit  to  recover  it  back  on  the  ground  ^  Weston  v.  Goldstein,  39  N.  Y.  App. 

of  fraud  and  duress.     Hoy  v.  Altoona,  Div.  661  (1899). 

1136 


FORGERY  —  STOLEN   STOCK. 


[§  363. 


for  the  same,  and  the  pledgor  need  not  allege  that  the  pledgee  took 
with  notice.  It  is  for  the  pledgee  to  intervene  and  prove  that  the  pledge 
was  bona  fide}  It  is  true  that,  after  judgment  has  been  obtained  and 
the  decree  of  the  court  executed,  any  subsequent  transfer  of  the  certifi- 
cates by  the  defendant  is  null  and  may  be  disregarded  .by  the  plaintiff 
and  by  the  corporation."  But  while  the  suit  is  pending  ihe  defendant 
may  transfer  the  certificates,  and  the  bona  fide  transferee  takes  a  good 
title  to  the  stock.  The  latter  is  not  affected  by  or  bound  to  take  notice 
of  a  lis  pendens  in  that  suit.=^  If  no  temporary  injunction  is  obtained, 
a  transfer  made  on  the  corporate  books  pending  suit  is  good,  and  the 
corporation  cannot  be  made  liable,  although  a  party  defendant. *  Where 
the  real  owner  of  stock  brings  suit  against  a  transferee  of  that  stock  who 
has  obtained  a  new  certificate  therefor  and  succeeds  in  the  suit,  and  in 
the  meantime  the  defendant  has  assigned  the  stock  to  a  third  party, 
the  corporation  may  institute  suit  and  interplead  between  the  success- 
ful claimant  of  the  stock  and  the  transferee  of  the  stock  from  the  de- 
fendant. The  defendant  in  the  former  suit  need  not  be  joined  as  a  party 
in  the  latter  suit.  The  purchaser  of  the  certificate  may  be  enjoined 
from  transferring  the  same,  and  may  be  compelled  to  deposit  the  certifi- 
cate with  the  clerk  of  the  court.^    The  purchaser  must  prove  that  he  is 


1  Reynolds  v.  Touzalin  Imp.  Co.,  62 
Neb.  236  (1901). 

2  Sprague  v.  Coeheco  Mfg.  Co.,  10 
Blatchf.  173  (1872);  s.  c,  22  Fed. 
Cas,  960. 

*  Quoted  and  approved  in  Central, 
etc.  V.  Smith,  43  Colo.  90  (1908).  See 
also  §  364,  infra. 

*  Hawes  v.  Gas  Consumers'  Ben.  Co. 
12  N.  Y.  Supp.  924  (1891).  See  also 
editorial  N.  Y.  L.  J.,  March  29,  1890. 
Cf.  §  387,  infra.  In  Louisiana  in  a 
suit  by  a  pledgor  to  redeem  he  may 
have  an  injunction  and  the  order  of  the 
court  may  compel  the  pledgee  to  deliver 
the  certificates  to  the  sheriff.  Ansley 
V.  Stuart,  123  La.  330  (1908).  In  a  suit 
by  a  claimant  of  stock  against  the 
corporation  and  others  holding  the 
stock,  an  injunction  against  any  trans- 
fer is  proper  inasmuch  as  the  certificate 
of  stock  has  a  quasi  negotiability. 
Zeiger  v.  Stephenson,  153  N.  C.  528 
(1910).  A  claimant  of  stock  who  has 
enjoined  another  party  from  selling 
it  is  entitled  to  defend  against  any 
subsequent  attachment  levied  on  such 
stock.  Pittock  V.  Buck,  15  Idaho,  47 
(1908).     In   the  case  Lamb,   etc.   Co. 


(72) 


V.  Lamb,  119  Mich.  568  (1899),  where 
a  party  claiming  to  be  the  real  owner 
of  stock  filed  a  bill  to  compel  the 
holder  of  such  stock  to  deliver  up  the 
same,  but  it  appeared  that  the  de- 
fendant had  already  disposed  of  the 
stock  before  the  commencement  of  the 
suit,  the  court  refused  to  grant  relief, 
even  though  it  further  appeared  that 
the  defendant  had  other  stock  in  the 
same  corporation  equal  in  amount  to 
the  stock  in  issue.  A  stockholder  can- 
not maintain  a  suit  against  the  cor- 
poration to  enjoin  other  stockholders 
from  selling  their  stock  to  a  second 
corporation,  such  second  corporation 
and  the  other  stockholders  not  being 
parties  to  the  suit.  Ingraham  v.  Na- 
tional Salt  Co.,  36  N.  Y.  Misc.  Rep. 
646  (1902) ;  aff'd,  72  N.  Y.  App.  Div. 
582 ;  appeal  dismissed,  172  N.  Y.  644. 
5  American,  etc.  Assoc,  v.  Brant- 
ingham,  57  N.  Y.  App.  Div.  399  (1901). 
Where,  by  order  of  the  court,  the  cor- 
poration has  interpleaded  between 
two  claimants  to  stock,  the  court  will 
retain  jurisdiction  and  determine  the 
defendants'  rights,  and  where  in  an- 
other action  one  of  the  defendants  has 


1137 


§  363.] 


FORGERY  —  STOLEN  STOCK. 


a  bona  fide  purchaser.^  Although  the  party  seeking  the  stock  of  which 
he  has  been  deprived  by  fraud  makes  the  party  complained  of  and  the 
corporation  itself  parties  defendant,  yet,  if  the  certificates  are  not  ob- 
tained from  the  party  holding  them,  the  court  will  not  order  the  cor- 
poration to  issue  new  certificates.  The  outstanding  certificates  may 
pass  into  the  hands  of  a  bona  fide  purchaser.- 

A  claimant  of  stock  in  a  corporation  may  institute  suit  at  the  place 
where  the  company  is  incorporated  for  the  purpose  of  obtaining  posses- 
sion of  the  stock,  even  though  the  holders  of  the  stock  are  non-residents 
and  are  brought  into  the  case  only  by  publication  and  substituted  serv- 
ice.    The  court  acquires  jurisdiction  over  the  defendants.^    Especially 


been  decreed  to  be  the  owner  of  the 
stock,  the  other  defendant,  although 
not  a  party  to  that  action,  but  who 
claims  to  be  a  bona  fide  purchaser  of  the 
certificates,  must  establish  such  bona 
fide  ownership  and  has  the  burden  of 
proof  to  that  extent.  American,  etc. 
Assoc.  V.  Brantingham,  37  N.  Y.  Misc. 
Rep.  426  (1902).  Where  a  stockholder 
and  his  transferee  have  brought  suit 
against  the  corporation  to  compel  a 
transfer  on  the  corporate  books  and 
the  trustee  in  bankruptcy  of  the  former 
has  brought  suits  in  different  coiu"ts 
claiming  the  same  stock,  the  corpora- 
tion may  maintain  a  suit  to  enjoin  the 
suits  other  than  the  main  proceeding  in 
bankruptcy.  The  court  has  jurisdic- 
tion if  the  certificates  of  stock  are 
within  the  jurisdiction,  even  though  the 
parties  are  non-residents.  KeUey  v. 
Smith  Co.,  196  Fed.  Rep.  466  (1912). 

1  Where  a  claimant  of  stock  has 
brought  suit  against  the  holder  of  the 
stock  and  obtains  judgment  that  the 
stock  be  transferred  to  such  claimant, 
a  person  claiming  to  have  purchased 
the  stock  in  the  meantime  must  prove 
that  he  is  a  bona  fide  purchaser  and  that 
he  purchased  before  final  judgment. 
Amercian  Press  Association  v.  Brant- 
ingham, 75  N.  Y.  App.  Div.  435  (1902). 

Where  the  title  to  stock  has  been 
litigated,  and  pending  the  litigation  a 
third  person  buys  the  stock,  such 
third  person  is  not  a  bona  fide  pur- 
chaser, she  having  been  a  witness  in 
the  suit.  P*rinting,  etc.  Co.  v.  Brant- 
ingham, 77  N.  Y.  App.  Div.  280  (1902). 

Uoslyn  V.  St.  Paul  Dist.  Co.,  44 
Minn.  183  (1890) ;  Bean  v.  American 
Loan,  etc.  Co.,  122  N.  Y.  622  (1890). 


^  Jellenik  v.  Huron,  etc.  Co.,  177 
U.  S.  1  (1900),  rev'g  82  Fed.  Rep.  778. 
A  suit  lies  in  a  New  Jersey  court  to 
compel  the  transfer  of  stock  in  a  New 
Jersey  corporation,  even  though  the 
stockholder  of  record  is  a  non-resident 
and  is  not  served  within  the  state. 
Andrews  v.  Guayaquil,  etc.  Ry.,  69 
N.  J.  Eq.  211  (1905).  A  suit  to  adjust 
conflicting  interests  in  stock  may 
be  instituted  in  the  state  where  the 
corporation  exists,  and  non-residents 
may  be  brought  in  by  statutory  notice 
of  such  suit.  Patterson  v.  Farmington, 
etc.  Ry.,  76  Conn.  628  (1904).  A 
suit  to  recover  back  stock  which  has 
been  illegally  transferred  by  a  trustee 
may  be  brought  in  the  state  where 
the  corporation  was  incorporated,  even 
though  the  holder  of  the  outstand- 
ing certificate  is  a  non-resident,  and 
the  latter  may  be  served  by  publica- 
tion. People's  Nat.  Bank  v.  Cleveland 
117  Ga.  908  (1903)-.  A  contributor 
to  a  fund  to  be  invested  by  syndicate 
managers  in  stocks  and  other  property 
has  not  such  an  interest  in  the  stocks 
as  enables  him  to  maintain  a  suit  in 
the  state  where  the  corporations  are 
organized  as  against  the  non-resident 
syndicate  managers.  Jones  v.  Gould, 
141  Fed.  Rep.  698  (1905) ;  aff'd,  149 
Fed.  Rep.  153.  In  the  case  Wait  v. 
Kern  River,  etc.  Co.,  157  Cal.  16  (1909) 
it  was  held  that  a  promoter  who  is 
entitled  to  a  portion  of  certain  unissued 
stock  in  an  Arizona  mining  company, 
which  did  all  its  business  in  California, 
which  company  had  contracted  to  issue 
such  stock  to  another  promoter,  who 
had  not  yet  actually  received  it,  might 
by  a  bill  in  equity  in  California  against 


1138 


CH.  XXI.] 


FORGERY  —  STOLEN   STOCK. 


[§  363. 


if  the  certificates  of  stock  are  within  the  jurisdiction,  the  court  may 
obtain  jurisdiction  over  non-resident  defendants  by  publication.^  A 
citizen  of  Alabama  cannot  maintain  in  the  courts  of  Alabama  a  suit 
to  enjoin  non-residents  from  transferring  stock  in  a  non-resident  cor- 
poration where  the  defendants  are  not  personally  served  within  the 
state.^     But  a  New  Jersey  corporation  claiming  that  its  stock  held  by 

the  corporation  and  the  other  promoter    stock  may  be  brought  in  by  publica- 

nht.fl.in    a.   Hftp.rftPi   thn.t,    tlip    f^nrnnratinri      tinn        Onmhlp    «i     Da-nrorkn      (V7    'W^acVi 


obtain  a  decree  that  the  corporation 
issue  to  him  the  stock  to  which  he  is 
entitled,  even  though  jurisdiction  of 
the  other  promoter  was  obtained 
only  by  publication.  The  court  held 
also  that  the  remedy  at  law  was 
insufficient  when  the  stock  had  no 
market  value,  and  the  property  of  the 
company  consisted  merely  of  mining 
claims  of  unknown  value.  Where  a 
certificate  of  stock  held  by  a  trustee 
of  an  estate  runs  to  the  trustee  as 
trustee  of  the  estate  and  by  a  decree 
of  the  coiirt  the  trustee  is  removed  for 
non-residence  and  a  new  trustee  ap- 
pointed, the  latter  may  maintain  a  suit 
to  have  the  corporation  issue  a  new 
certificate  to  him  as  trustee  in  Heu  of 
the  old  one,  even  though  the  non- 
resident trustee  refuses  to  give  up  the 
old  one,  the  old  trustee  having  been 
brought  in  by  constructive  process. 
Letcher's  Trustee  v.  German  Nat.  Bank, 
134  Ky.  24  (1909).  Where  by  con- 
tract one  person  is  to  deliver  to  another 
certain  stock  after  certain  things  were 
done,  the  latter  may  maintain  a  suit 
in  equity  at  the  place  where  the  com- 
pany is  incorporated  to  compel  delivery 
of  the  stock  and  may  bring  in  the  other 
party  by  publication.  Hamil  v. 
Flowers,  133  Ga.  216  (1909).  A 
pledgee  of  bonds  of  an  insolvent  cor- 
poration, the  interest  not  having  been 
paid,  may  maintain  a  suit  to  wind  up 
the  company,  and  change  the  trustees 
of  the  mortgage  (even  though  the 
existing  trustee  was  appointed  by  a 
state  court  after  the  pledgee's  suit  was 
commenced)  and  have  a  receiver  ap- 
pointed and  cancel  fraudulent  bonds, 
but  the  pledgor  is  a  necessary  party 
defendant.  Service  on  non-resident 
bondholders  may  be  by  publication. 
State  Nat.  Bank,  etc.  v.  Syndicate  Co., 
178  Fed.  Rep.  359  (1910).  A  foreign 
administrator  claiming  an  interest  in 


tion.  Gamble  v.  Dawson,  67  Wash. 
72  (1912).  A  decree  of  a  South 
Carolina  court  allowing  the  transfer 
of  stock  held  in  trust  in  a  South  Caro- 
lina corporation  is  not  binding  on  the 
remaindermen  if  they  were  not  par- 
ties to  the  proceedings.  Putnam  v. 
Lincoln,  etc.  Co.,  118  N.  Y.  App.  Div. 
469  (1907).  A  bill  in  equity  may  be 
filed  by  a  citizen  of  New  Jersey,  and 
a  foreigner  to  have  stock  in  a  New  Jer- 
sey corporation,  then  held  by  for- 
eigners, awarded  to  complainants  and 
new  certificates  issued  to  the  latter. 
Pending  the  suit  the  court  may  ap- 
point a  receiver  of  the  stock  and  may 
enjoin  transfer.  Service  on  the  de- 
fendant foreigners  may  be  made  by 
publication.  Sohege  v.  Singer  Mfg. 
Co.,  73  N.  J.  Eq.  567  (1907). 

1  Ryan  v.  Seaboard,  etc.  R.  R.,  83 
Fed.  Rep.  889  (1897);  Merritt  v. 
American,  etc.  Co.,  79  Fed.  Rep.  228 
(1897).  See  also  §§  12,  13,  supra; 
§§  475,  766c,  infra.  Where  a  stock- 
holder and  his  transferee  have  brought 
suit  against  the  corporation  to  compel 
a  transfer  on  the  corporate  books  and 
the  trustee  in  bankruptcy  of  the  former 
has  brought  suits  in  different  courts 
claiming  the  same  stock,  the  corpora- 
tion may  maintain  a  suit  to  enjoin  the 
suits  other  than  the  main  proceeding  in 
bankruptcy.  The  court  has  jurisdic- 
tion if  the  certificates  of  stock  are 
within  the  jurisdiction,  even  though 
the  parties  are  non-residents.  Kelley 
V.  Smith  Co.,  196  Fed.  Rep.  466  (1912). 

2  Rucker  v.  Morgan,  122  Ala.  308 
(1899).  A  suit  in  equity  does  not 
lie  in  the  United  States  court  in 
Nevada,  at  the  instance  of  a  resident 
of  that  state,  to  recover  stock  owned 
by  non-residents  in  an  Arizona  cor- 
poration where  service  upon  them  is 
made  only  upon  the  publication.  The 
stock  is  not  within  that  district,  within. 


1139 


S  363.]  FOKGERY  —  STOLEN   STOCK.  [CH.  XXI. 

its  non-resident  president  belongs  to  the  corporation  on  the  payment  of 
a  certain  sum  of  money,  may  maintain  a  suit  in  equity  to  redeem  and 
may  bring  in  the  president  or  his  non-resident  trustee  by  pubUcation.^ 
Where  a  decree  directs  the  transfer  of  certain  stock  in  the  distribution 
of  an  estate,  and  the  corporation  makes  such  transfer  and  thereafter 
the  decree  is  reversed  on  appeal,  the  executors  may  bring  suit  to  have 
the  transfer  canceled.  The  suit  is  properly  in  equity .^  But  where,  in 
accordance  with  a  judgment,  stock  is  delivered  and  the  party  receiving 
it  sells  it  and  thereafter  the  judgment  is  reversed,  such  stock  cannot 
be  recovered  back  from  the  transferee.^  Where  stock  is  tied  up  by 
an  injunction  which  is  afterwards  vacated,  and  in  the  meantime  the 
stock  depreciates  in  value,  the  loss  can  be  recovered  from  the  enjoining 
party  if  the  stocks  could  and  would  have  been  sold  before  the  depre- 
ciation if  they  had  not  been  so  tied  up.  But  if  such  stocks  are  in  pledge, 
and  the  pledgor  does  not  pay  the  loan  while  the  stocks  are  so  tied  up, 
no  damages  can  be  recovered.^  Where  an  injunction  against  the  sale 
of  stock  is  dissolved,  the  damages  recoverable  on  the  bond  may  include 
a  decline  in  the  price  at  which  the  stock  may  be  sold.^  If  an  attach- 
ment on  stock  is  vacated,  the  depreciation  in  its  value  between  the  time 
when  it  was  levied  and  the  time  when  it  was  vacated  is  collectible  under 
the  undertaking  given  in  the  attachment  proceeding.^  Under  the  stat- 
utes of  California,  even  though  stock  is  distributed  by  executors  in 
accordance  with  a  decree  of  distribution,  and  the  distributees  sell  the 

the   meaning  of   the  federal   statute,  her  husband  also  has  a  key,  and  he 

McKane  v.  Burke,  132  Fed.  Rep.  688  steals  and  sells  it,  she  may  recover  it 

(1904).     The  mere  fact  that  certificates  back  by  a  suit  in  equity  making  the 

of  stock  owned  by  a  citizen  of  New  corporation   also    a    party    defendant, 

York  in  a  New  York  corporation  hap-  and  even  though  the  lower  court  de- 

pened  to  be  in  Missouri  at  the  time  of  cides  against  her  and   thereupon  the 

his  death,  does  not  authorize  the  public  corporation  allows  a  transfer,  yet  if  on 

administrator  in  Missouri  to  administer  appeal   she   succeeds   in   her   suit   the 

such  stock  as  property  within  the  state,  corporation  is  liable  to  her.     Miller  v. 

Richardson    v.    Buseh,    198    Mo.    174  Doran,  151  111.  App.  527  (1909). 

(1906).     As    to   injunctions,    see   also  ^  Thaxter  v.  Thain,  100  N.  Y.  App. 

§§  391,  579,  infra.  Div.  488  (1905). 

1  Amparo,  etc.  Co.  v.  Fidelity,  etc.  *  Fourth  Nat.   Bank,   etc.   v.   Cres- 

Co.,  75  N.  J.  Eq.  555  (1909).     A  New  cent,   etc.   Co.,   52   S.   W.    Rep.    1021 

Jersey    corporation    may    maintain    a  (Tenn.    1897).     See  also   §  579,   infra. 

suit  to  recover  back  its  treasury  stock  ^  Slack  v.  Stephens,   19  Colo.  App. 

which  a  citizen  of  another  state  claims  538  (1904). 

to  own  absolutely  and  for  which  he  has  «  McCarthy  i^.  Boothe,  2  Cal.  App. 

the  certificates,  service  on  him  being  by  170  (1905).     In  a  decree  that  certain 

publication.     Amparo,     etc.     Co.     v.  stock  given  away  by  a  bankrupt  shall 

Fidelity,   etc.   Co.   74  N.   J.   Eq.    197  be  returned   to   his   trustee   in  bank- 

(1908).  ruptcy,  damages  may  also  be  awarded 

2Ashton  V.  Heggerty,  130  Cal.  516  for  depreciation   in  the   stock  in  the 

(1900).     Even  though  a  woman  who  meantime.     Wasey    v.    Holbrook,    65 

owns  stock  indorses  it  in  blank  and  N.  Y.  Misc.  Rep.  84  (1909). 
puts  it  in  a  safe  deposit  box  to  which 

1140 


CH.  XXI.]  FORGERY  —  STOLEN   STOCK.  [§§  364,  365. 

stock,  and  it  is  transferred  on  the  books  of  the  company,  nevertheless 
if  the  decree  is  reversed  on  appeal  the  transfers  are  void  and  the  com- 
pany is  liable  for  dividends  paid  in  the  meantime  to  such  purchasers. 
In  a  suit  by  the  executors  to  recover  such  dividends  the  purchasers  need 
not  be  made  parties.^ 

§  364.  Lis  pendens  as  affecting  a  purchase  of  stock.  —  A  purchaser 
of  certificates  of  stock  is  not  chargeable  with  constructive  notice  that 
a  suit  is  pending  in  which  his  vendor  is  defendant,  and  that  the  plaintiff 
is  endeavoring  to  obtain  possession  and  title  to  the  stock  which  the  pur- 
chaser is  buying.^  The  doctrine  of  lis  pendens  has  no  application  to 
sales  of  shares  of  stock.  The  purchaser  is  bound  to  know  that  a  judg- 
ment or  decree  has  been  rendered  and  executed  affecting  the  certificates 
he  is  buying,  if  such  a  judgment  or  decree  exists ;  but  he  is  not  bound 
to  know  that  a  suit  is  pending  in  which  judgment  has  not  yet  been  ren- 
dered.^ That  a  lis  pendens  in  a  suit  involving  shares  of  stock  does  not 
affect  a  purchaser  of  the  certificate  representing  those  shares,  the  pur- 
chase being  made  while  the  suit  is  pending,  was  clearly  established  by 
the  court  of  appeals  of  New  York  in  the  case  of  Holbrook  V.  New  Jersey 
Zinc  Company.^ 

C.     FORGERY. 

§  365.  Forgery  as  affecting  a  sale  of  stock.  —  An  owner  of  shares 
of  stock  cannot  be  deprived  of  his  property  by  a  forgery,  through  which 
his  certificates  of  stock  pass  into  the  hands  of  innocent  purchasers. 
He  may  be  deprived  of  his  stock,  but  has  in  lieu  thereof  the  right  to 
collect  the  value  of  that  stock,  either  from  the  corporation,  if  it  has  per- 
mitted a  transfer,  or  from  parties  who  have  held  the  stock.  The  rights 
and  remedies  of  the  stockholder  who  has  lost  possession  of  certificates 
of  stock  by  forgery  vary  according  to  the  extent  to  which  his  certificate 
has  been  transferred.  His  remedy  may  be  against  the  transferees  of 
the  certificate  before  a  registry  has  been  obtained,  or  it  may  be  against 
the  corporation  for  allowing  a  registry,  or  it  may  be  against  the  person 
obtaining  the  registry.     The  forgery  itself  may  consist  of  any  writing 

1  Ashton  y.  Zeila  Min.  Co.,  134  Cal.  (1881),  where  the  court  refused  to 
408  (1901).     See  also  §388,  inj'ra.  pass  upon  this  question;  also  Bank  of 

2  Quoted  and  approved  in  Central,  Virginia  v.  Craig,  6  Leigh  (Va.)  399, 
etc.  V.  Smith,  43  Colo.  90  (1908).  A  435  (1835),  holding  that  a  lis  pendens 
person  who  buys  stock  while  litigation  in  a  suit  by  sureties  to  restrain  guard- 
is  pending  involving  its  title  takes  it  ian  from  selling  stock  is  not  notice 
subject  thereto.  Foss  v.  People's  Gas,  to  the  corporation  to  refuse  to  allow 
etc.  Co.,  145  111.  App.  215  (1908).  him  to  register  a  transfer.     The  equi- 

'  Quoted  and  approved  in  Central,  table  doctrine  of  notice  by  lis  -pendens 
etc.  V.  Smith,  43  Colo.  90  (1908).  does  not  apply  to  certificates  of  stock. 

^  57  N.  Y.  616  (1874),  following  American  Press  Assoc,  v.  Branting- 
Leitch  V.  Wells,  48  N.  Y.  586  (1872).  ham,  75  N.  Y.  App.  Div.  435  (1902). 
See  Dovey's  Appeal,  97    Pa.  St.   153 

1141 


§  366.]  FORGERY  —  STOLEN   STOCK.  [cH.  XXI. 

on  the  certificate  of  stock,  whereby,  with  intent  to  defraud,  it  is  falsely 
and  materially  so  made  or  altered  as  to  have  an  apparent  legality.^ 
Generally  the  forgery  is  of  the  name  of  the  stockholder  to  the  transfer 
on  the  back  of  the  certificate.^  The  forgery  may,  however,  be  committed 
by  changing  the  number  of  shares  of  stock  which  the  transferrer  has 
written  out  in  the  transfer,^  or  by  inserting  the  numbers  of  shares  of 
stock  of  one  corporation  in  a  blank  transfer  duly  signed  by  the  stock- 
holder, but  signed  for  the  purpose  of  transferring  shares  of  stock  in 
another  and  different  corporation.^ 

The  subject  of  forgery  by  one  or  more  corporate  officers,  whereby 
spurious  and  overissued  stock  is  issued,  there  being  no  old  certificates 
returned  to  the  company  at  that  time,  is  considered  elsewhere.^ 

The  subject  now  under  consideration  is  where  the  name  of  a  stock- 
holder is  forged  to  an  assignment  of  the  certificate,  or  the  certificate 
itself  is  modified. 

§  366.  Rights  and  liabilities  of  transferees  of  forged  certificates  of 
stock,  there  being  no  intervening  registry  on  corporate  books.  —  The. 
position  of  a  transferee  of  a  certificate  of  stock  which  is  invalid  by  reason 
of  forgery  depends  largely  on  whether  there  has  been  an  intervening 
registry  of  transfer  on  the  corporate  books  after  the  former  owner  was 
deprived  of  his  stock  by  the  forgery.  The  forger  himself  is  of  course 
liable,  not  only  to  the  real  stockholder,  but  also  to  any  other  person 
who  has  been  injured  by  the  forgery.  If  the  purchaser  of  stock  from 
one  who  has  forged  a  transfer  of  the  same  sells  the  same  after  being 
notified  by  the  real  owner  that  the  latter  claims  the  stock  and  has  been 

1  See  1  Bouvier's  L.  Diet.,  p.  679 ;  (1860) ;  Sloman  v.  Bank  of  England, 
2  Bish.  Cr.  L.,  §  523.  Where  stock  is  14  Sim.  475  (1845).  Or  for  one  part- 
issued  without  consideration  to  the  ner  to  write  in  the  name  of  the  other 
treasurer  and  upon  his  being  advised  partner  without  authority,  where  the 
by  his  counsel  it  is  illegal  he  cancels  stock  stood  in  their  joint  names.  Mid- 
and  returns  it,  and  takes  back  his  land  Ry.  v.  Taylor,  8  H.  L.  Cas.  751 
old  certificate  for  a  smaller  amount  (1862),  aff'g  Taylor  v.  Midland  Ry.,  29 
which    he    had    canceled,    he    is    not  L.  J.  (Ch.)  731  (1860). 

guilty  of  forgery,  there  being  no  eon-         ^  Matthews  v.   Massachusetts  Nat. 

cealment  or  corrupt  act  in  regard  to  it.  Bank,  1  Holmes,  396  (1874)  ;  s.  c,  16 

Spilker  v.  Abrahams,  133  N.  Y.  App.  Fed.     Cas.     1113;     Sewall    v.    Boston 

Div.  226   (1909).     For   an   article  on  Water-power  Co.,  86  Mass.  277  (1862), 

fraudulent   certification  of   stock   cer-  where  the  alteration  was  treated  as  a 

tificates  by  the  secretary,  see  36  Am.  forgery    so    far    as    legal    rights    were 

Law  Rev.  875.  concerned,     although     the     alteration 

2  Nearly  all  of  the  cases  in  the  sev-  was  due  to  an  innocent  misunder- 
eral  following  sections  are  cases  of  a  standing  of  a  clerk. 

forgery  of  the  stockholder's  name  to         *  Swan  v.  North  British,   etc.   Co., 
a  transfer.     It  is  forgery  for  one  trus-    7  H.  &  N.  603  (1862),  practically  over- 
tee  to  write  in  the  names  of  the  other    ruling  Ex  parte  Swan,  7  C.  B.  (N.  S.) 
trustees   without    authority.     Cottam    400  (1859). 
V.  Eastern  Counties  Ry.,  IJ.  &  H.  243  '  See  §§  291-298,  supra. 

1142 


CH.  XXI.]  FORGERY  —  STOLEN   STOCK.  [§  366. 

deprived  of  it  by  forgery,  the  real  owner  may  recover  damages  in  trover 
for  the  value  of  the  stock  from  the  person  who  so  sells,  although  the 
latter  purchased  in  good  faith  and  without  notice  of  the  forgery.^  Where 
a  customer  deposits  with  a  broker  a  certificate  of  stock  running  to  the 
former  and  not  indorsed  by  him,  the  purpose  of  the  deposit  being  to 
show  that  he  is  financially  responsible,  and  the  broker  forges  his  signa- 
ture to  a  transfer  and  then  pledges  the  certificate,  the  pledgee  is  not 
protected.-  Where  an  agent  of  a  stockholder  forges  his  name  to  the 
certificates  of  stock  and  pledges  them  with  a  party  to  secure  a  loan  to 
the  agent's  principal,  such  loan  cannot  be  collected,  even  though  the 
proceeds  went  to  the  credit  of  the  principal  and  were  afterwards  em- 
bezzled by  the  agent  under  a  power  of  attorney  to  check  out  the  prin- 
cipal's money,  the  party  loaning  the  money  on  the  certificates  of  stock 
not  having  any  knowledge  of  such  power  of  attorney  at  the  time.^  If 
the  forgery  is  committed  by  a  member  of  a  firm,  the  real  owner  may  sue 
the  firm  for  money  had  and  received,  and  may  recover  the  value  of 
the  stock  and  dividends.^  Where  the  forger  has  sold  stock  to  a  pur- 
chaser without  notice,  and  the  latter  has  sold  to  another  purchaser  with- 
out notice,  and  the  latter  is  deprived  of  his  apparent  ownership  on  ac- 
count of  the  forgery,  the  second  transferee  may  hold  the  first  transferee 
liable.^  This  principle  grows  out  of  the  well-established  rule  of  law  that, 
in  a  sale  of  chattels,  there  is  an  implied  warranty  of  title,  unless  the  cir- 
cumstances are  such  as  to  give  rise  to  a  contrary  presumption.  A  per- 
son who  signs  as  a  witness  a  forged  transfer  of  stock  is  personally  liable, 
even  though  he  did  so  without  knowledge  of  the  fraud. ^  The  broker 
and  auctioneer  of  stock  which  passes  through  their  hands  cannot,  it 

1  Monk  t;.  Graham,  8  Mod.  9  (1721).  see    Andrews    v.    Clark.    72   Md.   396 

2  Unity,  etc.  Co.  v.  Bettman,  217  (1890).  See  §452,  infra.  Compare, 
U.  S.  127  (1910).  however,  §§  296  and  358,  notes,  supra. 

3  Fay  V.  Slaughter,  194  111.  157  A  purchaser  without  notice  of  a  forged 
(1901).  bond    may    recover    back    the    price 

*  Marsh  v.  Keating,  1  Bing.  N.  Cas.  paid  by  him  to  the  vendor,  even 
198  (1834) ;  Stone  v.  Marsh,  6  B.  &  C.  though  the  vendor  was  himself  a  bona 
551  (1827).  fide  purchaser  and  without  notice  of 

*  Matthews  v.  Massachusetts  Nat.  the  illegality  of  the  bond.  There  is 
Bank,  1  Holmes,  396  (1874)  ;  s.  c,  16  an  implied  warranty  of  identity  of  the 
Fed  Cas.  1113.  This  was  an  ex-  thing  sold.  Meyer  v.  Richards,  163 
tremely  hard  ease,  involving  a  rigid  U.  S.  385  (1896).  See  also  §  764,  in/r a. 
application  of  the  principle,  since  the  For  an  article  by  J.  B.  Ames  on  the 
defendant's  name  appeared  on  the  liability  of  an  innocent  purchaser  of 
back  of  the  certificate  of  stock  as  a  a  certificate  of  stock,  the  transfer  of 
transferrer  when  in  fact  it  had  only  which  has  been  forged,  see  17  Har- 
been  a   pledgee,   and   on   payment   of  vard  Law  Re\-iew,  543. 

the  pledge  had  retransferred  the  stock.  ^  Second  Nat.    Bank  v.   Curtiss,   2 

As  to  the  liability  of  brokers  for  the    N.  Y.  App.  Div.  508  (1896) ;  aff'd,  153 
forgery  of  their  employee  in  deliver-    N.  Y.  681. 
ing    spurious    stock    to    a    customer, 

1143 


§  366.] 


FORGERY  —  STOLEN  STOCK. 


[CH. 


seems,  be  held  liable,  though  It  turns  out  that  on  account  of  a  forgery 
there  was  no  title  to  the  stock  in  the  party  whom  they  represented.^ 
The  transferee  whose  title  is  based  on  a  forgery  has  no  rights  as  against 
the  corporation,  where  there  has  been  no  registry  on  the  corporate 
books  after  the  forgery.  He  cannot  compel  the  corporation  to  allow 
him  to  register  his  transfer.  If  the  corporation  has  already  registered 
him  as  transferee,  it  may  repudiate  its  registry  so  far  as  he  is  concerned, 
and  refuse  to  recognize  him  as  a  stockholder  or  as  having  the  right  to 
transfer  the  stock.^  Such  a  registered  transferee  has  no  right  of  action 
against  the  corporation  by  reason  of  its  rescission  of  the  registry,^  al- 
though the  rule  may  be  different  if  he  purchased  by  reason  of  the  fact 
that  he  was  allowed  such  registry  on  the  corporate  books.*  The  per- 
son who  first  obtains  a  registry  after  a  forgery  has  deprived  the  real 
owner  of  his  stock  cannot  retain  the  new  certificates  as  against  the  real 
owner  of  the  old  ones.^  A  bona  fide  purchaser  of  a  certificate  of  stock, 
the  transfer  to  which  has  been  forged,  is  liable  to  the  corporation  if  he 
presents  the  certificate  to  the  corporation  for  transfer  and  obtains  such 
transfer  to  himself,  where  the  corporation  has  been  held  liable  to  the 
owner  of  the  stock  whose  name  was  forged  to  the  transfer.^ 


1  Machinists'  Nat.  Bank  v.  Field, 
126  Mass.  345  (1879).  See  also  Isham 
V.  Post,  141  N.  Y.  100  (1894),  as  to  the 
liability  of  a  trustee.  Where  stock 
stands  in  the  name  of  two  trustees 
and  one  signs  a  transfer  and  the  sig- 
nature of  the  other  trustee  is  forged 
thereto,  a  stockbroker  who  causes 
the  corporation  to  make  a  transfer 
thereunder  is  liable  to  the  corporation,  * 
even  though  he  acted  in  good  faith. 
Oliver  v.  Governor  &  Co.,  [1902]  1  Ch. 
610;  aff'd,  [1903]  A.  C.  114;  sub  nom. 
Starkey  v.  Governors,  etc.  of  Bk.  of 
England. 

2  Simm  V.  Anglo-American  Tel.  Co., 
L.  R.  5  Q.  B.  D.  188  (1879) ;  White- 
wright  V.  American  Tel.,  etc.  Co.,  N.  Y. 
Daily  Reg.,  Aug.  6,  1886  (Superior 
Ct.) ;  Waterhouse  v.  London,  etc.  Ry., 

41  L.  T.  Rep.  553  (1879) ;  Hambleton 
V.  Central  Ohio  .R.  R.,  44  Md.  551 
(1876) ;  Brown  v.  Howard  F.  Ins.  Co., 

42  Md.  384  (1875) ;  Hildyard  v.  South 
Sea  Co.,  2  P.  Wms.  76  (1722).  C/. 
Ashby  V.  Blackwell,  2  Eden,  299 
(1765),  holding  the  corporation  liable 


not  only  to  the  real  owner,  but  also 
to  the  transferee  obtaining  registry. 
See  §  358,  supra,  as  to  the  rights  of 
the  transferee  of  the  first  registered 
holder.  A  forged  transfer  conveys  no 
title  to  stock.  Richardson  v.  Emmett, 
61  N.  Y.  App.  Div.  205  (1901) ;  rev'd 
on  another  point  in   170  N.   Y.  412. 

3  See  §  358,  supra,  and  §  370,  infra. 

*  Metropolitan  Sav.  Bank  v.  Balti- 
more, 63  Md.  6  (1884).  In  this  case 
the  plaintiff  took  the  forged  certifi- 
cates in  pledge  from  the  forger.  After- 
wards, upon  the  forger's  applying  for 
a  further  loan  on  the  same  pledge 
of  stock,  the  bank  refused  unless  the 
stock  was  registered  in  its  name,  which 
Avas  accordingly  done.  Held,  that  the 
bank  lost  the  first  loan,  but  had  re- 
course to  the  corporation  for  the  second 
loan. 

6  Johnston  v.  Renton,  L.  R.  9  Eq. 
181  (1870).  In  Scarlett  v.  Ward,  52 
N.  J.  Eq.  197,  210  (1893),  the  court 
said,  in  regard  to  the  exception  as  to 
one  who  applies  bona  fide  for  a  trans- 
fer   of    stock    that   has    been   forged : 


6  Corporation  of  Sheffield  v.  Bar-  decision  of  Lord  Alverstone,  C.  J., 
clay  &  Co.,  Ltd.,  [1905]  A.  C.  392  [1903]  1  K.  B.  1.  See  also  §  367,  infra. 
rev'g  [1903]  2  K.  B.  580  and  restoring 

1144 


CK.  XXI.] 


FORGERY 


STOLEN  STOCK. 


[§  367. 


§  367.  Liability  of  corporation  to  real  owner  of  stock  for  allow- 
ing registry  of  forged  transfer  —  Rights  of  the  corporation  in  such 
cases.  —  It  is  the  duty  of  a  corporation  to  prevent  and  refuse  a  reg- 
istry of  transfer  of  stock  where  that  transfer  has  been  forged.  If  the 
corporation  fails  to  detect  the  forgery,  it  is  liable  to  the  real  owner  of 
the  stock  who  has  been  deprived  of  it  by  the  forgery.^  The  owner  of 
the  stock  may  compel  the  corporation  to  cancel  the  illegal  registry  and 
restore  the  name  of  the  plaintiff.-     Inasmuch,  however,  as  a  bona  fide 


"This  exception,  I  take  it,  is  founded 
on  the  fact  that  the  person  who  so 
obtains  registry  has  had  possession  of 
the  certificate  and  forged  indorsement, 
and  has  thus  been  put  on  inquiry  as 
to  whether  it  is  genuine,  and  has  used 
it  without  such  inquiry,  and  still 
holds  the  fruit  of  the  fraud  affected 
by  the  forgery." 

1  Pratt  V.  Taunton  Copper  Mfg.  Co., 
123  Mass.  110  (1877);  Sewall  ;;.  Bos- 
ton Water-power  Co.,  86  Mass.  277 
(1862);  Pratt  v.  Boston,  etc.  R.  R., 
126  Mass.  443  (1879) ;  Johnston  v. 
Renton,  L.  R.  9  Eq.  181  (1870) ;  Cot- 
tam  V.  Eastern  Counties  Ry.,  1  J.  & 
H.  243  (1860) ;  Midland  Ry.  v.  Taylor, 
8  H.  L.  Cas.  751  (1862),  aff'g  Taylor 
V.  Midland  Ry.,  29  L.  J.  (Ch.)  731 
(1860) ;  Davis  v.  Bank  of  England,  2 
Bing.  393  (1824);  Swan  v.  North 
British,  etc.  Co.,  7  H.  &  N.  603  (1862), 
substantially  overruling  same  ease  in 
court  of  law.  Ex  parte  Swan,  7  C.  B. 
(N.  S.)  400  (1859) ;  Pollock  v.  National 
Bank,  7  N.  Y.  274  (1852) ;  American 
Tel.,  etc.  Co.  v.  Day,  52  N.  Y.  Super. 
Ct.  128  (1885) ;  Dalton  v.  Midland  Ry., 
12  C.  B.  458  (1852);  Baltimore  v. 
Ketchum,  57  Md.  23  (1881);  Coates 
V.  London,  etc.  Ry.,  41  L.  T.  Rep.  553 
(1879) ;  BlaisdeU  v.  Bohr,  68  Ga.  56 
(1881)  ;  Sloman  v.  Bank  of  England, 
14  Sim.  475  (1845).  For  a  careful 
analysis  of  the  English  cases  to  the 
effect  that  the  corporation  is  liable  to 
a  person  who  actually  pays  money 
or  loses  money  in  reliance  upon  the 
"certification"  or  act  of  the  corpora- 
tion directly  with  the  purchaser  of  a 
certificate,  even  though  there  has  been 
no  intervening  transfer,  see  6  Judicial 
Review  (Eng.),  58.  See  also  Tele- 
graph Co.  V.  Davenport,  97  U.  S.  369 
(1878),  where  the  court  said  :  "Upon 
the  facts  stated  there  ought  to  be  no 

1 


question  as  to  the  right  of  the  plain- 
tiffs to  have  their  shares  replaced  on 
the  books  of  the  company  and  proper 
certificates  issued  to  them,  and  to 
recover  the  dividends  accrued  on  the 
shares  after  the  unauthorized  transfer ; 
or  to  have  alternative  judgments  for 
the  value  of  the  shares  and  the  divi- 
dends. Forgery  can  confer  no  power 
nor  transfer  any  rights.  The  officers 
of  the  company  are  the  custodians  of 
its  stockbooks,  and  it  is  their  duty  to 
see  that  all  transfers  of  shares  are  prop- 
erly made,  either  by  the  stockholders 
themselves  or  persons  having  author- 
ity from  them.  If  upon  the  presenta- 
tion of  a  certificate  for  transfer  they 
are  at  all  doubtful  of  the  identity  of 
the  party  offering  it  with  its  owner, 
or  if  not  satisfied  of  the  genuineness 
of  a  power  of  attorney  produced,  they 
can  require  the  identity  of  the  party 
in  the  one  case,  and  the  genuineness 
of  the  document  in  the  other,  to  be 
satisfactorily  established  before  allow- 
ing the  transfer  to  be  made.  In 
either  case  they  must  act  upon  their 
own  responsibility ....  Neither  the 
absence  of  blame  on  the  part  of  the 
officers  of  the  company  in  allowing  an 
unauthorized  transfer  of  stock,  nor 
the  good  faith  of  the  purchaser  of  stolen 
property',  will  avail  as  an  answer  to 
the  demand  of  the  true  owner."  A 
corporation  is  liable  to  the  owner  of 
stock  if  it  allows  a  transfer  of  the  stock 
to  be  made  to  a  transferee  who  forged 
the  owner's  name  to  the  transfer  on 
the  back  of  the  certificate  of  stock. 
Penn.  Co.  v.  Phila.,  etc.  R.  R.,  153 
Pa.  St.  160  (1893). 

2  Johnston  v.  Renton,  L.  R.  9  Eq. 
181  (1870) ;  Cottam  v.  Eastern  Coun- 
ties Ry.,  1  J.  &  H.  243  (1860);  Slo- 
man V.  Bank  of  England,  14  Sim.  475 
(1845).  Where  a  person's  stock  has 
145 


§367. 


FORGERY 


STOLEN   STOCK. 


[CH.  XXI. 


transferee  of  the  illegally  registered  transferrer  is  entitled  to  retain  the 
stock,  the  former  owner  of  the  stock,  in  suing  the  corporation,  should 
demand  relief  in  the  alternative,  that  the  stock  be  restored  to  him,  or 
that  he  be  given  damages  in  lieu  thereof.^  Or  he  may  demand  that 
the  corporation  replace  the  stock  by  going  into  the  market,  if  neces- 
sary, and  purchasing  similar  stock.-  If  the  stockholder  sues  the  cor- 
poration for  a  dividend  on  stock  which  by  a  forged  assignment  has  been 
registered  in  the  name  of -another  person,  the  corporation  cannot  inter- 
plead.^ A  court  of  equity  has  concurrent  jurisdiction  with  law  in 
remedying  a  forged  transfer  of  stock.^  The  corporation,  the  co-con- 
spirators, and  the  transferees  of  the  forged  certificate  are  all  proper 
parties  to  the  suit ;  ^  but  the  only  necessary  party  is  the  corporation 
itself.®  On  the  other  hand,  it  is  the  transferee  obtaining  registry  who 
warrants  the  validity  of  his  title  and  right  to  transfer ;  and  if  the  cor- 
poration is  compelled  to  pay  damages  to  the  real  owner  on  account 
of  allowing  such  registry,  it  may  have  recourse  to  and  collect  the  same 
damages  from  the  transferee  who  obtained  the  registry,  however  inno- 
cent the  latter  may  have  been.^  Where  stock  stands  in  the  name  of 
two  trustees,  and  one  of  them  signs  a  transfer  and  forges  the  name  of  the 


"been  transferred  on  the  corporate 
books  on  a  forged  power  of  attorney, 
he  may  file  a  bill  to  compel  the  cor- 
poration to  cancel  the  transfer  and 
reissue  the  stock  to  him,  or  else  to 
pay  him  the  value  thereof.  The  court 
also  held  in  this  case  that  the  fact 
that  the  stockholder  gave  a  person 
access  to  the  safe-deposit  box  contain- 
ing such  certificates  of  stock  was  no 
defense  to  the  corporation,  and  also 
the  fact  that  the  stockholder  had 
authorized  such  person  to  sign  the 
stockholder's  name  to  other  certifi- 
cates of  stock  was  no  defense  to  the 
corporation.  Pennsylvania  Co.  v. 
Franklin  Ins.  Co.,  181  Pa.  St.  40 
(1897).  A  corporation  canceling  a 
certificate  of  stock  and  issuing  another 
certificate  to  the  assignee  under  a 
forged  assignment  will  be  required 
to  reissue  to  the  original  owner  a 
certificate  in  lieu  of  the  one  canceled. 
The  holder  of  the  certificate  which  was 
illegally  issued  is  not  a  necessary  party 
to  the  suit  unless  it  is  shown  that  the 
plaintiff  is  insolvent,  or  that  there  will 
he  an  overissue  by  the  corporation 
if  the  certificate  is  issued  to  the  plain- 
tiff. Chicago  Edison  Co.  v.  Fay,  164 
111.  32.3  (1896) .     See  101  N.  E.  Rep.  620. 

1 


1  This  is  the  usual  prayer  for 
relief  in   this   country. 

2  Pratt  V.  Boston,  etc.  R.  R.,  126 
Mass.  443  (1879).  See  also  §  284, 
supra. 

3  Dalton  V.  Midland  Ry.,  12  C.  B. 
458  (1852). 

'  Blaisdell  v.  Bohr,  68  Ga.  56  (1881). 

5  Blaisdell  v.  Bohr,  68  Ga.  56  (1881). 
As  to  a  statutory  criminal  liability  of 
an  officer  forging  and  issuing  stock, 
see  State  v.  Haven,  59  Vt.  399  (1887). 

«  Chicago  Edison  Co.  v.  Fay,  164  111. 
323  (1896) ;  Baltimore  v.  Ketchum,  57 
Md.  23  (1881);  Pratt  v.  Boston,  etc. 
R.  R.,  126  Mass.  443  (1879).  In  a 
stockholders'  action  to  compel  the  cor- 
poration to  retransfer  stock  to  them 
which  has  been  transferred  on  the 
corporate  books  by  forgery,  the  holders 
of  the  new  certificates  are  not  allowed 
to  come  in  and  defend.  Barton  v. 
London,  etc.  Ry.,  L.  R.  38  Ch.  D. 
144  (1888) ;    aff'd,  62  L.  T.  Rep.  164. 

^  Boston,  etc.  R.  R.  v.  Richardson, 
135  Mass.  473  (1883),  the  court  saying 
also  in  a  dictum  that  the  defendant 
has  a  remedy  over  against  the  parties 
that  sold  to  him.  See  also  §  366, 
supra. 

146 


CH.  XXI.]  FORGERY  —  STOLEN   STOCK.  [§  367. 

other  trustee  and  sells  the  stock  through  a  broker,  the  other  trustee 
whose  name  was  forged  may  hold  the  corporation  liable  for  the  stock, 
if  it  has  allowed  a  transfer,  and  the  corporation  may  hold  the  broker 
liable.^  Where  a  person  forges  the  power  of  attorney  on  a  certificate 
of  stock  and  transfers  the  stock  to  himself,  and  the  corporation  issues 
to  him  a  new  certificate  in  his  name,  and  he  pledges  the  same  to  a  bona 
fide  pledgee,  and  such  pledgee  afterwards  transfers  the  loan  and  stock 
as  collateral  to  the  corporation  itself,  the  corporation  cannot  hold  the 
pledgee  liable  in  regard  to  the  forgery.^  And  where  the  corporation  is 
sued  by  the  real  owner  of  the  stock  for  allowing  the  registry  of  a  transfer 
based  on  forgery,  it  cannot  institute  an  independent  action  bringing 
in  all  the  parties  interested  and  enjoining  the  action  of  the  owner  of  the 
stock.^  The  liability  of  the  corporation  on  stock  which  was  forged  by 
corporate  officers  or  fraudulently  issued  by  them  is  considered  elsewhere.^ 
Where  the  treasurer  of  a  charitable  corporation  forges  a  resolution  of 
the  board  of  trustees  authorizing  him  to  sell  bonds  registered  in  the  name 
of  the  corporation,  and  he  executes  fraudulently  a  power  of  attorney 
from  the  corporation  to  him  as  treasurer  to  make  such  sale,  the  corpora- 
tion w^hich  issued  the  bonds  and  then  allowed  a  transfer  on  such  forged 
resolution  is  liable  to  the  charitable  corporation  for  so  doing.  The 
charitable  corporation  may  hold  liable  a  broker  who  witnessed  the 
power  of  attorney  even  in  good  faith.  If  the  corporation  which  issued 
and  registered  the  bonds  is  held  liable,  it  has  recourse  against  the  broker 
by  reason  of  the  stock  exchange  rules  which  render  liable  a  broker  who 
witnesses  signatures  to  transfers  of  stocks  or  bonds. ^  Where  a  certificate 
of  stock  provides  on  its  face  that  it  must  be  signed  by  a  transfer  agent 
the  corporation  is  not  liable  on  a  certificate  to  which  the  transfer  agent's 
name  had  been  forged  by  an  employee  of  the  corporation.^  If  a  trust 
company,  as  registrar  of  stock,  allows  a  transfer  on  a  forged  assignment, 
it  is  liable  to  the  owner  for  the  value  of  the  stock,  less  any  amount  which 
he  may  have  recovered  from  other  parties.^    Where  stock  is  owned  by  a 

1  Oliver  v.  Governor,  etc.,  [1901]  1  liable  to  the  corporation  for  the  cost 
Ch.  652;  aff'd,  [1902]  1  Ch.  610  and  of  the  stock  which  the  corporation 
[1903]  A.  C.  114;  sub  nom.  Starkey  v.  had  to  purchase  on  the  market  for 
Governors,  etc.  of  Bk.  of  England.  the  benefit  of  the  real  owner    of   the 

2  Philadelphia  Nat.  Bank  v.  Smith,  stock.  Bank  of  England  v.  Cutler,  96 
195  Pa.  St.  38  (1900).  L.  T.  Rep.  636  (1907) ;   aff'd,  98  L.  T. 

3  American  Tel.,  etc.  Co.  t'.  Day,  52  Rep.  336  (1908). 

N.  Y.  Super.  Ct.  128  (1885).  « Dollar,  etc.  Co.  v.  Pittsburg,  etc. 

*  See  §  293,  supra.  Co.,  213  Pa.  St.  307  (1906). 

5  Clarkson  Home  v.  Missouri,  etc.  '  Wiechers  v.  Central  Trust  Co.,  80 
R.  R.,  182  N.  Y.  47  (1905).  Where  a  Hun,  576  (1894).  Where  a  prospec- 
broker  identifies  to  a  corporation  a  tus,  offering  for  sale  trustee's  trans- 
person  as  a  stockholder,  in  order  that  ferable  certificates,  states  that  such 
the  latter  may  transfer  stock,  and  certificates  represent  stock  deposited 
such  transfer  is  forged,  the  broker  is  with  the    trustee,   the  stock  being  in 

1147 


§§  368,  369.]  FORGERY  —  STOLEN  STOCK.  [cH.  XXI. 

township  and  the  corporation  allows  the  township  trustee  to  transfer 
it  without  authority,  the  township  may  compel  the  corporation  to  re- 
transfer  the  stock. ^ 

§§  368,  369.  The  right  of  the  rightful  owner  of  the  stock  to  com- 
plain of  the  forgery  whereby  his  certificate  has  passed  into  the  posses- 
sion of  another  may  be  barred  by  estoppel  or  ratification. ^  Formerly 
it  was  held  that  the  negligence  of  the  owner  of  the  stock  would  be  a 
bar  to  his  remedy.^  Later  decisions,  however,  have  firmly  established 
the  rule  that  "  there  must  be  either  something  that  amounts  to  an  es- 
toppel, or  something  that  amounts  to  a  ratification,  in  order  to  make 
the  negligence  a  good  answer."  ^  Accordingly,  the  rightful  owner  of 
the  stock  is  held  not  to  be  barred  of  his  remedy  by  the  fact  that  the 
stockholder,  a  corporation,  allowed  its  corporate  seal  to  be  in  the  posses- 
sion of  its  secretary,  whereby  he  sold  the  stock  owned  by  the  corpora- 
tion,^ or  by  the  fact  that  the  owner  delayed  several  months,  during  which 
time  the  forger  escaped,^  or  that  he  transferred  on  the  back  of  the  cer- 
tificate only  part  of  the  shares  specified  in  the  certificate ;  ^  or  that  he 
gave  his  address  wrong,  and  thereby  a  letter  of  inquiry  did  not  reach 
him ;  ^  or  that  he  allowed  his  clerk,  the  forger,  to  have  access  to  his 
papers,  and  gave  him  blank  transfers  duly  signed  to  use  in  transferring 
other  stock  ;^  or  that  the  guardian  of  the  plaintiff  was  negligent.^'^ 
The  statute  of  limitations  in  behalf  of  the  corporation  begins  to  run 

an  English  corporation,  the  trustee  is         '  Coles  v.  Bank  of  England,  10  Ad.  & 
personally  liable  if  it  turns  out  that  E.  437   (1839),  where  the  continuous 
the   English   corporation  had   a   prior  receipt  of  dividends  on  a  less  quan- 
lien  on  the   stock  to   the  full  extent  tity   of   stock   than   she   was   entitled 
of  its  value.     The  trustee  was  bound  to  was  held  a  bar,  though  the  stock- 
to  take  notice  of  the  lien  created  by  holder  was  old  and  infirm, 
the   by-laws  of    the  English  corpora-         *  Bank  of  Ireland  v.  Evans  Chari- 
tion.     The  rule  of   caveat  emptor  has  ties,  5  H.  L.  Cas.  389  (1855). 
been  relaxed  so  as  to  create  an  im-  ^  Bank  of  Ireland  v.  Evans  Chari- 
plied  warranty  of  title  on  the  part  of  ties,   5  H.   L.   Cas.   389    (1855) ;    and 
the  seller.     Even  though   the  trustee  Merchants  of  the  Staple  v.  Bank  of 
acted  as  agent,  yet,  the  principal  not  England,   56  L.   T.   Rep.   665   (1887), 
being  disclosed,  the  trustee  is  held  lia-  where   the  preceding  case  was  reluc- 
ble.     McClure  v.   Central    Trust   Co.,  tantly  followed. 
165  N.  Y.  108  (1900).  "  Davis  v.  Bank  of  England,  2  Bing. 

1  Vernon,  etc.  R.  R.  v.  Washington,  393  (1824). 

etc.  Tp.,  95  N.  E.  Rep.  599  (Ind.  1911).  '  Sewall  v.  Boston  Water-power  Co., 

2  Even  though  a  person  forges  the     86  Mass.  277  (1862). 

name  of  a  stockholder  on  the  back  of  *  Johnston  v.  Renton,  L.  R.  9  Eq. 

the    latter's    certificate    of    stock   and  181  (1870). 

pledges  it,  yet  if  the  stockholder,  be-  »  Swan  v.  North  British,  etc.   Co., 

ing  informed   of   the   transfer   by   the  7  H.  &  N.  603   (1862),   substantially 

secretary,   confirms  it,  and   the  stock  overruling    Ex    parte   Swan,    7    C.    B. 

is  sold   to  a   boria  fide  purchaser,  the  (N.  S.)  400  (1859). 

owner     cannot     complain.     Dover     v.         ^  Telegraph   Co.   v.  Davenport,  97 

Pittsburg,    etc.     Co.,     143    Cal.    501  U.  S.  369  (1878). 

(1904). 

1148 


CH.   XXI.] 


FORGERY  —  STOLEN   STOCK. 


[§  370. 


against  a  cause  of  action  for  forged  transfer  only  from  the  time  when 
the  corporation  denies  its  liability  therefor.^ 

§  370.  Rights  of  transferees  who  purchase  after  a  registry  has 
been  obtained.  —  It  has  already  been  shown  that  the  transferees  of 
a  certificate  of  stock  which  has  been  put  in  circulation  by  forgery  are 
not  allowed  to  retain  such  stock  where  there  has  not  been,  at  some  time 
subsequently  to  the  forgery,  a  transfer  registered  on  the  corporate  books. 
It  has  also  been  shown  that  he  who  applies  to  the  corporation  for  a 
registry  of  transfer,  such  registry  being  the  first  one  since  the  forgery 
was  committed,  is  not  allowed  to  retain  the  stock.  An  entirely  different 
rule  prevails  as  regards  all  subsequent  bona  fide  holders  of  the  new  cer- 
tificate obtained  by  the  first  registry.  The  person  who  obtains  the  first 
registry  has  no  rights  except  as  against  his  transferrer.  But  all  sub- 
sequent purchasers  without  notice  are  fully  protected.  They  cannot 
be  compelled  to  give  up  the  stock,  either  to  the  corporation  or  to  the 
person  who  lost  it  by  forgery .^  This  rule  arises,  not  from  the  law  of 
negligence,  but  from  the  law  of  estoppel  operating  against  the  corpora- 


1  Barton  v.  North  Staffordshire  Ry., 
L.  R.  38  Ch.  D.  458  (1888).  But  see 
Glover  v.  Natl.  Bk.  of  Com.,  156  N.  Y. 
App.  Div.  247  (1913). 

2  Quoted  and  approved  in  Kimball 
V.  Success  Mining  Co.,  38  Utah,  78 
(1910).  Machinists'  Nat.  Bank  v. 
Field,  126  Mass.  345  (1879) ;  Re  Bahia, 
etc.  Ry.,  L.  R.  3  Q.  B.  584  (1868), 
where,  however,  the  corporation,  hav- 
ing canceled  all  the  registries  made 
subsequently  to  the  forgery,  was  held 
liable  in  damages  to  a  purchaser  sub- 
sequently to  the  first  registry.  The 
court  said  that  the  giving  of  a  certifi- 
cate "is  a  declaration  by  the  company 
to  all  the  world  that  the  person  in  whose 
name  the  certificate  is  made  out  and  to 
whom  it  is  given  is  a  shareholder  in 
the  company,  and  it  is  given  by  the 
company  with  the  intention  that  it 
shall  be  so  used  by  the  person  to 
whom  it  is  given,  and  acted  upon  in 
the  sale  and  transfers  of  shares."  A 
purchaser  of  certificates  of  stock  need 
not  look  back  of  the  last  registry  of 
transfer  on  the  corporate  books.  A 
breach  of  trust  back  of  that  does  not 
invalidate  his  title.  Winter  v.  Mont- 
gomery Gaslight  Co.,  89  Ala.  544 
(1889).  See  also  §  358,  supra.  A 
purchaser  of  stock  in  a  corporation  is 
not  bound  to  inquire  whether  the  seller 


legally  acquired  the  stock  at  a  forfei- 
ture sale  by  the  corporation  for  non- 
payment of  an  assessment.  Kimball 
V.  Success  Mining  Co.,  38  Utah,  78. 
Where  stock  is  community  property  of 
husband  and  wife  and  upon  her  death 
the  corporation  allows  him  to  transfer 
it  to  a  third  person  and  issues  a  new 
certificate  to  the  latter,  a  bona  fide 
purchaser  from  such  third  person  is 
protected.  State  v.  Bank  of  Baton 
Rouge,  125  La.  138  (1910).  A  cor- 
poration cannot  refuse  to  transfer 
stock  on  the  ground  that  the  ven- 
dor fraudulently  induced  the  company 
to  issue  the  stock  to  him,  where  the 
.company  had  been  guilty  of  laches  in 
not  seeking  a  remedy  before  the  trans- 
fer. The  vendee  in  this  case  was  a 
director.  American  Wire  Nail  Co.  v. 
Bayless,  91  Ky.  94  (1891).  "A  secre- 
tary is  a  mere  servant.  His  position 
is  that  he  is  to  do  what  he  is  told,  and 
no  person  can  assume  that  he  has 
any  authority  to  represent  anything 
at  all."  Hence  a  receipt  by  the  secre- 
tary that  certificates  of  stock  had 
been  actually  lodged  in  the  corporate 
office  for  transfer  does  not  bind  the 
corporation  where  they  were  not 
actually  lodged,  and  the  receipt  was  a 
part  of  a  fraud.  George  Whitechurch, 
Ltd.  V.  Cavanagh,  [1902]  A.  C.  117. 


1149 


§  371.]  FORGERY  —  STOLEN   STOCK.  [cH.  XXI. 

tion.  It  is  in  accord  with  the  demands  of  trade  and  the  constant  tend- 
ency of  the  law  to  protect  bona  fide  purchasers  of  certificates  of 
stock. 

D.    CONFISCATION    OF    STOCK. 

§  371.  During  the  late  Rebellion,  acts  of  confiscation  were  passed 
both  by  the  United  States  government  and  by  the  Confederate  govern- 
ment, and  shares  of  stock  owned  by  parties  in  one  section  of  the  country 
in  corporations  domiciled  in  the  other  section  were  confiscated.  The  re- 
sult of  the  war  having  established  that  the  Confederate  government 
was  an  illegal  one,  all  its  acts  of  confiscation  became  null  and  void,  and 
all  transfers  and  registers  of  stock  thereunder  were  held  to  be  void  utterly. 
The  whole  line  of  transactions  based  on  the  confiscation  fell  with  the 
confiscation  itself.^  The  corporation  was  held  not  liable  to  purchasers 
whose  title  was  based  on  the  confiscation,  since  it  acted  under  compul- 
sion of  a  power  temporarily  greater  than  the  law  itself.^  If  the  corpora- 
tion neglects  to  remedy  the  confusion  and  claims  growing  out  of  the 
illegal  confiscation  of  stock,  any  stockholder  may  institute  an  action  in 
its  behalf  for  that  purpose.^  The  stock  is  to  be  restored  to  the  owner 
against  whom  the  confiscation  proceedings  were  had;  and  if  the  cor- 
poration, during  the  Rebellion,  voluntarily  paid  dividends  to  the  illegal 
holders  of  the  stock,  it  must  pay  the  same  to  the  plaintiff,  even  though 
it  would  have  been  compelled  to  pay  such  dividends  to  the  Southern 
holder  if  it  had  not  done  so  voluntarily.^  On  the  other  hand,  proceedings 
for  the  confiscation  of  stock  under  the  confiscation  acts  of  the  United 
States  government,  passed  by  reason  of  the  late  Rebellion,  are  held  to 
have  been  effective  if  in  accordance  with  established  rules  of  procedure. 
Where,  however,  no  notice  of  the  proceedings  was  given  to  the  defendant, 
and  her  name  and  the  stock  were  not  accurately  described,  the  proceed- 
ings were  void  ;  and  the  corporation,  having  obeyed  the  illegal  judgment 
of  confiscation,  was  held  liable  in  damages  to  the  Southern  owner  of  the 
stock. ^  Under  the  confiscation  acts  of  the  United  States  of  1861  and 
1862,  stock  owned  by  a  rebel  in  a  Michigan  railroad  could  be  condemned 
by  giving  notice  of  seizure  to  the  railroad  corporation.  This  amounted 
to  an  attachment  or  garnishment.^ 

1  Dewing   v.   Perdicaries,   96   U.    S.         ''  Keppel     v.     Petersburg     R.     R., 
193  (1877).  Chase's  Dec.  167  (1868) ;   s.  c,  14  Fed. 

2  Dewing   v.   Perdicaries,   96   U.    S.     Cas.  .357. 

193   (1877) ;    also  Central  R.  R.,  etc.  ^  Chapman  v.  Phoenix  Nat.  Bank,  85 

Co.  V.  Ward,  37  Ga.  515  (1868).  N.  Y.  437   (1881),  reversing  s.  c,  44 

3  Perdicaries  v.  Charleston  Gaslight  N.  Y.  Super.  Ct.  340.     See  also  Avil 
Co.,  Chase's  Dee.  435  (1869) ;   s.  c,  19  v.   Alexandria  Water  Co.,    1    Hughes, 
Fed.    Cas.    217 ;     affirmed    sub    nom.  408  (1877) ;   s.  c,  2  Fed.  Cas.  254. 
Dewing  v.   Perdicaries,   96  U.   S.    193  "Miller    ?;.  ■  U.    S.,    11    Wall.    268 
(1877).  (1870). 

1150 


CHAPTER   XXII. 


SALES     OF     STOCK  — FORMAL     METHOD     OF     TRANSFERRING 
CERTIFICATES,   AND   REGISTRY   THEREOF. 


§  372.  Subject  treated  herein. 

373.  The  two  usual  steps  in  perfect- 

ing a  transfer  of  stock. 

374.  Omission     of     either    or    both 

steps. 

A.     METHOD  OF  TRANSFERRING  THE  CER- 
TIFICATE. 

375.  Usual  forms  of  assignment  and 

powers  of  attorney  whereby 
the  transferrer  assigns  the 
certificate  of  stock  to  his 
transferee. 

Questions  which  arise  herein. 

A  seal  is  not  necessary  to  a 
transfer  of  stock. 

The  assignment  of  the  certifi- 
cate of  stock  estops  the 
transferrer  from  claiming 
any  further  title  in  the  stock 
as  against  subsequent  bona 
fide  transferees,  although 
such  assignment  be  not  reg- 
istered. 

Effect  of  charter  provision  re- 
quiring registry. 

380.  Certificate  of  stock  may  be  as- 

signed with  the  name  of  the 
transferee  left  blank. 

I.     METHOD    OF    REGISTERING   A   TRANS- 
FER   OF    STOCK. 

381.  Registry  an  important  part  of 

a  transfer  of  stock. 


376. 
377. 

378. 


379. 


§382 


383. 


Formalities  of  making  registry 
—  Transfer  book  and  stock 
ledger  not  necessary. 

Formalities  of  registry  may  be 
waived  by  the  corporation. 

384.  Either    the    transferrer    or    the 

transferee  may  apply  to  the 
corporation  for  a  registry  6f 
transfer. 

RIGHTS  AND  DUTIES  OF  THE  CORPO- 
RATION IN  ALLOWING  OR  REFUSING 
REGISTRY. 

385.  Corporation  may  require  proof 

of  identity ;  also  of  genuine- 
ness of  signature,  etc. 

386.  Corporation  cannot  refuse  regis- 

try on  account  of  the  motive 
of  the  transferrer  or  trans- 
feree in  the  transaction. 

387.  Corporation     may     interplead 

between  two  claimants  to 
stock. 

388.  Corporation  must  obey  mandate 

of  court  ordering  registry 
and  issue  of  new  certificates. 

Remedies  of  a  transferee  of 
stock  against  the  corpora- 
tion for  refusal  to  allow 
registry. 

Remedy  by  mandamus. 

Remedy  by  suit  in  equity. 

Remedy  by  an  action  for  dam- 
ages. 


389. 


390 
391 
392 


§  372.  Subject  treated  herein.  —  Having  considered  the  compe- 
tency of  parties  to  enter  into  a  contract  of  sale  of  stock ;  ^  the  legaUty, 
enforceabihty,  and  character  of  that  contract ;  ^  and  the  rights  of  third 
parties  as  affecting  the  contract  between  the  transferrer  and  trans- 
feree,^ —  it  is  now  necessary  to  discuss  certain  formahties  whereby  the 
title  to  stock  is  transferred.  These  formalities  are  peculiar  to  sales  of 
stock.  The  only  analogy  to  them  is  perhaps  that  arising  from  the  mak- 
ing of  a  deed  of  real  estate,  and  a  registry  of  the  same  at  a  recorder's 
office.     In  many  respects,  however,  this  analogy  does  not  apply.     Thus, 


1  Ch.  XIX,  supra. 


2  See  eh.  XX,  supra. 
1151 


3  Ch.  XXI,  supra. 


§§  373,  374.]         FORMALITIES    OF   TRANSFER   AND    REGISTRY.  [cH.  XXIl. 

the  corporation  itself  has  many  rights  and  duties  herein  which  a  register 
of  deeds  has  not.  The  rules  given  herein  have  arisen  for  the  most 
part  out  of  the  necessities  and  usages  of  business  as  sanctioned  by  the 
courts. 

§  373.  The  two  usual  steps  in  perjectiyig  a  transfer  of  stock.  —  To 
transfer  a  share  of  stock  there  are  generally  two  distinct  steps  to  be 
taken :  First,  the  certificate  is  assigned  by  the  transferrer  to  the  trans- 
feree; and  second,  that  assignment  and  transfer  are  perfected  and 
completed  by  delivering  the  assigned  certificate  to  the  corporation,  ob- 
taining an  entry  on  the  corporate  transfer  book  to  the  effect  that  the 
transferee  has  acquired  the  stock  of  the  transferrer,  and  taking  from  the 
corporation  a  new  certificate  of  stock  certifying  that  the  newly  recorded 
stockholder  owns  a  specified  amount  of  stock.  The  corporation  then 
cancels  the  old  certificate  of  stock  ^  and  posts  the  transfer  into  the  stock 
ledger.^ 

§  374.  Omission  of  either  or  both  steps.  —  Either  and  even  both  of 
these  two  steps  in  the  complete  transfer  of  stock  may  be  omitted ;  and 
yet,  where  the  facts  estop  the  various  parties  from  denying  that  a  trans- 
fer has  been  made,  it  will  be  held  to  be  complete.  Thus,  it  has  been 
held  that  an  owner  of  stock  may  transfer  his  stock  to  another  by  a  de- 
livery of  the  certificate  without  any  assignment.^  This  happens  when 
a  registry  of  transfer  is  made  without  any  surrender  of  the  old  certificate.^ 
So  far  as  the  transferrer  is  concerned  such  a  method  of  transfer  is  ef- 
fectual. Such  cases  also  arise  where  the  corporation  has  never  issued 
certificates  of  stock.  The  stockliolder  may  then  transfer  his  stock  with- 
out assigning  a  certificate.^    A  subscription  of  stock  may  be  assigned, 

1  In  Knox  v.  Eden  Musee,  etc.  Co.,  mussen  v.  Sevier  Valley,  etc.  Co.,  121 
148  N.  Y.  441  (1896),  certificates  of  Pae.  Rep.  741,  745  (Utah,  1912). 
stock  had  been  delivered  to  the  cor-  Brighara  v.  Mead,  92  Mass.  245 
poration  for  transfer,  and  the  new  (1865) ;  First  Nat.  Bank  v.  Gifford,  47 
certificates  had  been  duly  issued.  The  Iowa,  575  (1877).  Where  no  eertifi- 
old  certificates  were  put  in  a  safe  cates  of  stock  are  issued,  a  stock- 
uncanceled,  and  were  illegally  ab-  holder  may  transfer  his  interest  by 
stracted  by  an  employee  and  sold.  The  an  ordinary  assignment  in  writing, 
coiu-t  held  that  the  company  was  not  McGue  v.  Rommel,  148  Cal.  5.39 
liable  on  such  certificates  to  a  person  (1906).  Where  no  certificates  of  stock 
who  took  them  in  pledge  from  such  are  issued  and  the  stockholder  either 
employee.  The  coui't,  however,  based  orally  or  in  T\Titing  directs  the  corpo- 
its  decision,  not  on  the  fact  that  the  ration  to  make  a  transfer  to  another 
pledgee  took  with  notice,  but  on  the  person,  the  corporation  is  protected 
principle  of  law  that  no  one  could  in  so  doing.  Rasmussen  v.  Sevier 
acquire  title  to  stolen  certificates  of  Valley,  etc.  Co.,  121  Pac.  Rep.  741 
stock.  (Utah,  1912) ;   holding  also  that  where 

2  The  purposes  of  the  stock  ledger  no  certificates  of  stock  have  been 
are  explained  in  §  14,  supra.  issued  and  for  fifteen  years  a  person 

'See  §§  308,  465.  entitled    to    the    stock    has     allowed 

*  See  §  361,  supra.  another  person  to  vote  it  and  pay  all 

^  Quoted    and    approved    in    Ras-    the  assessments  on  it  and  treat  it  as 

1152 


CH.  XXII.] 


FORMALITIES   OF   TRANSFER  AND   REGISTRY. 


[§  375. 


even  though  only  a  part  of  the  subscription  has  been  called  for  and  paid, 
and  even  though  no  certificate  of  stock  has  even  been  issued.  Such  as- 
signment may  be  oral.^  No  certificate  of  stock  is  necessary  in  order  to 
transfer  title  to  the  stock.^  But,  where  no  certificates  of  stock  have 
been  issued,  a  purchaser  of  a  subscriber's  right  to  the  stock  is  not  pro- 
tected as  a  purchaser  of  a  certificate  of  stock  is  protected.^  Where  the 
certificates  for  unpaid  stock  are  never  issued,  and  the  stockholder  dis- 
poses of  his  interests  to  another  person,  and  the  corporation  recognizes 
that  person  as  such  stockholder,  the  original  subscriber  is  no  longer 
liable.'*  Where  the  corporation  issues  a  new  certificate  without  a  sur- 
render of  the  old  one,  it  may  be  liable  to  a  holder  of  the  new  certificate.^ 


A.    METHOD    OF    TRANSFERRING    THE    CERTIFICATE. 

§  375.  Usual  forms  of  assignment  and  powers  of  attorney  whereby 
the  transferrer  assigns  the  certificate  of  stock  to  his  transferee.  — 
A  certificate  of  stock  is  a  paper  issued  by  the  corporation  to  a  stock- 
holder, stating  that  the  person  specified  therein  is  the  owner  of  a  cer- 
tain number  of  shares  of  its  capital  stock.     The  assignment  of  this 


his  own,  the  stock  being  of  little  or  no 
value  in  the  beginning,  it  may  be  shown 
that  transfer  of  the  stock  was  made 
orally.  Where  no  stock  book  or  cer- 
tificate-of-stock  book  is  kept,  but  a 
by-law  provides  that  transfers  may  be 
by  written  assignments  filed  with  the 
company  exhibited  to  the  secretary,  an 
assignment  without  being  filed  with  the 
secretary  leaves  the  assignor  still  liable 
on  the  stock.  Kelly  v.  KilUan,  133  111. 
App.  102  (1907).  Where  no  certificate 
of  stock  has  been  issued  to  a  stockholder 
a  separate  instrument  signed  by  the 
stockholder  transferring  a  part  of  her 
stock  to  a  party  is  a  sufficient  transfer 
thereof  and  a  certificate  of  stock  may 
be  issued  to  such  new  party.  Richard- 
son V.  Longmont,  etc.  Co.,  19  Colo. 
App.  483  (1904).  Where  no  certifi- 
cates of  stock  have  been  issued  a 
stockholder  may  assign  his  stock  by 
a  written  instrument.  Lipscomb's 
Admr.  v.  Condon,  56  W.  Va.  416 
(1904).  See  also  §  382,  infra.  Al- 
though the  charter  prescribes  that 
stock  shall  be  transferred  in  such 
manner  as  the  by-laws  direct,  yet,  if 
the  by-laws  do  not  provide  for  trans- 
fers, a  common-law  transfer  is  suffi- 
cient. An  oral  transfer  is  sufficient 
where  no  certificates  have  been  issued, 


and  where  such  transferee  is  entered 
on  the  corporate  books  as  a  stock- 
holder. Kiely  v.  Smith,  27  Grant's 
Ch.  (Can.)  220  (1879). 

^  Manchester  St.  Ry.  v.  Williams, 
71  N.  H.  312  (1902).  A  secretary 
will  not  be  ordered  by  a  court  under  a 
statute  to  transfer  an  unpaid  subscrip- 
tion for  stock,  no  certificates  having 
been  issued.  Holyoke  v.  Millmann, 
139  N.  W.  Rep.  392  (Wis.  1913). 

2  May  V.  McQuillan,  129  Mich.  392 
(1902). 

3  Manchester  St.  Ry.  v.  Williams,  71 
N.  H.  312  (1902). 

*  Dain,  etc.  Co.  v.  Trumbull,  etc.  Co., 
95  Mo.  App.  144  (1902). 

^  See  §  361,  supra,  and  §  381,  infra. 
A  pledgee  who  does  not  receive  the 
certificate  of  stock,  but  takes  a  sep- 
arate written  assignment  thereof  and 
files  that  with  the  company  and  ob- 
tains from  the  company  a  certificate 
that  the  shares  Jiave  been  transferred 
on  the  books,  may  hold  the  company 
liable  if  subsequently  the  company 
on  presentation  of  the  original  certifi- 
cate of  stock  duly  indorsed  transfers 
the  same  to  a  purchaser  thereof. 
Equitable,  etc.  Co.  v.  Johnson,  36  Colo. 
377  (1906). 


(73) 


1153 


§  375.] 


FORMALITIES   OF   TRANSFER   AND   REGISTRY. 


[CH.   XXII. 


certificate  is  made,  it  seems,  in  three  different  ways :  First,  it  has  been 
held  that  it  may  be  made  by  a  simple  delivery  of  the  certificate  without 
any  writing.^  Where  a  deed  of  trust  refers  to  certain  stock  and  transfers 
the  same  to  the  trustee  and  authorizes  him  to  transfer  the  stock  to  him- 
self on  the  books,  an  indorsement  of  the  certificates  is  unnecessary  to 
pass  title  to  the  trustee.^  Again,  it  may  be  made  by  a  formal  instru- 
ment of  assignment  duly  signed  by  the  transferrer.  This  instrument 
may  be  separate  from  the  certificate  of  stock  or  may  be  printed  in  blank 
on  the  back  of  it.  In  either  case,  in  order  to  make  the  transfer  com- 
plete by  a  registry  of  it  on  the  corporate  books,  it  is  necessary  for  the 
transferrer  to  go  to  the  office  of  the  corporation  and  sign  the  transfer 
in  the  corporate  transfer  book,  whereby  the  transfer  is  recorded.  The 
third  and  most  usual  method  of  assigning  a  certificate  of  stock  is  by  a 
formal  instrument  of  assignment,  similar  to  the  one  explained  above, 
united  with  a  power  of  attorney  authorizing  a  person,  whose  name  is 
generally  left  blank,  to  be  subsequently  filled  in,  to  sign  the  corporate 
transfer  book,  whereby  the  transfer  is  recorded.  This  instrument  of 
transfer  and  the  power  of  attorney  are  generally  printed  in  blank  on 
the  back  of  the  certificate  of  stock.^     It  enables  the  transferee  to  ob- 


'  See  §  .308,  supra,  where  a  delivery 
of  a  certificate  of  stock  causa  mortis 
was  held  good,  without  any  writing 
assigning  the  certificate ;  and  §  465, 
note,  infra.  See  also  Masury  v.  Arkan- 
sas National  Bank,  9.3  Fed.  Rep. 
603  (1899) ;  Fraser  v.  Charleston,  11 
S.  C.  486  (1878).  Cf.  Sitgreaves  v. 
Farmers',  etc.  Bank,  49  Pa.  St.  359 
(1865) ;  Davis  v.  Bank  of  England,  2 
Bing.  393  (1824);  Burrall  v.  Bush- 
wick  R.  R.,  75  N.  Y.  21 1  (1878) ;  Dunn 
V.  Commercial  Bank,  11  Barb.  580 
(1852).  A  deed  of  release  of  shares 
of  stock  is  a  sufficient  transfer.  Hast- 
ings V.  Blue  Hill  Turnp.  Corp.,  26 
Mass.  80  (1829).  If  a  corporation  al- 
lows a  transfer  to  be  made  on  its 
books  without  the  transfer  on  the  old 
certificate  being  signed,  it  is  liable  to 
the  owner  of  the  old  certificate, 
even  though  the  old  certificate  is 
delivered  up  and  the  attorney  in  fact 
of  the  owner  shows  his  power  of  at- 
torney at  the  time  of  the  transfer  on 
the  books.  Tafft  v.  Presidio,  etc.  Co., 
84  Cal.  131  (1890).  A  decision  of  a 
state  court  that  a  donatio  causa  mor- 
tis of  bank  stock  was  effective,  al- 
though the  donor  merely  delivered 
the  certificates  of  stock  without  trans- 

1 


ferring  the  same  on  the  back  thereof, 
does  not  raise  a  federal  question, 
even  though  the  stock  was  national 
bank  stock.  Leyson  v.  Davis,  170 
U.  S.  36  (1898). 

2  Curtis  V.  Crossley,  59  N.  J.  Eq.  358 
(1900).  A  transfer  need  not  be  on 
the  back  of  the  certificate.  A  state- 
ment in  a  collateral  note  that  the 
stock  has  been  deposited  as  security, 
and  that  on  default  the  pledgee  might 
sell  the  same  at  public  auction  is 
sufficient  to  give  the  purchaser  at  such 
sale  sufficient  title  to  entitle  him  to 
a  transfer  on  the  corporate  books. 
Bank  of  CuUoden  v.  Bank  of  Forsyth, 
120  Ga.  575  (1904). 

^  A  stockholder  does  not  transfer 
his  stock  by  merely  putting  his  name 
in  the  first  line  of  a  transfer  reading 
."Know  all  men  by  these  presents  that 
...  do  hereby  appoint,"  etc.,  with- 
out signing  his  name  at  the  end  of 
the  transfer,  as  called  for  by  the 
form,  and  hence  a  purchaser  of  the 
certificate  from  a  thief  of  the  same 
is  not  protected  and  a  suit  lies  to 
compel  the  purchaser  to  give  up  the 
stock,  and  if  the  corporation  has 
been  merged  into  another  corporation, 
the  purchaser  must  account  for  what 
154 


CH.   XXII.] 


FORMALITIES   OF   TRANSFER  AND   REGISTRY. 


[§  375. 


tain  a  registry  without  the  presence  of  the  transferrer,  provided  the 
corporate  registry  agent  is  satisfied  with  the  signature  and  intent  of  the 
transferrer  to  assign  the  stock.  Although  a  transfer  is  on  a  separate 
piece  of  paper,  and  is  not  acknowledged  as  required  by  a  rule  of  the 
stock  exchange,  nevertheless  a  pledgee  may  be  a  bona  fide  holder.^  A 
person  who  signs  as  a  witness  a  forged  transfer  of  stock  is  personally 
liable,  even  though  he  did  so  without  knowledge  of  the  fraud.-  Where 
a  broker  identifies  to  a  corporation  a  person  as  a  stockholder,  in  order 
that  the  latter  may  transfer  stock,  and  such  transfer  is  forged,  the  broker 
is  liable  to  the  corporation  for  the  cost  of  the  stock  which  the  corpora- 
tion had  to  purchase  on  the  market  for  the  benefit  of  the  real  owner  of 
the  stock  .^  The  blank  power  of  attorney  is  generally  filled  in  by  the 
transfer  clerk,  who  inserts  his  own  name  and  thereby  becomes  the  at- 
torney.^ This  power  of  attorney  is  not  revoked  by  the  death  of  the 
transferrer  before  it  is  used.^    Any  one  may  be  attorney  to  transfer  the 


he  received  from  such  other  corpora- 
tion. TreadweU  v.  Clark,  114  N.  Y. 
App.  Div.  493  (1906) ;  aff'd,  190  N.  Y. 
51.  Even  though  a  person's  name 
appears  on  a  certificate  of  stock  on 
the  transfer  on  the  back  thereof,  yet 
if  a  line  is  drawn  through  it  and  the 
certificate  is  canceled  and  a  new  one 
issued  to  the  original  owner,  the  per- 
son whose  name  is  canceled  is  pre- 
sumed not  to  have  been  the  owner. 
Gillett  V.  Chicago  Title  &  T.  Co., 
230  111.  373  (1907). 

1  Smith  V.  Savin,  141  N.  Y.  315 
(1894).  A  blank  power  of  attorney  for 
the  transfer  of  stock  is  as  effective  as 
the  signing  of  the  transfer  on  the  back 
of  the  certificate  and  leaving  the 
transferee  blank.  Crawford  v.  Dollar, 
etc.  Co.,  136  Pa.  St.  206  (1912). 

2  Second,  etc.  Bank  v.  Curtiss,  2 
N.  Y.  App.  Div.  508  (1896) ;  aff'd,  153 
N.  Y.  681.  Where  the  treasurer  of  a 
charitable  corporation  forges  a  resolu- 
tion of  the  board  of  trustees  author- 
izing him  to  sell  bonds  registered  in 
the  name  of  the  corporation,  and  he 
executes  fraudulently  a  power  of  at- 
torney from  the  corporation  to  him 
as  treasurer  to  make  such  sale,  the 
corporation  which  issued  the  bonds 
and  then  allowed  a  transfer  on  such 
forged  resolution  is  liable  to  the 
charitable  corporation  for  so  doing. 
The  charitable  corporation  may  hold 
liable    a    broker    who    witnessed    the 


power  of  attorney  even  in  good  faith. 
If  the  corporation  which  issued  and 
registered  the  bonds  is  held  liable  it 
has  recourse  against  the  broker  by 
reason  of  the  stock  exchange  rules 
which  render  liable  a  broker  who 
witnessed  signatures  to  transfers  of 
stocks  or  bonds.  Clarkson  Home  v. 
Missouri,  etc.  R.  R.,  182  N.  Y.  47 
(1905). 

3  Bank  of  England  v.  Cutler,  [1907] 
1  K.  B.  889 ;  aff'd,  [1908]  2  K.  B.  208. 
A  broker  who  has  guaranteed  the  signa- 
ture of  the  vendor  of  stock  is  liable  to  a 
purchaser,  even  though  the  purchaser 
bought  through  an  intermediate  broker, 
the  sale  having  been  by  the  second 
broker  without  a  disclosure  of  the  name 
of  the  vendor,  and  the  commission  of 
the  intermediate  broker  having  been 
paid  by  the  first  broker.  Bassett  v. 
Perkins,  65  N.  Y.  Misc.  Rep.  103  (1909). 

*  The  fact  that  the  officer  of  the 
corporation  fills  in  his  own  name  as 
agent  to  transfer  does  not  make  him 
the  agent  of  the  stockholder  as  re- 
gards notice  of  the  agent's  frauds. 
Allen  V.  South  Boston  R.  R.,  150  Mass. 
200  (1889).     See  also  §  382,  infra. 

^  Fraser  v.  Charleston,  11  S.  C.  486 
(1878);  Leavitt  v.  Fisher,  4  Duer 
(N.  Y.),  1  (1854);  United  States  v. 
Cutts,  1  Sumn.  133  (1832) ;  s.  c,  25 
Fed.  Cas.  745.  The  death  of  the  trans- 
ferror of  a  certificate  of  stock  does 
not  affect  the  right  of  the  transferee 


1155 


§§  376,  377.]         FORMALITIES   OF   TRANSFER   AND   REGISTRY.  [cH.  XXII. 

stock  on  the  books  but  the  corporation  may  refuse  to  issue  a  new  cer- 
tificate until  such  attorney  actually  makes  the  transfer  on  the  corporate 
books. ^  A  general  power  of  attorney  to  sell  land  and  build  houses  does 
not  justify  a  sale  of  stock.^  A  general  power  of  attorney  authorizing  an 
agent  to  sell  and  transfer  stocks,  etc.,  authorizes  him  to  sign  the  stock- 
holder's name  to  a  transfer,  but  not  a  transfer  to  himself.^  Permitting, 
without  injury,  a  transfer  under  a  power  of  attorney  thirteen  years  old 
is  not  proper  vigilance  on  the  part  of  a  corporation.*  An  agent's  written 
authority  to  transfer  stock  is  revoked  by  death. ^  A  transferee  who 
receives  new  certificates  of  stock  is  not  affected  by  the  fact  that  the  old 
certificates  have  been  fraudulently  reissued  by  a  corporate  officer.^ 

§  376.  Questions  which  arise  herein.  —  The  assignment  of  a  certifi- 
cate of  stock  by  the  transferrer  to  the  transferee,  considered  apart 
from  the  actual  registry  of  such  assignment  on  the  corporate  books, 
involves  the  question  whether  such  an  assignment  should  be  under 
seal ;  whether,  after  the  assignment  and  the  delivery  thereof,  the  trans- 
ferrer can  claim  any  rights  of  ownership  as  against  the  transferee,  even 
though  there  be  no  registry  of  the  transfer;  and  whether  a  transfer 
and  power  of  attorney  duly  signed  by  the  transferrer,  but  left  in  blank 
as  to  the  name  of  the  transferee  and  attorney,  are  legal  and  may  pass 
from  hand  to  hand  until  some  holder  cares  to  fill  up  the  blanks.  These 
and  incidental  questions  are  discussed  in  the  following  sections. 

§  377.  A  seal  is  not  necessary  to  a  transfer  of  stock.  —  In  America 
an  assignment  or  transfer  of  a  certificate  of  stock  need  not  be  under 
seal.''  Formerly  it  was  the  custom  to  have  all  such  transfers  made  by 
deed,  duly  sealed.     As  the  nature  of  stock  and  certificates  of  stock, 

to  have  the  stock  transferred  on  the  thority.     Quay  v.  Presidio,  etc.  R.  R., 

corporate  books.     Gulp  v.  Mulvane,  66  82  Cal.  1  (1899). 

Kan.  143  (1903).  *  Pennsylvania  R.   R.'s  Appeal,  86 

•Shirley,  etc.  Co.  v.  Douglass,  130  Pa.  St.  80  (1878). 
111.  App.  285  (1906).  ^  In  re  Kern's  Estate,   176  Pa.  St. 

2  Camden  F.   Ins.  Assoc,   v.  Jones,  373  (1896). 

53  N.  J.  L.   189  (1890),  holding  also         «  See  §  292,  supra.     Where  a  person, 

that   the  corporation  is  liable   for   al-  as  preliminary  to  making  a  loan  with 

lowing  a  transfer  of  stock  where  the  stock  as  collateral,  indorses  his  stock 

stockholder  did  not  sign  the  transfer  over  to  the  lender  and  leaves  it  with 

nor  authorize  another  to  transfer  it.  the  corporate  secretary,  and  then  the 

3  Tafft  V.  Presidio,  etc.  Co.,  84  Cal.  loan  is  abandoned,  the  secretary  is 
131  (1890),  rev'g  22  Pac.  Rep.  485  bound  to  deliver  back  the  stock.  Gal- 
(1889).  A  stockholder's  power  of  at-  vin  v.  Mac  Mining,  etc.  Co.,  14  Mont, 
torney  to  his  agent  "to  exchange  old  508  (1894). 

issues   or   certificates    [of   stock],    and  '  Quiner  v.  Marblehead  Social  Ins. 

receive    new    issues    or   certificates  in  Co.,  10  Mass.  476  (1813) ;   Atkinson  v. 

lieu  thereof,"  does  not    authorize  the  Atkinson,    90    Mass.    15    (1864).     If, 

agent  to  sell  or  pledge  the  stock.     The  however,   the  by-laws  require  it,   the 

corporation    is   liable   for    allowing    a  transfer  must  be  under  seal.     Bishop 

transfer  to  a  third  person  on  such  au-  v.   Globe  Co.,   135  Mass.   132   (1883), 

1156 


CH.  XXII.] 


FORMALITIES   OF   TRANSFER  AND   REGISTRY. 


[§  378. 


however,  came  to  be  understood  more  clearly,  it  became  a  rule  of  law 
that  a  transfer  of  the  certificate,  like  the  transfer  of  choses  in  action, 
did  not  require  a  seal.  Not  even  the  presence  of  the  seal  gives  the  trans- 
fer the  character  of  a  sealed  instrument.  The  seal  is  a  superfluity  and 
is  disregarded.^ 

In  England,  on  the  other  hand,  transfers  of  railway  stocks  are  gen- 
erally required  by  charter  to  be  under  seal.  This  is  held  to  give  the 
instrument  the  character  of  a  deed ;  and  hence,  in  accordance  with  the 
ancient  technical  rule  of  law  that  a  deed  must  be  filled  out  as  to  the 
grantee  and  other  essential  particulars  before  it  is  sealed  in  order  to  be 
valid,  it  has  been  held  in  England  that  a  transfer  of  a  certificate  of  stock, 
duly  signed  and  sealed,  but  with  the  name  of  the  transferee  in  blank,  is 
void  absolutely.^  In  those  English  companies,  however,  whose  charters 
do  not  require  transfers  to  be  sealed,  the  transfer  may  be  by  an  ordinary 
instrument  in  writing,  and  the  presence  of  a  seal  will  be  disregarded.^ 

§  378.  The  assignment  of  the  certificate  of  stock  estops  the  trans- 
ferrer from  claiming  any  further  title  in  the  stock  as  against  sub- 
sequent  bona  fide  transferees,  although  such  assignment  be  not 
registered.'^  —  There  is  no  case  which  denies  this  principle  of  law.^ 


holding  also  that  the  word  "seal"  is 
insufficient. 

1  German  Union,  etc.  Assoc,  v. 
Sendmeyer,  50  Pa.  St.  67  (1865); 
Commercial  Bank  v.  Kortright,  22 
Wend.  348  (1839);  McNeil  v.  Tenth 
Nat.  Bank,  46  N.  Y.  325  (1871); 
Bridgeport  Bank  v.  New  York,  etc. 
R.  R.,  30  Conn.  231,  274  (1861) ;  Eas- 
ton  V.  London  J.  S.  Bank,  L.  R.  34 
Ch.  D.  95  (1886). 

2  Hibblewhite  v.  McMorine,  6  M.  & 
W.  200  (1840),  per  Parke,  B. ;  Re 
Balkis  Consol.  Co.,  58  L.  T.  Rep.  300 
(1888) ;  Tayler  v.  Great  Indian,  etc. 
Ry.,  4  De  G.  &  J.  559  (1859) ;  Societe 
Generale  v.  Tramways  Union  Co.,  L.  R. 
14  Q.  B.  D.  424  (1884),  where  trans- 
fer was  to  be  by  deed ;  aff'd,  Societe 
Generale  v.  Walker,  L.  R.  11  App.  20 
(1885).  Cf.  §  325,  supra,  and  §  412, 
infra. 

3  Re  Tees  Bottle  Co.,  33  L.  T.  Rep. 
834  (1876);  Walker  v.  Bartlett,  18 
C.  B.  845  (1856) ;  Re  Barned's  Banking 
Co.,  L.  R.  3  Ch.  App.  105  (1867); 
Ex  parte  Sargent,   L.    R.    17   Eq.   273 


(1874) ;  Ortigosa  v.  Brown,  47  L.  J. 
(Ch.)  168  (1878).  The  American  eases 
incline  to  the  opinion  that,  even 
though  a  seal  were  required,  the 
sealed  transfer  would  not  be  void  be- 
cause of  the  blanks  left  in  it.  Bridge- 
port Bank  v.  New  York,  etc.  R.  R.,  30 
Conn.  231,  274  (1861);  Commercial 
Bank  v.  Kortright,  22  Wend.  348 
(1839) ;  Matthews  v.  Massachusetts 
Nat.  Bank,  1  Holmes,  396,  407  (1874) ; 
s.  c,  16  Fed.  Cas.  1113,  lllS  ;  McNeil 
V.  Tenth  Nat.  Bank,  46  N.  Y.  325 
(1871). 

^  Masury  ;;.  Arkansas  Nat.  Bank,  93 
Fed.  Rep.  603  (1899) ;  Scott  v.  Pequon- 
nock  Nat.  Bank,  15  Fed.  Rep.  494 
(1883);  Brown  v.  Smith,  122  Mass. 
589  (1877);  Fitchburg  Sav.  Bank  v. 
Torrey,  134  Mass.  239  (1883) ;  Duke 
i>.  Cahawba  Nav.  Co.,  10  Ala.  82 
(1846) ;  Choteau  Spring  Co.  v.  Har- 
ris, 20  Mo.  382  (1855) ;  St.  Louis  P. 
Ins.  Co.  V.  Goodfellow,  9  Mo.  149 
(1845) ;  Gilbert  v.  Manchester  Iron 
Mfg.  Co.,  11  Wend.  627  (1834);  Sar- 
gent V.   Essex  Marine  Ry.   Corp.,  26 


^  Quoted  and  approved  in  O'Neil  v.  Wolcott  Mining  Co.,  174  Fed.  Rep.  527, 
531  (1909). 

1157 


§  378.] 


FORMALITIES    OF   TRANSFER   AND    REGISTRY. 


[CH.   XXII. 


On  close  examination  of  the  cases  which  seem  to  mihtate  against  it, 
it  will  be  found  that  the  issue  involved  was  whether  the  unregistered 
transferee  was  protected  against  third  persons  who  claimed  title  back 
of  the  transferrer.  The  transferrer  himself  is  not  allowed  to  impeach 
his  unregistered  transferee's  title.  Even  in  Connecticut,  where  at 
an  early  day  the  court  held  that  the  registry  was  the  origin  of 
the  title  of  the  transferee,  the  court  was  considering  the  rights  of  third 
persons,  and  not  the  rights  of  the  transferrer  himself.^  That  the  trans- 
ferrer cannot  question  the  completeness  of  his  transfer  of  title  is  a  rule 
binding  not  only  on  himself,  but  also  upon  his  assignees  in  bankruptcy 
or  insolvency .2  The  transferee  is  estopped  also  from  attacking  the 
Mass.  202  (1829) ;  Nesmith  v.  Wash-    another  the  certificate  therefor,  either 


ington  Bank,  2.3  Mass.  324  (1828); 
Sargent  v.  Franklin  Ins.  Co.,  25  Mass. 
90  (1829);  Conant  v.  Reed,  1  Ohio 
St.  298  (1853);  Baltimore,  etc.  Ry. 
V.  Sewell,  35  Md.  238  (1871) ;  Bank  of 
America  v.  McNeil,  10  Bush  (Ky.), 
54  (1873) ;  U.  S.  v.  Vaughan,  3  Binn. 
(Pa.)  394  (1811);  Beckwith  v.  Bur- 
rough,  13  R.  I.  294  (1881) ;  Farmers', 
etc.   Bank   v.   Wasson,   48   Iowa,   336 


indorsed  in  blank  or  by  a  separate 
instrument  of  transfer  and  power  of 
attorney,  the  person  to  whom  the  cer- 
tificate and  instrument  are  deUvered 
can  pass  a  good  title  by  delivery  or 
pledge  regardless  of  the  relations 
between  him  and  the  owner.  This  is 
not  on  the  ground  that  the  certificate 
becomes  a  negotiable  instrument,  but, 
on  the  ground  of  estoppel,  because  the 


(1878) ;    Carroll    v.    Mullanphy    Sav.    owner,    having    given    another    such 
Bank,  8  Mo.  App.  249  (1880) ;  Broad-    indicia  of  title  as  clothes  him  with  the 


way  Bank  v.  McEh-ath,  13  N.  J.  Eq. 
24  (1860);  Smith  v.  Crescent  City, 
etc.  Co.,  30  La.  Ann.  1378  (1878); 
People's  Bank  v.  Gridley,  91  lU.  457 
(1879) ;  Richardson  v.  Longmont,  etc. 
Co.,  19  Colo.  App.  483  (1904).  Nor 
can  the  transferrer  avoid  the  assign- 
ment before  registry  on  the  ground 
that  no  consideration  passed.  Hall  v. 
V.  S.  Ins.  Co.,  5  Gill  (Md.),  484  (1847) ; 
Cushman  v.  Thayer  Mfg.  Co.,  76 
N.  Y.  365  (1879).  Such  an  assign- 
ment satisfies  a  contract  to  sell  stock. 
White  V.  Salisbury,  33  Mo.  150  (1862) ; 
Merchants'  Nat.  Bank  v.  Richards, 
6  Mo.  App.  454  (1879) ;  afif'd,  74  Mo. 
77.  The  fact  that  the  corporation 
subsequently  refuses  to  register  the 
transfer  does  not  prevent  title  passing, 
as  between  transferrer  and  transferee. 
Crawford  v.  Provincial  Ins.  Co.,  8 
Up.  Can.  C.  P.  263  (1859).  Even 
though  a  stockholder  signs  a  transfer 


appearance  of  ownership,  is  precluded 
from  setting  up  title  in  himself  as 
against  a  holder  in  good  faith."  Baker 
V.  Davie,  211  Mass.  429  (1912). 

1  Northrop  v.  Newtown,  etc.  Co.,  3 
Conn.  544,  552  (1821);  Fisher  v. 
Essex  Bank,  71  Mass.  373  (1855),  the 
rights  of  attaching  creditors  being 
involved. 

2  Ex  parte  Dobson,  2  Mont.  D.  &  De 
G.  685  (1842) ;  Dickinson  v.  Central 
Nat.  Bank,  129  Mass.  279  (1880); 
Morris  v.  Cannan,  4  De  G.,  F.  &  J.  581 
(1862) ;  Sibley  v.  Quinsigamond  Nat. 
Bank,  133  Mass.  515  (1882).  Even 
though  by  the  statutes  of  a  state 
(Arizona)  a  transfer  of  the  stock  is 
not  good  until  recorded  except  as 
between  the  parties,  yet  where  various 
stockholders  have  pooled  their  stock 
by  turning  in  their  certificates  of  stock 
to  one  person  to  hold,  and  one  of  the 
parties   so   pooling  has   sold   his   pool 


for  all  the  shares  represented  by  a  certificate,  and  the  manager  of  the 
certificate,  it  may  be  shown  that  the  pool  knowing  that  fact  refuses  to  per- 
transferee  was  to  return  a  portion  mit  the  stock  itself  to  be  correspond- 
thereof.  Hill  V.  Kerstetter,  43  Ind.  ingly  transferred  on  the  books  of  the 
App.  431  (1909).  "If  the  owner  of  company,  and  later,  fraudulently  ob- 
stock  knowingly  places  in  the  hand  of  tains  a  judgment  against   the  party 

1158 


CH.  XXII.] 


FORMALITIES    OF   TRANSFER   AND    REGISTRY. 


[§  378. 


assignment  of  the  certificate  on  the  ground  of  informalities  in  the  trans- 
fer.^ A  bona  fide  pledgee  of  stock  indorsed  in  blank  on  the  back  is 
protected.^  In  ^Maryland,  however,  a  distinction  is  drawn  between 
the  rights  of  a  bona  fide  purchaser  and  a  bona  fide  pledgee.  It  is  held 
that  the  usual  form  of  transfer  on  the  back  of  certificates  of  stock,  signed 
by  the  stockholder,  with  the  name  of  the  transferee  left  blank,  does  not 
protect  a  bona  fide  pledgee  and  the  pledgee  is  chargeable  with  notice 
of  all  the  facts  and  equities.^  Where  no  certificates  of  stock  have  been 
issued,  a  purchaser  of  a  subscriber's  right  to  the  stock  is  not  protected 
as  a  purchaser  of  a  certificate  of  stock  is  protected.^  ^Vhere  a  person  resi- 
dent in  England  purchases  certificates  of  stock  in  a  French  corporation 
and  fails  to  have  the  certificates  transferred  on  the  books,  an  administra- 
tion on  such  certificates  may  be  taken  out  in  England.^  In  delivering 
stock  to  a  life  tenant  the  executor  may  indorse  on  the  certificate  that 
it  is  to  be  held  by  the  legatee  under  the  terms  of  the  will.^  The  pur- 
chaser of  a  certificate  of  stock  may  be  subject  to  an  agreement  of  all  the 
stockholders  already  entered  into.^ 


who  originally  entered  the  pool,  and 
sells  out  his  stock  under  such  judg- 
ment, he  may  be  compelled  by  a 
court  of  equity  to  transfer  the  stock 
to  the  purchaser  of  the  pool  certificate, 
even  though  the  stock  has  advanced 
in  value  and  two  years  have  inter- 
vened. Brissell  v.  Knapp,  1.55  Fed. 
Rep.  809  (1907). 

1  Quoted  and  approved  in  Richard- 
son V.  Longmont,  19  Colo.  App.  483 
(1904).  Holyoke  Bank  v.  Goodman 
Paper  Mfg.  Co.,  63  Mass.  576  (1852) ; 
Maguire's  Case,  3  De  G.  &  S.  31 
(1849);  Sheffield,  etc.  Ry.  v.  Wood- 
cock, 7  M.  &  W.  574  (1841) ;  Chelten- 
ham, etc.  Ry.  V.  Daniel,  2  Q.  B.  281 
(1841) ;  Home  Stock  Ins.  Co.  v.  Sher- 
wood, 72  Mo.  461  (1880).  The  legal 
sufficiency  of  the  instrument  of  trans- 
fer cannot  be  questioned  by  the  trans- 
ferrer. Chew  V.  Bank  of  Baltimore, 
14  Md.  299  (1859). 

2  Gilbert  v.  Erie  Bldg.  Assoc,  184 
Pa.  St.  554  (1898).  A  bona  fide 
pledgee  of  a  certificate  of  stock  from 
a  broker  with  a  separate  assignment 
thereof  in  blank,  signed  by  the  per- 
son to  whom  the  certificate  runs, 
is  protected.  O'Mara  v.  Newcomb, 
38  Colo.  275  (1906).  A  purchaser  of 
stock  -with  notice  is  a  bona  fide  pur- 
chaser if  his  vendor  was  a  bona  fide 
purchaser    without    knowledge    of    an 


unrecorded  mortgage  on  the  corporate 
property,  which  is  subject  to  attack. 
Roberts  v.  Hughes  Co.,  83  Atl.  Rep. 
807  (Vt.  1912).  A  pledgee  of  stock  for 
an  antecedent  debt  is  not  protected 
as  against  equities.  Roberts  v.  Hughes 
Co.,  83  Atl.  Rep.  807  (Vt.  1912).  This 
question,  however,  of  who  is  a  bona 
fide  holder  is  considered  elsewhere.  See 
§  293,  supra.     155  N.  Y.  App.  Div.  646. 

3  Under  this  decision  it  would  seem 
to  be  necessary  to  enlarge  the  terms 
and  form  of  the  usual  assignment  and 
power  of  attorney  on  the  back  of  cer- 
tificates of  stock.  German  Sav.  Bank 
V.  Renshaw,  78  Md.  475  (1894),  a 
ease  wherein  a  broker  holding  stock 
on  a  margin  repledged  it  at  a  bank. 

"  Manchester  St.  Ry.  v.  Williams,  71 
N.  H.  312  (1902). 

5  In  the  Goods  of  Agnese,  [1900]  P. 
60. 

6De  Loney  v.  Hull,  128  Ga.  778 
(1907). 

^  An  agreement  of  stockholders 
that  dividends  shall  be  applied  to  the 
payment  of  a  certain  debt  takes  prece- 
dence over  an  assignment  by  one  of 
them  of  his  stock  to  a  third  person. 
Farquhar  v.  Canada,  etc.  Co.,  98  N.  E. 
Rep.  1036  (Mass.  1912)  ;  c/.  Campbell 
V.  American  Zylonite  Co.,  122  N.  Y. 
455  (1890). 


1159 


§  379.] 


FORMALITIES   OF   TRANSFER   AND   REGISTRY. 


CH.  XXII, 


§  379.  Effect  of  charter  provision  requiring  registry.  —  The  same 
rules  prevail  even  though  the  certificate  or  by-laws,  or  charter  itself, 
declares  that  a  transfer  shall  not  be  legal  or  complete  or  effectual  until 
it  is  registered  on  the  corporate  books. ^  As  between  the  transferrer 
and  transferee,  the  unregistered  assignment  is  complete  and  effectual 
in  contradiction  of  such  declarations.  The  courts  construe  these  pro- 
visions of  the  certificate  or  by-laws  or  charter  to  be  intended,  not  to 
affect  the  rights  of  the  transferee  as  against  the  transferrer,  but  to  affect 
the  rights  of  the  transferee  as  against  attaching  creditors  of  his  trans- 
ferrer and  other  third  parties  claiming  an  interest  in  the  stock,  and  also 
to  affect  his  right  to  claim  dividends,  the  privilege  of  voting,  and  other 
rights  of  a  stockliolder,^    The  vendor  of  stock  cannot  recover  it  back. 


1  Johnston  v.  Laflin,  103  U.  S.  800, 
804  (1880),  affirming  5  Dill.  65  (1878) ; 
6.  c,  13  Fed.  Cas.  758;  Masury  v. 
Arkansas  Nat.  Bank,  93  Fed.  Rep. 
603  (1899);  Noyes  v.  Spaulding,  27 
Vt.  420  (1855),  where  the  court  said: 
"That  provision  is  similar  to  the  stat- 
ute in  this  state  in  relation  to  the 
transfer  of  real  estate,  under  which  it 
has  uniformly  been  held  that  the  title 
passes  to  the  grantee  as  between  the 
parties  to  the  conveyance,  though  the 
deed  is  unrecorded .  .  .  .  The  object 
of  having  the  transfer  recorded  on  the 
books  of  the  corporation  is  notice, 
and  that  is  the  only  object.  For  that 
reason  the  transfer,  though  unre- 
corded, is  good  against  the  party  and 
all  those  who  have  notice  in  fact  of 
the  transfer."  The  words  on  a  certifi- 
cate of  stock  that  it  is  transferable 
only  on  the  books  of  the  company  are 
"only  for  the  convenience  and  protec- 
tion of  the  corporation  itself,"  and  if 
the  certificate  is  indorsed  in  blank  on 
the  back,  it  can  be  sold  and  any  pur- 
chaser can  fill  in  his  name  and  have  a 
new  certificate  issued  to  him,  the  court 
saying:  "As  a  rule,  stocks  are  so 
sold  and  bought  in  this  busy  age,  and 
pass  from  seller  to  buyer,  quasi  nego- 
tiable. .  .  .  The  convenience  and 
necessities  of  commercial  centers  v/ill 


always  require  such  a  usage."  Shat- 
tuek  V.  American  Cement  Co.,  205  Pa. 
St.  197  (1903) ;  U.  S.  v.  Cutts,  1  Sumn. 
133  (1832);  s.  c,  25  Fed.  Cas.  745; 
First  Nat.  Bank  v.  Gifford,  47  Iowa, - 
575  (1877).  The  same  provision  was 
involved  in  nearly  all  the  cases  cited  in 
preceding  sections.  See  also  Johnson 
V.  Underbill,  52  N.  Y.  203  (1873) ;  Bank 
of  Utica  V.  Smalley,  2  Cow.  770  (1824) ; 
Baldwin  v.  Canfield,  26  Minn.  43 
(1879),  where  the  court  said  that 
charter  "provisions  of  this  kind  are 
intended  solely  for  the  protection  and 
benefit  of  the  corporation  ;  they  do  not 
incapacitate  a  shareholder  from  trans- 
ferring his  stock  "without  any  entry 
upon  the  corporation  books."  In 
Colorado  it  is  held  that  the  statute 
requiring  transfer  on  the  corporate 
books  in  order  to  transfer  title  renders 
void  a  transfer  without  such  registra- 
tion on  the  corporate  books.  Cen- 
tral, etc.  V.  Smith,  43  Colo.  90  (1908). 
The  Colorado  statute  requiring  a  trans- 
fer of  stock  to  be  recorded  on  the  cor- 
porate books  within  sixty  days  in  order 
to  be  valid  refers  only  to  matters 
between  the  corporation  and  its  stock- 
holders, such  as  the  company's  internal 
management  and  the  protection  of 
transferees  against  the  creditors  of 
transferrers  and  other  persons  claiming 


2  Continental  Nat.  Bank  v.  Eliot 
Nat.  Bank,  7  Fed.  Rep.  369  (1881); 
Merchants',  etc.  Bank  v.  Richards,  6 
Mo.  App.  454  (1879) ;  aff'd,  74  Mo.  77 ; 
and  cases  cited  supra,  and  §  465,  infra. 
As  between  the  transferrer  and  trans- 


feree, the  transfer  is  complete  even 
though  not  registered,  and  even  though 
the  charter  requires  registry.  Bates- 
Farley,  etc.  Bank  v.  Dismukes,  107 
Ga.  212  (1899). 


1160 


CH.  XXII.] 


FORMALITIES   OF   TRANSFER   AND   REGISTRY. 


[§  380. 


even  though  the  transfer  has  not  been  recorded  within  a  specified  time 
as  required  by  the  statute  of  the  state. ^  A  statute  may  provide  that 
stockholders  shall  not  be  relieved  from  a  statutory  liability  by  a  sale  of 
their  stock  until  such  sale  shall  have  been  recorded  with  the  secretary 
of  state  by  an  officer  of  the  company.-  The  corporation  itself  is  not 
bound  to  take  notice  of  an  unrecorded  transfer,  of  which  it  has  no  actual 
notice.^ 

§  380.  Certificate  of  stock  may  be  assigned  with  the  name  of  the 
transferee  left  blank.  —  By  a  commercial  usage,  which  has  been  re- 
peatedly recognized  as  valid  by  the  courts,  certificates  of  stock  may  be 
assigned  by  a  transfer  duly  signed  by  the  transferrer,  but  with  the  name 
of  the  transferee  left  blank.'*     Generally  the  combined  instrument  of 


the  title,  and  that  statute  does  not 
prevent  a  transferee  of  a  certificate 
taking  title  even  though  the  transfer 
is  not  recorded.  O'Neil  v.  Wolcott 
Mining  Co.,  174  Fed.  Rep.  .527  (1909). 
A  pledge  of  stock  need  not  be  recorded 
in  the  county  clerk's  office,  under  the 
Arkansas  statute.  Brady  v.  Irby,  142 
S.  W.  Rep.  1124  (Ark.  1912).  A 
charter  provision  that  stock  shall  be 
transferred  only  on  the  books  affects 
only  the  right  of  the  corporation  as 
to  dividends,  voting,  etc.  First  State 
Bank  v.  First  Nat.  Bank,  145  S.  W. 
Rep.  691  (Tex.  1912). 

1  Shires  v.  AUen,  47  Colo.  440  (1910). 

2  Henley  v.  Myers,  215  U.  S.  373 
(1910). 

'  An  um-ecorded  pledgee  of  stock  is 
not  entitled  to  be  notified  of  proceed- 
ings for  a  consolidation  with  another 
company.  A  corporation  is  not  lia- 
ble to  an  unrecorded  pledgee  of  its 
stock,  even  though  a  consolidation  is 
brought  about  and  the  new  stock 
issued  to  the  pledgor,  thereby  depriv- 
ing the  pledgee  of  the  value  of  the  stock 
held  in  pledge,  the  corporation  having 
acted  in  good  faith.  Cleveland  City 
Ry.  V.  Fu-st  Nat.  Bank,  68  Ohio  St. 
582  (1903). 

*  Walker  v.  Detroit  Transit  Ry., 
47  Mich.  338  (1882)  ;  Pennsylvania 
R.  R.'s  Appeal,  86  Pa.  St.  80  (1878) ; 
Cutting  V.  Damerel,  88  N.  Y.  410 
(1882)  ;  German  Union,  etc.  Assoc. 
V.  Sendmeyer,  50  Pa.  St.  67  (1865).  A 
power  of  attorney  on  the  back  of  a 
certificate  of  stock  signed  in  blank  is 
sufficient    to   transfer  shares  of  stock 


in  a  corporation.     Andrews  v.  Worces- 
ter, etc.  R.  R.,  159  Mass.  64  (1893). 
"Even  in  the  absence  of  such  usage,  a 
blank    transfer    on    the    back    of    the 
certificate,    to    which    the    holder    has 
affixed    his    name,    is   a   good    assign- 
ment ;    and    a    party    to    whom    it   is 
delivered  is  authorized  to  fill  it  up  by 
writing  a  transfer  and  power  of  attor- 
ney over   the   signature."     McNeil   v. 
Tenth  Nat.  Bank,  46  N.  Y.  325,  331 
(1871).     "There   is   no    force   in    the 
suggestion  that  the  power  of  attorney 
in   the   present   case   was   incomplete, 
because    there    were    blanks    for    the 
number  of  shares  and   for   the  name 
of   the    attorney.     Any    holder   might 
fill  up  the  blanks  and  constitute  him- 
self the   attorney.     These    points  are 
too  well-settled  to  need    discussion." 
Holbrook  v.  New  Jersey  Zinc  Co.,  57 
N.  Y.  616,  623   (1874).     A  transfer  of 
stock  by  signing  the  transfer  on  the 
back   of   the   certificate   need   not   be 
dated,    nor    need    all    the    blanks    be 
filled  in  to  convey  complete  title  at 
law  and  in  equity.     Aspell  v.  Camp- 
beU,  64  N.  Y.  App.  Div.  393  (1901).     A 
bona  fide   pledgee   of   a   certificate   of 
stock  from  a  broker  with  a  separate 
assignment    thereof    in    blank,    signed 
by  the  person  to  whom  the  certificate 
runs,   is  protected.     O'Mara  v.   New- 
comb,  38  Colo.  275  (1906).     A  stock- 
holder does  not  transfer  his  stock  by 
merely  putting  his  name  in  the  first 
line    of    a    transfer    reading    "Know 
all  men  by  these  presents  that     .... 
do     hereby     appoint,"    etc.,     without 
signing  his  name  at   the  end   of  the 


1161 


§381.] 


FORMALITIES   OF   TRANSFER   AND   REGISTRY. 


[CH.  XXII. 


transfer  and  power  of  attorney  on  the  back  of  the  certificate  Is  signed 
by  the  stockholder  and  dehvered  to  the  purchaser,  with  the  names  of 
the  transferee  and  the  attorney  left  blank.  Such  a  certificate  of  stock, 
transferred  in  blank,  may  be  sold  and  passed  from  hand  to  hand.  Any 
purchaser  of  the  certificate,  duly  signed  but  transferred  in  blank,  may 
fill  up  the  blanks  and  insert  his  own  name.^  He  may  fill  in  his  own  name 
as  transferee,  and  the  name  of  an  agent  as  the  attorney  to  make  the  reg- 
istry, or  he  may  leave  the  latter  blank  and  allow  the  registry  clerk  to 
fill  in  his  own  name,  as  is  generally  done. 


B.    METHOD    OF   REGISTERING   A   TRANSFER   OF   STOCK. 

§  381.  Registry  an  important  part  of  a  transfer  of  stock.  —  The 
effect  of  obtaining  a  registry  or  neglecting  to  obtain  a  registry  of  the 
transfer  on  the  corporate  books,  immediately  after  purchasing  a  cer- 
tificate of  stock,  has  given  rise  to  much  litigation  and  much  apparent 
confusion.     A  registry  of  the  transfer  is  important  in  two  respects : 


transfer,  as  called  for  by  the  form, 
and  hence  a  purchaser  of  the  certificate 
from  a  pledgee  of  the  same  is  not 
protected  and  a  suit  lies  to  compel  the 
purchaser  to  give  up  the  stock,  and  if 
the  corporation  has  been  merged  into 
another  corporation,  the  purchaser  must 
account  for  what  he  received  from  such 
other  corporation.  Treadwell  v.  Clark, 
114  N.  Y.  App.  Div.  493  (1906).  This 
decision  was  affirmed  on  appeal  and 
it  was  held  that  where  a  certificate  of 
stock  is  stolen  from  a  pledgee  and  the 
transfer  on  the  back  is  insufficient  in 
that  the  pledgor's  name  was  written, 
not  at  the  end  of  the  transfer  but  at 
the  beginning,  the  pledgor  may  by  a 
bill  in  equity  redeem  the  stock  from  a 
person  who  purchased  it  from  the  thief. 
A  suit  in  equity  lies  inasmuch  as  an 
act  is  involved  as  to  the  amount  due 
and  the  dividends  received.  The  ten- 
years  statute  of  limitations  applies, 
there  being  no  acquiescence  or  unrea- 
sonable delay.  Treadwell  v.  Clark, 
190  N.  Y.  51  (1907).  Where  the  ven- 
dor of  stock  sends  the  certificates 
indorsed  in  blank  to  a  supposed  bank 
by  mail,  and  the  vendee,  who  has 
oi-ganized  the  bank  for  fraudulent 
purposes,  thereby  obtains  possession 
of  the  certificates  and  sells  them,  with- 
out the  draft  attached  to  the  stock 
being  paid,  a  bona  fide  purchaser  of  the 
certificates  is  protected.     Beckwith  v. 

1 


Galice,  etc.  Co.,  .50  Oreg.  542  (1908). 
In  Montana  a  strange  decision  was 
rendered  that  a  purchaser  of  a  certificate 
of  stock  indorsed  in  blank,  the  ven- 
dor not  being  the  original  owner,  was 
not  a  bona  fide  purchaser.  Barker 
V.  Montana,  etc.  Co.,  35  Mont.  351 
(1907).  As  to  the  English  rule,  see 
§  32.5,  supra,  and  §  412,  infra. 

^  Broadway  Bank  v.  McEh-ath,  13 
N.  J.  Eq.  24  (1860) ;  Matthews  v.  Mas- 
sachusetts Nat.  Bank,  1  Holmes,  396 
(1874);  s.  c,  16  Fed.  Cas.  1113; 
Bridgeport  Bank  v.  New  York  &  N. 
H.  R.  R.,  30  Conn.  231  (1861) ;  Kort- 
right  V.  Buffalo  Com.  Bank,  20  Wend.  91 
(1838) ;  aff'd,  Commercial  Bank  v. 
Kortright,  22  Wend.  348  (1839)  ;  Otis 
V.  Gardner,  105  111.  436  (1883) ;  Mount 
Holly,  etc.  Co.  v.  Ferree,  17  N.  J.  Eq. 
117  (1864) ;  Prall  v.  Tilt,  28  N.  J.  Eq. 
479  (1877) ;  Leavitt  v.  Fisher,  4  Duer, 
1,  20  (1854).  An  unrecorded  pledgee 
of  stock  is  not  entitled  to  be  notified 
of  proceedings  for  a  consolidation 
with  another  company.  A  corpora- 
tion is  not  liable  to  an  unrecorded 
pledgee  of  its  stock,  even  though  a 
consolidation  is  brought  about  and 
the  new  stock  issued  to  the  pledgor, 
thereby  depriving  the  pledgee  of  the 
value  of  the  stock  held  in  pledge,  the 
corporation  having  acted  in  good  faith. 
Cleveland  City  Ry.  v.  First  Nat.  Bank, 
68  Ohio  St.  582  (1903). 
162 


CH.  XXII.]  FORxMALITIES   OF   TRANSFER  AND    REGISTRY.  [§  382. 

First,  as  regards  the  rights  of  the  purchaser  in  reference  to  the  corpora- 
tion ;  second,  in  regard  to  the  rights  of  the  purchaser  as  to  third  per- 
sons who  are  either  creditors  of  the  old  registered  stockholders  or  have 
claims  upon  the  stock  in  question.  So  far  as  the  corporation  is  con- 
cerned, it  is  bound  to  recognize  only  the  registered  stockholder.^  To 
him  is  accorded  the  right  to  vote,  draw  dividends,  and  exercise  the  gen- 
eral right  of  stockholdership.  The  unregistered  purchaser  of  stock 
cannot  claim  such  rights.  All  the  cases  agree  in  this  result  of  a  neglect 
to  register  a  transfer.  As  regards  the  rights  of  third  persons,  however, 
the  courts  of  the  different  states  vary  widely  in  their  opinions. 
Generally  the  question  arises  by  reason  of  an  attachment  or  execution 
levied  by  a  creditor  of  the  transferrer  against  the  stock  standing  on  the 
corporate  books  in  the  name  of  the  transferrer,  who  has  already  sold 
and  assigned  the  certificate  of  stock  to  another.  As  a  general  rule,  it 
may  be  said  that  a  purchaser  of  a  certificate  of  stock  is  usually  protected 
as  fully  without  a  registry  on  the  corporate  books  as  he  would  be  by  a 
registry,  so  far  as  subsequent  attachments  and  most  other  possible 
equities  against  the  stock  are  concerned.-  This  is  the  rule  in  New  York 
and  most  of  the  states.  In  some  other  states,  a  contrary  rule  prevails. 
In  Massachusetts,  Illinois,  New  Hampshire,  and  elsewhere,  statutes 
have  changed  the  old  rule  so  that  it  now  accords  with  that  of  New  York.^ 
It  is  to  be  borne  in  mind  also  that  a  lien  in  behalf  of  the  corporation  may 
attach  after  transfer  of  the  certificate  and  before  registration  thereof.^ 
It  is  unreasonable  for  a  stockholder  owning  twenty-five  shares  in  one 
certificate,  to  demand  that  the  corporation  issue  twenty-five  share 
certificates  of  one  share  each  in  exchange  therefor.^ 

§  382.  Formalities  of  making  registry  —  Transfer  book  and  stock 
ledger  not  necessary.  —  The  customary  method  of  registering  a  trans- 
fer of  stock  on  the  corporate  books  is  simple.  The  registered  stock- 
holder, or  his  attorney  in  fact,  whose  name  is  written  in  the  blank 
power  of  attorney,  applies  to  the  corporate  officer  having  charge  of  the 
transfer  books,  and  requests  a  registry  of  the  transfer  to  a  person  desig- 
nated by  a  name  written  in  the  form  of  transfer.     Books  of  transfer 

1  Registry  herein  means  not  only  corporation  may  amend  its  by-laws  so 
an  actual  registry,  but  also  a  request  as  to  give  it  a  lien  on  stock  which  will 
to  the  corporation  to  allow  registry,  be  prior  to  any  existing  unregistered 
where  improperly  refused  by  it.  See  pledge  or  assignment  of  the  certificates 
§  382,   infra.  of    stock,    an    American    pledgee    or 

2  These  various  questions  are  con-  holder  of  such  certificates  of  stock  is 
sidered  in  chs.  XXI,  supra,  and  bound  by  such  by-law.  Hudson,  etc. 
XXVII,  infra.  Co.  v.  Warner  &  Co.,  99  Fed.  Rep.  187 

3  This  statute  is  referred  to  in  §  488,  (1900). 

infra.  s  Schell  v.  Alston  Mfg.  Co.,  149  Fed. 

^  See  eh.  XXXI,  infra.     Inasmuch    Rep.  439  (1906). 
as  by  the  laws  of  England  an  English 

1163 


§  382.] 


FORMALITIES    OF   TRANSFER    AND    REGISTRY. 


CH.   XXII. 


are  kept  for  purposes  of  registering,  and  upon  such  an  application  and 
the  surrender  of  the  old  certificate  the  old  stockholder  or  his  attorney 
makes  the  registry  and  a  new  certificate  is  issued.^ 

Any  suitable  registry  or  stock  list,  or  formal  entry  on  the  corpo- 
rate books,  suffices.  No  special  book  need  be  kept  for  that  purpose.^. 
Where  the  stock  book  of  the  corporation  is  locked  up  and  cannot  be 
reached,  the  directors  may  adopt  a  new  stock  book  and  minute  book, 
and  make  transfers  of  stock.^  Where  the  company  does  not  keep  a 
transfer  book,  but  has  only  a  certificate-of-stock  book,  the  transfer  of 
stock  is  complete  when  the  owner  of  stock  transfers  the  certificate  on 
the  back  and  delivers  it  to  the  secretary  in  order  that  a  new  certificate 
may  be  issued  to  the  transferee  and  the  new  certificate  is  made  out.* 


1  Burrall  v.  Bushwick  R.  R.,  75 
N.  Y.  211  (1878);  Green  Mount,  etc. 
Co.  V.  Bulla,  45  Ind.  1  (1873).  See 
also  §  375,  supra. 

2 ' '  All  that  is  necessary,  when  the 
transfer  is  required  by  law  to  be  made 
upon  the  books  of  the  corporation,  is 
that  the  fact  should  be  appropriately 
recorded  in  some  suitable  register  or 
stock  list,  or  otherwise  formally  entered 
upon  its  books.  For  this  purpose 
the  account  in  a  stock  ledger,  showing 
the  names  of  the  stockholders,  the 
number  and  amount  of  the  shares 
belonging  to  each,  and  the  sources  of 
their  title,  whether  by  original  sub- 
scription and  payment  or  by  deriva- 
tion from  others,  is  quite  suitable, 
and  fully  meets  the  requirements  of 
the  law."  National  Bank  v.  Wat- 
sontown  Bank,  105  U.  S.  217  (1881). 

3  Re  Argus  Co.,  138  N.  Y.  557 
(1893). 

*  Chemical  Nat.  Bank  v.  Colwell, 
132  N.  Y.  250  (1892).  A  stockholder 
is  liable  by  statute  on  stock  where  he 
has  merely  transferred  the  certificate 
and  no  effort  has  been  made  to  com- 
plete the  transfer  on  the  corporate 
books ;  but  where  there  is  no  transfer 
book,  and  the  certificates  are  merely 
canceled  and  new  ones  issued,  this  is 
sufficient  to  effect  a  transfer  on  the 
corporate  books.  Plumb  v.  Bank  of 
Enterprise,  48  Kan.  484  (1892).  Where 
the  corporation  keeps  a  stock-certifi- 
cate book  but  no  transfer  book,  a 
transfer  on  the  back  of  a  certificate, 
which  is  then  canceled  and  pasted 
back  in  the  certificate  book,  and  a  new 


certificate  issued  to  the  transferee,  is 
a  sufficient  transfer  to  constitute  a 
transferee  a  stockholder.  He  may 
vote  at  elections,  and  an  assignment  by 
the  corporation  on  the  direction  of 
officers  elected  by  such  a  transferee  is 
valid.  Such  a  transfer  is  valid  also, 
although  a  by-law  provided  that 
before  selling  his  stock  a  stockholder 
must  offer  it  to  other  stockholders  for 
purchase.  American  Nat.  Bank  v. 
Oriental  Mills,  17  R.  I.  551  (1891).  A 
certificate-of-stock  book  is  sufficient  to 
show  stockholdership,  if  there  are  no 
transfer  or  stock  books,  even  though 
the  statute  requires  the  latter  to  be 
kept.  Knowles  v.  Sandercock,  107  Cal. 
629  (1895).  A  mere  memorandum  of 
a  sale  of  stoQk,  made  by  the  corpora- 
tion in  the  certificate  book,  was  held 
a  sufficient  transfer  to  sustain  a  lien 
in  Bank  of  Commerce  v.  Bank  of  New- 
port, 63  Fed.  Rep.  898  (1894).  Where 
the  corporation  keeps  no  stock  ledger, 
a  transfer  is  sufficiently  registered 
when  the  old  certificate  is  surrendered, 
a  new  one  issued,  and  the  new  name 
entered  on  the  subscription  list. 
Stewart  v.  Walla  Walla,  etc.  Co.,  1 
Wash.  St.  -521  (1889).  Where  the 
corporation  transfers  stock  on  the 
stock  certificate  book  it  cannot  there- 
after collect  the  subscription  price  from 
the  transferrer,  even  though  it  has  kept 
no  stock  book.  Iverson  v.  Bradrick, 
54  Wash.  633  (1909).  Where  no  stock 
or  transfer  books  are  kept,  although 
the  statute  requires  them,  and  the 
certificate  of  stock  is  so  kept  that 
upon  a  transfer  the  old  certificates  of 


1164 


CH.  XXII.]  FORMALITIES   OF   TRANSFER   AND    REGISTRY.  [§  382. 

In  fact  the  usefulness  of  a  transfer  book  may  well  be  doubted,  and  unless 
the  statutes  require  it  there  is  a  strong  argument  in  favor  of  abolishing 
it.  Probably  the  transfer  book,  and  the  power  of  attorney  on  the  back 
of  certificates  of  stock,  and  the  provision  in  the  certificate  of  stock  that 
it  can  be  transferred  on  the  books  of  the  company  only  in  person  or  by 
duly  authorized  attorney,  might  be  abolished  without  harm.  In  these 
days  a  sale  and  assignment  of  the  certificate  of  stock  should  be  suffi- 
cient to  warrant  a  corporation  making  a  transfer  on  its  corporate  books 
upon  the  presentation  of  the  old  certificate  so  assigned.  The  fact  is 
that  the  transfer  on  the  transfer  book  is  a  mere  repetition  of  the  transfer 
on  the  back  of  the  certificate  of  stock,  and  as  the  stock  ledger  can  be 
posted  directly  from  the  canceled  certificates  of  stock,  the  transfer  book 
might  well  be  abolished.  A  stock  journal  might  be  convenient  to  show 
the  daily  transfers.  The  certificate-of-stock  book,  the  stock  journal, 
and  stock  ledger  would  then  correspond  to  the  day-book,  journal,  and 
ledger  in  ordinary  bookkeeping.  But  in  these  days,  when  it  is  the  rule 
to  issue  certificates  of  stock,  and  a  transfer  thereof  transfers  the  equi- 
table title  to  the  stock  itself  in  all  the  states,  and  the  legal  title  in  most 
of  the  states,  every  legal  and  equitable  right  can  be  preserved  as  well 
without  a  transfer  book  and  power  of  attorney  as  with  them.  The 
practical  result  would  be  the  saving  of  transfer  books  and  much  book- 
keeping. Many  small  corporations  in  these  days  do  not  keep  any 
transfer  book  at  all,  and  yet  they  experience  no  difficulty  in  transferring 
stock.  Of  course  where  the  statutes  of  a  state,  as  in  New  Jersey,  re- 
quire the  keeping  of  a  transfer  book,  the  above  suggestions  could  not  be 
adopted.  A  demand  for  registry  of  a  transfer  of  stock  should  be  made 
upon  the  principal  officer  or  clerk  at  the  office  of  the  corporation.  When 
so  made  it  is  sufficient.^    The  method  of  registry  may  be  regulated  by 

stock  are  not  pasted  back  on  to  the  especially  where  there  is  evidence  of 
stubs  corresponding  thereto,  the  trans-  bad  faith  in  the  transfer.  Seals  v. 
ferrer  may  be  liable  for  subsequent  Buffalo,  etc.  Co.,  49  N.  Y.  App.  Div. 
debts,  even  though  a  new  certificate  589(1900).  Where  a  corporation  keeps 
was  issued  to  the  transferee  and  the  a  stock  certificate  book,  but  no  regular 
stub  opposite  thereto  stated  ,  from  stock  book,  the  former  controls  as  to 
whom  the  stock  was  transferred,  the  right  to  vote.  ^Matter  of  Utica, 
Herrick  v.  Wardwell,  58  Ohio  St.  294  etc.  Co.,  115  X.  Y.  App.  Div.  821  (1906). 
(1898).  Under  the  New  York  statute  Memoranda  upon  the  stubs  of  the 
a  holder  of  unpaid  stock  is  not  relieved  certificate-of-stock  book  are  not  admis- 
from  liability  by  a  transfer  of  the  same  sible  in  evidence  the  same  as  by 
unless  such  transfer  is  registered  in  a  statute  a  stock  transfer  book  is  admis- 
stock  book;  and  it  is  held  that  even  sible.  Geneva,  etc.  Co.  v.  Steele,  111 
though  no  stock  book  is  kept  by  N.  Y.  App.  Div.  706  (1906).  Even 
the  corporation,  yet,  if  the  transferrer  though  the  statute  requires  transfer 
was  an  officer  of  the  company  and  books  to  be  kept,  yet  the  certificate- 
partly  responsible  for  not  having  such  of-stock  book  is  sufficient.  In  re 
book  kept,  he  cannot  set  up  the  Election,  etc.  74  N.  J.  Eq.  315  (1907). 
defense  that  no  such  book  was  kept,  ^!'It  is  sufficient  for  him  to  apply 

1165 


§  382.] 


FORMALITIES   OF   TRANSFER  AND   REGISTRY, 


[CH.  XXII. 


the  by-laws  of  the  corporation.  Thus,  a  by-law  that  the  stock  shall 
be  transferable  by  indorsement  in  writing,  made  in  the  presence  of  the 
cashier  or  two  other  witnesses,  has  been  sustained  as  valid,  and  is  com- 
plied with  only  by  the  presence  and  signature  of  the  cashier  or  of  the 
witnesses.^  So,  also,  of  a  by-law  requiring  registry  in  the  presence  of 
the  president  and  secretary  of  the  company .^  But  a  by-law  requiring 
the  assent  of  the  president  of  the  corporation  to  the  registry  of  a  trans- 
fer would  be  in  restraint  of  trade  and  void.^  It  is  legal  for  a  corpora- 
tion to  enact  a  by-law  requiring  stockholders  to  pay  a  small  fee  on  mak- 
ing transfers  of  their  stock  upon  the  corporate  books. ^  A  delivery  of 
certificates  to  the  corporation,  and  a  mere  request  to  the  corporate  offi- 
cers to  make  the  transfer,  is  not  a  complete  registry  until  the  entry  is 
actually  made,^  excepting  as  to  liability,^  attachments,^  and  liens.^ 
'  The  fact  that  the  registry  clerk  marks  on  the  instrument  of  transfer 
the  words  "  received  for  record  "  does  not  constitute  a  registry.^    A 


at  the  bank  during  the  usual  hours 
of  business  and  make  his  demand 
upon  the  officers  and  clerks  who  may 
be  in  attendance  there;  and,  in  case 
they  are  not  authorized  to  transact 
that  particular  business,  they  must 
either  refer  him  to  the  proper  officer 
in  the  bank  or  procure  the  attendance 
of  such  officer,  or  of  the  board  of  direc- 
tors, if  necessary,  without  any  unrea- 
sonable delay.  ...  In  the  absence 
of  any  proof  to  the  contrary,  it  may 
be  fairly  presumed  that  the  principal 
officer  or  clerk  in  attendance  at  the 
bank,  during  the  usual  hours  of  busi- 
ness, is  authorized  to  permit  such  a 
transfer  when  proper."  Commercial 
Bank  v.  Kortright,  22  Wend.  348,  351 
(1839) ;  Case  v.  Bank,  100  U.  S.  446 
(1879),  where  application  to  the 
cashier  was  held  to  be  proper;  Mc- 
Murrich  v.  Bond  Head  Harbor  Co.,  9 
Up.  Can.  Q.  B.  333  (1852),  where  the 
application  was  to  the  secretary ; 
Goodwin  v.  Ottawa,  etc.  Ry.,  13  U.  C. 
C.  P.  254  (1863),  where  an  application 
to  secretary  and  treasury  was  sus- 
tained;  Green  Mount,  etc.  Co.  v. 
Bulla,  45  Ind.  1  (1873),  where  the  appli- 
cation was  to  the  president.  Presenta- 
tion of  the  certificate  of  stock,  duly 
indorsed,  to  the  person  in  charge  of 
the  office  of  the  corporation  is  a  suffi- 
cient demand  of  transfer.  Dunn  v. 
Star  F.  Ins.  Co.,  19  N.  Y.  Week.  Dig. 
531  (1884).     See  86  Atl.  Rep.  1026. 


1  Dane  v.  Young,  61  Me.  160  (1872). 

2  Planters',  etc.  Ins.  Co.  v.  Selma 
Sav.  Bank,  63  Ala.  585  (1879). 

'  Sargent  v.  Franklin  Ins.  Co.,  25 
Mass.  90  (1829).     See  also  §  622,  infra. 

*  Giesen  v.  London,  etc.  Mortg.  Co., 
102  Fed.  Rep.  584  (1900).  It  is  un- 
reasonable for  a  stockholder  owning 
twenty-five  shares  in  one  certificate, 
to  demand  that  the  corporation  issue 
twenty-five  share  certificates  of  one 
share  each  in  exchange  therefor. 
Schell  V.  Alston  Mfg.  Co.,  149  Fed. 
Rep.  439  (1906). 

^  Brown  v.  Adams,  5  Biss.  181 
(1870) ;  s.  c,  4  Fed.  Cas.  350.  Nor 
will  a  mere  entry  of  credit  to  the 
transferee,  on  the  treasurer's  books, 
suffice.  Marlborough  Mfg.  Co.  v. 
Smith,  2  Conn.  579  (1818). 

^  See  §  258,  supra. 

^  See  §  490,  infra.  Under  the  Iowa 
statute  a  transfer  of  stock  is  not  ef- 
fective as  against  creditors,  even 
though  a  request  has  been  made  to 
the  corporation  to  transfer  the  stock, 
if  such  transfer  has  not  been  made, 
and  even  though  the  corporation  at- 
tached to  the  stub  of  the  certificate 
an  acknowledgment  of  the  assign- 
ment of  the  certificate,  and  even 
though  the  attaching  creditor  knew 
of  such  request.  Perkins  v.  Lyons, 
111  Iowa,  192  (1900). 

8  See  §  532,  infra. 

s  Northrop  v.  Xewtown,  etc.  Co.,  3 


1166 


FORMALITIES   OF   TRANSFER   AND    REGISTRY. 


[§  382. 


memorandum  on  the  stock  book  that  the  stock  has  been  transferred  as 
collateral  security  is  sufficient  to  give  the  transfer  precedence  over  an 
attachment.^  It  has  been  held  that,  where  the  corporation  has  a  branch 
registry  office  in  another  state,  a  registry  in  the  branch  office  is  not  an 
effectual  registry  until  it  has  been  reported  and  entered  in  the  books  of 
the  main  office  of  the  corporation.-  It  has  been  held  in  Iowa  that 
where  an  Iowa  corporation  keeps  its  stock  books  in  Boston,  a  transfer 
on  such  books  in  Boston  is  not  effective  as  against  subsequent  attach- 
ments on  the  stock  in  Iowa,  unless  a  book  is  kept  in  Iowa  showing  all 
transfers  as  required  by  the  statutes  of  lowa.^  If  the  corporation  does 
not  keep  books  for  the  registry  of  transfers  of  stock,  a  mere  notice  to 
the  corporation  that  a  transfer  has  been  made  constitutes  a  registry.* 
But  if  the  statute  or  charter  requires  a  transfer  to  be  made  on  the  cor- 
porate books,  no  registry  is  possible  until  such  books  are  obtained  and 
opened.^  If  the  corporation  never  issues  certificates  of  stock,  the  stock- 
holder cannot  demand  them.^  If  the  corporation  cannot  allow  the  reg- 
istry on  account  of  an  injunction,  it  is  nevertheless  bound  to  respect 
the  rights  of  a  transferee  who  gives  notice  to  it  of  the  transfer.^    The 


Conn.  544  (1821) ;  Northrop  v.  Curtis, 
5  Conn.  246  (1824).  But  a  memoran- 
dum entered  on  the  stub  in  the  stock 
book  opposite  to  the  certificate  issued, 
that  that  certificate  has  been  trans- 
ferred, is  a  sufficient  registry'  as  against 
attaching  creditors  of  the  transferrer. 
Fisher  v.  Jones,  82  Ala.  117  (1887).  A 
mere  letter  from  the  transferee  to  the 
corporation  that  he  has  purchased  the 
certificate  is  insufficient,  even  though 
such  letter  is  pinned  to  the  transfer 
book.  Newell  v.  Williston,  138  Mass. 
240  (1885). 

1  Moore  v.  Marshalltown,  etc.  Co., 
81  Iowa,  45  (1890).  The  secretary 
cannot  bind  the  corporation  by  entries 
made  in  the  corporate  books  by  him- 
self to  the  effect  that  he  is  interested  in 
certain  stock.  Fletcher  v.  Kidder,  127 
Pac.  Rep.  73  (Cal.  1912).  A  bona 
fide  purchaser  of  a  certificate  of  stock  is 
protected  as  against  the  prior  assignee 
of  the  stock  mthout  the  delivery  of  the 
certificate,  even  though  the  corpora- 
tion has  accepted  such  prior  assignee 
as  the  owner  of  the  stock  and  has  made 
an  entry  to  that  effect  in  the  corporate 
books.  Ironstone  Ditch  Co.  r.  Equita- 
ble, etc.  Co.,  52  Colo.  268  (1911). 

^  Pinkerton  v.  Manchester,  etc.  R.R., 
42  N.  H.  424  (1861).     A  wm.  giving 


all  personal  property  in  the  United 
Kingdom  to  one  party  and  all  per- 
sonal property  in  South  Africa  to  an- 
other party,  gives  to  the  former  lega- 
tee shares  of  stock  in  a  South  African, 
corporation,  where  such  corporation 
has  a  transfer  office  in  London  as  well 
as  in  South  Africa,  and  the  certifi- 
cates themselves  are  on  deposit  in 
London ;  but  bonds  issued  by  a  South. 
African  Company  ■will  not  pass  to  the 
London  legatee,  even  though  such, 
bonds  are  on  deposit  in  London.  Re 
Clark,  [1904]  1  Ch.  294. 

3  Perkins  v.  Lyons,  111  Iowa,  192 
(1900). 

^  Crawford  v.  Pro\aneial  Ins.  Co.,  8 
U.  C.  C.  P.  263  (1859) ;  Agricultural 
Bank  v.  Wilson,  24  Me.  273  (1844), 
holding  that  a  transfer  on  the  books 
of  a  corporation  of  stock  for  which 
certificates  had  not  been  issued  is 
sufficient  to  pass  the  property  in  the 
stock,  and  a  valid  consideration  for 
a  note  given  in  payment. 

^  McCourry  v.  Doremus,  10  N.  J.  L. 
245  (1828). 

e  Thorp  V.  WoodhuU,  1  Sandf.  Ch. 
411     (1844).     See    §§  61,    192,    supra. 

^  Purchase  v.  New  York  Exch.  Bank, 
3  Rob.  (N.  Y.)  164  (1865). 


1167 


§  382.] 


FORMALITIES   OF   TRANSFER   AND   REGISTRY. 


[CH.  XXII. 


issue  of  a  new  certificate  of  stock  is  not  essential  to  the  completeness  of 
a  registry  of  the  transfer.^  The  officers  have  a  reasonable  time,  after 
a  transfer  has  been  requested,  in  which  to  find  out  whether  the  transfer 
is  in  order. ^  If  the  corporation  delays  unreasonably  in  allowing  a 
registry,  it  is  liable  in  damages  to  the  applicant  for  registry.^ 

The  instrument  of  transfer  must  be  in  proper  form.^  Unless  the 
old  stockholder,  or  his  duly  authorized  attorney,  offers  to  make  the 
registry,  the  corporation  may  refuse  to  allow  it.^  The  power  of  attor- 
ney must  run  from  the  previous  registered  stockholder,  and  not  from 
an  intermediate  unregistered  transferee  of  the  certificate.^  Transfers 
under  bankruptcy  or  insolvent  laws  are  to  be  registered  like  voluntary 
transfers.^  In  England  a  written  acceptance  of  the  stock  by  the  trans- 
feree is  required.^ 


1  First  Nat.  Bank  v.  Gifford,  47 
Iowa,  575  (1877) ;  Chouteau  Spring 
Co.  V.  Harris,  20  Mo.  382  (1855). 

2  Ireland  v.  Hart,  [1902]  1  Ch.  522. 
'  Sutton  V.  Bank  of  England,  1  Car. 

&  P.  193  (1824),  where  the  bank  de- 
layed longer  than  one  day,  the 
customary  time,  and  refused  to  give 
any  reason  therefor ;  Catchpole  v.  Am- 
bergate,  etc.  Ry.,  1  El.  &  B.  Ill 
(1852),  where,  by  reason  of  the  de- 
lay, the  stock  was  forfeited,  notice  of 
forfeiture  going  to  the  old  stockholder. 
See  also  Healey,  Companies  Law, 
3d  ed.,  p.  93.  Although  the  directors 
are  entitled  to  reasonable  time  to  de- 
cide whether  to  make  a  transfer,  yet, 
if  they  had  already  made  up  their 
minds,  the  measure  of  damages  for 
refusal  is  the  price  of  the  stock  on 
the  day  when  the  application  was 
made.  Re  Ottos,  etc.  Mines,  [1893] 
1  Ch.  618.  Even  though  the  transfer 
agent  of  a  corporation  refuses  to 
make  the  transfer  until  a  decision  is 
had  as  to  taxation,  and  it  turns  out 
that  there  was  no  tax,  and  in  the 
meantime  the  stock  declines  in  value, 
yet  the  transfer  agent  is  not  liable  in 
damages,  it  being  the  agent  of  the 
corporation  and  not  of  the  stockhold- 
ers, and  it  being  a  non-feasance  for 
which  the  agent  is  not  liable  to  third 
parties.  Dunham  v.  City  Trust  Co., 
115  N.  Y.  App.  Div.  584  (1900),  aff'd, 
193  N.  Y.  642,  app'g  Denny  v.  The 
Manhattan  Co.,  2  Denio,  115  (1846). 
Where  the  corporation  delays  over 
thirty    days    in    transferring    stock, 


and  in  the  meantime  a  resolution  to 
wind  up  the  company  and  recon- 
struct it  was  passed  in  a  way  that  it 
could  not  have  been  passed  if  such 
transfer  had  been  made,  the  court 
will,  under  the  English  statute,  allow 
the  transferee  to  vote  as  though  the 
transfer  had  been  made  at  once. 
Re    Sussex    Brick    Company,     [1904] 

I  Ch.  598. 

''  Queen  v.  General  Cemetery  Co.,  6 
EI.  &  B.  415  (1856),  holding  that  the 
deed  of  transfer,  where  a  deed  is  nec- 
essary, must  be  properly  drawn.  See 
also  Soeiete  Generale  v.  Walker,  L.  R. 

II  App.  20  (1885). 

^  Mechanics'  Banking  Assoc,  v.  Mari- 
posa Co.,  3  Rob.  (N.  Y.)  395  (1865). 
Where  the  name  of  the  attorney  to 
make  the  transfer  on  the  back  is  filled 
into  the  blank,  such  attorney  must 
personally  apply  to  the  corporation  to 
make  the  transfer ;  otherwise  the  cor- 
poration is  not  liable  for  refusal  to 
allow  the  transfer.  Kjellman  v.  Scan- 
dia  Fish  Co.,  128  lU.  App.  Rep.  544 
(1906). 

8  Dunn  V.  Commercial  Bank,  11 
Barb.  580  (1852). 

^  Dutton  V.  Connecticut  Bank,  13 
Conn.  493  (1840) ;  State  v.  Ferris,  42 
Conn.  560  (1875). 

8  Ortigosa  v.  Brown,  47  L.  J.  (Ch.) 
168  (1878).  The  Joint-stock  Com- 
panies Act  of  1856  required  such  an 
acceptance.  The  act  of  1862,  repeal- 
ing the  act  of  1856,  prescribed  that 
transfers  should  be  made  as  was  cus- 
tomary, unless  the  by-laws  prescribed 


1168 


XXII.] 


FORMALITIES   OF   TRANSFER  AND   REGISTRY. 


[§  382. 


A  mere  notice  to  the  corporation  that  an  assignment  has  been  made 
is  not  equivalent  to  a  transfer.^  Where,  however,  the  transferee  giving 
such  notice  does  not  obtain  registry  because  the  corporation  refuses, 
for  any  reason,  to  make  the  registry,  the  mere  notice  must  be  borne  in 
mind  by  the  corporation,  and  the  rights  of  the  applicant  preserved  by 
it,  as  regards  future  registries.^  The  Arkansas  statute  requiring  trans- 
fers of  stock  to  be  recorded  with  the  county  clerk  does  not  apply  to  a 
pledge  of  stock. ^    Where  by  statute  no  transfer  of  stock  on  the  corpo- 


otherwise.  Hence,  in  the  absence  of 
by-laws,  the  written  acceptance  is 
held  to  be  customary  and  necessary. 
In  England,  where  a  transfer  of  stock 
is  made  by  first  applying  to  the  com- 
pany, and  having  the  companj^  cer- 
tify that  the  certificate  of  stock  had 
been  lodged  with  the  company,  and 
then  the  money  is  paid,  it  is  held 
that  the  party  purchasing  the  stock 
on  the  faith  of  this  certificate  of  the 
company  cannot  hold  the  company  lia- 
ble, although  it  turns  out  that  the  ven- 
dor was  not  entitled  to  the  stock,  and 
consequently,  the  whole  capital  stock 
being  already  issued,  that  the  transfer 
could  not  be  made.  The  court  held 
that  the  certification  was  ultra  vires 
and  hence  not  enforceable.  Bishop 
V.  Balkis  Consol.  Co.,  L.  R.  25  Q. 
B.  D.  77,  512  (1890),  the  court,  how- 
ever, dissenting  from  the  view  that 
the  certification  was  ultra  vires,  but 
holding  that  the  certification  did  not 
warrant  the  title  nor  the  validity  of 
the  various  documents.  The  mode  of 
transferring  stock  on  the  corporate 
books  in  England  is  described  in 
Shepherd  v.  Harris,  [1905]  2  Ch.  310, 
and  it  was  held  that  a  trustee  who 
joins  with  his  co-trustee,  a  stock- 
broker, in  seUing  the  stock  as  author- 
ized, is  not  liable  for  his  co-trustee 
defaulting  mth  the  proceeds  and  forg- 
ing the  note  and  stock  receipt.  In 
England  shares  of  the  capital  stock 
cannot  be  transferred  without  the 
production  of  the  certificate,  where 
the  certificate  recites  on  its  face  that 
no  transfer  can  be  registered  without 
its  production,  and  hence  the  com- 
pany is  liable  to  a  pledgee  of  the  cer- 
tificate, even  though  he  does  not  ap- 
ply for  a  transfer  until  after  the 
owner  has  transferred  the  shares  to  a 
third  person,  without  producing  the 
(74)  1 


original  certificate.  Rainford  v.  Keith, 
etc.  Co.,  Ltd.,  [1905]  2  Ch.  147,  rev'g 
[1905]  1  Ch.  296.  See  also  §  360, 
supra. 

1  Stockwell  V.  St.  Louis  Mer.  C.  Co., 
9  Mo.  App.  133  (1880).  A  mere  oral 
notice  by  a  third  party  that  a  stock- 
holder had  transferred  his  stock  to  a 
designated  person  does  not  relieve 
the  former  from  his  liability  on  the 
subscription,  no  formal  transfer  hav- 
ing been  made,  the  stock  having  been 
issued  at  twenty  cents  on  the  dollar. 
Vermont,  etc.  Co.  v.  Deelez,  etc.  Co., 
135  Cal.  579  (1902).  Where  a  bank 
knows  that  a  stockholder  has  pledged 
his  certificate  of  stock,  the  bank  can- 
not claim  a  lien  upon  such  stock  for 
a  debt  incurred  to  the  bank  subse- 
quently by  the  pledgor  of  the  stock, 
even  though  the  stock  is  not  trans- 
ferred on  the  books,  and  even  though 
the  statute  requires  that  transfers 
should  be  made  only  on  the  books  of 
the  bank.  But  the  fact  that  the  pledgor 
was  the  cashier  of  the  bank  is  not 
notice  to  the  bank,  nor  is  the  fact 
that  the  president  knew  of  the  pledge 
notice  to  the  bank  where  he  took  no 
active  part  in  the  management  of  the 
bank  and  was  not  acting  for  the  bank 
when  he  learned  of  the  pledge.  Cur- 
tice V.  Crawford,  etc.  Bank,  110  Fed. 
Rep.  830  (1901).  A  statutory  lien 
does  not  take  precedence  over  a 
pledge,  notice  of  which  had  been 
given  to  the  corporation  before  the 
debt  was  incurred,  even  though  the 
transfer  was  not  registered  on  the 
corporate  books.  White  River,  etc. 
Bank  v.  Capital,  etc.  Co.,  77  Vt.  123 
(1904).     See  §  523,  infra. 

2  See  §  258,  supra,  and  §§  383,  490, 
532,  infra. 

'  Batesville,  etc.  Co.  v.  Myer,  etc. 
Co.,  68  Ark.  115  (1900). 
169 


§383. 


FORMALITIES   OF   TKANSFER   AND   REGISTRY. 


[CH.  XXII. 


rate  books  shall  be  legal  until  a  statement  of  such  transfer  has  been  filed 
with  the  secretary  of  state,  the  transferrer  remains  liable  on  the  stock 
until  such  statement  is  filed  with  the  secretary  of  state.^  An  over- 
issue of  corporate  certificates  of  indebtedness  is  not  binding  on  the 
corporation,  even  though  the  president  signed  them  in  blank  and  the 
treasurer  countersigned  and  issued  them  fraudulently  for  his  own  pur- 
poses, such  certificates  not  being  negotiable  in  form,  but  being  in  the 
form  of  certificates  of  stock.^ 

§  383.  Formalities  of  registry  may  he  waived  by  the  corpora- 
1{qyi^  —  The  corporation  may  waive  the  formalities  connected  with  a 
registry  of  transfer,  and  when  it  does  so  the  transferee  becomes  a  stock- 
holder as  completely  as  though  registry  had  been  regularly  made.^ 
Frequently  the  waiver  arises  by  placing  the  transferee's  name  on  the 
list  of  stockholders,  although  no  formal  registry  has  been  had.^  Even 
a  charter  requirement  that  the  consent  of  the  directors  to  a  registry  of 
transfer  shall  be  obtained  may  be  waived  by  the  corporation.^    The  cor- 


1  Henley  v.  Myers,  76  Kan.  723 
(1907).     See  also  ch.  XV,  supra. 

2  American  Exchange  Nat.  Bank  v. 
Woodlawn  Cemetery,  194  N.  Y.  116 
(1909).     See  also  §  293,  siipra. 

3  Richmondville  Mfg.  Co.  v.  Prall, 
9  Conn.  487  (1833) ;  Clowes  v.  Bret- 
teU,  11  M.  &  W.  461  (1843) ;  Sadler's 
Case,  3  De  G.  &.  S.  36  (1849) ;  Cham- 
bersburg  Ins.  Co.  v.  Smith,  11  Pa.  St. 
120  (1849) ;  Walters's  Case,  3  De  G. 
&  S.  149  (1850) ;  Bain  v.  Whitehaven, 
etc.  Ry.,  3  H.  L.  Cas.  1  (1850) ;  Wills 
V.  Miirray,  4  Exch.  843  (1850) ;  Yel- 
land's  Case,  5  De  G.  &  Sm.  395 
(1852);  Powis  v.  Harding,  1  C.  B. 
(N.  S.)  533  (1857) ;  Henderson  v. 
Royal  British  Bank,  7  El.  &  B.  356 
(1857);  Daniell  v.  Royal  British 
Bank,  1  H.  &  N.  685  and  note  (1857) ; 
East  Gloucestershire  Ry.  v.  Barthol- 
omew, L.  R.  3  Exch.  15  (1867) ;  Ind's 
Case,  L.  R.  7  Ch.  App.  485  (1872); 
Weber  v.  Fiekey,  52  Md.  500,  516 
(1879);  s.  c,  47  Md.  196;  Home 
Stock  Ins.  Co.  V.  Sherwood,  72  Mo.  461 
(1880) ;  Isham  v.  Buckingham,  49 
N.  Y.  216  (1872).  If  the  corporation 
issues  a  new  certificate  to  a  bona  fide 
pledgee  without  the  surrender  of  the 
old  certificate  it  thereby  waives  the 
by-law  requiring  such  surrender. 
Richardson  v.  Longmont,  etc.  Co.,  19 
Colo.  App.  483  (1904).  Where  a  party 
about  to  take  stock  in  pledge  inquires 


of  the  corporation  as  to  its  value,  and 
as  to  whether  there  was  any  lien  upon 
the  stock,  and  no  lien  is  claimed, 
and  he  then  takes  the  stock  in  pledge 
and  causes  an  indorsement  thereof  to 
be  made  on  the  stub  of  the  stock  book 
of  the  corporation,  the  corporation 
cannot  thereafter  claim  a  lien  as 
against  him;  and,  moreover,  a  sub- 
sequent transfer  of  the  stock  by  the 
pledgor  to  the  corporation  as  security 
for  a  debt  due  from  him  to  it  does 
not  take  precedence  over  the  first 
pledge,  the  certificates  themselves 
having  been  transferred  to  the  first 
pledgee,  but  not  transferred  on  the 
books.  Des  Moines,  etc.  Co.  v.  Des 
Moines,  etc.  Bank,  97  Iowa,  668 
(1896).  See  also  §§  258,  260,  262,  382, 
supra,  and  §§  490,  532,  infra. 

*  Upton  V.  Burnham,  3  Biss.  431,  520 
(1873);  s.  c,  28  Fed.  Cas.  831,  833; 
Yelland's  Case,  5  De  G.  &  Sm.  395 
(1852). 

6  Ex  parte  Walton,  26  L.  J.  (Ch.) 
545  (1857).  Likewise  where  the  by- 
laws contain  such  a  provision.  Cham- 
bersburg  Ins.  Co.  v.  Smith,  11  Pa.  St. 
120  (1849),  holding  also  that  an  over- 
sight, whereby  the  attorney  who 
makes  the  registry  omits  to  sign  the 
registry,  is  immaterial.  A  transferee 
is  liable  on  an  unpaid  subscription 
where  the  transfer  has  been  recorded 
on  the  books,  even  though  the  trans- 


1170 


FORMALITIES   OF   TRANSFER   AND   REGISTRY. 


[§  384. 


poration,  by  paying  dividends  to  an  unregistered  transferee  of  stock, 
thereby  waives  the  formalities  of  registry.^  When  the  corporation  re- 
fuses to  allow  a  registry  for  reasons  other  than  those  connected  with  the 
mere  formalities  of  registry,  or  for  reasons  not  given  to  the  applicant, 
it  waives  its  right  to  insist  on  them,  and  cannot  afterwards  claim  that 
the  applicant  did  not  conform  to  such  technicalities.-  A  failure,  how- 
ever, on  the  part  of  the  corporation  to  notify  the  transferee  of  a  refusal 
to  allow  registry  is  no  waiver  of  such  registry.^  An  unrecorded  stock- 
holder may  maintain  a  suit  for  a  receiver  for  mismanagement,  especially 
where  the  corporation  has  recognized  him  as  a  stockholder.^ 

§  384.  Either  the  transferrer  or  the  transferee  may  apply  to  the 
corporation  for  a  registry  of  transfer.  —  A  person  who  appears  on 
the  corporation  books  as  the  holder  of  stock,  but  who  in  fact  has  sold 
the  stock,  has  a  right  to  have  his  transfer  recorded  on  the  corporate 
books,  thereby  releasing  him  from  liability  on  the  stock. ^    The  vendor 


feree  did  not  comply  with  a  by-law 
requiring  the  names  of  transferees  to 
be  submitted  to  the  board  of  directors 
and  the  approval  of  such  board  and 
requiring  transferees  to  sign  the  by- 
laws. The  corporation  may  waive 
such  requirements.  People's,  etc. 
Bank  v.  Rickard,  139  Cal.  285 
(1903). 

1  Cutting  V.  Damerel,  88  N.  Y.  410 
(1882).  Where  a  person  buys  certifi- 
cates of  stock  in  a  national  bank,  the 
certificates  being  indorsed  in  blank, 
and  the  bank  makes  a  memorandum 
in  the  eertificate-of-stock  book  that  it 
had  been  transferred  to  him,  and 
sends  him  dividends,  he  is  liable 
thereon,  although  no  transfer  of  the 
certificate  is  made  on  the  corporate 
books,  and  although  he  bought  the 
stock  for  the  cashier  of  the  bank  and 
was  merely  a  nominal  holder.  He  is 
not  such  a  trustee  as  is  exempt  from 
Liability  under  the  National  Bank  Act. 
Horton  v.  Mercer,  71  Fed.  Rep.  153 
(1895). 

2  Quoted  and  approved  in  Richard- 
son V.  Longmont,  etc.  Co.,  19  Colo. 
App.  483  (1904).  State  v.  Mclver,  2 
S.  C.  25  (1870);  Bond  v.  Mt.  Hope 
Iron  Co.,  99  Mass.  505  (1868),  holding 
that  the  corporation  must  put  the  re- 
fusal on  the  ground  of  non-conformity 
with  formalities  at  the  time  of  the  ap- 
plication, and  cannot  afterward  raise 
such.     Chouteau  Spring  Co.  v.  Harris, 

1 


20  Mo.  382  (1855) ;  Robinson  v.  New 
Berne  Nat.  Bank,  95  N.  Y.  637  (1884), 
where  the  court  said:  "The  require- 
ment of  a  registry,  existing  only  for 
its  own  protection  and  convenience, 
must  be  deemed  waived  and  non- 
essential when  it  wrongfully  refuses 
to  obey  its  own  rule."  Where  the  cor- 
poration fails  to  keep  a  stock  register 
as  required  by  statute,  a  purchaser  of 
stock  who  sends  it  to  the  corpora- 
tion for  transfer  is  protected  the 
same  as  though  it  had  been  reg- 
ularly transferred  on  a  stock  register. 
Central,  etc.  v.  Smith,  43  Colo.  90 
(1908). 

^Gustard's  Case,  L.  R.  8  Eq.  438 
(1869). 

*  Van  Horn  v.  New  Western,  etc. 
Co.,  54  Wash.  117  (1909).  See  also 
§  735,  infra. 

^  "The  purchase  was  in  itself  au- 
thority to  the  vendor  to  make  the 
transfer.  ...  A  court  of  equity  will 
compel  a  transferee  of  stock  to  record 
the  transfer,  and  to  pay  all  calls  after 
the  transfer.  ...  If  so,  it  is  clear 
that  the  vendor  may  himself  request 
the  transfer  to  be  made."  Webster  v. 
Upton,  91  U.  S.  65,  71  (1875).  "If  a 
subsequent  transfer  of  the  certificate 
be  refused  by  the  bank,  it  can  be  com- 
pelled at  the  instance  of  either  of 
them."  Johnston  v.  Laflin,  103  U.  S. 
800,  804  (1880). 


171 


§  385.]  FORMALITIES   OF   TRANSFER   AND   REGISTRY.  [cH.  XXII. 

may  request  the  corporation  to  register  the  transfer,  and  the  corporation 
may  make  it  at  his  request  upon  the  certificate  of  stock  being  dehvered 
up  for  cancellation.  If  the  vendee  refuses  to  cause  registry  to  be  made, 
the  vendor  may  bring  suit  in  a  court  of  equity  to  compel  the  registry  of 
the  transfer.^  .It  has  been  held  also  that  an  intermediate  vendor  of 
the  stock,  whose  name  has  never  appeared  on  the  corporate  books,  may 
Hkewise  compel  a  registry  to  be  made.^  After  an  ultimate  vendee  has 
beqp  registered,  the  original  vendor  cannot  have  an  intermediate  vendee 
and  vendor  registered  as  the  stockholder.^  The  corporation  may  register 
the  transfer,  even  against  the  wishes  of  the  transferee.''  The  transferee 
also  has  a  right  to  apply  for  and  compel  a  registry  of  the  transfer  of 
stock  to  himself.^ 

C.    RIGHTS   AND  DUTIES   OF  THE   CORPORATION   IN   ALLOWING   OR  REFUSING 

REGISTRY. 

§  385.  Corporation  may  require  proof  of  identity;  also  of  gen- 
uineness of  signature,  etc.  —  When  a  transfer  of  stock  is  presented  to 
the  corporation  for  registry,  if  the  corporation  is  in  doubt  as  to  the 
identity  of  the  person  presenting  it,  whether  he  be  the  stockholder 
already  registered  on  the  books  or  the  attorney  of  such,  the  corporation 
may  require  proof  of  such  identity.^  The  officers  have  a  reasonable 
time,  after  a  transfer  has  been  requested,  in  which  to  find  out  whether 
the  transfer  is  in  order.^     If  they  are  in  doubt  as  to  the  competency  of 

1  Wynne  v.  Price,  3  De  G.  «&  S.  310  Cushman  v.  Thayer  Mfg.  Co.,  76 
(1849).  See  also  Bermingham  v.  N.  Y.  365  (1879).  But  the  com- 
Sheridan,  33  Beav.  660  (1864);  Eus-  plaint  must  be  full  and  accurate  in 
tace  V.  Dublin,!  etc.  Ry.,  L.  R.  6  Eq.  its  averments.  Edwards  v.  Sonoma 
182  (1868).        '  Valley    Bank,    59    Cal.     136     (1881). 

2  Paine  v.  Hutchinson,  L.  R.  3  Ch.  Where  a  contract  does  not  merely 
App.  388  (1868).  pledge   stock,   but   gives   the   creditor 

3  Shaw  V.  Fisher,  5  De  G.,  M.  &  G.  the  legal  title  and  unlimited  power 
596  (1855).  of   disposition,    the   creditor   may    by 

*  Upton  V.   Burnham,  3   Biss.   520,  suit  in  equity  compel  the  company  to 

525   (1873) ;     s.  c,  28  Fed.   Cas.  833,  allow  a  transfer,   and   the   transferrer 

835,  need  not  be  made  a  party  to  the  suit. 

6  O'Neil  r.  Wolcott  Mining  Co.,  174  Skinner  v.  Fort  Wayne,  etc.  R.  R., 
Fed.  Rep.  527  (1909).  Norris  v.  58  Fed.  Rep.  55  (1893). 
Irish  Land  Co.,  8  El.  &  B.  512  (1857) ;  ^  Telegraph  Co.  v.  Davenport,  97 
Daly  V.  Thompson,  10  M.  &  W.  309  U.  S.  369  (1878) ;  Davis  t;.  Bank  of  Eng- 
(1842);  Johnson  v.  Laflin,  5  DiU.  65  land,  2  Bing.  393  (1824),  where  the 
(1878) ;  s.  c,  13  Fed.  Cas.  758;  s.  c,  court  says  the  corporation  '"may  take 
103  U.  S.  800  ;  Hill  v.  Pine  River  Bank,  reasonable  time  to  make  inquiries, 
45  N.  H.  300  (1864);  Presbyterian  and  require  proof  that  the  signature 
Cong.  V.  Carlisle  Bank,  5  Pa.  St.  345  to  a  power  of  attorney  is  the  writing 
(1847) ;  Mechanics'  Bank  v.  Seton,  1  of  the  person  whose  signature  it  pur- 
Pet.  299  (1828);  Arnold  v.  Suffolk  ports  to  be"  ;  Bayard  d.  Farmers',  etc. 
Bank,  27  Barb.  424  (1857) ;  Sargent  v.  Bank,  52  Pa.  St.  232  (1866). 
Franklin  Ins.  Co.,  25  Mass.  90  (1829) ;  '  Ireland  v.  Hart,  [1902]  1  Ch.  522. 

1172 


CH.  XXII. I 


FORMALITIES   OF  TRANSFER  AND   REGISTRY. 


3SG. 


the  transferrer  to  sell  the  stock/  legal  proof  of  such  competency  must 
be  given.  If  the  applicant  for  registry  applies  as  the  attorney  of  the 
registered  stockliolder,  the  corporation  may  require  satisfactory  evi- 
dence of  the  genuineness  of  the  latter's  transfer,  or  may  require  the 
presence  of  the  stockholder  himself.^  A  corporation  cannot  refuse  to 
transfer  stock  to  a  person  on  the  ground  that  a  trustee  in  bankruptcy 
has  been  appointed  of  his  estate.^ 

§  386.  Corporation  cannot  refuse  registry  on  account  of  the  motive 
of  the  transferrer  or  transferee  in  the  transaction.  —  The  corpora- 
tion has  nothing  to  do  with  the  motive  or  purpose  of  the  vendor  or 
vendee  of  the  stock.^  It  can  refuse  a  registry  only  when  there  is  doubt 
as  to  the  legal  right  of  the  applicant  to  have  such  registry.     It  cannot 


Even  though  the  transfer  agent  of  a 
corporation  refuses  to  make  the  trans- 
fer until  a  decision  is  had  as  to  taxa- 
tion, and  it  turns  out  that  there  was 
no  tax,  and  in  the  meantime  the  stock 
declines  in  value,  yet  the  transfer 
agent  is  not  liable  in  damages,  it  be- 
ing the  agent  of  the  corporation  and 
not  of  the  stockholders,  and  it  being 
a  non-feasance  for  which  the  agent  is 
not  liable  to  third  parties.  Dunham 
i;.  City  Trust  Co.,  115  N.  Y.  App.  Div. 
584  (1906) ;  aff'd,  193  N.  Y.  642,  app'g 
Denny  v.  The  Manhattan  Co.,  2 
Denio,  115  (1846).  See  also  §  382, 
supra. 

1  See  §§  318,  319,  supra. 

2  See  notes,  §  385,  supra;  and 
§§  365-370,  supra.  Where  stock  is 
owned  by  a  township  and  the  corpora- 
tion allows  the  township  trustee  to 
transfer  it  without  authority,  the  town- 
ship may  compel  the  corporation  to  re- 
transfer  the  stock.  Vernon,  etc.  R.  R. 
V.  Washington,  etc.  Tp.,  95  N.  E. 
Rep.  599  (Ind.  1911). 

3  Sutton  V.  English,  etc.  Co.,  [1902] 
2  Ch.  502. 

*  State  V.  Mclver,  2  S.  C.  25  (1870) ; 
People  V.  Paton,  5  N.  Y.  St.  Rep.  316 
(1887);  s.  c,  20  Abb.  N.  C.  195. 
O'Neil  V.  Wolcott  Mining  Co.,  174 
Fed.  Rep.  527  (1909).  See  also 
§§  391,  736,  infra.  But  a  transfer, 
merely  nominal,  to  obtain  for  the 
transferee  certain  special  privileges, 
such  as  free  admission  to  a  place  of 
amusement,  may  be  a  fraud  on  other 
stockholders  and  will  be  set  aside. 
Academy  of  Music's  Appeal,  108  Pa. 


St.  510  (1885).  Equity  will  not  com- 
pel a  corporation  to  register  a  trans- 
fer of  stock  when  the  purpose  of  the 
transfer  is  to  obtain  the  control  of  the 
corporation  and  wreck  it.  Gould  v. 
Head,  41  Fed.  Rep.  240,  248  (1890). 
In  an  action  to  compel  the  unincor- 
porated Standard  Oil  "trust"  to  trans- 
fer on  its  books  trust  certificates 
which  the  plaintiff  has  purchased,  the 
defendants,  who  allege  that  the  plain- 
tiff is  a  competitor  of  the  trust  and 
purchased  the  certificates  in  order  to 
break  up  the  trust  and  compel  it  to 
buy  the  plaintiff  out,  may  be  com- 
pelled to  give  a  bill  of  particulars. 
Rice  V.  Rockefeller,  N.  Y.  Daily  Reg., 
May  29,  1888.  The  plaintiff  in  this 
case  finally  succeeded.  (134  N.  Y. 
174-1892.)  Where  a  corporation  is 
sued  for  damages  for  a  refusal  to 
transfer  stock,  the  company  cannot 
set  up  that  the  plaintiff  acquired  his 
stock  by  an  illegal  gambling  contract, 
there  being  nothing  to  show  that  the 
prior  owner  objected  or  made  any 
claim  upon  the  company ;  nor  is  it 
any  defense  that  the  stock  was  held 
as  collateral  security  for  a  debt  which 
was  barred  by  the  statute  of  limita- 
tions, that  defense  being  personal  to 
the  debtor.  Miller  v.  Houston,  etc. 
Ry.,  55  Fed.  Rep.  366  (1893).  The 
mere  fact  that  a  man  purchases  stock 
through  his  brother  as  his  agent,  and 
allows  the  stock  to  stand  in  his 
brother's  name  and  thereby  gives  him 
credit  is  not  fraud  on  the  part  of  the 
former.  Shields  v.  City  Nat.  Bank, 
138  N.  C.  185  (1905). 


1173 


§  387.]  FORMALITIES   OF   TRANSFER   AND   REGISTRY.  [cH.  XXII. 

refuse  on  the  ground  that  the  transfer  would  injure  the  corporation,  nor 
on  the  theory  that  the  object  of  the  transfer  is  to  increase  the  votes  of 
the  transferee.^  It  has  been  held  in  Iowa,  however,  with  much  force 
that  where  a  farmers'  mercantile  corporation  is  boycotted  by  competi- 
tors, and  in  their  behalf  a  person  buys  stock  in  the  former  in  order  to 
aid  such  boycott,  the  court  will  refuse  a  mandamus  to  compel  the  cor- 
poration to  transfer  the  stock,  and  will  refuse  an  order  authorizing  him 
to  examine  its  books,  the  court  saying  that  he  was  "  a  malicious  med- 
dler," and  purchased  the  stock  to  betray  the  company  to  its  com- 
petitors.^ A  bank,  however,  may  refuse  to  allow  a  transfer  of  its  stock 
to  another  bank  where  the  latter  has  purchased  the  same  in  violation 
of  its  charter.^  Where  all  the  stockholders  agree  to  a  consolidation, 
but  before  it  is  carried  out  one  of  them  sells  his  stock,  the  purchaser, 
if  he  knew  of  the  agreement,  is  bound  by  it,  but  is  entitled  to  a  transfer 
of  the  stock  to  himself  on  the  books. ^  A  corporation  cannot  refuse  to 
transfer  stock  on  the  ground  that  the  vendor  had  agreed  with  others 
not  to  sell  his  stock. ^  In  England  the  directors  are  by  charter  often 
given  a  discretionary  power  to  refuse  a  transfer.^ 

§  387.  Corporatio7i  may  interplead  between  two  claimants  to 
stock.  —  The  task  imposed  upon  a  corporation  in  determining  whether 
to  refuse  or  to  allow  a  registry  of  stock  is  a  difficult  and  dangerous 
one.  It  is  easy  to  avoid  the  risk  of  forgery  or  of  failure  of  the  applicant 
to  identify  himself.  But  circumstances  frequently  are  such  that  the 
corporation  dare  not  allow  registry  to  either  of  two  parties,  each  of 
whom  claims  to  be  the  sole  and  absolute  owner  of  the  stock,  and  each 


1  Moffatt  V.  Farquhar,  L.  R.  7  Ch.  they  do  not  approve  of  the  transferee, 

D.  591  (1878).  "the  discretionary  power  is  of  a  fidu- 

^  Funek  v.  Farmers',  etc.  Co.,   142  ciary   nature   and   must    be   exercised 

Iowa,  621  (1909).  in  good  faith;   that  is,  legitimately  for 

'  Franklin     Bank     v.     Commercial  the  purpose  for  which  it  is  conferred. 

Bank,  36  Ohio  St.  350  (1881).  It  must  not  be  exercised  corruptly,  or 

^  Senn  v.  Union,  etc.  Co.,  115  Mo.  fraudulently,  or  arbitrarily,   or  capri- 

App.  685  (1906).  eiously,  or  wantonly.     It  may  not  be 

^  Sylvania,    etc.    R.     R.    v.    Hoge,  exercised  for  a  collateral  purpose.     In 

129  Ga.  734  (1907).  exercising   it    the   directors    must    act 

^  See  Healey,   Companies   Law,   3d  in   good  faith   in   the   interest   of   the 

ed.,  p.  90.     Directors  cannot  refuse  to  company  and  with  due  regard  to  the 

allow  a  transfer  on  account  of  hostil-  shareholder's    right     to     transfer     his 

ity  to  the  transferee,  even  though  the  shares,  and  they  must  fairly  consider 

transfer  does  not  set  out  the  address  the  question  of  the  transferee's  fitness 

of    the    transferrer    or    the    particular  at  a  board  meeting."     It  is  not  a  suf- 

number  of  the  share  transferred,   the  ficient  reason  that  the  transferee  is  not 

transferrer  having  only  one  share.     Re  a  member  of  a  particular  family,  and 

Letheby,  etc.,  Ltd.,  [1904]    1   Ch.  815.  the  directors  will  be  ordered  to  make 

Where  the  directors  are  authorized  by  the  transfer.     Re  Bell,  65  L.  T.  Rep. 

the  articles  of  incorporation  to  reject  245  (1891).     See  also  §  622,  infra. 
a  transfer  of  stock  on  the  ground  that 

1174 


CH.  XXII.] 


FORMALITIES   OF   TRANSFER  AND   REGISTHT. 


[§  387. 


of  whom  claims  the  right  of  registry  or  notifies  the  corporation  not  to 
register  the  other  claimant  as  a  stockholder.  These  cases  arise  on  vari- 
ous occasions,  but  most  often  where  the  stock  has  been  attached  or 
sold  on  execution  by  the  transferrer's  creditors  before  the  transferee 
has  obtained  registry ;  or  where,  by  the  fraud  of  the  old  stockholder's 
agent,  the  certificate  has  passed  into  the  hands  of  a  bona  fide  purchaser ; 
or  where,  by  a  breach  of  trust,  an  executor  or  administrator,  or  trustee 
or  guardian,  has  sold  the  trust  stock  and  appropriated  the  proceeds; 
or  under  other  states  of  fact  wherein  there  are  two  claimants  of  the 
stock,  each  having  rights  which  can  be  clearly  ascertained  only  by  liti- 
gation. It  is  not  incumbent  on  the  corporation  to  decide  between  these 
conflicting  parties  and  rights.^  Such  a  requirement  would  expose  it  to 
unreasonable  risks  and  compel  it  to  assume  the  functions  of  a  court. 
Where  there  is  a  reasonable  doubt  as  to  the  facts  involved  or  as  to 
the  respective  rights  of  the  claimants  of  the  stock,  and  the  corporation 
is  sued  by  one  of  the  claimants  for  refusing  to  allow  a  registry  by  him, 
the  corporation  may  interplead,  and  thus  compel  the  claimants  to  ascer- 
tain their  rights  through  the  medium  of  a  court  of  justice.^    A  similar 


1  The  discussion  of  the  duty  of  the 
corporation  in  various  circumstances 
is  given  under  chapters  devoted  to 
them.     See  also  §  363,  supra. 

2  Merchants'  Nat.  Bank  v.  Richards, 
6  Mo.  App.  454  (1879) ;  aff'd,  74  Mo. 
77 ;  State  Ins.  Co.  v.  Gennett,  2  Tenn. 
Ch.  100  (1874);  Leavitt  v.  Fisher,  4 
Duer  (N.  Y.),  1  (1854).  In  Lovell 
V.  Jacobs,  150  N.  Y.  84  (1896),  a  trust 
company,  acting  as  depositary  for 
stock  which  had  been  sold  on  certain 
conditions,  sustained  a  bill  of  inter- 
pleader, the  vendor  having  claimed 
that  the  stock  should  not  be  delivered 
and  the  vendee  claiming  the  contrary. 
In  Equity  Gas  Light  Co.  v.  McKeige, 
139  N.  Y.  237  (1893),  where  a  bailee 
of  stock  was  sued  by  one  of  the  claim- 
ants for  the  return  of  the  stock,  the 
court  said  :  "The  defendant  may  ordi- 
narily protect  himself  by  bringing 
suit  in  the  nature  of  a  bill  of  inter- 
pleader, making  the  different  claim- 
ants parties."  Where  by  will  the 
widow  is  given  a  life  interest  in  the 
personalty,  and  certain  stock  was 
transferred  to  her  and  she  transfers  to 
one  of  the  life  tenants  such  stock, 
retaining  the  right  to  the  dividends 
during  her  life,  and  upon  her  death  the 
other  life  tenants  claim  their  interest, 

1 


the  corporation  may  interplead  as 
between  them,  even  though  it  issued  a 
new  certificate  in  the  name  of  such 
life  tenant,  but  retained  the  certifi- 
cate itself.  Dickinson  v.  Griggsville 
Nat.  Bank,  209  111.  350  (1904).  The 
corporation  may  file  a  bill  of  inter- 
pleader. Miller  v.  Doran,  151  111. 
App.  527  (1909).  A  corporation  inter- 
pleaded between  a  purchaser  of  bank 
stock  at  an  execution  sale  and  an  alleged 
bona  fide  purchaser  of  the  stock  from  a 
judgment  debtor,  in  the  case  M'Don- 
ald  V.  First,  etc.  Bank,  116  Fed.  Rep. 
129  (1902).  In  the  ease  American 
Press  Assoc,  v.  Brantingham,  75  N.  Y. 
App.  Div.  435  (1902),  the  corpora- 
tion interpleaded  between  two  claim- 
ants for  certain  stock.  Where  the  real 
owner  of  stock  brings  suit  against  a 
transferee  of  that  stock  who  has  ob- 
tained a  new  certificate  therefor  and 
succeeds  in  the  suit,  and  in  the  mean- 
time the  defendant  has  assigned  the 
stock  to  a  third  party,  the  corporation 
may  institute  suit  and  interplead  be- 
tween the  successful  claimant  of  the 
stock  and  the  transferee  of  the  stock 
from  the  defendant.  The  defendant  in 
the  former  suit  need  not  be  joined 
as  a  party  in  the  latter  suit.  The 
purchaser  of  the  certificate  may  be 
175 


§387. 


FOKMALITIES   OF   TRANSFER  AND   REGISTRY. 


[CH.  XXII. 


interpleader  may  be  made  where  the  corporation  is  sued  for  dividends 
which  are  claimed  by  two  opposing  parties.^    Where  a  stockholder  and 


enjoined  from  transferring  the  same, 
and  may  be  compelled  to  deposit  the 
certificate  with  the  clerk  of  the  court. 
American,  etc.  Assoc,  v.  Brantingham, 
57  N.  Y.  App.  Div.  399  (1901).  A 
bill  of  interpleader  between  a  pledgee 
of  certificates  of  stock  and  a  purchaser 
of  the  stock  on  execution  sale  of  the 
the  pledgor's  interest  was  involved  in 
Athol,  etc.  Bank  v.  Bennett,  203  Mass. 
480  (1909).  A  suit  for  the  partition 
of  stock  under  the  statutes  of  Louisi- 
ana cannot  be  enjoined  by  the  company 
on  the  ground  that  there  was  another 
claimant  of  the  stock.  Bank  of  Baton 
Rouge  V.  Leurey,  126  La.  903  (1910). 
A  depositary  of  stock  maintained  a 
suit  in  equity  to  have  determined  the 
title  thereto  as  between  various  claim- 
ants in  the  case  Miner  v.  Paulson,  60 
Wash.  134  (1910).  A  corporation  may 
compel  two  claimants  to  interplead. 
Amparo,  etc.  Co.  v.  Fidelity,  etc.  Co., 
75  N.  J.  Eq.  555  (1909).  If  the 
court  decides  that  the  interpleader 
is  properly  filed  by  the  corpora- 
tion herein,  it  generally  on  a  motion 
dismisses  the  proceeding  with  costs 
to  the  corporation,  and  the  court 
also  decides  between  the  defendants  if 
the  case  is  ready  as  between  them. 
If  not  ready,  it  directs  an  action  or  an 
issue,  or  a  reference  to  a  master,  to 
ascertain  contested  facts,  as  may  be 
best  suited  to  the  nature  of  the  case : 
"or  the  court  may  leave  it  to  the  de- 
fendants to  prepare  the  case  between 
them  as  they  may  be  advised,  which 
would  be  the  effect  of  a  general  order 
to  interplead."  State  Ins.  Co.  v. 
Gannett,  2  Tenn.  Ch.  100  (1874), 
citing,  as  cases  on  above  rules  of 
practice.  East,  etc.  Co.  v.  Littledale, 
7    Hare,    57,    62    (1848);     Martinius 


V.  Helmuth,  2  Ves.  &  B.  412,  note 
(1817) ;  Horton  v.  Baptist  Church, 
34  Vt.  309,  317  (1861);  Rowe  v. 
Matteson,  7  N.  J.  Eq.  131  (1848); 
Crawford  v.  Fisher,  1  Hare,  436,  441 
(1842) ;  Condict  v.  King,  13  N.  J.  Eq. 
375,  383  (1861) ;  Hendriekson  v.  Shot- 
well,  1  N.  J.  Eq.  595  (1802);  City 
Bank  v.  Bangs,  2  Paige,  570  (1831); 
Angell  V.  Hadden,  16  Ves.  Jr.  202 
(1809). 

In  State  Ins.  Co.  v.  Gennett,  2  Tenn. 
Ch.  82  (1874),  the  court  also  said: 
"The  law  is  that  the  mere  pretext  of  a 
conflicting  claim  is  not  sufficient ;  the 
court  must  be  able  to  see  from  the 
facts  stated  that  there  is  a  question 
to  be  tried."  A  corporation  which  for 
a  long  time  was  abandoned  and  which 
is  unable  to  tell  who  its  stockholders 
are  may  file  a  bill  in  equity  to  ascer- 
tain who  its  stockholders  are  and  to 
cancel  illegal  certificates  and  deter- 
mine the  rights  of  conflicting  claims 
to  the  stock.  Geneva,  etc.  Co.  v. 
Steele,  111  N.  Y.  App.  Div.  706  (1906). 
In  England,  by  section  35  of  the  Com- 
panies Act,  1862  (25  &  26  Vict.,  c.  89), 
a  corporation  may  interplead  between 
two  claimants  of  stock,  and  need  not 
pay  costs.  Re  Kimberley,  etc.  Min. 
Co.,  58  L.  T.  Rep.  305  (1888).  An  in- 
terpleader was  sustained  in  Bangor, 
etc.  Co.  V.  Robinson,  52  Fed.  Rep.  520 
(1892).  Where  a  judgment  creditor 
levies  on  stock  standing  in  the  name 
of  a  dummy  for  the  debtor,  the  cor- 
poration may  practically  interplead 
between  such  creditor  and  an  alleged 
bona  fide  holder  of  the  stock.  A  court 
of  equity  has  jurisdiction  in  order  to 
decree  a  transfer.  Spencer  v.  James, 
10  Tex.  Civ.  App.  327  (1895).  In 
Langston  v.  Boylston,  2  Vesey,  Jr.  101 


'  Salisbury  Mills  v.  Townsend,  109 
Mass.  115  (1871) ;  Todd  v.  Diamond 
State  Iron  Co.,  8  Houst.  (Del.)  372 
(1889).  Quaere,  as  to  whether  an 
action  for  dividends  can  be  maintained 
before  the  right  of  the  claimant  to  the 
stock  is  established.  Hughes  v.  Ver- 
mont Copper  Min.  Co.,  72  N.  Y.  207 


(1878).  Where  stock  stands  in  the 
name  of  a  person  as  trustee,  and  an- 
other person  claims  that  the  trustee 
is  holding  it  for  him  as  pledgee,  and 
both  parties  claim  the  dividend,  the 
corporation  may  interplead.  Page,  etc. 
Co.  V.  F.  H.  Prince  &  Co.,  74  N.  H. 
262    (1907).      See    also    §  538,    infra. 


1176 


CH.   XXII.] 


FORMALITIES   OF  TRANSFER  AND   REGISTRY, 


[§  387. 


his  transferee  have  brought  suit  against  the  corporation  to  compel  a 
transfer  on  the  corporate  books  and  the  trustee  in  bankruptcy  of  the 
former  has  brought  suits  in  different  courts  claiming  the  same  stock,  the 
corporation  may  maintain  a  suit  to  enjoin  the  suits  other  than  the  main 
proceeding  in  bankruptcy.  The  court  has  jurisdiction  if  the  certificates 
of  stock  are  within  the  jurisdiction,  even  though  the  parties  are  non- 
residents.^ 

There  is  some  doubt  and  considerable  difficulty  in  laying  down  rules 
as  to  when  a  corporation  may  safely  claim  a  right  to  refuse  to  act,  and 
to  compel  the  claimants  to  litigate  between  themselves  before  it  allows 
a  registry  to  either.  The  policy  of  the  law  doubtless  is  to  go  very  far 
in  allowing  the  corporation  to  refuse  to  incur  responsibility  by  taking 
action.  Where,  however,  the  rights  of  one  claimant  are  reasonably 
clear,  the  corporation  should  suspend  action  for  a  reasonable  time 
within  which  the  contesting  party  may  commence  suit ;  and  if  no  such 
action  is  brought  it  should  allow  a  registry  by  the  first-named  claimant.^ 


(179.3),  where  a  bailee  of  bonds  was 
sued  by  the  bailor  for  conversion  for 
not  delivering  up  the  bonds  to  the 
latter,  although  attachments  had  been 
levied  on  them,  the  bailee  sustained  a 
bill  of  interpleader.  In  Cady  v.  Pot- 
ter, 55  Barb.  463  (1869),  a  corporation 
sustained  its  bill  of  interpleader  as 
between  a  person  to  whom  it  had  is- 
sued stock  on  a  transfer  without  a 
surrender  of  the  old  certificate  and 
a  person  to  whom  it  afterwards  is- 
sued the  stock  on  a  surrender  of  the 
old  certificate.  The  author  himself, 
in  the  year  1897,  maintained,  in 
the  New  York  supreme  court,  a  suit 
of  interpleader  by  a  corporation  as 
between  two  claimants  of  stock,  to- 
gether with  an  injunction  against  the 
prosecution  of  a  suit  at  law  com- 
menced by  one  of  the  claimants 
against  the  corporation  for  damages 
for  refusal  to  transfer  the  stock.  A 
broker  cannot  interplead  between  his 
customer  and  an  indorser  of  the  cus- 
tomer's note,  in  regard  to  stocks  de- 
posited with  the  broker  by  the  cus- 
tomer, even  though  the  administra- 
tor of  the  indorser  claims  that  he  has 
an  interest  in  such  stock.  Post  v. 
Emmett,  40  N.  Y.  App.  Div.  477 
(1899).  A  person  holding  stock  in 
escrow  under  an  option  agreement  may 
interplead  between  the  parties  in 
interest  if  they  make  conflicting  claims. 

1 


Walker   v.   Bamberger,    17  Utah,   239 

(1898). 

1  Kelley  v.  Smith  Co.,  196  Fed.  Rep. 
466  (1912). 

2  State  V.  Melver,  2  S.  C.  25  (1870). 
"Where  the  rights  of  a  claimant  are 
reasonably  clear,  and  the  corporation 
suspends  action  and  gives  to  another  an 
opportunity  to  establish  his  opposing 
claim,  and  he  neither  does  so  before 
the  corporation  nor  commences  any 
action  to  prevent  the  transfer  within 
a  reasonable  time,  it  is  the  duty  of  the 
corporation  to  record  the  transfer 
demanded  by  the  first  claimant.  .  .  . 
Evidence  of  some  adverse  title,  interest, 
or  lien,  that  at  least  raises  a  substantial 
doubt  of  the  right  of  a  demandant  to 
a  transfer  of  stock,  is  indispensable  to 
sustain  a  refusal  to  make  it.  The 
corporation  when  it  refuses,  and  upon 
the  trial  of  the  issue  the  court,  must 
be  able  to  see  from  the  facts  estab- 
lished that  there  is  some  question  to 
be  tried.  A  mere  claim  of  the  stock 
is  not  sufficient."  O'Neil  v.  Wolcott 
Mining  Co.,  174  Fed.  Rep.  527,  533 
(1909).  A  corporation  cannot  inter- 
plead as  between  stockholders  for  the 
purpose  of  determining  the  owner- 
ship of  stock,  there  having  been  no 
claim  made  upon  it  in  regard  to 
registry  or  in  regard  to  dividends. 
It  must  be  shown  also  that  the  com- 
pany has  not  acted  in  a  partisan  man- 

177 


§  387.] 


FORMALITIES   OF   TRANSFER   AND   REGISTRY. 


[CH.   XXII. 


Any  other  rule  would  enable  any  person,  practically,  to  deprive  a  stock- 
holder of  the  possession  of  his  stock  temporarily,  by  simply  notifying 
the  corporation  that  he  claims  the  stock.^  Where,  however,  the  cor- 
poration has  allowed  one  claimant  to  register  his  transfer,  or  has  recog- 
nized him  as  a  stockliolder,  the  right  of  the  corporation  to  interplead 
is  gone.2  It  cannot  afterwards  remove  the  name  of  the  registered  stock- 
holder, especially  where  such  stockholder  has  acted  in  reliance  upon 
such    registry.^     It    may,   however,   bring   suit    to    recover   back    the 

interplead  between  the  stockholder 
and  the  claimant,  but  if  the  corpora- 
tion takes  the  risk  and  allows  the 
transfer  to  the  claimant  it  is  liable  to 
the  owner  if  he  proves  that  he  was 
entitled  to  the  stock.  Cooper  v. 
vSpring,  etc.  Co.,  16  Cal.  App.  17  (1911). 
Where  a  person  makes  a  blank  assign- 
ment of  a  certificate  of  stock  standing 
in  his  name  and  delivers  it  to  another 
person,  and  thereafter  notifies  the 
company  not  to  allow  any  transfer 
because  the  certificate  has  been  lost, 
and  thirteen  years  afterwards  a  recent 
bona  fide  purchaser  of  the  certificate 
presents  it  for  transfer,  the  company 
cannot  legally  return  the  old  certificate 
to  the  original  stockholder  of  record 
without  any  proof  of  ownership  being 
offered  by  the  latter,  and  if  it  does  so 
the  corporation  may  be  liable  to  the 
purchaser.  O'Neil  v.  Wolcott  Mining 
Co.,  174  Fed.  Rep.  527  (1909).  If  the 
company  has  favored  one  of  the  two 
parties,  as  by  voluntarily  agreeing  with 
the  sheriff  to  recognize  an  execution, 
an  interpleader  will  not  lie.  Crom- 
well V.  American  Loan,  etc.  Co.,  57 
Hun,  149  (1890).  See  also  American 
Tel.,  etc.  Co.  v.  Day,  20  J.  &  S.  (N.  Y.) 
128  (1885).  A  corporation  cannot 
refuse  to  transfer  stock  on  the  ground 
that  the  vendor  fraudulently  induced 
the  company  to  issue  the  stock  to 
him,  where  the  company  has  been 
guilty  of  laches  in  not  seeking  a  rem- 
edy before  the  transfer.  The  vendee 
in  this  case  was  a  director.  American, 
etc.  Co.  V.  Bayless,  91  Ky.  94  (1891). 
3  Ward  V.  Southeastern  Ry.,  2  El.  & 
El.  812  (1860) ;  Hart  v.  Frontino,  etc. 
Co.,  L.  R.  5  Exch.  Ill  (1870) ;  Cohen 
V.  Gwynn,  4  JMd.  Ch.  3.37  (1848).  Un- 
less there  clearly  is  a  clerical  mistake 
and  the  issue  is  to  the  wrong  party. 
Smith  V.  North  Am.  Min.  Co.,  1  Nev. 


ner  as  between  the  different  claim- 
ants. Hinckley  v.  Pfister,  83  Wis.  64 
(1892).  If  the  corporation  allows  a 
transfer  to  be  made  during  the  pen- 
dency of  a  suit  between  two  claim- 
ants therefor,  and  the  corporation  has 
notice,  it  is  not  liable  to  the  success-- 
ful  party,  who  is  thereby  deprived 
of  tlie  stock,  there  having  been  no 
injunction  pendente  lite.  Hawes  v. 
Gas,ete.Co.,12N.  Y.  Supp.924(1891). 
An  interpleader  may  be  proper  even 
though  no  suit  has  been  actually  com- 
menced against  the  corporation.  See 
Story's  Eq.  Juris.,  §  808 ;  Daniell,  Ch. 
PL  &  Pr.,  pp.  1561,  1564,  notes.  In 
New  York,  under  the  Code  of  Civil 
Procedure,  an  order  for  interpleader 
can  only  be  granted  after  a  suit  has 
been  commenced  against  the  corpora- 
tion. Buffalo  Grape  Sugar  Co.  v.  Al- 
berger,  22  Hun,  349  (1880).  As  to 
the  proper  allegations,  see  Crane  v. 
Macdonald,  118  N.  Y.  648  (1890),  in- 
volving a  suit.  A  corporation  cannot 
refuse  to  transfer  stock  to  a  person 
on  the  ground  that  a  trustee  in  bank- 
ruptcy has  been  appointed  of  his 
estate.  Sutton  v.  English,  etc.  Co., 
[1902]  2  Ch.  .502. 

1  Ex  parte  Sargent,  L.  R.  17  Eq.  273 
(1874).  Where  the  pledgee  presents 
the  stock  to  the  corporation  for  trans- 
fer, but  the  pledgor  forbids  the  trans- 
fer, and  thereafter  the  stock  goes 
down,  the  pledgee  may  hold  the 
pledgor  liable  for  loss  caused  by  inter- 
fering with  the  transfer.  Hooper  v. 
Herts,  [1906]  1  Ch.  549. 

2  Dalton  V.  Midland  Ry.,  12  C.  B. 
458  (1852) ;  Mt.  Hollv,  etc.  Co.  v.  Fer- 
ree,  17  N.  J.  Eq.  117  (1864).  Where  a 
stockholder  claims  that  his  certificate 
indorsed  in  blank  has  been  stolen 
and  notifies  the  corporation  not  to 
allow   transfer,    the   corporation   may 


1178 


CH.  XXII.] 


FORMALITIES   OF   TRANSFER  AND   REGISTRY. 


[§  388. 


stock. ^  Where  a  claimant  of  stock  has  instituted  suit  against  the  stock- 
holder of  record  and  also  the  corporation  to  obtain  the  stock,  it  is  the 
duty  of  the  corporation  not  to  pay  any  further  dividends  to  the  stock- 
holder of  record  until  the  suit  is  decided,  and  it  is  liable  if  it  does  pay.^ 

§  388.  Corporation  must  obey  mandate  of  court  ordering  registry 
and  issue,  of  new  certificates. — The  authorities  on  this  proposition 
of  law  are  few  in  number,  but  they  aim  to  protect  the  corporation  from 
liability  where  it  proceeds  under  mandate  of  a  court.  Thus,  where  a 
decree  is  obtained  commanding  the  corporation  to  register  a  transfer, 
the  corporation  is  protected  in  obeying  the  decree,  even  though  it  is 
reversed  on  appeal,  there  having  been  no  stay  of  proceedings.^  Under 
the  statutes  of  California,  however,  even  though  stock  is  distributed 
by  executors  in  accordance  with  a  decree  of  distribution,  and  the  dis- 
tributees sell  the  stock  and  it  is  transferred  on  the  books  of  the  company, 
nevertheless,  if  the  decree  is  reversed  on  appeal,  the  transfers  are  void 


423  (1865).  The  corporation  is  liable 
for  such  mistakes.  Harrison  v.  Pryse, 
Barn.  Ch.  324  (1740). 

1  See  §  367,  supra.  Where  the 
president  claims  certain  unissued  stock 
as  assignee  of  a  contractor  who  was 
entitled  to  it,  and  another  person  also 
claims  it  as  assignee  of  the  contractor, 
and  the  president  issues  the  stock 
to  himself  without  authority  of  the 
board  of  directors,  the  corporation 
may  institute  a  suit  to  compel  him  to 
give  it  up,  and  in  such  suit  the  court 
will  determine  who  is  entitled  to  such 
stock.  Lakewood  Gas  Co.  v.  Smith, 
62  N.  J.  Eq.  677  (1902). 

2  McCord  V.  Nabours,  101  Tex.  494 
(1908). 

'  Chapman  v.  New  Orleans,  etc.  Co., 
4  La.  Ann.  153  (1849).  See  also  Pur- 
chase V.  New  York  Exch.  Bank,  3  Rob. 
(N.  Y.)  164  (1865).  But  when  the 
court  directs  the  corporation  to  issue 
a  certificate  to  the  life  tenant  of 
stock,  the  corporation  is  still  bound 
to  notify  a  purchaser  of  that  cer- 
tificate that  it  represents  a  life  in- 
terest only  ;  otherwise  the  corporation 
is  liable  to  the  remainderman.  Caulk- 
ins  V.  Gaslight  Co.,  85  Tenn.  683 
(1887).  A  corporate  officer  is  guilty 
of  contempt  if  he  refuses  to  obey  an 
order  of  court  requiring  him  to  make 
certain  transfers  of  stock  upon  the 
surrender  of  the  old  certificates.  King 
V.  Barnes,  113  N.  Y.  476,  655  (1889). 


Upon  an  appeal  from  final  judgment 
an  interlocutory  judgment  ordering 
the  transfer  of  stock  from  a  trustee 
to  the  party  entitled  to  the  same 
will  not  be  enforced,  provided  the 
party  is  allowed  to  vote  thereon. 
Potter  V.  Rossiter,  109  N.  Y.  App.  Div. 
32  (1905).  An  English  court  in  ap- 
pointing a  person  to  transfer  stock 
which  stands  in  the  name  of  a  person 
who  has  been  ordered  to  transfer  it 
but  who  has  neglected  or  refused  to 
do  so,  will  not  require  a  bond  of  in- 
demnity to  the  corporation,  because 
the  corporation  is  protected  even  if 
the  order  should  turn  out  to  have 
been  erroneous.  Savage  v.  Norton, 
[1908]  1  Ch.  290;  Shaw  v.  Goebel 
Brew.  Co.,  202  Fed.  Rep.  408  (1912). 
Where  a  corporation  makes  a  trans- 
fer in  accordance  with  the  order  of 
the  court  it  is  protected  against  out- 
standing certificates.  Gamble  v.  Daw- 
son, 67  Wash.  72  (1912).  Even  though 
a  woman  who  owns  stock  indorses 
it  in  blank  and  puts  it  in  a  safe- 
deposit  box  to  which  her  husband 
also  has  a  key,  and  he  steals  and  sells 
it,  she  may  recover  it  back  by  a  suit 
in  equity  making  the  corporation  also 
a  party  defendant,  and  even  though 
the  lower  court  decides  against  her 
and  thereupon  the  corporation  allows 
a  transfer,  yet  if  on  appeal  she  succeeds 
in  her  suit  the  corporation  is  liable  to 
her.     Miller  v.   Doran,    151   111.   App. 


1179 


§388.]  FORMALITIES   OF   TRANSFER  AND  .REGISTRY.  [cH.  XXII. 

and  the  company  is  liable  for  dividends  paid  in  the  meantime  to  such 
purchasers.^  And  it  has  been  held  in  Illinois  that  even  though  a  cor- 
poration obeys  the  decree  of  a  court  and  transfers  stock  in  accordance 
with  such  decree,  yet  if  thereafter  the  decree  is  reversed  on  appeal 
and  the  original  party  is  held  entitled  to  the  stock,  such  original  party 
may  hold  the  corporation  liable  for  allowing  the  transfer.^  Cases  herein 
may  arise  also  where  the  registered  stockholder  alleges  that  he  has  lost 
his  certificate,  and  the  court  compels  the  corporation  to  issue  to  him  a 
new  one ;  ^  also  where  an  attachment  or  execution  has  been  levied,  the 
old  certificate  of  stock  being  outstanding.^  There  is  a  limit,  however, 
to  the  power  of  courts  in  these  matters.  If  the  whole  capital  stock  has 
been  issued  and  the  certificates  therefor  are  outstanding,  a  court  can- 
not order  the  issue  of  other  certificates,  unless  the  decree  at  the  same 
time  practically  nullifies  a  corresponding  outstanding  certificate.^  A 
person  holding  a  certificate  of  stock  issued  by  order  of  the  court  after 
an  execution  sale,  is  entitled  to  attend  meetings,  and  his  transferee  who 
has  presented  the  stock  for  transfer,  and  who  also  has  a  proxy  from  the 
transferrer,  is  entitled  to  attend  the  meetings  and  may  recover  dam- 
ages for  assault  if  he  is  ejected  from  the  meeting.  The  company  cannot 
defend  on  the  ground  that  the  execution  sale  was  invalid,  and  that  the 
stock  had  been  canceled.^  A  bill  in  equity  may  be  filed  by  a  citizen  of 
New  Jersey  and  a  foreigner  to  have  stock  in  a  New  Jersey  corporation, 
then  held  by  foreigners,  awarded  to  complainants  and  new  certificates 
issued  to  the  latter.  Pending  the  suit  the  court  may  appoint  a  receiver 
of  the  stock  and  may  enjoin  transfer.  Service  on  the  defendant  foreign- 
ers may  be  made  by  pubUcation.^ 

527    (1909)  ;    aff'd,  245    111.  200.     See  even  though  the  party  holding  it  is  a 

also  §§  363,  364,  swpra.  party   defendant.     Bean   v.   American 

1  In  a  suit  by  the  executors  to  re-  Loan,  etc.  Co.,  122  N.  Y.  622  (1890). 
cover  such  dividends  the  purchasers  ^  Noller  v.  Wright,  138  Mich.  416 
need  not  be  made  parties.  Ashton  v.  (1904).  Where  a  creditor  of  a  bond- 
Zeila  Min.  Co.,  134  Cal.  408  (1901).  holder  has  obtained  by  default  a  judg- 
See  also  Ashton  v.  Heggerty,  130  Cal.  ment  against  the  corporation  restrain- 
516  (1900).  ing  it  from  paying  the  bonds  or  coupons 

2  Miller  !;.  Doran,  245  111.  200  (1910).  to  any  person  except  the  plaintiff, 
See  also  §  364,  supra.                        .  the  corporation  must  pay  the  amount 

3  See  §§  358-362,  supra.  of  the  coupons  to  the  plaintiff  without 
*  See  §  489,  i«/ra.  requiring  security .  Schreiberi-.  Garden, 
6  See  §  284,  supra.     Where  stock  is     152    N.    Y.    App.    Div.    817    (1912). 

deposited  with  a  trustee  for  purposes  Where  stock  is  owned  by  a  township 
of  reorganization,  and  transferable  and  the  corporation  allows  the  town- 
certificates  are  issued  therefor  by  the  ship  trustee  to  transfer  it  without 
trustee,  a  claimant  of  stock  which  authority,  the  township  may  compel 
another  person  has  deposited,  and  for  the  corporation  to  retransfer  the  stock. 
which  such  other  person  has  the  trus-  Vernon,  etc.  R.  R.  v.  Washington,  etc. 
tee's  certificate,  cannot  compel  the  Tp.,  95  N.  E.  Rep.  599  (Ind.  1911). 
trustee  to  deliver  up  the  stock  until  '  Sohege  v.  Singer  Mfg.  Co.,  73 
the    trustee's    certificate    is    returned,  N.    J.    Eq.    567     (1907).     Citizens    of 

1180 


CH.  XXII.]  FORMALITIES    OF   TRANSFER   AND   REGISTRY.  [§§  389,  390. 

§  389.  Remedies  of  a  transferee  of  stock  against  the  corporation 
for  refusal  to  allow  registry.  —  Wliere,  for  any  reason,  the  corpo- 
ration refuses  to  allow  the  registry  of  a  transfer  of  stock,  when  it  is 
the  duty  and  obligation  of  the  corporation  to  allow  it,  the  transferrer 
or  the  transferee  who  applies  for  registry  may,  in  general,  pursue  one 
of  three  remedies.  He  may  apply  to  a  court  of  law  for  a  mandamus,  to 
the  corporation  to  compel  it  to  open  its  books  and  allow  the  registry ; 
or  he  may  bring  a  suit  in  equity,  praying  that  the  corporation  be  de- 
creed to  allow  the  registry,  or  to  pay  him  damages  if  registry  is  impos- 
sible ;  or  he  may  sue  the  corporation  at  law  for  damages,  on  the  ground 
that  by  its  refusal  it  has  been  guilty  of  a  conversion  of  his  stock.^  The 
officers  cannot  be  held  personally  liable.^  Inasmuch  as  the  United 
States  court  has  no  original  jurisdiction  to  issue  a  mandamus,  a  stock- 
holder may  maintain  a  bill  in  equity  in  that  court  to  compel  a  corpora- 
tion to  register  a  transfer  of  stock  to  him.^  In  Wisconsin  there  is  a 
statute  authorizing  the  court  on  affidavits  to  order  a  transfer  of  stock.* 

§  390.  Remedy  by  mandamus.  —  The  authorities  are  in  irrecon- 
cilable conflict  on  the  question  whether  a  mandamus  lies  to  compel 
a  corporation  to  allow  a  registry  on  its  books  of  a  transfer  of  stock. 
The  weight  of  authority  holds  very  clearly  that  mandamus  will  not 
lie.^  This  rule  is  based  largely  on  the  historical  origin  of  the  writ  of 
mandamus,  and  on  the  theory  that  the  stock  of  a  private  corporation 

Idaho  may  bring  suit  in  Washington  to  64  (1901),  and  in  Real  Estate,  etc.  Co. 

compel  a  North   Dakota   corporation  v.  Bird,  90  Md.  229  (1899). 

to  issue  original  stock  to  him  although  ^  gee  §  392,  infra. 

the  company  has  already  issued  it  to  ^  Jessup   v.    Chicago,  etc.    Ry.,  188 

another    promoter,   it  appearing   that  Fed.  Rep.  931  (1911). 

the  president  and  secretary  reside  in  *  Schwab   v.    Smith,    143   Wis.    427 

Washington,  and  that  a  money  judg-  (1910). 

ment  may  be  entered  if  the  stock  is  *  The  leading  case  in  this  country 

not    transferred    as    required    by    the  is    Shipley    v.    Mechanics'    Bank,    10 

decree.     Lively  v.  Husebye,  60  Wash.  Johns.    484    (1813),    where    the   court 

47     (1910).     Where    a    certificate    of  said:     "The  applicants  have  an  ade- 

stock  held  by  a  trustee  of  an  estate  quate  remedy,  by  a  special  action  on 

runs  to  the  trustee  as  trustee  of  the  the  ease,  to  recover  the  value  of  the 

estate  and  by  a  decree  of  the  court  the  stock  if  the  bank  have  unduly  refused 

trustee   is   removed  for  non-residence  to   transfer  it.     There  is   no   need  of 

and  a  new  trustee  appointed,  the  latter  the  extraordinary  remedy  by  manda- 

may  maintain  a  suit  to  have  the  cor-  rnus  in  so  ordinary  a  case.     It  might 

poration  issue  a  new  certificate  to  him  as    well    be    required     in    every    ease 

as  trustee  in  lieu  of  the  old  one,  even  where  trover  would  lie.     It  is  not  a 

though  the  non-resident  trustee  refuses  matter   of   public   concern,    as   in   the 

to  give  up  the  old  one,  the  old  trustee  case  of  public  records  and  documents ; 

having  been  brought  in  by  constructive  and  there  cannot  be  any  necessity,  or 

process.     Letcher's  Trustee  v.  German  even  a  desire,  of  possessing  the  identi- 

Nat.  Bank,   134  Ky.  24   (1909).     See  eal    shares    in    question."     Ex    parte 

also  §  363,  supra.  Fireman's  Ins.  Co.,  6  Hill  (N.  Y.),  243 

1  Quoted  and  approved  in  Herbert,  (1843) ;    People   v.    Parker   Vein   Coal 

etc.  Bank  v.  Bank  of  Orland,  133  Cal.  Co.,    10  How.   Pr.   543    (1854) ;   State 

1181 


§  390.]                      FORMALITIES    OF   TRANSFER  AND   REGISTRY.  [cH.  XXII. 

has  no  peculiar  value,  and  may  be  readily  obtained  in  open  market  or 

fully  compensated  for  in  damages.^  There  is  a  strong  line  of  decisions, 

V.  Rombauer,  46  Mo.  155  (1870) ;  State  enforced  and  needs  its  assistance." 
V.  St.  Louis,  etc.  Co..  21  Mo.  App.  See  also  Rex  v.  Worcester,  etc.  Nav. 
526  (1886) ;  Rex  v.  London  Assur.  Co.,  Co.,  1  Man.  &  R.  .529  (1828) ;  Regina 
1  Dowl.  &  R.  510  (1822) ;  s.  c,  5  B.  v.  Liverpool,  etc.  Ry.,  21  L.  J.  (Q.  B.) 
&  Aid.  899 ;  Staekpole  w.  Seymour,  127  284  (1852);  Murray  v.  Stevens,  110 
Mass.  104  (1879);  Rex  v.  Bank  of  Mass.  95  (1872),  where  the  court  said, 
England,  2  Doug.  524  (1780)  ;  Curry  in  refusing  a  mandamus  to  compel  a 
V.  Scott,  54  Pa.  St.  270,  276  (1867);  registry  of  stock:  "Without  under- 
Gray  V.  Portland  Bank,  3  Mass.  364,  taking  to  lay  down  an  invariable  rule  on 
381  (1807) ;  State  v.  Guerrero,  12  Nev.  the  subject,  we  think  it  must  be  said 
105  (1877) ;  People  v.  Miller,  39  Hun,  that  this  process  was  not  attended 
557  (1886);  aff'd,  114  N.  Y.  636;  and  is  not  well  adapted  for  the  trial 
Baker  ?^  Marshall,  15  Minn.  177  (1870),  of  mere  questions  of  property;"  State 
where  the  stock  had  already  been  v.  Warren  Foundry,  etc.  Co.,  32  N.  J. 
issued  to  another;  Wilkinson  v.  Provi-  L.  439  (1868),  where  a  previous  trans- 
denee  Bank,  3  R.  I.  22  (1853) ;  Kim-  fer  had  been  registered,  although  pos- 
ball  V.  Union  Water  Co.,  44  Cal.  173  sibly  in  fraud  of  creditors ;  Freon  v. 
(1872);  Birmingham  F.  Ins.  Co.  v.  Carriage  Co.,  42  Ohio  St.  30  (1884), 
Commonwealth,  92  Pa.  St.  72  (1879),  refusing  a  mandamus,  although  it  is 
where  the  court  says,  that,  even  if  the  said  "that  this  stock  has  no  market 
courts  "were  inclined  to  enlarge  the  value,  that  the  corporation  is  doing  a 
remedy,  it  could  not  be  done  in  a  case  growing  and  profitable  business,  that 
where  the  right  is  disputed,  where  no  its  good-will  enhances  the  value  of  the 
public  interest  is  involved,  where  no  stock,  and  that  by  reason  of  these 
reason  is  shown  for  a  transfer  of  a  things  damages  will  not  be  an  ade- 
specific  and  favorite  thing,  and  where  quate  remedy.  These  facts  do  not 
the  remedy  by  action  is  fully  ade-  change  the  rule.  They  are  elements 
quate"  ;  Townes  y.  Nichols,  73  Me.  515  in  assessing  damages  which  may  be 
(1882),  where  the  court  vigorously  fully  ascertained  in  an  action  at  law." 
says:  "AU  the  authorities  declare  See  also  Pomeroy,  Eq.  Jur.,  §1412; 
that  the  remedy  by  mandamus  cannot  State  v.  People's  Bldg.  etc.  Assoc,  43 
be  resorted  to  in  a  case  like  this,  unless  N.  J.  L.  389  (1881) ;  State  v.  Timkin, 
the  legal  right  of  the  petitioner  to  48  N.  J.  L.  87  (1886) ;  Tobey  v.  Hakes, 
the  possession  of  the  thing  sought  54  Conn.  274  (1886),  refusing  a  man- 
tor  is  clear  and  unquestionable.  If  damns  on  the  corporate  secretary ; 
there  be  doubt  as  to  what  his  legal  Bank  of  State  v.  Harrison,  66  Ga.  696 
right  may  be,  involving  the  necessity  (1881).  See  also  Lindley,  Company 
of  litigation  to  settle  it,  mandamus  Law,  pp.  79,  811,  812,  6th  ed.  Man- 
must  be  withheld.  Mandamus  is  the  damns  does  not  issue  to  compel  a  cor- 
right  arm  of  the  law.  Its  principal  poration  to  transfer  stock  when  there 
office  is,  not  to  inquire  and  investi-  is  no  written  transfer  of  the  certifi- 
gate,  but  to  command  and  execute,  cate  and  another  party  claims  it. 
It  is  not  designed  to  assume  a  part  Burnsville  Turnp.  Co.  v.  State,  119 
in  ordinary  lawsuits  or  equitable  pro-  Ind.  382  (1889).  See  also  Durfee  v. 
ceedings.  It  is  properly  called  into  Harper,  22  Mont.  354  (1899).  Man- 
requisition  in  cases  where  the  law  damns  does  not  lie  to  compel  a  cor- 
has  been  settled,  or  in  cases  where  poration  to  transfer  stock.  People  v. 
questions  of  law  or  equity  cannot  Brandis  Mfg.  Co.,  N.  Y.  L.  J.,  Dec. 
properly  and  reasonably  arise.  Its  11,  1889.  Mandamus  is  not  a  proper 
very  nature  implies  that  the  law,  remedy  at  common  law  to  compel  a 
although  plain  and  clear,   fails   to   be  corporation  to  transfer  stock.     People 

1  Quoted  and  approved  in  State  v.  Jumbo,  etc.  Min.  Co.,  30  Nev.  192  (1908). 

1182 


CH.   XXII.] 


FORMALITIES    OF   TRANSFER   AND   REGISTRY, 


[§  390. 


however,  which  holds  that  a  mandamus  does  He  to  compel  a  corporation 
to  allow  a  registry  of  a  transfer  of  stock,  particularly  where  the  corpora- 
tion has  no  good  and  sufficient  reason  for  refusing  the  registry.^    Perhaps 


V.  Utah,  etc.  Co.,  135  N.  Y.  App.  Div. 
418  (1909).  Mandamus  does  not  lie 
against  the  Bank  of  England  to  compel 
it  to  register  a  transfer  of  stock  to  an 
individual  and  a  corporation  jointly. 
Law.  Guarantee,  etc.  Soc.  v.  Bank  of 
England,  L.  R.  24  Q.  B.  D.  406  (1890). 
Mandamus  is  not  the  proper  remedy 
to  compel  the  issue  of  a  certificate  of 
stock.  State  v.  Carpenter,  51  Ohio 
St.  83  (1894).  Mandamus  does  not  lie 
to  compel  a  company  to  transfer 
stock,  even  though  the  right  is  clear, 
there  being  an  adequate  remedy  at 
law  or  in  equity.  Clarke  v.  Hill,  132 
Mich.  434  (1903).  Under  the  statutes 
of  Georgia  it  is  held  that  mandamus 
does  not  lie  to  compel  a  transfer  of 
stock,  unless  the  transfer  is  connected 
with  a  judicial  sale ;  and  even  though 
a  sale  is  made  by  a  trustee  appointed 
by  a  court  and  he  has  been  authorized 
to  sell  the  stock,  yet  this  is  not  suffi- 
cient to  sustain  mandamus.  Terrell 
V.  Georgia,  etc.  Co.,  115  Ga.  104 
(1902).  Under  the  latest  decisions  of 
the  federal  courts,  it  seems  that  man- 
damus does  not  lie  in  the  federal  court 
as  an  independent  proceeding.  Large 
V.  Consolidated  Nat.  Bank,  137  Fed. 
Rep.  168  (1905)  ;  Rosenbaum  v.  Bauer, 
120  U.  S.  450  (1887).  Where  by 
statute  a  transfer  must  be  in  accord- 
ance with  the  by-laws,  the  purchaser 
of  stock  cannot  compel  a  transfer  by 
mandamus  unless  he  alleges  that  the  by- 
laws were  complied  with.  Butterfly, 
etc.  Co.  V.  Brind,  41  Colo.  29  (1907). 

1  Quoted  and  approved  in  Dennett 
V.  Acme  Mfg.  Co.,  106  Me.  476  (1910), 
and  in  Madison  Bank  v.  Price,  79 
Kan.  289  (1909),  where  the  court 
sustained  the  jurisdiction  of  a  court  of 
equity  on  the  ground  that  there  was 
no  general  market  for  such  stock  and 
its  real  value  depends  upon  many 
fluctuating  features  which  cannot  be 
established  in  dollars  and  cents,  and 
that  the  selling  price  is  rarely  the  book 
value  or  market  or  other  standard 
value,  and  that  the  stock  is  generally 
desired  for  purposes    not    measurable 


1183 


in  money.  The  following  cases  hold 
that  mandamus  will  lie.  People  v. 
Goss,  etc.  Co.,  99  111.  355  (1881); 
State  V.  First  Nat.  Bank,  89  Ind. 
302  (1883);  Green  Mount,  etc.  Co. 
V.  Bulla,  45  Ind.  1  (1873);  People 
I'.  Crockett,  9  Cal.  112  (1858);  State 
V.  Mclver,  2  S.  C.  25  (1870) ;  State  v. 
Cheraw,  etc.  R.  R.,  16  S.  C.  524 
(1881) ;  Cooper  v.  Dismal  Swamp,  etc. 
Co.,  2  Murph.  (N.  C.)  195  (1812); 
Amidon  v.  Florence,  etc.  Co.,  132  N. 
W.  Rep.,  166  (So.  Dak.  1911);  Norris 
V.  Irish  Land  Co.,  8  El.  &  Bl.  512 
(1857) ;  Regina  v.  Carnatic  Ry.,  L.  R. 
8  Q.  B.  299  (1873);  Crawford  v. 
Provincial  Ins.  Co.,  8  U.  C.  C.  P. 
263  (1859) ;  Goodwin  v.  Ottawa,  etc. 
Ry.,  13  U.  C.  C.  P.  254  (1863),  hold- 
ing also  that  the  mandamus  may  run 
to  the  corporation  itself  without  spe- 
cifying any  officers,  and  that  an  eva- 
sive answer  by  them  is  equivalent  to  a 
refusal  to  register.  It  has  been  held 
that  mandamus  will  issue  to  aid  the 
sheriff  in  transferring  stock  sold  on 
an  execution  sale.  This  rule,  how- 
ever, would  work  harshly  in  states 
where  the  purchaser  of  the  outstand- 
ing certificate  may  have  some  rights.' 
Where  such  a  possibility  exists  the 
mandamus  should  be  denied.  State 
V.  First  Nat.  Bank,  89  Ind.  302  (1883) ; 
Bailey  v.  Strohecker,  38  Ga.  259 
(1868) ;  Durham  v.  Monumental,  etc. 
Co.,  9  Oreg.  41  (1880).  Cf.  §489, 
infra.  Mandamus  will  lie  to  compel 
the  corporation  to  transfer  the  stock 
on  its  books  where  any  other  record 
would  be  inadequate  because  there  is 
no  market  value  for  the  stock,  and 
because  the  company  has  fraudu- 
lently transferred  its  property  for  the 
purpose  of  injuring  the  value  of 
the  stock.  The  mandamus  will  lie 
although  a  suit  is  pending  in  equity 
to  accomplish  the  same  purpose. 
Slemmons  v.  Thompson,  23  Oreg.  215 
(1892).  Mandamus  lies  to  compel  a 
corporation  to  transfer  stock  sold 
under  levy  of  execution.  It  may  be 
granted  as  a  common-law  remedy  or 


§  391.] 


FORMALITIES   OF   TRANSFER   AND   REGISTRY. 


[cH.  xxn. 


the  strongest  argument  against  granting  a  mandamus  for  this  purpose 
lies  in  the  fact  that  by  a  bill  in  equity  not  only  can  a  registry  be  spe- 
cifically decreed  and  ordered  by  the  court,  but  the  rights  of  the  corpora- 
tion and  of  all  of  the  claimants  may  be  fully  and  finally  heard  and  dis- 
posed of.  The  United  States  courts  have  no  original  jurisdiction  to 
issue  a  mandamus} 

§  391.  Remedy  hy  suit  in  equity.  —  This  is  the  surest,  most  com- 
plete, and  most  just  remedy  for  compelling  a  corporation  to  register 
a  transfer  of  stock,^  and  for  adjusting  the  various  conflicting  rights  or 
claims  of  other  parties.^  It  is  a  remedy  applicable  to  almost  all  cases 
arising  under  a  refusal  of  the  corporation  to  allow  a  registry  of  transfer. 

Chicago,  etc.  Ry.,  188  Fed.  Rep.  931 
(1911). 

2  Quoted  and  approved  in  Vernon, 
etc.  R.  R.  V.  Washington,  etc.  Tp., 
95  N.  E.  Rep.  599  (Ind.  1911). 

^  Quoted  and  approved  in  Real- 
Estate,  etc.  Co.  V.  Bird,  90  Md.  229 
(1899) ;  Cushman  v.  Thayer  Mfg.  Co., 
76  N.  Y.  365  (1879) ;  Walker  v.  Detroit 
Transit  Ry.,  47  Mich.  338  (1882); 
lasigi  V.  Chicago,  etc.  R.  R.,  129  Mass. 
46  (1880) ;  Mechanics'  Bank  v.  Seton, 
1  Pet.  299  (1828) ;  Wilson  v.  Atlantic, 
etc.  R.  R.,  2  Fed.  Rep.  459  (1880); 
Middlebrook  v.  Merchants'  Bank,  3 
Keyes  (N.  Y.),  135  (1866) ;  Buckmaster 
v.  Consumers'  Ice  Co.,  5  Daly,  313 
(1874);  Fitzpatrick  v.  O'Neill,  43 
Mont.  5.52  (1911).  Where  a  certifi- 
cate of  stock  is  stolen  from  a  pledgee 
and  the  transfer  on  the  back  is  insuf- 
ficient, in  that  the  pledgor's  name  was 
written  not  at  the  end  of  the  transfer 
but  at  the  beginning,  the  pledgor 
may  by  a  bill  in  equity  redeem  the 
stock  from  a  person  who  purchased  it 
from  the  thief.  A  suit  in  equity  lies 
inasmuch  as  an  account  is  involved 
as  to  the  amount  due  and  the  divi- 
dends received.  The  ten-years  statute 
of  limitations  applies,  there  being  no 
acquiescence  or  unreasonable  delay. 
Treadwell  v.  Clark,  190  N.  Y.  51  (1907). 
In  Rice  v.  Rockefeller,  134  N.  Y.  174 
(1892,  reversing  9  N.  Y.  Supp.  866), 
a  court  of  equity  compelled  the  trustees 
of  a  trust  to  transfer  on  their  books 
trust  certificates  which  had  been  pur- 
chased in  open  market  by  a  person  who 
then  applied  to  the  trustees  for  a 
transfer.  The  court  based  its  deci- 
sion  on   the   similarity   of   such   trust 


as  a  remedy  ancillary  to  the  suit. 
Hair  v.  Burnell,  106  Fed.  Rep.  280 
(1900).  Where  the  purchaser  of  stock 
at  execution  sale  applies  for  a  man- 
damus to  compel  the  corporation  to 
transfer  the  stock  to  him,  and  the 
owner  of  the  stock  intervenes  and 
claims  that  the  debt  on  which  the 
stock  was  sold  had  been  paid,  and 
asks  for  a  delivery  of  the  certificates 
to  the  owner,  the  case  may  be  tried 
in  equity.  Croft  t'.  Colfax,  etc.  Co., 
113  Iowa,  455  (1901).  Where  the  sub- 
scriber to  stock  makes  the  final  pay- 
ment thereon  and  directs  the  corpora- 
tion to  issue  the  certificate  to  one  to 
whom  he  has  sold  it  and  then  counter- 
mands the  order,  the  purchaser  will 
be  granted  a  mandamus  commanding 
the  corporation  to  issue  the  certificate 
to  him.  Scherk  v.  Montgomery,  81 
Miss.  426  (1903).  Where  the  cor- 
poration has  no  reason  for  refusing 
transfer  mandamus  lies.  State  v.  Con- 
sumers', etc.  Co.,  115  La.  782  (1905). 
Mandamus  will  not  issue  to  compel 
a  corporation  to  issue  to  a  purchaser 
treasury  stock  which  he  has  purchased, 
even  though  he  has.paid  for  the  same, 
unless  the  stock  has  some  peculiar 
and  special  value  different  from  other 
similar  stock  in  that  company,  or 
unless  the  control  of  the  corporation  is 
at  issue.  The  legal  right  to  the  stock 
must  also  be  clear.  State  v.  Jumbo, 
etc.  Min.  Co.,  30  Nev.  192  (1908). 
1  Inasmuch  as  the  United  States 
Court  has  no  original  jurisdiction  to 
issue  a  mandamus,  a  stockholder  may 
maintain  a  bill  in  equity  in  that  court 
to  compel  a  corporation  to  register  a 
transfer   of   stock   to  him.     Jessup   r. 


1184 


CH.  XXII. 


FORMALITIES    OF   TIL\NSFER   AND    REGISTRY, 


[§  391. 


The  case  will  be  decided  on  equitable  principles,  however,  and  a  trans- 


certificates  to  stock  certificates,   and 
said:     "The    denial    of    the    right    to 
transfer  upon  the  books  is  not  consist- 
ent    with     the     transferable     quality 
of  the  shares,  which  imports  that  the 
purchaser    taking    an    assignment    of 
them  in  a  duly  formal  manner  has  the 
right   to   become   a    transferee   within 
the  meaning  of   the  agi-eement  upon 
which    the    trust    was    formed.    .    .    . 
In  such  case  it  is  -wathin  the  equitable 
power   of   the   court   to   compel   such 
transfer  to  be  made."     The  court  held 
also  that  it  was  immaterial  that  the 
purchaser  who  applied  for  the  transfer 
was  hostile  to  and  a  competitor  of  the 
trust.     The  court  said  that  although  it 
w^ould  have  been   legal   in   the  begin- 
ning to  have  vested    a    discretion  in 
the  trustees  as  to  allowing  transfers, 
yet   that,   such  discretion  not  having 
been  reserved,  it  could   not   be  exer- 
cised by  the  dn-ectors.     See  also  White 
V.   Price,   39  Hun,   395    (1886);   aff'd, 
108  N.  Y.  661   (1888) ;  Iron  R.  R.  v. 
Pink,  41  Ohio  St.  321  (1884),  the  court 
saying   that   the   power   of   equity   to 
decree  a  registry  is  well  settled.     As 
regards   the  pleadings,   see  BurraU   v. 
Bushwick  R.  R.,  75  N.  Y.  211  (1878). 
See  also  §  579,  infra.     A  pm-chaser  of 
a  minority  interest  in  a  small  country 
bank  may  maintain  a  suit  in  equity 
to   compel   the   bank   to    transfer   the 
stock,  even  though  he  controls  a  rival 
bank.     Madison    Bank    v.    Price,    100 
Pac.  Rep.  280  (Kan.  1909).     A  pledgee 
of    stock    may    maintain    a    suit    to 
have  illegal  assessments  declared  void, 
and  incidentally  the  court  may  order 
the  corporation  to  make  a  transfer  of 
the  stock.     Farmers',  etc.  Co.  v.  Hen- 
derson,   46    Colo.    37    (1909).     A   bill 
in   equity   lies   to   compel   a   corpora- 
tion   to    transfer    stock    where    it    is 
alleged    that  it  is  a    dividend-paying 
stock  and  valuable  as  an  investment, 
and  that  an  action  at  law  would  be 
an    inadequate     remedy.     Mundt     v. 
Commercial  Nat.   Bank,  35   Utah,  90 
(1909).     A    suit    to    determine    title 
to  stock  and  to  have  the  outstanding 
certificate    canceled    and    a    new   one 
issued  is  in  equity  and  need  not  be 
tried  before  a  jury.     Noble  v.  Learned, 


87  Pac.  Rep.  402  (Cal.  1906).  A  pur- 
chaser of  stock  at  an  execution  sale 
may  file  a  bill  against  an  alleged 
transferee  of  the  stock  and  the  cor- 
poration to  have  the  conflicting  rights 
adjudicated.  Howard  v.  Corey,  126 
Ala.  283  (1900).  In  an  action  against 
the  secretary  of  a  corporation  to  com- 
pel him  to  register  a  transfer  of  stock, 
the  corporation  is  not  a  necessary 
party.  Gould  v.  Head,  41  Fed.  Rep. 
240  (1890). 

The  federal  courts  have  jurisdiction 
of  a  suit  in  equity  brought  by  a  citi- 
zen of  one  state  to  compel  a  corpora- 
tion of  another  state  to   transfer  on 
its  books  certain  shares  of  stock,  which 
the    complainant    purchased    from    a 
citizen  of  the  same  state  as  the  defend- 
ant.    Jewett    V.    Bradford,    etc.    Co., 
45  Fed.   Rep.  801    (1891).     Inasmuch 
as   the   United    States    court   has   no 
original   jurisdiction    to    issue   a    man- 
damus, a  stockholder  may  maintain  a 
bill  in  equity  in  that  court  to  compel 
a  corporation  to  register  a  transfer  of 
stock  to  him.     Jessup  v.  Chicago,  etc. 
Ry.,    188   Fed.    Rep.    931    (1911).     A 
suit  to  recover  stock  and  to  compel  the 
corporation    to    transfer   it   cannot   be 
joined  wnth  a  suit  against  the  corpora- 
tion itself  for  damages  for  breach  of  an 
additional  contract.     Backus  v.  Brooks, 
189  Fed.  Rep.  922  (1911).     A  resident 
of  Colorado  having  a  cause  of  action 
against    a    Colorado    corporation    for 
not  allowing  a  transfer  of  stock  may 
sell  her  claim  to  a  non-resident  and  the 
latter  may  bring   suit   in   the  federal 
court.     O'Neil  v.  Wolcott  Mining  Co., 
174  Fed.  Rep.  527  (1909).     A  suit  by 
a  purchaser  of  a  certificate  of  stock  to 
compel    the    corporation    to    transfer 
the  stock  on  the  books  need  not  join 
a   claimant   of   the   stock   as   a  party 
defendant.     O'Neil    v.    Wolcott    Min- 
ing  Co.,    174   Fed.    Rep.    527    (1909). 
Where  a  corporation  refuses  to  trans- 
fer   stock    on    account    of    the    state 
inheritance  tax  not  ha\ang  been  paid, 
the  amount  of  the  tax  being  less  than 
$2,000,   the  United  States  Court  has 
no  jurisdiction  of  a  suit  to  compel  a 
transfer.     Jessup  v.  Chicago,  etc.  Ry., 
188    Fed.    Rep.    931    (1911).     If    the 


(75) 


1185 


§391. 


FORMALITIES   OF   TRANSFER  AND   REGISTRY. 


CH.  xxir. 


fer  will  not  be  decreed  if  it  involves  bad  faith.^  The  corporation  itself 
is,  of  course,  a  necessary  and,  in  fact,  the  chief  defendant,  where  stock  has 
been  presented  for  transfer,  which  has  been  refused.^  In  a  suit  in  equity 
by  the  claimant  of  stock  against  other  parties,  claiming  the  stock,  the 
corporation  is  a  proper  but  not  a  necessary  party  defendant,  in  order 
that  a  transfer  of  the  stock  may  be  had  upon  the  corporate  books.^    A 


holder  of  a  certificate  of  stock  has 
applied  for  transfer  and  been  refused 
he  may  sue  for  the  dividend  before 
bringing  a  suit  in  equity  to  obtain 
a  transfer  of  his  stock.  Hill  v.  Atoka, 
etc.  Co.,  21  S.  W.  Rep.  508  (Mo. 
1893).  This  case  arose  again  in  124 
Mo.  153.  An  agreement  of  the 
holder  of  a  majority  of  the  stock 
that  he  will  retain  control  is  no  defense 
by  the  corporation  to  an  action  by 
the  receiver  of  such  stockholder  to 
transfer  the  stock  on  the  corporate 
books.  Weller  v.  Pace  Tobacco  Co., 
25  N.  Y.  Week.  Dig.  531  (1886).  A 
suit  in  equity  lies  to  compel  a  corpo- 
ration to  transfer  stock  on  its  books. 
Arbuckle  v.  Spice  Co.,  11  Ohio  Cir- 
cuits, 726  (1901).  A  pledgee  of  a 
certificate  of  stock  is  not  bound  by  an 
agreement  of  all  the  stockholders  to 
surrender  to  the  corporation  a  part 
of  their  stock,  which  part  is  to  be 
then  considered  preferred  stock,  and 
is  to  be  sold  by  the  corporation  for 
the  purpose  of  paying  corporate 
debts.  Although  all  the  other  stock 
has  had  this  agreement  stamped  on 
the  certificates,  yet  the  corporation 
cannot  insist  that  the  purchaser  of  the 
stock  so  pledged  shall  allow  the  same 
agreement  to  be  stamped  on  the  new 
certificate  issued  to  such  purchaser. 
The  court  will  order  a  transfer  free 
from  the  agreement.  Campbell  v. 
American  Zylonite  Co.,  122  N.  Y. 
455  (1890).  CJ.  Farquhar  v.  Canada, 
etc.  Co.,  98  N.  E.  Rep.  1036  (Mass. 
1912).  Even  though  the  charter  of 
an  irrigation  company  provides  that 
no  one  shall  hold  stock,  except  an 
owner  of  land  to  the  amount  of  one 
acre  for  each  share  of  stock  held  by 
him,  yet  where  the  stock  is  sold 
for  non-payment  of  assessments  the 
purchaser  at  such  sale  is  entitled  to 
a  transfer  on  the  corporate  books, 
although  he  owns  no  land.     The  pur- 


chaser may  file  a  bill  in  equity  to 
determine  his  rights.  The  court  found 
it  unnecessary  to  pass  on  the  ques- 
tion as  to  whether  such  a  restriction 
as  to  the  stock  is  legal.  Spurgeon  v. 
Santa  Ana,  etc.  Co.,  120  Cal.  71 
(1898).  A  bill  in  equity  lies  to  com- 
pel a  corporation  which  has  declared 
a  stock  dividend  to  stockholders  of 
record  on  July  1st,  to  deliver  such 
stock  dividend  to  a  purchaser  on  July 
6th  whose  purchase  included  such  divi- 
dend. Rose  V.  Barclay,  191  Pa.  St. 
594  (1899). 

1  Regina  v.  Liverpool,  etc.  Ry.,  21 
L.  J.  (Q.  B.)  284  (1852).  Cf.  Rice  v. 
Rockefeller,  134  N.  Y.  174  (1892). 
See  also  §  386,  supra,  and  §  736,  infra. 

2  In  a  suit  to  compel  the  issue  of 
certificates  of  stock  to  a  transferee  it 
must  be  alleged  that  a  transfer  has 
been  made  on  the  books  or  that  the 
company  should  have  made  such 
transfer.  Lacaff  v.  Dutch,  etc.  Co.,  31 
Wash.  566  (1903).  See  also  the  cases 
in  this  section  generally. 

3  See  §  338,  supra ;  also  Tanner  v. 
Gregory,  71  Wis.  490  (1888) ;  Kendig 
V.  Dean,  97  U.  S.  423  (1878) ;  Budd  v. 
Munroe,  18  Hun,  316  (1879),  the  lat- 
ter case  holding  also  that  the  corpora- 
tion may  recover  costs  against  a 
co-defendant  who-  is  defeated  in  the 
suit ;  Johnson  v.  Kirby,  65  Cal.  482 
(1884).  A  stockholder  whose  stock 
has  been  wrongfully  transferred  by 
the  corporation  may  maintain  a  suit 
in  equity  to  compel  the  corporation  to 
transfer  it  back  again,  the  new 
holder  of  the  stock  being  made  a  party 
defendant.  Vernon,  etc.  R.  R.  v. 
Washington,  etc.  Tp.,  95  N.  E.  Rep. 
599  (Ind.  1911).  In  a  suit  by  a  pur- 
chaser of  a  certificate  of  stock  in  a 
bank  to  compel  the  bank  to  transfer 
the  same  on  its  books,  the  cashier  is 
not  a  necessary  party  defendant,  and 
if  the  president  is  made  a  party  defend- 


1186 


CH.   XXII. 


FORMALITIES   OF   TRANSFER   AND   REGISTRY. 


[§  391. 


somewhat  similar  suit  in  equity  is  involved  where  the  purchaser  of 
stock  files  a  bill  in  equity  against  the  vendor  for  specific  performance  of 
the  contract.^  The  relief  usually  demanded  is  in  the  alternative,  being 
either  for  a  registry  of  the  transfer  or  damages  in  lieu  thereof.-    A 


ant,  the  decree  ordering  the  transfer 
may  be  directed  to  him.     Johnson  v. 
Hume,  138  Ala.  564  (1903).     A  state 
court  may  decree  that  national  bank 
stock    standing    in    the  name  of  one 
person    belongs     to     another    person. 
The  bank  is  not  necessarily  a  party 
defendant.     In     re     Fisher's     Estate, 
128  Iowa,  18  (1905).     Where  a  vendor 
claims  that  by  mistake  he  has  trans- 
ferred  more   stock   than   was   agreed, 
and  causes  the  corporation  to  refuse 
transfer,    a    suit    lies    by    the    vendee 
against  the  corporation  and  the  vendor 
to     obtain     transfer     and     dividends. 
Wilson    V.    Wyoming,    etc.    Co.,    129 
Iowa,    16    (1905).     In   a   suit   against 
a     subsidiary     company     to     obtain, 
among  other  things,  a  transfer  to  the 
receiver  of  the  parent  company  of  the 
stock    which    such    parent    company 
holds  in  the  subsidiary  company,  the 
subsidiary    company    is    a    necessary 
party   defendant.     ConkUn   v.   United 
States,  etc.  Co.,   123  Fed.   Rep.  913 
(1903).     A    promoter    may    maintain 
a  bill  in  equity  against  another  pro- 
moter to  compel  the  latter  to  deliver 
stock  due  by  contract  to  the  former, 
in   connection   with    the   organization 
of  the  company,  and  the  corporation 
is  a  proper  party  defendant  in  order 
to    obtain    a    transfer.     Howison     v. 
Baird,  145  Ala.  683  (1905).     A  court 
will  not  at  the  instance  of  a  pledgee 
order  a  transfer  to  be  recorded  on  the 
books  to  the  pledgee  as  pledgee,  and 
giving  the  pledgor  the  right  to  vote 
the  stock,  inasmuch  as  this  would  com- 
plicate the  title  as  between  the  cor- 
poration   and    its    stockholders    and 
interfere  with  the  business  of  the  cor- 
poration.    American,  etc.   Co.   v.  Pa- 
cific, etc.  Co.,  34  Wash.  10  (1904).     In 
such  eases  the  corporation  is  but  nom- 
inally concerned  in  the  result  of  the 
suit.     It  cannot  appeal  from  the  judg- 
ment when  both  of  the  real  parties  in 
interest  are  satisfied  and  do  not  appeal. 
Board  of  Liquidation  v.  New  Orleans 
Water-works   Co.,   39    La.   Ann.    202 

1 


(1887).  If  the  complainant  is  a  citi- 
zen of  the  same  state  as  the  corpora- 
tion, one  of  the  parties  defendant, 
another  defendant  cannot  remove  the 
case  into  a  United  States  court.  Crump 
V.  Thurber,  115  U.  S.  56  (1885).  Where 
a  corporation  has  not  yet  issued  stock 
as  called  for  by  a  contract,  a  claimant 
of  such  stock  may  bring  suit  in  the 
state  where  the  corporation  was  organ- 
ized to  obtain  the  stock,  even  though 
the  other  claimant  is  a  non-resident. 
Jennings  v.  Rocky  Bar,  etc.  Co.,  29 
Wash.  726  (1902).  Where  the  title  to 
stock  is  litigated  in  a  suit  in  equity  and 
an  officer  of  the  corporation  is  a  party 
defendant,  being  interested  in  the 
transaction,  the  court  may  compel  him 
in  that  suit  to  transfer  the  stock  on 
the  corporate  books,  even  though 
the  corporation  is  not  a  party  to  the 
suit.  Durfee  v.  Harper,  22  Mont.  354 
(1899).  A  corporation  by  the  action 
of  its  board  of  directors  and  consent 
of  all  of  its  stockholders  may  agree 
that  a  certain  percentage  of  its  profits 
shall  be  paid  annually  to  a  person 
for  services  already  rendered  by  him. 
In  a  suit  by  him  to  enforce  such  agree- 
ment and  asking  an  injunction  against 
any  sales  of  stock,  except  wath  notice 
of  such  agreement,  stockholders  are 
necessary  parties  defendant.  Such  an 
agreement  is  not  an  exclusion  of  future 
boards  of  directors  from  the  manage- 
ment of  the  company.  Dupignac  v. 
Bernstrom,  76  N.  Y.  App.  Div.  105 
(1902). 

1  See  §§  337,  338,  supra. 

2  Quoted  and  approved  in  State  v. 
Carpenter,  51  Ohio  St.  83  (1894).  "A 
bill  in  equity  may  be  maintained  by 
a  bona  fide  purchaser  of  stock  against 
the  corporation  to  compel  a  transfer 
of  the  stock  upon  the  corporate 
books."  The  bill  may  be  in  the 
alternative  for  a  transfer  of  the  stock 
or  for  damages,  and,  if  the  company 
has  already  issued  its  whole  capital 
stock,  damages  will  be  granted.  Bir- 
mingham Nat.  Bank  v.  Roden,  97  Ala. 

187 


§  391.] 


FORMALITIES    OF   TRANSFER   AND    REGISTRY. 


CH.  xxir. 


preliminary  injunction  is  often  obtained  in  connection  with  such  a 
suit.^  If  all  the  stock  has  already  been  issued,  equity  has  no  power 
to  compel  a  further  issue.^    Where  a  stockholder  leaves  a  certificate 


404  (1892).  In  a  suit  against  a  corpo- 
ration to  compel  it  to  issue  stock  to  the 
plaintiff  or  else  pay  the  value  thereof, 
the  proper  form  of  judgment  is  an  order 
to  issue  the  stock.  A  money  judgment 
should  be  entered  only  after  proof  of 
the  corporation's  failure  to  comply  with 
the  main  order.  Consolidated,  etc. 
Co.  V.  Huff,  62  Kan.  405  (1901). 
Where  a  corporation  refuses  to  issue 
the  stock  to  a  subscriber,  he  may  file 
a  bill  in  the  alternative  to  compel  the 
issue  of  the  shares  or  the  payment  of 
their  value  with  damages.  If  during 
the  pendency  of  the  suit  the  company 
becomes  insolvent,  the  court  can  give 
him  damages  payable  pro  rata  out  of 
the  assets  of  the  corporation.  Re 
Reading  Iron  Works,  149  Pa.  St.  182 
(1892).     See  §  61,  supra. 

1  See  §  579,  infra,  and  §  363,  supra. 
In  a  suit  by  a  vendee  of  stock  for 
specific  performance  the  vendor  and 
a  person  who  has  the  legal  title  to  the 
stock  may  be  enjoined  from  disposing 
of  the  stock  pending  the  suit.  Doherty 
&  Co.  V.  Rice,  186  Fed.  Rep.  204  (1910). 
In  a  suit  by  a  claimant  of  stock  against 
the  corporation  and  others  holding  the 
stock,  an  injunction  against  any 
transfer  is  proper  inasmuch  as  the 
certificate  of  stock  has  a  quasi  nego- 
tiability. Zeiger  v.  Stephenson,  153 
N.  C.  528  (1910).  In  a  suit  in  equity 
by  a  pledgor  to  recover  back  certifi- 
cates of  stock  in  pledge  a  receiver  will 
not  be  appointed  if  the  defendant  is 
responsible,  but  an  injunction  will  be 
granted  against  the  pledgee  disposing 
of  the  stock.  Ketcham  v.  Provost, 
147  N.  Y.  App.  Div.  777  (1911). 
In  a  suit  to  recover  stock  an  injunc- 
tion is  more  readily  granted  than  in  a 
suit  to  recover  other  kinds  of  personal 
property.  Currie  v.  Jones,  138  N.  C. 
189  (1905).  Where  a  stockholder  has 
delivered  his  stock  to  the  directors 
to  be  divided  into  smaller  certificates, 
and  the  directors  claim  that  it  was 
agreed  that  a  part  of  the  stock  should 


be  sold  for  the  benefit  of  the  corpora- 
tion, the  stockholder  may  have  a  pre- 
liminary injunction  against  such  sale 
pending  his  suit  to  compel  delivery  of 
the  stock.  Bedford  v.  American,  etc. 
Co.,  51  N.  Y.  App.  Div.  537  (1900). 
Where  a  corporation  refuses  to  trans- 
fer stock,  the  purchaser  may  file  a 
bill  in  equity  to  compel  such  transfer, 
and  may  make  the  vendor  a  party 
thereto,  an  injunction  against  any  sale 
by  him  being  asked.  Thornton  v. 
Martin,  116  Ga.  115  (1902).  A  court 
will  enjoin  a  party  from  voting  upon 
or  disposing  of  his  stock  in  a  corpora- 
tion pendente  lite,  where  the  plaintiffs 
show  that  they  transferred  the  stock 
to  the  defendant  on  the  latter's  agree- 
ment not  to  sell  the  same,  except 
with  the  consent  of  the  former,  and 
that  when  he  did  sell  the  stock  three 
fourths  of  the  proceeds  should  belong 
to  the  former,  and  it  appearing  further 
that  the  defendant  had  given  the  stock 
to  his  sister  without  consideration. 
Weston  V.  Goldstein,  39  N.  Y.  App. 
Div.  661  (1899).  Where  stock  is 
tied  up  by  an  injunction  which  is  after- 
wards vacated,  and  in  the  meantime 
the  stock  depreciates  in  value,  the  loss 
can  be  recovered  from  the  enjoining 
party  if  the  stocks  could  and  would 
have  been  sold  before  the  depreciation 
if  they  had  not  been  so  tied  up.  But 
if  such  stocks  are  in  pledge,  and  the 
pledgor  does  not  pay  the  loan  while 
the  stocks  are  so  tied  up,  no  damages 
can  be  recovered.  Fourth  Nat.  Bank, 
etc.  V.  Crescent,  etc.  Co.,  52  S.  W.  Rep. 
1021  (Tenn.  1897).  Under  the  stat- 
utes of  California,  even  though  stock 
is  distributed  by  executors  in  accord- 
ance with  a  decree  of  distribution, 
and  the  distributees  sell  the  stock  and 
it  is  transferred  on  the  books  of  the 
company,  nevertheless,  if  the  decree  is 
reversed  on  appeal,  the  transfers  are 
void  and  the  company  is  liable  for 
dividends  paid  in  the  meantime  to 
such    purchasers.     In   a    suit    by    the 


2  Smith  V.  North  Am.  Min. 


Co.,   1  Nev.  423  (1865) ;  and  see  §  284,  supra. 
1188 


FORMALITIES    OF   TRANSFER   AND    REGISTRY. 


[§  391. 


with  a  person  for  safekeeping,  and  the  latter  illegally  transfers  it  to 
another  who  has  demanded  transfer  on  the  corporate  books,  a  purchaser 
from  the  original  stockholder  may  maintain  a  suit  in  replevin,  under 
the  New  York  practice,  even  though  the  allegations  were  intended  to 
sustain  an  injunction  and  obtain  a  transfer  of  the  stock  itself,  and  even 
■though  the  corporation  was  joined  as  a  party  defendant,  it  appearing 
that  there  were  not  sufficient  grounds  for  jurisdiction  in  a  court  of 
equity.^  Laches  or  the  statute  of  limitations  may  be  a  bar  to  a  suit  in 
equity.-  A  citizen  of  Alabama  cannot  maintain  in  the  courts  of  Alabama 
a  suit  to  enjoin  non-residents  from  transferring  stock  in  a  non-resident 
corporation  where  the  defendants  are  not  personally  served  within  the 
state.^     But  a  South  Carolina  corporation  may  be  sued  in  New  Hamp- 


executors  to  recover  such  dividends 
the  purchasers  need  not  be  made  par- 
ties. Ashton  V.  Zeila  Min.  Co.,  134 
Cal.  408  (1901).     See  also  §  330,  supra. 

1  Sisson  V.  Bassett,  134  N.  Y.  App. 
Div.  53  (1909). 

2  Even  though  the  pledgee  eight, 
years  after  the  pledge  was  made 
obtained  judgment  for  the  amount  due, 
yet  if  for  twenty-two  years  he  takes 
no  further  action,  he  cannot  compel 
the  corporation  to  transfer  the  stock 
to  him  unless  the  pledgor  is  made  a 
partj',  the  stock  not  having  been 
transferred  in  the  meantime.  Wad- 
Unger  v.  Fu-st  Nat.  Bank,  209  Pa.  St. 
197  (1904).  A  corporation  may  be 
compelled  by  a  purchaser  of  stock  to 
transfer  the  stock  on  its  books,  espe- 
cially where  the  real  and  prospective 
value  of  the  stock  depends  upon  the 
future  development  and  management 
of  the  company,  and  delay  in  bringing 
the  suit  is  no  bar,  if  not  unreasonable, 
and  if  the  company  has  not  been 
prejudiced.  Westminster  Nat.  Bank 
j;.  New  England,  etc.,  73  N.  H.  465 
(1906).  In  New  York  the  ten-year 
statute  of  limitations  runs  against  an 
equitable  action  against  the  corpora- 
tion for  a  transfer  of  the  certificates 
on  its  books  from  the  time  when  the 
outstanding  certificate  was  issued. 
Ryder  t-.  Bushwick  R.  R.,  10  N.  Y. 
Supp.  748  (1890) ;  aff'd,  134  N.  Y.  83. 
In  Ware  v.  Galveston  City  Co.,  146 
U.  S.  102  (1892),  the  biU  of  a  claimant  of 
stock  against  the  company  to  hold  it 
liable  for  allowing  a  transfer  of  the 
stock  in  fraud  of  his  rights  was  barred 


by  laches,  the  suit  having  been  brought 
thirty-five   years    after    the    cause   of 
action  had  accrued.     Cf.   §  392,  infra. 
The  holders  of  full-paid  stock  cannot 
be  assessed  on  such  stock  even  under 
a    reorganization    agreement    of    the 
majority  of  the  stockholders.  Where, 
however,    for    four    years    the    stock- 
holder does  not  object,  and  then  applies 
for  a  transfer  of  his  stock,  a  coiirt  of 
equity  may  refuse  to  grant  the  trans- 
fer, but  may  give  him  damages  for  the 
value  of  his  stock  at  the  time  of  the 
demand    of    transfer,    together    with 
interest.     Gresham     v.     Island     City 
Sav.  Bank,  2  Tex.  Civ.  App.  52  (1893). 
Delay   in   bringing   a   suit   in   equity 
against    a    corporation    to    compel    a 
transfer  of  stock  is  not  a  bar  if  it  is 
short    of    the    statute    of    limitations. 
Barker  v.  Montana,  etc.  Co.,  35  Mont. 
351    (1907).     C/.   Treadwell   v.   Clark, 
190    N.    Y.    51     (1907).     Equity    has 
jiu"isdiction  of  a  suit  by  a  stockholder 
to  compel  a  corporation  to  issue  to  him 
stock  to  which  he  is  entitled  and  also 
past  dividends,  but  where  for  several 
years  the  stockholder  had  not  claimed 
the  stock  and  the  company  being  un- 
able to    proceed,  all  the   subscriptions 
had  been  canceled  and  new  subscrip- 
tions taken  with  the  knowledge  of  the 
plaintiff,  his  remedy  is  barred  by  laches. 
Ward  V.  Hotel  Randolph  Co.,  65  W.  Va. 
721  (1909). 

3  Rucker  v.  Morgan,  122  Ala.  308 
(1899).  Minnesota  subscribers  to 
stock  in  an  Arizona  corporation  may 
maintain  a  suit  in  equity  in  Minnesota 
to  compel  the  corporate  officers  who  are 


1189 


§  392.] 


FORMALITIES   OF   TRANSFER   AND   REGISTRY. 


[CH.  XXII. 


shire  by  a  purchaser  of  a  certificate  of  stock  to  compel  a  transfer  thereof 
on  the  books  of  the  company.^  Where  a  decree  directs  the  transfer  of 
certain  stock  in  the  distribution  of  an  estate  and  the  corporation  makes 
such  transfer,  and  thereafter  the  decree  is  reversed  on  appeal,  the  exec- 
utors may  bring  suit  to  have  the  transfer  canceled.^  In  a  decree  that 
certain  stock  given  away  by  a  bankrupt  shall  be  returned  to  his  trustee 
in  bankruptcy,  damages  may  also  be  awarded  for  depreciation  in  the 
stock  in  the  meantime.^  A  director  cannot  legally  use  corporate  funds 
to  pay  an  attorney  to  defend  a  suit  brought  against  him  and  the  cor- 
poration to  cancel  stock  which  he  caused  the  corporation  to  issue  to 
himself  in  order  to  control  it,  the  corporation  being  but  a  nominal 
party  .^ 

§  392.  Remedy  hy  an  action  for  damages.  —  An  action  at  law  for 
damages  is  an  old  and  well-established  remedy  of  a  stockholder  who  has 
applied  to  the  corporation  for  a  registry  of  a  transfer  and  has  been  re- 
fused.^    The  form  of  the  action  may  vary,  and  may  sound  in  tort  or 


residents  of  Minnesota  to  surrender  for 
cancellation  stock  fraudulently  ob- 
tained by  them  from  the  corporation 
as  promoters,  the  plaintiffs  having  sub- 
scribed on  misrepresentations.  It  is 
immaterial  that  jurisdiction  cannot  be 
obtained  over  the  corporation  itself. 
Gere  v.  Dorr,  114  Minn.  240  (1911). 
Citizens  of  Idaho  may  bring  suit  in 
Washington  to  compel  a  North  Dakota 
corporation  to  issue  original  stock  to 
him  although  the  company  has  already 
issued  it  to  another  promoter,  it  appear- 
ing that  the  president  and  secretary 
reside  in  Washington,  and  tliat  a 
money  judgment  may  be  entered  if  the 
stock  is  not  transferred  as  required  by 
the  decree.  Lively  v.  Husebye,  60 
Wash.  47  (1910).  See  also  note  1,  p. 
1042,  supra. 

'  Westminster  Nat.  Bank  v.  New 
England,  etc.,  73  N.  H.  465  (1906).  Cf. 
§  327,  siipra.     Cf.  101  N.  E.  Rep.  822. 

2  Ashton  V.  Heggerty,  130  Cal.  516 
(1900).  See  also  Ashton  v.  Zeila  Min. 
Co.,  1.34  Cal.  408  (1901).  See  also 
§§  330,  338,  388,  supra.  Where,  in 
accordance  with  a  judgment,  stock  is 
delivered  and  the  party  receiving  it 
sells  it  and  thereafter  the  judgment  is 
reversed,  such  stock  cannot  be  recov- 
ered back  from  the  transferee.  Thax- 
ter  V.  Thain,  100  N.  Y.  App.  Div.  488 
(1905). 

^  Wasey  v.  Holbrook,  65  N.  Y.  Misc. 


Rep.  84  (1909).  See  also,  §  364, 
supra. 

■•Chabot,  etc.  Co.  v.  Chabot,  84 
Atl.  Rep.  892  (Me.  1912). 

^  Quoted  and  approved  in  State  v. 
Jumbo,  etc.  Min.  Co.,  30  Nev.  192 
(1908).  Hussey  v.  Manufacturers', 
etc.  Bank,  27  Mass.  415  (1830); 
Helm  V.  Swiggett,  12  Ind.  194  (1859). 
Cases  supporting  this  rule  abound  in 
all  the  states.  They  will  be  found  to- 
gether with  others  in  ch.  XXXV,  infra. 
Even  in  England,  if  the  company  has 
completed  a  transfer  upon  its  books 
and  then  repudiates  the  transfer  on 
the  ground  that  it  had  prior  to  that 
time  transferred  the  same  stock  to 
others,  the  company  is  liable  in  dam- 
ages to  the  party  to  whom  the  last 
transfer  was  made.  Tomkinson  v. 
Balkis  Consol.  Co.,  [1891]  2  Q.  B.  614. 
A  corporation  is  liable  in  damages 
for  refusing  to  allow  a  transfer  of  the 
stock  where  such  refusal  is  unjustifi- 
able. Doty  V.  First  Nat.  Bank  of  Lari- 
more,  3  N.  Dak.  9  (1892).  If  the  com- 
pany illegally  refuses  to  transfer 
stock  it  is  a  conversion.  Rio  Grande 
Cattle  Co.  V.  Burns,  82  Tex.  50  (1891). 
An  action  on  the  case  lies,  wherein 
the  measure  of  damages  is  the  value 
at  the  time  of  refusal  to  transfer.  See 
§  575,  infra.  In  a  suit  against  a  cor- 
poration for  refusing  to  transfer  stock, 
the  fact  that  the  certificates  had  been 


1190 


CH.   XXII.] 


FORMALITIES   OF   TRANSFER   AND    REGISTRY. 


[§  392. 


contract.^  Conversion  lies  against  a  corporation  at  the  instance  of  a 
purchaser  of  certificates  of  stock  for  refusal  to  transfer  the  stock  on  the 
books  of  the  company.^  The  common-law  action  of  trover  is  a  proper 
remedy.^  Where  the  transferee  of  certificates  of  stock  in  a  bank  presents 
them  to  the  cashier  of  the  bank  for  transfer,  and  the  cashier  and  a  direc- 
tor delay  transfer  until  a  debt  of  the  transferrer  to  the  bank  becomes 
due,  and  then  in  behalf  of  the  bank  levy  an  attachment  on  the  stock  for 
such  debt,  the  transferee  may  hold  the  bank  and  the  cashier  and  such  di- 
rector liable  in  trover  for  conversion  of  the  stock,  and  it  is  no  defense 
that  the  transfer  of  the  certificate  was  made  to  defraud  creditors.^  But 
a  transferee  cannot  hold  the  transfer  agent  liable  in  damages  for  re- 
fusal to  allow  the  transfer,  inasmuch  as  his  remedy  is  against  the  princi- 
pal, the  corporation  itself.^  For  the  refusal  of  the  president  to  sign  a  cer- 
tificate of  stock,  the  remedy  of  the  person  entitled  to  the  stock  is  against 
the  corporation  and  not  against  him.®  A  transferee's  action  upon  the 
case  for  damages,  instead  of  in  trover  for  conversion,  against  the  cor- 
poration for  refusal  to  register  the  transfer,  entitles  him  to  nominal 
damages  only,  unless  he  proves  special  damage.^  Where  the  corpora- 
tion has  been  held  liable  for  conversion,  it  cannot  then  tender  the  stock 
back  to  the  stockholder  and  avoid  the  payment  of  the  damages.^    The 


lost  since  the  refusal  need  not  be 
alleged.  Blair  Co.  v.  Rose,  26  Ind. 
App.  487  (1901).  Where  the  corpora- 
tion illegally  refuses  a  transfer  it  is 
liable  for  the  value  of  the  stock  at 
the  time  of  the  demand  and  refusal. 
Bank  of  Culloden  v.  Bank  of  Forsyth, 
120  Ga.  575  (1904).  A  corporation  is 
not  liable  for  refusing  a  transfer  of 
stock  when  the  only  damage  from  the 
refusal  was  to  call  attention  to  the 
fact  that  an  assessment  had  been  lev- 
ied on  the  stock.  Penfold  v.  Charle- 
voix, etc.  Bank,  140  Mich.  126  (1905). 

»  See  ch.  XXXV,  infra. 

2  See  ch.  XXXV,  infra.  Where  the 
purchaser  of  a  certificate  of  stock 
sends  it  to  the  corporation  for  trans- 
fer and  the  secretary  replies  that  the 
corporation  has  a  lien  on  the  stock, 
the  corporation  is  not  liable  for  a  con- 
version of  the  stock,  no  demand  for 
the  retiirn  of  the  certificate  being 
shown.  Cummins  v.  People's,  etc. 
Assoc,  61  Neb.  728  (1901). 

'  Ralston  v.  Bank  of  California,  112 
Cal.  208  (1896). 

*  Hine  v.  Commercial  Bank,  etc., 
119  Mich.  448  (1899). 


5  Denny  v.  Manhattan  Co.,  2  Den. 
115  (1846) ;   aff'd,  5  Den.  639. 

5  Cooley  V.  Curran,  54  N.  Y.  Misc. 
Rep.  572  (1907). 

^  McLean  v.  Charles,  etc.  Co.,  96 
Mich.  479  (1893).  On  this  subject, 
see  ch.  XXXV,  infra.  In  a  suit 
against  a  corporation  for  refusal  to 
transfer  stock  on  its  books,  "the  rule  of 
damages  is  the  highest  intermediate 
value  of  the  stock  between  the  time 
of  conversion  and  a  reasonable  time 
after  the  owner  has  received  notice 
of  the  conversion  to  enable  him  to  re- 
place the  stock."  A  general  allegation 
of  damage  is  sufficient,  inasmuch  as 
the  plaintiff  is  entitled  to  nominal 
damages  anyway.  Blair  Co.  v.  Rose, 
26  Ind.  App.  487  (1901). 

'  Carpenter  v.  American,  etc.  Assoc, 
54  Minn.  403  (1893).  The  purchaser 
may  hold  the  corporation  liable  in 
damages  for  conversion  for  a  refusal 
to  transfer  the  stock  on  books.  His 
damage  is  the  value  of  the  stock  at 
the  time  of  demand  with  interest  to 
the  date  of  trial,  and  after  suit  is  com- 
menced the  corporation  cannot  stop  it 
by    offering    to    transfer.     Dooley    v. 


1191 


§  392.] 


FORMALITIES   OF   TRANSFER  AND   REGISTRY. 


[CH.  XXII. 


statute  of  limitations  runs  only  from  the  time  when  a  demand  for  regis- 
try was  made.^  If  a  corporation  improperly  allows  a  transfer  of  stock 
it  must  respond  in  damages  to  the  true  owner.^ 


Gladiator,  etc.  Co.,  134  Iowa,  468 
(1906).  If  the  corporation  illegally 
refuses  to  allow  a  registry,  but  after- 
wards does  allow  it,  the  corpora- 
tion is  not  liable  in  damages  for  the 
decline  of  the  market  value  of  the 
stock  in  the  meantime.  Skinner  v. 
City  of  London  M.  Ins.  Co.,  L.  R.  14 
Q.  B.  D.  882  (1885). 

1  Cleveland,  etc.  R.  R.  v.  Robbins, 
35  Ohio  St.  483  (1880) ;   Iron  R.  R.  v. 


Fink,    41    Ohio   St.    321    (1884).     Cf. 
§  391,  supra. 

2  Leurey  v.  Bank  of  Baton  Rouge, 
58  S.  Rep.  1022  (La.  1912),  holding 
that  a  minor  who  is  entitled  to  stock 
in  an  estate  may  upon  his  majority 
sue  the  corporation  for  having  allowed 
a  transfer  ten  years  prior  thereto. 
The  measure  of  damages  is  the  value 
of  the  stock  at  the  time  of  the  transfer 
with  interest. 


1192 


CHAPTER    XXIII. 


RULES    FOR    CORPORATIONS    IN    REGARD    TO    REFUSING    OR 
ALLOWING    REGISTRIES  OF  TRANSFERS  OF  STOCK. 


393.  Purpose  of  the  chapter. 

394.  Right  to  refuse  until  the  trans- 

ferrer pays  the  unpaid  sub- 
scription price. 

395.  Whether   the   corporation  may 

refuse  to  register  a  trans- 
fer to  an  irresponsible  trans- 
feree. 

Corporation  may  refuse  to  reg- 
ister as  transferees  persons 
who  are  incompetent  to  con- 
tract. 

Trustees,  executors,  guardians, 
agents,  and  pledgees. 

Sales  of  stock  by  executors  or 
administrators. 

Sales  by  trustees. 

Sales  by  guardians. 

Forgery  of  transfer. 


396. 


397. 

398. 

399. 
400. 
401. 


§  402.  Corporation     must     require     a 
surrender  of  the  outstanding 
certificate. 
403.  Alleged  loss  of  the  old  certifi- 
cate. 

Attachment  or  execution. 

Decree  of  a  court  that  certifi- 
cates be  issued. 
406.  Theft    of    certificates    indorsed 
in  blank. 

Interpleader  by  the  corporation. 

Restrictions  by  corporation  on 
stockholder's  right  to  sell  or 
transfer. 

Lien  of  the  corporation. 

Formalities  of  registry  which 
the  corporation  may  insist 
upon. 


404. 
405. 


407. 
408. 


409. 
410. 


§  393.  Purpose  of  the  chapter.  —  It  is  proposed  in  this  chapter,  as 
a  continuation  of  the  last,  and  as  a  recapitulation  of  the  various  rights, 
UabiHties,  and  duties  of  the  corporation  in  refusing  or  allowing  a  reg- 
istry of  a  transfer  of  stock,  to  state  briefly  the  rules  which  prevail  herein. 
The  standpoint  taken  is  that  of  the  corporation.  The  minute  and  par- 
ticular application  of  the  general  rules  governing  this  subject  is  not 
stated  here  at  length  ;  but  an  effort  has  been  made  to  give,  in  systematic 
order,  certain  directions  which  will  enable  a  corporation,  when  in  doubt 
as  to  whether  to  allow  or  refuse  a  registry,  to  decide  the  question  intelli- 
gently and  safely. 

§  394.  Right  to  refuse  until  the  transferrer  pays  the  unpaid  sub- 
scription price}  —  A  corporation  cannot  refuse  to  register  a  transfer 
of  stock  merely  because  the  subscription  price  has  not  been  fully  paid  in, 
unless  the  charter  or  the  statutes  of  the  state  expressly  give  that  right. 
Nor  can  it  refuse  registry,  even  though  a  call  for  part  of  the  subscription 
price  has  been  made,  is  due,  and  remains  unpaid.  It  must  allow  regis- 
try, but  may  continue  to  hold  the  transferrer  liable  for  the  call.  The 
corporation  has  no  lien  on  the  stock  for  the  subscription  price,  nor  has 
it  a  right  to  restrict  transfers  until  calls  or  parts  of  the  subscription  price 
not  yet  called  are  paid.  The  policy  of  the  law  is  to  favor  the  right  of 
transfer,  and  no  impediments  by  the  corporation  are  allowed  to  restrict 

1  See  ch.  XV,  supra. 
1193 


§§  395-397.]  RULES  regulating  registry.  [ch.  xxni. 

that  right.  As  regards  parts  of  the  subscription  not  yet  called  in,  the 
transferrer  is  released  from  and  the  transferee  assumes  the  liability. 
As  regards  calls  made  before  the  application  for  registry,  but  not  yet 
due,  the  transferrer  is  liable,  but,  it  seems,  not  the  transferee.  As  re- 
gards calls  made  before  the  application  and  due  before  such,  the  trans- 
ferrer and  not  the  transferee  is  liable.  As  regards  calls  made  after 
the  application  the  transferee  alone  is  liable.  In  some  states,  however, 
a  different  rule  prevails,  and  by  statute  the  transferrer,  if  he  is  the  orig- 
inal subscriber,  is  liable  until  the  whole  subscription  is  paid. 

§  395.  Whether  the  corporation  may  refuse  to  register  a  transfer 
to  an  irresponsible  transferee}  —  Greater  difficulty  is  experienced 
in  finding  a  working  rule  on  this  subject.  On  one  point,  however, 
all  the  authorities  agree.  If  the  corporation  is  insolvent,  or  in  such  a 
state  of  decline  that  insolvency  seems  inevitable,  the  corporation  may 
refuse  to  allow  a  registry  of  transfer  from  a  responsible  to  an  irresponsible 
insolvent  transferee.  The  policy  of  the  law  is  to  protect  corporate 
creditors,  even  at  the  expense  of  restricting  the  right  of  transfer.  The 
above  rule  applies  not  only  where  the  subscription  is  unpaid,  but  also 
where  it  has  been  paid  and  only  a  statutory  liability  exists.  Where, 
however,  the  corporation  is  solvent,  and  a  stockholder  applies  for  a 
registry  of  transfer  from  himself  to  an  irresponsible  transferee,  it  seems 
that  the  corporation  cannot  refuse  to  make  the  registry. 

§  396.  Corporation  may  refuse  to  register  as  transferees  persons 
who  are  incompetent  to  contract.  ^  —  If  the  transferee  of  a  certificate 
of  stock  is  an  infant  or  person  of  unsound  mind,  the  corporation  may 
refuse  to  register  such  transferee  as  a  stockholder.  The  reason  of  the 
rule  is  that  such  persons  would  not  be  obliged  at  law  to  respond  to  the 
obligations  of  a  stockholder,  and  consequently  are  not  entitled  to  its 
privileges.  With  married  women  at  the  present  day  the  law  is  different. 
At  common  law  they  were  incompetent  to  become  stockholders,  as  is 
an  infant  at  the  present  time.  But  the  statutes  of  all  the  states  have 
substantially  removed  these  disabilities,  and  enabled  a  married  woman 
to  transact  business  as  a  feme  sole,  so  far  as  her  separate  estate  is  con- 
cerned. She  may  become  a  stockholder  in  a  corporation,  but  cannot 
bind  her  husband's  estate  for  the  liabilities  of  such  stockholdership. 

§  397.  Trustees,  executors,  guardians,  agents,  pledgees.^  —  In  reg- 
istering a  transfer  to  a  trustee,  executor,  or  guardian,  the  corpora- 
tion may  be  required  to  register  the  transferee  as  holder  in  his  official 
capacity.  A  trustee  who  purchases  or  receives  stock  to  hold  in  trust 
for  the  benefit  of  another  may,  it  seems,  require  the  corporation  to  regis- 
ter the  transfer  and  issue  new  certificates  to  himself  in  his  own  name 

1  See  ch.  XV,  supra.     ^  See  ch.  XIV,  supra.     ^  See  ch.  XIV,  supra. 

1194 


CH.  XXIII.]  RULES   REGULATING   REGISTRY.  [§§  398,  399. 

as  "  trustee."  In  England  the  rule  appears  to  be  different.  The  reason 
of  this  rule  is  that  the  liability  of  a  trustee  on  stock  is  in  many  of  the 
states  different  from  that  of  a  complete  owner  of  the  stock,  and  also 
because,  where  stock  is  held  by  a  trustee  as  such,  it  is  the  duty  of  the 
corporation  to  refuse  to  allow  the  trustee  to  sell  and  register  a  sale  of 
the  stock  unless  the  instrument  creating  the  trust  authorizes  such  sale. 
So  also  an  executor  or  administrator  or  guardian  may  compel  the  cor- 
poration to  place  his  official  title  after  his  name  in  the  stock  registry. 
Pledgees,  however,  and  agents  have  not  this  right.  The  corporation 
may,  but  is  not  obliged  to,  write  the  word  "  pledgee  "  after  the  trans- 
feree's name  either  in  the  stock  registry  or  on  the  certificate.  Such  is 
the  rule,  for  the  reason  that  the  corporation  is  not  obliged  to  protect 
the  rights  of  the  pledgor,  nor  to  recognize  the  pledgeeship  of  the  trans- 
feree. The  same  rule  applies  to  transferees  who  take  as  agents  of  the 
transferrer. 

§  398.  Sales  of  stock  by  executors  or  administrators }  —  A  corpora- 
tion may  with  safety,  and  in  fact  is  obliged  to,  allow  a  domestic  execu- 
tor or  administrator  to  register  a  transfer  of  the  sale  of  stock  belonging 
to  the  estate  upon  presentation  by  the  executor  or  administrator  of  the 
letters  testamentary  or  letters  of  administration.  The  executor  or 
administrator  may  then  register  a  transfer  of  the  stock  to  himself  as 
executor  or  administrator,  or  directly  from  the  name  of  the  deceased 
to  a  purchaser  from  the  executor ;  or  from  the  deceased  to  the  executor, 
and  then  from  the  executor  to  the  purchaser.  One  executor  may  sell 
and  register  a  transfer  of  the  stock.  The  corporation  is  not  bound  to 
inquire  whether  it  is  necessary  that  the  sale  be  made  in  order  to  pay  the 
debts  of  the  estate,  nor  to  see  to  it  that  the  executor  actually  applies 
the  proceeds  of  the  sale  to  that  purpose.  Where,  however,  the  corpora- 
tion has  actual  knowledge  through  its  officers  that  a  breach  of  trust  is 
contemplated  by  the  executor,  it  is  bound  to  refuse  registry,  and  will 
be  liable  to  the  estate  for  neglecting  so  to  do.  So,  also,  where  such  a 
long  time  has  elapsed  between  the  taking  out  of  the  letters  and  the  sale 
by  the  executor  that  the  latter  has  become  practically  a  trustee,  the 
corporation  must  use  the  same  precaution  as  in  sales  by  a  trustee. 
In  the  case  of  specific  legacies  of  stock,  the  corporation  need  not  pro- 
tect them,  but  may  allow  the  executor  to  transfer  the  stock  into  his  own 
name  as  executor,  since  he  may  need  it  to  pay  debts,  and  the  corpora- 
tion is  not  bound  to  investigate  such  questions.  In  England  it  is  held 
that  the  corporation  is  liable  for  allomng  a  transfer  by  foreign  execu- 
tors without  pa^-ment  of  an  inheritance  tax. 

§  399.  Sales  by  trustees}  —  A  trustee  who  holds  stock  belonging 
to  the  trust  estate  has  no  right  to  sell  and  transfer  such  stock  unless 

1  See  ch.  XIX,  supra.  ■  See  eh.  XIX,  supra. 

1195 


§§  400-402.]  RULES   REGULATING   REGISTRY.  [cH.  XXIII. 

he  is  expressly  authorized  so  to  do  by  the  instrument  creating  the  trust. 
Consequently  the  law  Imposes  upon  the  corporation  the  duty  of  refusing 
to  allow  a  trustee  to  transfer  the  stock  unless  he  clearly  has  a  right  so  to 
do.  If  the  corporation  neglects  this  duty  it  is  liable  to  the  trust  estate, 
and,  in  case  of  a  breach  of  trust  by  the  trustee,  may  be  compelled  to 
replace  the  stock  or  pay  damages.  If  the  trustee  has  an  express  power 
given  to  him  to  sell,  the  corporation  may  allow  him  to  make  the 
transfer.  If  no  such  power  Is  given,  the  corporation  must  refuse.  The 
trustee  Is  bound  reasonably  to  satisfy  the  corporation  of  his  right,  but 
the  corporation  cannot  permanently  retain  the  papers  submitted  to  it 
for  that  purpose. 

§  400.  Sales  by  guardians}  —  A  guardian  has  a  right  to  change 
the  Investment  of  the  funds  In  his  charge,  and  consequently  has  a 
right  to  sell  stock  held  by  him  in  his  official  capacity.  Accordingh% 
the  corporation  may  allow  him  to  register  a  transfer  of  stock  held 
by  him  as  guardian,  and  cannot  require  the  guardian  to  obtain  an 
order  or  decree  from  a  court  authorizing  such  transfer.  An  order 
or  decree  is  often  obtained  by  the  guardian,  however,  for  his  own  pro- 
tection, and  Is  to  be  commended.  In  New  York  the  rights  and  duties 
of  guardians  are  regulated  by  statute,  and  other  states  have  similar 
statutes. 

§  401.  Forgery  of  transfer?  —  A  corporation  Is  bound  and 
required  to  detect  a  forgery  whereby  the  name  of  the  owner  of  a  cer- 
tificate of  stock  is  signed  to  it  and  a  transfer  made  which  the  corpora- 
tion is  requested  to  register.  The  stockholder  in  whose  name  the  old  cer- 
tificate was  made  out,  and  whose  name  was  forged  to  the  transfer,  may 
hold  the  corporation  liable  if  it  fails  to  detect  the  forgery  and  allows  a 
registry  of  the  forged  transfer.  He  may  compel  it  to  replace  the  stock 
or  pay  damages.  This  rule  Is  due  to  the  fact  that  the  corporation  Is  a 
custodian  of  the  books  whereby  a  stockholder  obtains  his  rights  of  stock- 
holdership,  and  it  cannot  deprive  him  of  these  rights  by  allowing  others 
to  take  them  from  him  by  the  aid  of  the  corporation  and  without  his 
consent.  It  is  in  the  power  of  the  corporation  to  require  the  presence 
of  the  transferrer  at  the  time  of  registry,  or  at  least  clear  proof  that  the 
signature  is  genuine.  The  corporation,  however,  has  recourse  over 
against  the  person  who  applied  for  registry  on  the  forged  transfer,  how- 
ever innocent  the  latter  may  be.  He  Is  held  to  have  impliedly  repre- 
sented that  the  transfer  was  genuine. 

§  402.  Corporation  must  require  a  surrender  of  the  outstanding 
certificate.^  —  If  a  corporation  permits  a  registry  of  a  transfer  of  stock, 
and  issues  new  certificates  to  the  transferee  without  requiring  a  sur- 

1  See  ch.  XIX,  supra.         =  See  eh.  XXI,  supra.  '  See  eh.  XXI,  supra. 

1196 


CH.   XXIII. 


RULES   REGULATING   REGISTRY.  [§§  403,  404. 


render  of  the  old  certificate,  it  assumes  a  dangerous  position,  and  one 
which  it  is  not  obliged  to  assume.  If  the  certificate  which  is  not  de- 
livered up  is  in  the  hands  of  a  bona  fide  purchaser  for  value  and  without 
notice,  he  may  hold  the  corporation  liable  for  allowing  a  registry  of 
transfer  to  another  without  requiring  a  delivery  of  the  certificate. 
It  is  negligence  and  a  breach  of  duty  on  the  part  of  the  corporation  to 
allow  a  registry  without  a  surrender  of  the  old  certificate.  It  generally 
refuses  to  do  so,  as  is  its  duty,  and  is  sustained  by  the  law  in  its  refusal. 
There  are  occasions,  however,  where  the  law  compels  the  corporation 
to  register  the  transfer  without  a  surrender  of  the  old  certificate.  When 
so  compelled  to  do,  the  corporation  cannot  be  held  liable  by  the  pur- 
chaser of  the  outstanding  certificate,  but  he  must  seek  his  remedy 
against  others.  Such  compulsory  registry,  excusing  the  corporation, 
may  exist  in  cases  of  alleged  loss  of  the  old  certificate,  a  decree  of  a 
court  compelling  the  registry,  and,  under  the  latter,  an  attachment  or 
execution  against  the  stock. ^ 

§  403.  Alleged  loss  of  the  old  certificate.^  —  According  to  the  rule 
of  nearly  all  the  states,  a  corporation  is  not  obliged  to  issue  a  new 
certificate  of  stock  to  the  owner  of  an  old  one,  which  he  alleges  he 
has  lost,  unless  such  person  gives  to  the  corporation  a  sufficient  bond 
of  indemnity  to  protect  it  against  liability  in  case  it  turns  out  that  the 
old  certificate  was  not  lost  but  was  sold  and  passed  into  bona  fide  hands. 
In  New  York  this  rule  is  fixed  by  statute.  The  corporation  is  liable 
to  the  holder  of  the  outstanding  certificate,  if  it  is  outstanding,  and 
consequently  should  be  protected  against  that  liability  by  a  bond  from 
the  applicant  for  registry.  In  Louisiana  a  statutory  advertisement  is 
made  and  a  bond  of  indemnity  dispensed  with.  But  in  the  other  states 
the  court  compels  the  loser  to  give  a  bond,  varying  in  amount  according 
to  the  amount  of  the  stock  and  the  clearness  of  the  proof  of  loss. 

§  404.  Attachment  or  execution.^  —  SeaAy  all  the  states  have 
laws  whereby  shares  of  stock  are  rendered  subject  to  levy  of  attachment 
and  to  sale  on  levy  of  execution.  \Mien  an  execution  sale,  or  an  attach- 
ment followed  by  an  execution  sale,  takes  place  in  the  state  where  the 
corporation  exists,  the  purchaser  at  such  sale  generally  has  not  the  out- 
standing certificate,  but  nevertheless  demands  registry  of  himself  as 
stockholder  in  accordance  with  the  law  authorizing  the  attachment  and 
execution.  In  the  meantime  the  judgment  debtor  whose  stock  is  thus 
attached  or  sold  under  an  execution  generally  may  have  sold  his  certifi- 
cate of  stock  to  a  bona  fide  purchaser  for  value.  If  it  happens  that 
both  parties  claim  the  stock,  the  duty  and  privilege  of  the  corporation 
is  plain.     It  may  refuse  to  decide  between  them,  and  when  sued  by 

1  But  see  §  4S9,  infra.       ^  See  ch.  XXI,  supra.       '  See  eh.  XXVII,  infra. 

1197 


§  405.]  RULES   REGULATING   REGISTRY.  [cH.  XXIII. 

either  may  interplead  and  compel  the  claimants  to  settle  the  right  be- 
tween them  in  the  courts.  But  frequently  it  happens  that  the  corpora- 
tion does  not  know  whether  the  judgment  debtor  has  sold  the  outstanding 
certificate  or  not.  By  the  law  of  most  of  the  states,  if  such  certificate 
was  sold  before  the  attachment  or  execution  was  levied,  the  purchaser 
would  be  protected,  and  the  corporation  would  be  liable  to  him  for  regis- 
tering as  a  stockholder  the  purchaser  at  the  execution  sale.  Accordingly, 
in  that  case,  it  is  the  duty  of  the  corporation  to  refuse  to  register  the 
purchaser  at  the  execution  sale.  It  cannot  afford  to  take  the  risk,  and 
is  not  obliged  to  take  it.  If  the  court  then  compels  it  to  make  the  reg- 
istry of  transfer  to  the  execution  purchaser,  the  court  will  also,  probably, 
compel  such  purchaser  to  give  a  bond  of  indemnity  to  protect  the  cor- 
poration. If  such  a  bond  is  not  required  by  the  court,  the  corporation 
must  nevertheless  obey  the  decree.  What  rights  the  purchaser  of  the 
outstanding  certificate  would  then  have,  has  not  as  yet  been  passed  upon 
by  the  courts. 

§  405.  Decree  of  a  court  that  certificates  be  issued}  —  A  corpora- 
tion must  of  course  obey  the  decree  of  a  court  that  it  issue  a  certificate 
of  stock  to  a  specified  person.  But  a  court  will  rarely  resort  to  such  an 
extreme  remedy  where  it  is  probable  or  possible  that  there  may  be  an 
outstanding  certificate  in  the  hands  of  an  innocent  holder  representing 
the  same  shares.  As  a  principle  of  law  the  court  has  no  power  to  decree 
such  an  issue  ordinarily,  since  the  whole  capital  stock  has  been  issued, 
and  its  decree  amounts  practically  to  an  order  to  make  an  overissue  of 
stock.  Generally  the  court  decrees  damages  to  be  paid,  or  directs  the 
corporation  to  purchase  stock  for  the  purpose  of  reissuing  it  to  the 
specified  party.  This  occurs  frequently  where  the  corporation  has  un- 
justly deprived  a  person  of  his  stock.  A  different  class  of  cases  arises 
where  the  corporation  has  refused  to  allow  a  registry  because  the  out- 
standing certificate  is  not  surrendered.  Such  cases  include  those  of 
alleged  loss  of  certificate,  an  execution  sale  of  the  stock,  and,  possibly, 
a  suit  in  equity  at  the  domicile  of  the  corporation  to  recover  from  another 
stock  which  the  complainant  claims.  A  decree  in  such  a  suit  in  most 
states  would  be  ineffectual  to  deprive  of  his  rights  one  who  purchased 
from  the  defendant  his  certificate  of  stock  before  the  decree  was  ren- 
dered. It  would  accordingly  be  a  harsh  decree  that  compelled  the  cor- 
poration to  register  the  successful  complainant  as  a  stockholder.  The 
corporation  should  not  be  compelled  to  assume  the  risk  of  being  sued  by 
the  purchaser  of  the  outstanding  certificate.  The  complainant  should 
be  compelled  to  give  a  bond  of  indemnity,  or  else  be  content  with  a 
personal  judgment  against  the  defendant.     The  demands  of  trade  and 

'  See  eh.  XXII,  supra. 
1198 


CH.  XXIII.]  RULES   REGULATING   REGISTRY.  [§§  406-i08. 

of  the  investing  public  require  that  the  safety  of  a  purchaser  of  a  certifi- 
cate of  stock  should  be  assured,  except  against  attachments,  execution 
sales,  or  decrees  duly  obtained  and  notified  to  the  corporation  before  the 
bona  fide  purchaser  received  the  certificate  of  stock. 

§  406.  Theft  of  certificates  indorsed  in  blank}  —  The  corporation 
has  a  duty  to  perform  as  regards  certificates  of  stock  which  have  been 
stolen  from  the  owner  who  held  them  indorsed  in  blank. 

If  the  owner  notified  the  corporation  of  the  theft  it  must  refuse  to 
register  a  transfer  to  a  purchaser  of  such  stolen  certificate.  Since  the 
owner's  negligence  may  have  estopped  him  from  reclaiming  the  stock, 
the  corporation  may  refuse  to  recognize  either  party  as  a  stockholder, 
where  there  is  a  reasonable  question  of  negligence,  and  when  sued  by 
either  may  interplead.  If  the  corporation  allowed  a  registry  before  it 
was  notified  of  the  theft,  it  is  difficult  to  see  on  what  principle  it  is  to  be 
held  liable  to  the  owner.  Such  a  case  seems  not  yet  to  have  arisen.  If 
notified  of  the  theft  before  anything  is  learned  concerning  the  where- 
abouts of  the  certificate,  the  case  is  to  be  treated  the  same  as  when  the 
certificate  is  alleged  to  have  been  lost. 

§  407.  Interpleader  by  the  corporation.^  —  Whenever  there  are 
two  or  more  conflicting  claims  made  to  stock,  and  demands  are  made 
on  the  corporation  to  allow  registry,  it  is  the  privilege  of  the  corpora- 
tion, if  there  is  a  reasonable  legal  doubt  as  to  the  rights  of  the  parties, 
to  refuse  to  register  either  party,  and,  when  sued  by  one,  to  interplead 
and  compel  the  parties  to  contest  the  matter  between  themselves  in  the 
courts.  The  law  does  not  oblige  the  corporation  to  turn  itself  into  a 
court  of  justice  and  decide  the  rights  of  the  parties.  The  corporation, 
however,  cannot  interplead  if  it  has  already  committed  itself  by  regis- 
tering one  of  the  claimants  as  the  stockholder.  Nor  can  the  corpora- 
tion resort  to  an  interpleader  where  one  of  the  claimants  is  clearly 
wrong.  The  right  of  interpleader  and  the  power  of  the  corporation 
to  refuse  to  register  a  transfer  until  compelled  to  do  so  by  the  courts, 
where  an  outstanding  certificate  is  not  surrendered,  constitute  the  two 
most  effective  safeguards  of  the  corporation  in  allowing  or  refusing  reg- 
istry. 

§  408.  Restrictions  by  corporation  on  stockholder's  right  to  sell  or 
transfer.^  —  The  law  has  uniformly  and  decisively  discountenanced 
and  overruled  all  attempts  of  a  corporation  to  prevent  the  sale  and 
transfer  of  its  stock  by  the  stockholder.  Such  attempted  restrictions 
are  generally  made  by  means  of  by-law^s.  Thus,  a  by-law  requiring 
the  consent  of  the  directors  or  other  corporate  officers  to  a  transfer, 
or  a  by-law  requiring  the  stockholder,  when  he  sells,  to  sell  his  stock  to 

'  See  eh.  XXI,  supra.      ^  See  ch.  XXII,  supra.      '  See  ch.  XXXVII,  infra. 

1199 


§§  409,  410.]  RULES   REGULATING   REGISTRY.  [cH.  XXIII. 

specified  persons,  is  null  and  void.  Restrictions  may  be  created  by  a 
contract  mutually  agreed  to  by  the  stockholders,  but  cannot  be  imposed 
upon  them  by  the  majority  of  the  stockholders  nor  by  the  board  of 
directors.  When,  however,  such  restrictions  are  created  by  the  char- 
ter, they  are  valid,  since  they  arise  with  the  corporation  and  stock  itself. 
Thus,  in  England,  the  charter  frequently  authorizes  the  directors  to 
refuse  a  registry  unless  the  transferee  is  satisfactory  to  them.  Even 
there,  however,  the  directors  must  be  reasonable  in  the  use  of  their  dis- 
cretion. In  this  country  the  most  frequent  restriction  created  by  char- 
ter is  that  of  a  lien  for  debts  due  to  the  corporation  from  the  transferrer. 

§  409.  Lien  of  the  corporation}  —  The  charters  of  many  corpora- 
tions contain  an  express  provision  that  the  corporation  may  refuse 
to  allow  a  stockholder  to  register  a  transfer  of  his  stock  until  he  has 
paid  any  and  all  debts  which  he  may  at  that  time  owe  to  the  corporation. 
Such  a  lien  need  not  be  stated  in  the  certificate  of  stock.  While  it  may 
not  be  created  generally  by  a  by-law,  yet  certain  phrases  in  charters 
have  been  held  to  uphold  a  lien  that  is  declared  and  made  effectual  by 
a  by-law.  Where  the  lien  exists  the  corporation  may  refuse  to  allow  a 
registry  of  transfer  of  any  stock  owned  by  the  debtor  until  all  debts 
due  from  him  to  the  corporation  are  paid,  whether  due  or  not  due,  in- 
cluding, it  seems,  unpaid  subscriptions.  It  does  not  apply,  however, 
to  debts  due  from  a  transferee  of  the  certificate  who  never  obtained 
registry  or  appeared  as  a  stockholder  on  the  corporate  books.  Nor 
does  it  apply  to  debts  due  from  the  registered  stockholder,  but  incurred 
after  the  corporation  was  given  notice  that  he  had  sold  his  stock  to  an- 
other. The  corporation  may  waive  its  lien  and  allow  registry-  without 
the  debts  of  the  old  stockholder  being  paid.  A  registry  without  re- 
quiring payment  is  a  waiver  in  itself. 

§  410.  Formalities  of  registry  which  the  corporation  may  insist 
upon}  — Where,  as  is  ordinarily  the  case,  the  owner  of  stock  has 
sold  it  by  signing  the  transfer  and  power  of  attorney  on  the  back  of  the 
certificate,  leaving  the  names  of  the  transferee  and  of  the  attorney  blank, 
the  corporation  may  require  the  names  of  the  transferee  and  of  the  at- 
torney to  be  filled  in  before  it  allows  a  registry.  If  it  is  in  doubt  as  to 
the  genuineness  of  the  signature  of  the  former  owner  of  the  certificate, 
it  may  require  his  presence  or  reasonable  proof  that  he  actually  made 
the  signature.  It  cannot  compel  the  transferrer  to  be  present,  but 
may  require  the  presence  of  the  attorney  authorized  to  make  the  reg- 
istry. The  registry  itself  is  generally  made  by  a  corporate  oflScer  as 
attorney.  A  surrender  of  the  old  certificate  is  required,  and  new  cer- 
tificates in  the  name  of  the  transferee  are  issued.     The  by-laws  may 

1  See  ch.  XXXI,  infra.  ^  See  ch.  XXII,  supra. 

1200 


CH.   XXIII. I 


RULES   REGUL-^TING   REGISTRY.  [§  410. 


prescribe  that  the  registry  shall  be  in  the  presence  of  certain  corporate 
officers.  If  the  corporation  does  not  keep  a  transfer  book  or  stock  book, 
a  surrender  of  the  old  certificate  and  the  issue  of  a  new  one  is  sufficient 
to  constitute  a  transfer  and  registry.  The  applicant  may  inquire  of 
the  corporate  officer  in  charge  for  the  registry  clerk,  and  is  not  bound 
to  ascertain  the  individual  himself.  The  corporate  registry  may  be 
on  its  ledger  without  any  issue  of  certificate.  If  it  keeps  no  registry 
at  all,  mere  notice  to  it  of  a  transfer  constitutes  a  legal  registry.  The 
corporation  has  no  right  to  delay  registry  unreasonably  for  the  purpose 
of  obtaining  advice  or  for  any  other  reasons.  It  may  require  that  the 
power  of  attorney  run  directly  from  the.  former  registered  stockholder 
and  not  from  an  intermediate  one.  A  written  acceptance  of  the  stock 
by  the  transferee  cannot  be  insisted  on  by  the  corporation.  The  formali- 
ties of  registry  may  be  waived  by  the  corporation,  and  any  act  which 
indicates  that  it  considers  a  transferee  to  be  a  stockholder  is  effectual 
to  make  him  such  so  far  as  the  corporation  is  concerned,  though  no  reg- 
istry was  had. 

Either  the  transferrer  or  the  transferee  or  an  intermediate  unregis- 
tered transferee  may  apply  to  the  corporation  for  the  purpose  of  ob- 
taining a  registry.  The  corporation  cannot  refuse  it  merely  because 
of  the  motive  of  the  transferrer  or  of  the  transferee  in  making  the  sale 
and  transfer.  WTienever  the  corporation  refuses  to  allow  a  registry 
the  applicant  may  sue  it  for  damages,  or  he  may  go  into  a  court  of  equity 
and  ask  that  the  corporation  be  decreed  to  allow  registry  or  to  pay  dam- 
ages in  lieu  thereof.  A  few  cases  hold  that  he  may  compel  registry  by 
a  mandamus  against  the  corporation,  but  the  weight  of  authority  holds 
otherwise.  In  another  volume  of  this  work  are  given  the  rules  of  a 
great  railroad  corporation  on  this  subject,^  and  it  will  be  noticed  that 
particular  attention  is  called  to  transfers  by  or  to  married  women, 
trustees,  executors,  administrators,  and  corporations. 

1  A  set  of  rules  governing  the  transfer  of  stock  is  given  in  Vol.  V,  infra. 


(76)  1201 


CHAPTER   XXIV. 

NON-NEGOTIABILITY  OF  STOCK  AND  DANGERS  INCURRED  IN 
THE   PURCHASE  OF  CERTIFICATES  OF  STOCK. 


A.    NON-NEGOTIABILITY. 

§  411.  Nature  and  kinds  of  negotiable 
instruments. 

412.  Certificates  of  stock  are  not  ne- 

gotiable instruments,  but 
have  been  given  many  of  the 
elements  of  negotiability  in 
America  —  In  England  they 
are  not  negotiable  in  any 
sense. 

413.  The  term  "  quasi-negotiability , ' ' 

as  applied  to  certificates  of 
stock  throws  little  light 
upon  the  subject. 

414.  The    distinction    between    the 

"legal"  and  the  "equitable" 
title  in  the  transfer  of  cer- 
tificates of  stock  is  unsatis- 
factory. 

415.  The  only  method  of  treatment 

of  the  subject  seems  to  be 
by  inquiring  under  what 
facts  the  holder  or  pur- 
chaser is  protected. 

416.  The  particular  rules  protecting 

a  bona  fide  purchaser  of  cer- 
tificates of  stock  are  based 
on  estoppel. 

B.    DANGERS   INCURRED   IN   PURCHASING 
STOCK. 

417.  Liabilities,  risks,  and  rights  of 

one  who  owns  or  purchases 
a  certificate  of  stock. 

418.  Liability  on  unpaid  par  value, 

that  is,  the  unpaid  subscrip- 
tion price  of  the  stock. 

419.  Forfeiture  for  non-payment  of 

calls. 

420.  Statutory  liability. 

421.  Liability   where   the   purchaser 

has  the  transfer  made  to  a 
nominal  holder. 

422.  No     liability     for     assessments 

after  the  par  value  of  stock 
has  been  paid  in. 


423.  Liability  when  stock  was  issued 

for  property. 

424.  Liability  as  partners  by  reason 

of  defective  incorporation  or 
for  other  reasons. 

425.  Danger  of  corporate  lien. 

426.  Overissued  stock. 

427.  Danger  that  transferrer  or  pre- 

vious holder  is  an  infant, 
married    woman,    or   lunatic. 

428.  Purchase  of  stock  by  or  from  a 

corporation. 

429.  Purchase    from    joint    owners^ 

partners,  and  agents. 

430.  Purchase   of   stock   at   sheriff's 

execution  sale,  or  from  as- 
signee in  bankruptcy,  or  for 
benefit  of  creditors. 

431.  Purchase  from  a  pledgee. 

432.  Pledgee    is    protected    in    the 

same  way  as  purchaser  of 
stock. 

433.  Danger  of  purchasing  from  an 

executor,  administrator,  or 
guardian. 

434.  Purchase  from  a  trustee. 

435.  Sale  by  vendor  to  another  pur- 

chaser without  delivery  of 
certificates  of  stock. 

436.  Danger  of  forgery. 

437.  Loss  or  theft  of  certificates  in- 

dorsed in  blank. 

438.  Danger  that  a  previous  holder 

has  been  deprived  of  thai 
same  stock  by  fraud. 

439.  Statute  of  frauds. 

440.  Gambling  sales  of  stock. 

441.  Method   of  assigning  a  certifi- 

cate of  stock. 

442.  Registry  of  transfer. 

443.  Purchaser  not  affected  by  rights 

of  holders  of  that  stock  back 
of  the  last  registry. 

444.  Summary. 


A.    NON-NEGOTIABILITY. 


§  411.  Nature  and  kinds  of  negotiable  instruments.  —  Negotiable 
instruments  at  the  present  day  are  promissory  notes,  bills  of  exchange, 

1202 


CH.  XXIV.]  RISK   IN    PURCHASING   STOCK.  [§  412. 

checks,  bank-notes,  bonds  of  the  United  States,  of  states,  of  foreign 
governments,  of  cities  and  counties  and  municipahties  generally,^ 
certificates  of  deposit,  interest  coupons,  and  bonds  of  corporations.^ 
Bills  of  lading  have  only  a  quasi-negotiability.^  These  different  instru- 
ments, however,  are  not  necessarily  negotiable,  but  are  so  only  when 
in  writing ;  when  containing  an  unconditional  promise  or  order  to  pay ; 
when  the  payment  is  to  be  in  money  only ;  when  the  amount  is  cer- 
tain ;  when  it  is  payable  to  a  specific  person,  and  not  in  the  alternative ; 
when  it  is  payable  at  a  certain  time;  when  it  contains  words  such  as 
"  to  A.  or  order,"  or  "  to  bearer,"  or  their  equivalent ;  and  when  de- 
livery has  been  duly  made.  If  the  instrument  is  lacking  in  any  one  of 
these  qualities,  it  falls  back  into  the  category  of  non-negotiable  —  that 
is,  merely  assignable  —  instruments.  Again,  a  holder  of  one  of  the 
above-named  negotiable  instruments  can  have  the  benefit  of  its  nego- 
tiability only  when  he  has  purchased  it  in  good  faith,  for  value,  before 
the  instrument  was  due,  and  without  notice  of  the  equitable  rights  of 
previous  holders  or  makers ;  that  is,  he  must  be  a  bona  fide  holder 
or  a  purchaser  from  a  bona  fide  holder.^  When  all  these  elements  of 
negotiability  and  ownership  co-exist,  the  advantage  of  negotiability  over 
non-negotiability  is  this :  that  the  holder  of  the  instrument  is  entitled 
to  the  face  value  thereof,  and  his  right  cannot  be  affected,  decreased, 
or  defeated  by  any  facts  or  equities  between  previous  holders  which 
would  defeat  the  security  as  between  them,  unless  it  be  void  for  usury 
or  other  original  cause.  A  receiver's  certificate  may  be  assigned,  and  a 
new  certificate  demanded  of  the  receiver  in  exchange,  and  while  the 
certificate  is  non-negotiable,  yet  if  the  holder  signs  it  in  blank,  and  gives 
it  to  brokers  to  sell  a  bona  fide  purchaser  is  protected.^  Even  though 
a  corporate  obligation  to  pay  money  is  drawn  in  the  shape  of  a  cer- 
tificate of  stock,  yet  it  is  not  quasi-negotiable  like  a  certificate  of  stock.® 
§  412.  Certificates  of  stock  are  not  negotiable  instruments,  but 
have  been  given  many  of  the  elements  of  negotiability  in  America  — 
In  England  they  are  not  negotiable  in  any  sense.  —  It  is  very  clear, 
and  it  is  well  established,  that  certificates  of  stock  are  not  negotiable 
instruments.^    A  certificate  of  stock  is  not  a  promise  or  order  to  pay 

1  Warrants  issued  by  a  municipal-  195  (1887).  In  Oregon  by  statute 
ity  are  transferable,  but  not  negotia-  warehouse  receipts  are  made  negotia- 
ble. Watson  V.  City  of  Huron,  97  Fed.  ble.  Anderson  v.  Portland,  etc.  Co., 
Rep.  449  (1899).  37  Oreg.  483  (1900). 

2  Daniel,  Neg.  Inst.,  3d  ed.,  book  *  As  to  who  is  a  bona  fide  holder, 
VI ;     Dos    Passos   on   Stock   Brokers,  see  §  293,  supra,  and  §  767,  infra. 

ch.  IX.     As  to  bonds  of  corporations,  ^  McCarthy   v.    Crawford,    238    111. 

see  eh.  XLVI,  infra.  38  (1908).     See  also  §§  876,  877,  infra. 

3  Pollard  V.  Reardon,  65  Fed.  Rep.  « Am.  Ex.,  etc.  Bank  v.  Woodlawn 
848    (1895).     See    also    Bank    of    Ba-  Cemetery,  194  N.  Y.  116  (1909). 
tavia  V.  New  York,  etc.  R.  R.,  106  N.  Y.  '  Certificates  of  stock  are  not  nego- 

1203 


§412. 


RISK   IN    PURCHASING   STOCK. 


[CH.   XXIV. 


money,  nor  has  it  any  of  the  essentials  of  a  negotiable  instrument- 
Moreover,  it  has  been  repeatedly  decided  by  the  courts  that  a  certifi- 
cate of  stock  is  not  negotiable,  and  no  custom  of  trade  or  of  brokers 

tiable.  Hammond  v.  Hastings,  134  that  "the  certificate  accompanied  by 
U.  S.  401  (1890).  "Certificates  of  the  assignment  and  power  of  attorney- 
stock  are  not  securities  for  money  in  thus  executed  in  blank  has,  perhaps,  a 
any  sense;  much  less  are  they  nego-  species  of  negotiability,  although  of  a 
tiable  securities."  Mechanics'  Bank  v.  peculiar  character,  but  one  necessary 
New  York,  etc.  R.  R.,  13  N.  Y.  599,  to  the  public  convenience."  In  First 
627  (1856);  Farmers'  Bank  v.  Die-  Nat.  Bank  v.  Lanier,  11  Wall.  369, 
bold,  etc.  Co.,  66  Ohio  St.  367  (1902)  ;,/377  (1871),  the  court  said  that  al- 
Barstow  v.  Savage  Min.  Co.,  64  Cal.l^  though  certificates  of  stock  are  " — ' 


388  (1883) ;  Clark  v.  American  Coal 
Co.,  86  Iowa,  436  (1892).  Baker  r. 
Davie,  211  Mass.  429  (1912).  Schu- 
macher v.  Greene,  etc.  Co.,  117  Minn. 
124  (1912).  Weaver  v.  Barden,  49 
N.  Y.  286,  288  (1872),  says  that  a 
certificate   of   stock   has   none   of   the 


ther  in  form  or  character  negotiable 
paper,  they  approximate  to  it  as  nearly 
as  practicable."  Brinkerhoff-Farris, 
etc.  Co.  V.  Home  Lumber  Co.,  118  Mo. 
447  (1893).  In  a  recent  case  in  Mary- 
land an  important  distinction  is 
drawn  between   the  rights  of  a  bona 


qualities    of    commercial    or    negotia-  fide  purchaser  and  a  bona  fide  pledgee 

ble  paper.     Leitch  v.  Wells,  48  N.  Y.  It  is  held  that  the  usual  form  of  trans- 

585,  613  (1872),  says:    "Since  the  de-  fer  on  the  back  of  certificates  of  stock 

cision  of  the  case  of  McNeil  v.  Tenth  signed    by    the   stockholder   with    the 

Nat.  Bank,  .  .  .  certificates  of  stock,  name  of  the  transferee  left  blank  does 

with   blank   assignments,   and   powers  not  protect  a  bona  fide  pledgee.     The 

of  attorney  attached,  must  be  nearly  pledgee   is   chargeable   with   notice   of 


as  negotiable  as  commercial  paper." 
Weyer  v.  Second  Nat.  Bank,  57  Ind. 
198,  208  (1877),  says:  "The  differ- 
ence between  a  promissory  note  and  a 
certificate  of  bank  stock  is  so  wide 
and  marked  that  a  rule  of  law  gov- 
erning the  transfer  of  the  former  is 
by  no  means  applicable  to  the  latter." 
Sewall  V.  Boston  Water-power  Co.,  86 
Mass.  277  (1862),  says  :  "The  authori- 
ties cited  show  that  a  certificate  of 
stock  is  not  a  negotiable  instrument, _ 
and  without  any  authorities  it  is  ap- 
parent that  it  has  not  a  negotiable 
character."  To  same  effect,  Mandel- 
baum  V.  North  Am.  Min.  Co.,  4  Mich. 
465,  473  (1857),  holding,  however, 
that  by  statute  in  that  state  certifi- 
cates of  stock  are  practically  negotia- 
ble. Shaw  V.  Spencer,  100  Mass.  382 
(1868),  says:  "It  is  clear  that  a  cer- 
tificate of  stock  transferred  in  blank 
is  not  a  negotiable  instrument.  .  .  . 
No  commercial  usage  can  give  to  such 
an  instrument  the  attributes  of  nego- 
tiability." Sherwood  v.  Meadow  Val- 
ley Min.  Co.,  50  Cal.  412  (1875); 
Bridgeport  Bank  v.  New  York,  etc. 
R.  R.,  30  Conn.  231, 275  (1871),  holding 


all  the  facts  and  equities.  Under  this 
decision  it  would  seem  to  be  necessary 
to  enlarge  the  terms  and  form  of  the 
usual  assignment  and  power  of  at- 
torney on  the  back  of  certificates  of 
stock.  German  Sav.  Bank  v.  Ren- 
shaw,  78  Md.  475  (1894),  a  case 
wherein  a  broker  holding  stock  on  a 
margin  repledged  it  at  a  bank.  Com- 
pare §  432,  infra.  In  Hampton,  etc. 
R.  R.  V.  Bank,  48  S.  C.  120  (1897), 
where  a  railroad  had  issued  stock  and 
bonds  to  a  finance  company  for  money 
to  be  paid  in  the  future,  and  the 
finance  company  had  not  paid  the 
money,  but  on  the  contrary  had 
pledged  some  of  the  stock  to  a  bank, 
the  court  held  that  the  bank  was 
bound  to  take  notice  of  a  provision  in 
the  charter  to  the  effect  that  no  sale 
of  stock  should  relieve  an  original 
owner  from  his  obligations  to  the 
company,  and  hence  was  not  protected 
as  pledgee.  By  statute  in  Louisiana 
certificates  of  stock  are  made  fully 
negotiable  by  written  transfer  or 
written  power  to  sell  and  transfer. 
Succession  of  Desina,  123  La.  468 
(1909). 


1204 


CH.  XXIV.] 


RISK   IN    PURCHASING   STOCK. 


[§  412. 


can  give  to  it  that  character.  Nevertheless  the  New  York  court  of 
appeals  has  well  said  that  while  certificates  of  stock  are  not  negotiable 
in  form  and  represent  no  debt  and  are  not  securities  for  money,  yet 
"  the  courts  of  this  country,  in  view  of  the  extensive  dealing  in  certif- 
icates of  shares  in  corporate  enterprises,  and  the  interest,  both  of  the 
public  and  of  the  corporation  which  issues  them,  in  making  them  readily 
transferable  and  convertible,  have  given  to  them  some  of  the  elements 
of  negotiability."  ^ 


1  Knox  V.  Eden  Musee  Co.,  148  N.  Y. 
441  (1896),  rev'g  74  Hun,  483.  The 
New  York  court  of  appeals  has  held 
that  where  certificates  of  stock  is- 
sued by  a  New  Jersey  corporation  are 
within  the  state  of  New  York,  an 
attachment  may  be  levied  upon  them 
and  the  interest  of  the  owner  or 
pledgor  therein  sold,  such  certificates 
being  a  property  right  within  the 
state.  Simpson  v.  Jersev  City,  etc. 
Co.,  165  N.  Y.  193  (19o5),  the  court 
distinguishing  the  case  of  Plimpton  v. 
Bigelow,  93  N.  Y.  592  (1883),  on  the 
ground  that  the  certificates  of  stock 
in  that  ease  were  not  within  the 
state.  The  coiu-t  said:  "Certificates 
of  stock  are  treated  by  business  men 
as  property  for  all  practical  purposes. 
They  are  sold  in  the  market  and  they 
are  transferred  as  collateral  security 
for  loans,  and  they  are  used  in  vari- 
•ous  ways  as  property.  They  pass  by 
delivery  from  hand  to  hand  and  they 
are  the  subject  of  larceny."  In  Mas- 
ury  V.  Arkansas  National  Bank,  93 
Fed.  Rep.  603  (1899),  the  court  said: 
"It  is  a  well-known  fact  that  stock 
certificates  frequently  circulate  in 
places  far  remote  from  the  home  of 
the  corporation  by  which  they  were 
issued,  that  in  all  commercial  centers 
they  are  commonly  transferred  from 
hand  to  hand  like  negotiable  paper, 
and  that  they  are  hypothecated  for 
temporary  loans  by  a  simple  indorse- 
ment and  delivery  thereof,  the  latter 
being  perhaps  the  most  common  use 
to  which  such  securities  are  put.  In 
the  great  majority  of  cases  when 
stock  is  merely  pledged  for  a  loan,  no 
record  of  the  transfer  is  made  on  the 
books  of  the  corporation,  and  in  the 
judgment  of  laymen  the  making  of 
such  a  record  seems  to  be  a  needless 
formality.     The  trend  of  modern  deci- 


sions has  been  to  encourage  the  free 
circulation  of  stock  certificates  in  the 
mode  last  indicated,  on  the  theory 
that  they  are  a  valuable  aid  to  com- 
mercial transactions,  and  that  the 
public  interest  is  best  subserved  by  re- 
moving all  restrictions  against  their 
circulation,  and  by  placing  them  as 
nearly  as  possible  on  the  plane  of 
commercial  paper."  Where  no  certifi- 
cates of  stock  have  been  issued,  a 
purchaser  of  a  subscriber's  right  to 
the  stock  is  not  protected  as  a  pur- 
chaser of  a  certificate  of  stock  is  pro- 
tected. Manchester  St.  Ry.  v.  Wil- 
liams, 71  N.  H.  312  (1902).  See  also 
§  374,  supra.  Where  all  the  stock- 
holders agree  to  a  consolidation,  but 
before  it  is  carried  out  one  of  them 
sells  his  stock,  the  purchaser,  if  he 
knew  of  the  agreement,  is  bound  by 
it,  but  is  (mtitled  to  a  transfer  of  the 
stock  to  himself  on  the  books.  Senn 
V.  Union,  etc.  Co.,  115  Mo.  App.  685 
(1906).  Cf.  Campbell  v.  American 
Zylonite  Co.,  122  N.  Y.  455  (1890). 
Even  though  pledged  stock  is  not  trans- 
ferred on  the  corporate  books,  yet  as 
between  pledgor  and  pledgee,  the 
pledgee  is  entitled  to  all  dividends  and 
persons  having  notice  to  that  effect 
cannot  retain  such  dividends  as  against 
the  pledgee,  whether  in  cash  or  stock. 
Brady  v.  Irby,  142  S.  W.  Rep.  1124 
(Ark.  1912).  An  agreement  of  stock- 
holders that  dividends  shall  be  applied 
to  the  payment  of  a  certain  debt  takes 
precedence  over  an  assignment  by  one 
of  them  of  his  stock  to  a  third  person. 
Farquhar  v.  Canada,  etc.  Co.,  212  Mass. 
278  (1912)  ;  holding  that  the  unregis- 
tered transferee  was  not  bound  by  the 
agreement  of  the  transferrer  that  cer- 
tain other  shares  should  be  preferred 
as  to  dividends.  Even  though  a 
corporate    obligation    to    pay    money 


1205 


§  412.] 


EISK  IN   PURCHASING  STOCK. 


[CH.  XXIV. 


In  England  an  entirely  different  rule  prevails.  Certificates  of  stock 
in  that  country  are  merely  evidences  of  ownership  of  stock,  and  this 
muniment  of  title  is  not  negotiable  nor  quasi-negotiable.  The  pur- 
chaser of  it  is  not  protected  against  equities  involved  in  the  title  of 
prior  owners  of  the  certificate.  Only  a  transfer  on  the  corporate  books 
shuts  off  those  equities.  Indeed,  this  rule  is  insisted  upon  in  England 
so  rigidly  that  not  even  the  certificates  of  stock  issued  by  American 
corporations  and  held  by  Englishmen  are  given  the  quasi-negotiabihty 
of  the  American  law.^     It  has  recently  been  held  in  England,  however. 


is  drawn  in  the  shape  of  a  certificate  of 
stock,  yet  it  is  not  quasi-negotiable  like 
acertificateof  stock.  Am.  Ex., etc.  Bank 
V.  Woodlawn  Cemetery,  194  N.  Y.  116 
(1909).  See  155  N.  Y.  App.  Div.  646. 
1  The  English  courts  refuse  to  fol- 
low the  American  rule  in  regard  to 
the  practical  negotiability  of  certifi- 
cates of  stock  transferred  in  blank,  al- 
though such  certificates  of  stock  are 
issued  by  an  American  corporation. 
Hence  where  the  English  owner  of 
such  certificates  delivered  them  to  a 
broker  to  forward  to  America  for  a 
transfer,  and  the  broker  fraudulently 
sold  them  for  his  own  purposes  to 
other  persons,  it  was  held  that  no  title 
was  conveyed  to  such  other  persons, 
and  that  the  American  law  did  not 
apply.  The  court  said,  however,  that 
there  was  sufl&eient  in  the  case  to  put 
the  purchasing  party  upon  notice. 
Colonial  Bank  v.  Cady,  L.  R.  15  App. 
Cas.  267  (1890) ;  Williams  v.  Colonial 
Bank,  L.  R.  38  Ch.  D.  388  (1888); 
Dodds  V.  Hills,  2  H.  &  M.  424  (1865) ; 
Roots  V.  Williamson,  L.  R.  38  Ch.  D. 
485  (1888).  In  England,  even  if  the 
secretary  by  mistake  delivers  the  old 
certificates  back  to  •  the  transferrer 
and  he  pledges  them,  the  pledgee  is 
not  protected,  the  basis  of  this  deci- 
sion being  that  the  proximate  cause 
of  the  loss  was  the  transferrer  and 
not  the  secretary,  but  in  England  the 
transfers  are  made  by  instruments 
separate  from  the  certificates.  Long- 
man V.  Bath,  etc.  Ltd.,  [1905]  1  Ch. 
646.  Where  an  assignee  for  the  bene- 
fit of  creditors  demands  from  the  as- 
signor certificates  of  stock  which  he 
owns,  but  he  does  not  deliver  them, 
and  the  assignee  then  notifies  the 
company,  he  is  entitled  to  the  stock 


as  against  a  broker  to  whom  the  as- 
signor subsequently  delivers  the  cer- 
tificates to  sell.  Peat  and  Moss  v. 
Clayton  and  others,  [1906]  1  Ch.  6.59. 
In  England  certificates  of  stock  in- 
dorsed in  blank  convey  title  by  estop- 
pel to  a  bona  fide  purchaser  when  the 
transfer  need  not  be  by  deed  under 
seal.  Rumball  v.  Metropolitan  Bank, 
L.  R.  2  Q.  B.  D.  194  (1877),  where  a 
broker  committed  a  breach  of  trust. 
The  court  said  the  stockholder  "is 
in  the  position  of  a  person  who  has 
made  a  representation,  on  the  face  of 
his  scrip,  that  it  would  pass  with  a 
good  title  to  any  one  on  his  taking  it 
in  good  faith  and  for  value,  and  who 
has  put  it  in  the  power  of  this  agent 
to  hand  over  the  scrip  with  this  rep- 
resentation to  those  who  are  induced 
to  alter  their  position  on  the  faith  of 
the  representation  so  made."  Ex  parte 
Sargent,  L.  R.  17  Eq.  273  (1874) ;  Re 
Barned's  Banking  Co.,  L.  R.  3  Ch. 
App.  105  (1867).  But  this  is  generally 
not  the  case.  Ortigosa  v.  Brown,  47 
L.  J.  (Ch.)  168  (1877);  and  France 
V.  Clark,  L.  R.  22  Ch.  D.  830  (1883), 
gives  no  protection  to  the  bona  fide 
purchaser  until  he  is  registered.  See 
also  Shropshire,  etc.  Co.  v.  Queen, 
L.  R.  7  H.  L.  496  (1875);  Brigga 
V.  Massey,  42  L.  T.  49  (1880).  See 
also  §§  325,  361,  377,  supra.  See  Eas- 
ton  V.  London  J.  S.  Bank,  L.  R.  34 
Ch.  D.  95  (1886).  Even  in  England, 
if  a  broker  transfers  stock  in  breach 
of  trust  to  a  bank,  and  the  bank  after- 
wards, at  his  request,  transfers  the 
stock  to  another  person,  the  bank  be- 
ing ignorant  of  his  agency,  is  not  lia- 
ble to  the  principal  for  the  value  of 
the  stock.  Marshall  v.  National,  etc. 
Bank,  66  L.  T.  Rep.  525  (1892).     As 


1206 


CH.  XXIV.I 


EISK   IN   PURCHASING   STOCK. 


[§  413. 


that  a  certificate  of  fully-paid-up  stock  running  to  "  bearer  "  was  nego- 
tiable, and  if  stolen  and  then  sold  to  a  bona  fide  holder  for  value  without 
notice,  the  latter  might  compel  the  company  to  pay  subsequent  divi- 
dends to  him  in  respect  to  such  a  share  warrant.^ 

§  413.  The  term  "  quad-negotiability,''  as  applied  to  certificates 
of  stock,  throws  little  light  upon  the  subject.-  —  It  is  little  satisfac- 
tion to  the  court,  the  practitioner,  the  student,  or  the  owner  of  stocks 
to  be  told  that  certificates  of  stock  have  a  quasi-negotiability.  This 
term  has  been  coined  to  describe  the  character  of  certain  things  which 
can  be  understood  only  by  a  study  and  knowledge  of  the  characteristics 
of  the  thing  described.  Especially  is  this  true  of  certificates  of  stock. 
The  information  sought  is  not  whether  the  certificate  is  quasi-negotiable, 
but  whether  the  holder  of  it  is  protected  under  different  states  of  fact 
and  circumstances.  He  who  intends  to  purchase  such  certificates 
wishes  to  know  what  dangers  or  risks  he  incurs  by  the  purchase.  The 
practitioner  is  interested,  not  in  the  general  character  of  the  instru- 
ment, but  in  the  law  as  applicable  to  his  particular  case.  Many  of  the 
cases  concede  to  certificates  of  stock  a  quasi-negotiability ;    but  it  is 


between  the  trustee  in  bankruptcy  of 
a  defaulter  and  the  party  to  whom  the 
defaulter    has    transferred    shares    of 
stock  without  a  transfer  on  the  cor- 
porate books,  the  latter  is  entitled  to 
the  stock.     Re  Dodds,  64  L.  T.  Rep. 
476  (1891).     In  Moore  v.  Northwest- 
ern Bank,  [1891]  2  Ch.  599,  the  rules 
of  the  company  provided  that,  when 
certificates  were  sent  in  for  transfer, 
the  particulars  should  be  entered  in  a 
book  which  must   be  brought   before 
the    directors    for    approval    and    be 
signed  by  three  members  of  the  board, 
after   which    the    registry    of    transfer 
was  completed.     The  real  owner  of  the 
certificates  was  permitted   to  reclaim 
them  before  approval  by  the  directors, 
the  court  saying  that  the  notice  thus 
given  to  the  company  gave  the  court 
seisin  for  purposes  of  adjudication.     In 
Simmons  v.  London  J.  S.  Bank,  [1891] 
1  Ch.  270,  the  court  held  that  a  bank 
to  whom  a  broker  had  pledged  stocks 
belonging  to  his  customer  was  not  a 
bona   fide   purchaser    under    the    facts 
in   that   case,    and   consequently   was 
not  protected,  even  though  a  bona  fide 
purchaser  might  have  been.  Although 
in  England  an  unregistered  transferee 
of  stock  is  not  protected  against  an- 
other transfer  which  is  registered,  yet 


he  is  protected  where  he  lodged  his 
transfer  with  the  corporate  secretary, 
and  the  latter  accepted  it  for  trans- 
fer before  the  second  transfer  was 
made.  Nanney  v.  Morgan,  L.  R.  35 
Ch.  D.  598  (1887).  See  Shaw  v. 
Goebel-Brew.  Co.,  202  Fed.  Rep.  408 
(1912).  In  the  case  Donaldson  v. 
Gillot,  L.  R.  3  Eq.  274  (1866),  the 
pledgee  of  one  who  held  the  eertifieate 
indorsed  to  himself  was  not  protected, 
since  the  pledgor  had  purchased  as 
agent  and  had  fraudulently  taken  title 
in  his  own  name. 

1  Webb,  etc.  Co.  v.  Alexandria,  etc. 
Co.,  Ltd.,  93  L.  T.  Rep.  339  (1905). 

2  Healy  v.  Defiance  City  Bank,  160 
111.  App.  628,  637  (1911).  Daniel, 
Neg.  Insts.,  §1708,  says:  "The 
phrase  'quasi-negotiable'  has  been 
termed  an  unhappy  one,  and  certainly 
it  is  far  from  satisfactory,  as  it  conveys 
no  accurate,  well-defined  meaning.  But 
still  it  describes  better  than  any  other 
short-hand  expression  the  nature  of 
those  instruments  which,  while  not 
negotiable  in  the  sense  of  the  law  mer- 
chant, are  so  framed  and  so  dealt  with 
as  frequently  to  convey  as  good  a  title 
to  the  transferee  as  if  they  were  nego- 
tiable." National  Bk.  v.  Kershaw  Oil 
Mill,  202  Fed.  Rep.  90,  94  (1912). 


1207 


414. 


RISK   IN    PURCHASING   STOCK. 


[CH.  XXIV. 


extremely  doubtful  whether  such  discussions  do  not  confuse  any 
understanding  of  the  character  of  such  an  instrument  more  than  they 
explain  it. 

§  414.  The  distinction  between  the  "  legal  "  and  the  "  equitable  " 
title  in  the  transfer  of  certificates  of  stock  is  unsatisfactory.  —  Many 
of  the  cases  involving  the  rights  of  a  transferee  of  stock  discuss  and 
treat  the  subject  from  the  point  of  view  that  the  transferee  is  protected 
in  his  ownership  when  the  legal  title  passes  to  him,  but  is  not  so  protected 
when  only  the  equitable  title  passes.  Unfortunately  it  happens  that, 
under  the  same  state  of  facts,  one  court  will  hold  that  only  the  equitable 
title  passes ;  another  that  the  legal  title  passes ;  and  a  third  court  will 
hold  that  both  the  legal  and  the  equitable  titles  pass.  The  result  is 
confusion,  doubt,  and  difficulty,  with  little  light  as  to  the  real  status  of 
certificates  of  stock. ^ 


4 


i"In  reaching  this  conclusion  we 
have  not  thought  it  necessary  to  con- 
sider the  supposed  distinction  between 
the  legal  and  the  equitable  title,  or  to 
determine  whether  the  title  of  the  ex- 
ecutors is  the  one  or  the  other.  The 
distinction  belongs  appropriately  to 
the  law  of  real  estate ;  and,  though  it 
has  been  extended  to  personalty,  the 
application  with  regard  thereto  has 
been  less  extensive ;  and  the  distinc- 
tion itself  is  less  significant.  For  in 
many  cases  —  as,  for  example,  in  the 
case  of  money  received  in  trust  or  for 
the  use  of  another  —  courts  of  law 
recognize  the  equitable  as  the  legal 
title ;  and,  even  where  the  distinction 
obtains,  the  equitable  is  regarded  as 
the  true  owner  by  courts  of  equity. 
Hence,  in  this  state,  where  the  courts 
exercise  both  jurisdictions,  the  ques- 
tion as  to  the  nature  of  the  title 
sued  upon  is  generally  immaterial,  or, 
rather,  it  is  material  only  to  the 
question  of  the  nature  of  the  action, 
whether  legal  or  equitable,  and  to 
the  question  of  parties."  Ashton  v. 
Zeila  Min.  Co.,  134  Cal.  408  (1901). 
Such  also  seems  to  be  the  view  taken 
in  Lowell  on  Transfer  of  Stock  (1884), 
pp.  104,  105,  where  the  learned  author 
says:  "It  is  often  supposed,  for 
example,  that  the  right  of  a  creditor 
to  seize  stock  which  has  been  sold 
before  it  is  transferred  upon  the 
books  depends  on  the  passing  of  the 
legal  title ;  but  we  shall  attempt  to 
prove  that  the  legal  title  has  in  real- 


ity no  effect  upon  the  matter."  The 
same  authority  shows  the  confusion 
resulting  from  this  distinction  of  the 
legal  from  the  equitable  title  in  the 
following  note  to  page  103  :  "That  the 
legal  title  passes  before  the  transfer 
on  the  books.  In  the  following  cases 
this  is  made  part  of  the  ratio  deci- 
dendi: Ross  V.  Southwestern  R.  R.,  53 
Ga.  514,  532  (1874) ;  Merchants'  Nat. 
Bank  v.  Richards,  6  Mo.  App.  454,  463 
(1879) ;  aff'd,  74  Mo.  77  (1881) ;  Car- 
roll V.  Mullanphy  Sav.  Bank,  8  Mo. 
App.  249,  2.52  (1880);  Scripture  v. 
Francestown  Soapstone  Co.,  50  N.  H. 
571  (semble) ;  McNeil  v.  Tenth  Nat. 
Bank,  46  N.  Y.  325  (1871) ;  Leitch  v. 
Wells,  48  N.  Y.  585  (1872) ;  Smith  v. 
American  Coal  Co.,  7  Lans.  317 
(1873);  Noyes  v.  Spaulding,  27  Vt. 
420  (1855);  Cherry  v.  Frost,  7  Lea 
(Tenn.),  1  (1881).  In  the  following 
cases  the  same  principle  was  laid 
down  obiter:  State  v.  Leete,  16  Nev. 
242,  2.50  (1881);  Eastman  v.  Fiske, 
9  N.  H.  182  (1838) ;  New  York,  etc. 
R.  R.  V.  Schuyler,  34  N.  Y.  30,  80 
(1865) ;  Grymes  v.  Hone,  49  N.  Y.  17 
(1872) ;  Johnson  v.  Underbill,  52  N.  Y. 
203  (1873);  Holbrook  v.  New  Jer- 
sey Zinc  Co.,  57  N.  Y.  616  (1874); 
Cushman  v.  Thayer  Mfg.  Co.,  76 
N.  Y.  365  (1879) ;  and  see  Purchase  v. 
Exchange  Bank,  3  Rob.  (N.  Y.)  164 
(1865).  .  .  .  That  the  legal  title  does 
not  pass  until  transfer  on  the  books. 
In  the  following  cases  this  principle  is 
made   a   part   of   the   ratio   decidendi: 


1208 


CH.  XXIV. 


KISK   IN    PURCH.\SING   STOCK. 


[§  415. 


§  415.  The  only  method  of  treatment  of  the  subject  seems  to  he  by 
inquinng  under  what  facts  the  holder  or  purchaser  is  protected.— 
The  court,  the  practitioner,  the  purchaser,  or  the  holder  of  certifi- 
cates of  stock  wishes  to  know  what  liabihty  and  what  dangers  are  in- 
curred by  the  purchase  and  ownership  of  a  certificate  of  stock.  It 
becomes  important  for  him  to  ascertain  whether  forgery  or  theft; 
or  improper  registry  by  the  corporation  ;  or  breach  of  trust  by  a  trustee, 
executor,  or  agent  formerly  holding  that  particular  stock;  or  fraud 
whereby  a  former  owner  was  deprived  of  that  same  stock ;  or  legal  pro- 
ceedings, such  as  attachment,  execution,  mandamus,  and  decrees  of 
the  court ;  or  any  other  fact  or  equitable  right  between  former  owners 
of  the  stock  which  he  purchases,  can  affect  him,  a  bona  fide  purchaser 
for  value  and  without  notice  of  those  rights.  These  questions  cannot 
be  solved  or  answered  by  any  general  rules  or  theories,  since  certificates 
of  stock  have  a  law,  an  origin,  and  a  nature  different  from  other  kinds 
of  securities.  The  fact  that  a  registry  of  transfer  is  required  to  be  made 
on  the  corporate  books  adds  further  complication  to  the  rights  of  a 
holder.  General  rules  derived  from  and  applicable  to  other  instruments 
or  securities  cannot,  with  any  certainty,  clearness,  or  satisfactory  results. 


Union  Bank  v.  Laird,  2  Wheat.  390 
(1817) ;  Lowry  v.  Commercial,  etc. 
Bank,  Taney,  310  (1848);  s.  c,  15 
Fed.  Cas.  1040;  Brown  v.  Adams,  5 
Biss.  181  (1870);  s.  c,  4  Fed.  Cas. 
3.30;  Williams  v.  Mechanics'  Bank,  5 
Blatchf.  59  (1862) ;  s.  c,  29  Fed.  Cas. 
1376;  Becher  v.  Wells,  etc.  Co.,  1  Fed. 
Rep.  276  (1880);  Marlborough  Mfg. 
Co.  V.  Smith,  2  Conn.  579  (1818); 
Northop  V.  Newtown,  etc.  Turnp.  Co., 
3  Conn.  544  (1821);  Oxford  Turnp. 
Co.  V.  Bunnel,  6  Conn.  552  (1827) ; 
Button  V.  Connecticut  Bank,  13  Conn. 
493  (1840) ;  Vansands  v.  Middlesex 
County  Bank,  26  Conn.  144  (1857) ; 
Coleman  v.  Spencer,  5  Blaekf.  197 
(1839);  Helm  v.  S^^iggett,  12  Ind. 
194  {semhle)  (1859);  Weyer  v.  Sec- 
ond Nat.  Bank,  57  Ind.  198  (1877); 
Fisher  v.  Essex  Bank,  71  Mass.  373 
(1855) ;  Boyd  v.  Rockport  Steam  Cot- 
ton Mills,  73  Mass.  406  (1856); 
Blanehard  v.  Dedham  Gas  Light  Co., 
78  Mass.  213  (1858);  McCourry  v. 
Suydam,  10  N.  J.  L.  245  (1828); 
.  .  .  Stebbins  v.  Phoerdx  Ins.  Co., 
3  Paige,  350  (1832) ;  Mechanics'  Bank 
V.  New  York,  etc.  R.  R.,  13  N.  Y.  599 
(1856);  New  York,  etc.  R.  R.  r. 
Schuyler,  38  Barb.  534  (1860) ;    Lock- 


wood  V.  Mechanics'  Nat.  Bank,  9  R.  L 
308,  331,  335  (1869).  In  the  following 
eases  the  same  doctrine  is  laid  down 
obiter:  Black  v.  Zacharie,  3  How. 
(U.  S.)  483  (1845) ;  U.  S.  v.  Cutts,  1 
Sumn.  133  (18-32) ;  s.  c,  25  Fed.  Cas. 
745  (this  was,  however,  a  case  of  gov- 
ernment debt,  not  of  corporate  stock) ; 
Planters',  etc.  Ins.  Co.  v.  Selma  Sav. 
Bank,  03  Ala.  585  (1879);  Otis  v. 
Gardner,  105  lU.  436  {semhle)  (1883) ; 
and  see  Kellogg  v.  Stoclmell,  75  III. 
68  (1874) ;  People's  Bank  v.  Gridley, 
91  111.  457  (1879) ;  Bruce  v.  Smith,  44 
Ind.  1  (1873) ;  State  v.  First  Nat. 
Bank,  89  Ind.  302  (1883);  Shaw  v. 
Spencer,  100  ^lass.  382  (1868) ;  Sibley 
V.  Quinsigamond  Nat.  Bank,  133  Mass. 
515  (1882);  White  v.  Salisbury,  33 
Mo.  150  (1862) ;  Boatmen's  Ins.  Co.  v. 
Able,  48  Mo.  136  (1871) ;  .  .  .  Conant 
V.  Seneca  County  Bank,  1  Ohio  St. 
298  (18.53) ;  U.  S.  v.  Vaughan,  3 
Binn.  (Pa.)  394  {semhle)  (1811); 
Bank  of  Commerce's  Appeal,  73  Pa. 
St.  59  (1873) ;  Fraser  v.  Charleston, 
11  S.  C.  486  {semhle)  (1878)."  As  ta 
the  reason  for  the  distinction  betweea 
the  legal  and  equitable  title,  see  1 
University  Law  Rev.  218  (1894). 


1209 


§416. 


BISK   IN    PURCHASING   STOCK. 


[CH.  XXIV. 


be  applied  to  certificates  of  stock.  They  should  be  considered  by  them- 
selves. The  future  character  and  status  of  certificates  of  stock  will  be 
much  clearer,  better,  and  more  satisfactory  to  the  investing  public 
if  the  law  governing  them  be  formed  on  its  own  basis. 

§  416.  The  particular  rules  protecting  a  bona  fide  purchaser  of 
certificates  of  stock  are  based  on  estoppel.  —  Nearly  all  of  the  rules 
whereby  a  purchaser  of  stock  is  protected  against  the  rights  of  previous 
holders  grow  out  of  the  fact  that  such  previous  holder  or  holders  have 
enabled  persons  to  sell  the  stock,  and  consequently  are  estopped  from 
claiming  that  they  did  not  intend  so  to  do.^  This  law  of  estoppel  pro- 
tects the  purchaser  against  not  only  the  rights  of  previous  holders,  but 
against  the  claims  of  the  corporation  itself.^  Indeed,  to  such  an  extent 
has  the  law  of  estoppel  been  applied  to  protect  a  bona  fide  purchaser 
of  stock,  that,  excepting  in  cases  of  certificates  transferred  in  blank 
and  lost  or  stolen  without  negligence  on  the  part  of  the  owner,  a  bona 
fide  purchaser  is  protected  now  in  almost  every  instance  where  he  would 
be  protected  if  he  were  purchasing  a  promissory  note  or  other  negotiable 
instrument.^    The  courts  are  steadily  extending  the  application  of  the 


1  Wood's  Appeal,  92  Pa.  St.  379,  390 
(1880) ;  McNeil  v.  Tenth  Nat.  Bank, 
46  N.  Y.  325,  329  (1871) ;  Weaver  v. 
Barden,  49  N.  Y.  286,  288  (1872); 
Moore  v.  Metropolitan  Nat.  Bank,  55 
N.  Y.  41,  47  (1873) ;  Mount  Holly,  etc. 
Co.  V.  Ferree,  17  N.  J.  Eq.  117  (1864) ; 
Walker  v.  Detroit  Transit  Ry.,  47 
Mich.  338,  347  (1882).  See  also  Fat- 
man  V.  Lobach,  1  Duer,  354  (1852) ; 
Moodie  v.  Seventh  Nat.  Bank,  3  W.  N. 
Cas.  118  (1876);  Matthews  v.  Massa- 
chusetts Nat.  Bank,  1  Holmes,  396 
(1884);  s.  c,  16  Fed.  Cas.  1113.  "If 
the  owner  of  stock  kno^vvingly  places  in 
the  hand  of  another  the  certificate 
therefor,  either  indorsed  in  blank  or  by 
a  separate  instrument  of  transfer  and 
power  of  attorney,  the  person  to  whom 
the  certificate  and  instrument  are 
delivered  can  pass  a  good  title  by 
delivery  or  pledge  regardless  of  the 
relations  between  him  and  the  owner. 
This  is  not  on  the  ground  that  the 
certificate  becomes  a  negotiable  instru- 
ment, but,  on  the  ground  of  estoppel, 
because  the  owner,  having  given  an- 
other such  indicia  of  title  as  clothes 
him  with  the  appearance  of  ownership, 
is  precluded  from  setting  up  title  in 
himself  as  against  a  holder  in  good 
faith."     Bfcker    v.    Davie,    211    Mass. 


429  (1912).  The  agreement  of  a 
stockholder  to  surrender  his  stock  in 
liquidation  of  an  unpaid  assessment  is 
without  consideration,  and  does  not 
bind  a  purchaser  of  the  certificate. 
Hill  V.  Atoka,  etc.  Co.,  21  S.  W.  Rep. 
508  (Mo.  1893).  Other  phases  of  this 
case  are  passed  on  in  124  Mo.  153. 

2  Many  instances  of  the  Uability  of 
the  corporation  on  certificates  of 
stock  which  it  has  issued,  and  which 
have  been  sold  or  pledged  to  an  in- 
nocent person  for  value,  are  given  in 
chs.  XVII,  XIX,  XXI,  XXII,  XXIII, 
supra,  and  ch.  XXVI,  infra.  The  pur- 
chaser, however,  is  not  bona  fide,  un- 
less he  actually  parted  with  the  con- 
sideration before  he  knew  of  defects 
as  to  the  stock.  See  §  767,  infra,  as  to 
bona  fides,  and  Hayden  v.  Charter  Oak, 
etc.  Park,  63  Conn.  142  (1893). 

3  Quoted  and  approved  in  Cincin- 
nati, etc.  Ry.  V.  Citizens'  Nat.  Bank, 
56  Ohio  St.  351  (1897).  The  supreme 
court  of  Maryland  in  the  case  Real 
Estate,  etc.  Co.  v.  Bird,  90  Md.  229 
(1899),  after  quoting  the  above,  com- 
mented thereon  as  follows:  "Without 
intending  to  unite  in  the  prophecy  of 
the  learned  author  as  to  what  may 
yet  be  done,  the  fact  is  that  courts 
have  felt  called   on,  ex   necessitate  rei. 


1210 


CH.  XXIV.J 


RISK   IN    PURCHASING   STOCK. 


[§  416. 


law  of  estoppel  herein,  and  in  the  course  of  time  it  is  possible  that  cer- 
tificates of  stock  may  become  more  negotiable  than  negotiable  instru- 
ments themselves.^  Thus  the  New  York  court  of  appeals  has  held 
that  where  certificates  of  stock  issued  by  a  Xew  Jersey  corporation 
are  wathin  the  state  of  New  York,  an  attachment  may  be  levied  upon 
them  and  the  interest  of  the  owner  or  pledgor  therein  sold,  such  cer- 
tificates being  a  property  right  within  the  state.^  Again,  even  though 
in  anticipation  of  an  increase  of  the  capital  stock  the  stockliolders  agree 
among  themselves  to  waive  their  prior  right  to  subscribe  for  such  in- 
creased capital  stock,  yet  a  bona  fide  purchaser  of  a  certificate  of  stock 
prior  to  such  increase  is  not  bound  by  such  agreement  and  may  claim 
his  pro  rata  share  of  the  increased  capital  stock  at  par.^  And  again, 
where  four  shares  of  stock  are  transferred  to  a  person  by  the  corpora- 
tion to  qualify  him  as  a  director,  and  he  agrees  to  return  the  same  to 
the  corporation  when  ceasing  to  be  a  director,  but  thereafter  and  be- 
fore he  ceases  to  be  a  director  he  ag^ees  with  the  indorsers  of  his  note 
that  they  shall  have  the  stock  as  collateral  security,  they  are  protected, 
even  though  the  stock  was  actually  delivered  to  them  after  they  had 
notice  of  the  first  agreement,  it  being  shown,  however,  that  they  had 
no  notice  of  such  agreement  at  the  time  they  became  sureties."*  Where 
no  certificates  of  stock  have  been  issued,  a  purchaser  of  a  subscriber's 
right  to  the  stock  is  not  protected  as  a  purchaser  of  a  certificate  of  stock 
is  protected.^ 


to  free  certificates  of  stock  from  many 
of  the  burdens  that  most  non-negoti- 
able instruments  are  required  in  law 
to  carry.  If  a  negotiable  instrument 
is,  as  has  been  said  of  it  by  a  dis- 
tinguished jurist,  'a  courier  without 
luggage,'  a  certificate  of  stock  in  the 
form  now  usually  followed  might  at 
least  be  said  to  be  'a  courier  without 
much  luggage.'" 

1  Quoted  and  approved  in  O'Mara  v. 
Newcomb,  38  Colo.  27.5  (1906),  the 
court  saying  also:  "And  while  it  is 
true  that  certificates  of  stock  are  not 
negotiable  paper,  and  the  statement 
that  they  are  semi-negotiable  has  been 
criticized  as  tending  to  confusion,  it  is 
nevertheless  true  that  the  courts  are  so 
steadily  and  consistently  extending  the 
application  of  the  law  of  estoppel  to 
certificates  of  stock  that,  as  said  by 
Mr.  Cook,  in  the  course  of  time  it  is 
possible  that  they  may  become  more 


negotiable  than  negotiable  instruments 
themselves." 

2  Simpson  v.  Jersey  City,  etc.  Co., 
165  N.  Y.  193  (1900),  the  court  dis- 
tinguishing the  case  of  Plimpton  v. 
Bigelow,  93  N.  Y.  592  (1883),  on  the 
ground  that  the  certificates  of  stock 
in  that  case  were  not  within  the  state. 
The  court  said:  "Certificates  of  stock 
are  treated  by  business  men  as  prop- 
erty for  all  practical  purposes.  They 
are  sold  in  the  market  and  they  are 
transferred  as  collateral  security  for 
loans,  and  they  are  used  in  various 
ways  as  property.  They  pass  by  deliv- 
ery from  hand  to  hand  and  they  are 
the  subject  of  larceny." 

3  Real  Estate,  etc.  Co.  v.  Bird,  90 
Md.  229  (1899). 

*  Dueber,  etc.  Co.  v.  Daugherty,  62 
Ohio  St.  589  (1900). 

5  Manchester  St.  Ry.  v.  Williams,  71 
N.  H.  312  (1902). 


1211 


§§  417^19.]  RISK   IN   PURCHASING   STOCK.  [cH.  XXIV. 


B.     DANGERS   INCURRED   IN   PURCHASING    STOCK. 

§  417.  Liabilities,  risks,  and  rights  of  one  who  owns  or  purchases 
a  certificate  of  stock.  —  It  is  proposed  to  state  separately  and  in  de- 
tail the  liabilities  on  the  subscription  price  and  by  statute  incurred 
by  one  who  owns  or  purchases  a  certificate  of  stock ;  also  the  risks 
or  dangers  incurred  by  a  purchase  of  stock  as  affected  by  the  rights 
of  previous  holders  of  that  stock ;  also  a  few  of  the  rights  of  an  owner 
or  purchaser  of  a  certificate  of  stock  as  regards  the  general  incidents 
appertaining  to  stockholdership.  These  subjects  are  discussed  in  full 
in  other  parts  of  this  work,  and  consequently  the  authority  for  rules 
laid  down  herein  must  be  sought  for  in  those  parts.  The  purpose 
here  is  to  state  succinctly  and  in  language  free  from  technical 
phraseology  the  position  occupied  by  a  bona  fide  purchaser  of  a 
certificate  of  stock. 

§  418.  Liability  on  unpaid  par  value,  that  is,  the  unpaid  subscrip- 
tion price  of  the  stock}  —  In  general  the  purchaser  of  a  certificate  of 
stock  is  immediately  liable  on  the  subscription  price  of  the  stock  so 
far  as  it  has  not  been  paid  by  previous  holders  of  the  stock  purchased 
and  has  not  been  called  by  the  corporation.  The  transferrer  is  bound 
to  pay  all  calls  made  before  the  transferee  purchases.  If  the  transferee 
does  not  immediately  register  his  transfer  on  the  corporate  books,  he 
is  liable  to  pay  to  the  transferrer  such  calls  as  are  made  after  the  trans- 
fer and  which  the  corporation  compels  the  latter  to  pay.  The  transferee 
who  buys  stock  supposing  it  to  be  full-paid  is  not  liable  for  uncalled 
and  unpaid  parts  of  the  subscription,  even  though  the  certificate  is 
silent  as  to  whether  the  par  value  of  the  stock  has  been  paid  in  or  not. 
The  rule  is  still  stronger  where  the  certificate  states  that  the  stock  is 
paid-up  stock,  or  the  transferee,  before  purchasing,  inquires  of  the  cor- 
poration and  is  told  that  the  stock  is  paid-up.  He  may  purchase  in 
reliance  thereon,  and  cannot  afterwards  be  held  liable,  even  though  the 
stock  turns  out  not  to  have  been  fully  paid-up. 

§  419.  Forfeiture  for  non-payment  of  calls}  —  Where  the  corpo- 
ration is  given  by  its  charter  or  by  statute  the  right  to  forfeit  and  sell 
stock  for  non-payment  of  the  subscription  price  when  called  in  by  the 
corporation,  a  notice  to  the  stockholder  of  the  intended  forfeiture  is 
always  required.  This  notice,  however,  is  given  always  to  him  who 
appears  by  the  corporate  registry  to  be  the  stockholder.  Accordingly, 
a  transferee  or  owner  of  stock  who  has  not  obtained  a  registry  of  his 
transfer  on  the  corporate  books  is  liable  to  lose  his  stock  by  a  forfeiture 
for  non-payment  of  calls,  and  may  lose  it  without  knowledge  of  the 

^  See  eh.  XV,  supra.  '  See  ch.  VIII,  supra. 

1212 


CH.  XXIV.]  RISK   IN    PURCHASING   STOCK.  [§§420-423. 

call  or  forfeiture,  unless  he  appears  on  the  registry  of  the  corporation 
as  the  owner  of  the  stock. 

§  420.  Statutory  liability}  —  The  liability  by  statute,  of  a  purchaser 
of  certificates  of  stock,  to  corporate  creditors,  in  addition  to  the  sub- 
scription price  which  is  treated  of  above,  exists  in  a  great  many  cases. 
In  the  first  place  this  liability  may  not  exist  at  all  against  any  one,  either 
transferrer  or  transferee.  It  rarely  exists  in  the  case  of  railroad  cor- 
porations. WTiere  the  statutory  liability  exists,  the  liability  of  a  pur- 
chaser of  stock  is  as  follows :  If  the  transferee  immediately  registers 
his  transfer  on  the  corporate  books,  he  becomes  at  once  liable  by  stat- 
ute for  debts  of  the  corporation  contracted  after  such  registry,  and  the 
transferrer  is  not  liable  thereon.  The  transferee  may  or  may  not  be 
liable  on  corporate  debts  contracted  before  he  purchased,  according 
to  the  words  of  the  statute  creating  the  liability.  The  transferrer  is 
liable  on  corporate  debts  contracted  after  he  sold  the  stock  but  before 
the  transfer  was  registered.  In  the  latter  case  the  transferrer  has  re- 
course to  the  transferee. 

§  421.  Liability  where  the  purchaser  has  the  transfer  made  to  a 
nominal  holder?  —  Where  a  person  purchases  stock  and  takes  it  in 
the  name  of  a  "  dummy,"  the  stock  never  having  been  registered  in 
the  name  of  the  real  owner,  the  latter  is  not  liable  on  such  stock,  ac- 
cording to  the  English  rule.  In  America  a  contrary  rule  prevails,  and 
the  courts  hold  him  liable  on  the  ground  that  he  is  a  principal,  and  as 
such  is  liable  as  an  undisclosed  principal  for  the  acts  of  his  agent,  the 
"  dummy." 

§  422.  No  liability  for  assessments  after  the  par  value  of  the  stock 
has  been  paid  in?  —  By  well-established  principles  of  law,  stock- 
holders are  liable  on  their  stock  only  to  the  extent  of  the  unpaid  par 
value  of  the  stock,  unless  the  statute  expressly  provides  otherwise. 
Neither  the  directors,  nor  all  the  other  stockholders  combined,  in  cor- 
porate meeting  assembled  or  otherwise,  can  compel  a  dissenting  stock- 
holder to  pay  any  more  money  into  the  corporation  or  subject  him  to 
further  liability  on  his  stock.  Nor  can  the  legislature,  subsequently 
to  his  purchase  of  the  stock,  pass  a  law  increasing  his  liability,  unless 
the  power  to  alter  or  amend  the  charter  is  reserved  to  it,  in  which  case 
such  a  law  would  be  constitutional. 

§  423.  Liability  when  stock  was  issued  for  property?  —  Shares  of 
stock  may  be  issued  under  an  agreement  that  payment  is  to  be  made  in 
labor,  services,  material,  or  contract  work.  If  so  issued,  and  the  labor 
or  material  received  by  the  corporation  is  fairly  equal  in  value  to  the 
par  value  of  the  stock,  both  the  original  holder  and  the  transferee  of 

1  See  ch.  XII,  supra.  3  gee  eh.  XIII,  supra. 

*  See  §§  253,  265,  supra.  *  See  chs.  II  and  III,  supra. 

1213 


§§  424,  425.]  BISK   IN    PURCHASING   STOCK.  [cH.  XXIV. 

such  stock  take  it  as  full-paid  stock,  and  cannot  be  held  liable  for  any 
further  amount,  even  though  the  value  of  the  property  turns  out  sub- 
sequently to  have  been  overestimated  but  was  made  in  good  faith. 
Where,  however,  the  property  is  intentionally  overvalued  and  stock  is 
issued  for  it,  the  persons  originally  receiving  the  stock  are  liable  to  have 
the  transaction  set  aside,  the  value  of  the  property  or  work  done  credited 
to  them,  and  the  real  value  of  the  stock,  not  necessarily  the  par  value, 
charged  to  them,  or  be  compelled  to  return  the  stock.  As  to  the  trans- 
ferees the  case  may  be  different.  If  they  purchased  with  notice  of  the 
fraud  they  are  not  protected ;  but  if  they  purchased  without  notice 
or  knowledge  that  the  property  was  intentionally  overvalued,  but  sup- 
posed that  the  stock  was  issued  as  paid-up  by  payment  in  property  or 
work  taken  at  a  bona  fide  value,  or  if  they  have  no  knowledge  of  how 
the  stock  was  paid  for,  but  take  it  as  paid-up  stock,  they  may  retain 
the  stock,  and  are  not  liable  for  any  further  amount  thereon. 

§  424.  Liability  as  partners  by  reason  of  defective  incorporation 
or  for  other  reasons}  —  Where  a  supposed  corporation  has  not  been 
duly  incorporated,  or  where  a  corporation  for  that  business  is  not  pro- 
vided for,  the  supposed  corporation  has  been  held  to  be  but  a  partner- 
ship, and  all  the  stockholders  held  liable  as  partners.  But  a  failure  to 
file  the  articles  of  association,  or  to  sign  and  publish  them,  or  the  omis- 
sion from  them  of  any  of  the  essential  facts  required  to  be  stated,  does 
not  ordinarily  defeat  the  attempted  incorporation  and  render  the  stock- 
holders liable  as  partners.  Again,  the  stockholders  are,  in  some  juris- 
dictions, liable  to  be  held  to  be  partners,  as  regards  creditors  of  the  en- 
terprise, where  the  corporation  organizes  in  one  place  and  proceeds  to 
do  all  its  business  in  another  place.  In  most  such  cases,  however,  the 
corporation  has  been  recognized  and  upheld,  and  the  stockholders  pro- 
tected in  their  limited  liability.  The  latter  class  of  decisions  is  the 
stronger,  and  certainly  more  to  be  commended  and  followed.  In  any 
case  a  transferee  is  not  liable  for  all  precedent  debts  of  the  concern,  but 
only  for  those  incurred  subsequently  to  the  registry  of  his  transfer. 

§  425.  Danger  of  corporate  lien}  —  Frequently  corporations  are 
given  by  charter  or  statute  a  lien  on  a  stockholder's  stock  for  debts 
due  from  him  to  the  corporation.  Wlien  such  lien  exists,  a  purchaser 
of  the  certificate  in  open  market  buys  subject  to  the  risk  that  the  one 
from  whom  he  buys  owes  the  corporation  a  debt,  and  that  the  corpora- 
tion will  not  allow  the  transferee  of  the  certificate  to  obtain  a  registry 
until  such  debt  is  paid.  In  many  of  the  states  the  lien  of  the  corpora- 
tion cannot  be  created  by  by-law.  Generally  it  exists  by  reason  of  a 
provision  of  the  charter.  Wlien  it  does  legally  exist  it  extends  to  all 
debts  owed  by  the  last  registered  stockholder,  whether  the  debt  be  due 

1  See  eh.  XIII,  supra.  2  gee  eh.  XXXI,  injra. 

1214 


CH.  XXIV.]  RISK   IN    PURCHASING   STOCK.  [§§  426,  427. 

or  not  due,  and  includes  uncalled  parts  of  the  subscription  price  of  the 
stock.  It  does  not,  however,  apply  to  debts  due  from  one  who  has 
bought  and  sold  the  certificate  without  appearing  on  the  registry  as  a 
stockliolder.  The  corporation  may  waive  the  lien,  and  a  registry  with- 
out insisting  on  the  lien  is  such  a  waiver.  The  lien  of  the  corporation 
extends  to  debts  incurred  by  the  transferrer  after  the  transfer,  but  be- 
fore the  corporation  is  notified  thereof. 

§  426.  Overissued  stock}  —  The  capital  stock  of  a  corporation  is 
fixed  by  statute.  There  is  no  power  in  the  corporation  itself  to  increase 
that  amount.  It  can  be  done  only  by  a  legislative  enactment.  Ac- 
cordingly, if  the  corporation  issues  certificates  of  stock  when  the  whole 
capital  stock  has  already  been  issued,  the  new  issue,  if  an  equivalent 
amount  of  outstanding  certificates  is  not  surrendered,  is  an  overissue, 
and  is  void.  Any  issue  of  stock  in  excess  of  the  amount  of  the  capital 
stock  as  fixed  by  the  charter  is  null  and  void.  The  purchaser  of  such 
certificates,  however,  is  not  without  his  remedy.  His  certificate  is 
so  much  waste  paper,  and  he  is  not  a  stockliolder ;  but  he  may  sue  the 
corporation  for  damages  and  recover  to  the  extent  of  his  injury.  The 
purchaser  may  also  sue  the  corporate  officers  who  participated  in  the 
issue  of  the  spurious  stock,  and  may  recover  damages.  He  cannot, 
however,  hold  an  innocent  transferrer  liable.  The  latter,  if  he  knew 
nothing  of  the  overissue,  is  not  to  be  held  as  a  guarantor  of  the  validity 
of  the  stock  which  he  sells. 

§  427.  Danger  that  transferrer  or  previous  holder  is  an  infant, 
married  woman,  or  lunatic.^  —  A  purchase  of  stock  from  an  infant 
is  a  dangerous  investment.  When  the  infant  comes  of  age  he  may 
elect  to  disaffirm,  and  may  hold  the  transferee  liable  for  the  stock. 
There  is  less  danger,  however,  in  accepting  a  transfer  of  stock  from 
an  infant  who  has  previously  purchased  the  stock  which  he  sells.  This 
previous  purchase,  and  also  his  sale  of  the  stock,  are  technically  void- 
able acts ;  but  after  the  stock  has  passed  from  his  control  the  law  dis- 
regards the  doubtful  medium  of  title,  and  considers  the  purchaser  from 
the  infant  as  the  legal  stockliolder.  As  regards  married  women,  the 
common  law  allowed  the  husband  to  sell  her  stock  after  he  had  reduced 
it  to  possession  by  registering  it  in  his  own  name  on  the  corporate  books. 
In  modern  times,  however,  the  right  of  a  married  woman  to  hold  and 
convey  personal  property  as  though  unmarried  has  been  established  in 
most  states  by  statute.  Her  right  to  sell  shares  of  stock  owned  by  her- 
self exists  where  she  may  sell  other  personal  property  similarly  owned, 
and  this  right  depends  upon  the  law  and  statutes  of  her  domicile.  A 
purchase  of  stock  from  a  lunatic  is  void. 

>  See  ch.  XVII,  supra.       ^  See  §§  66,  67,  250,  308,  310,  318,  319,  supra. 

1215 


§§  428-430.]  RISK  in  purchasing  stock.  [ch.  xxiv. 

§  428.  Purchase  of  stock  by  or  from  a  corporation}  —  In  England 
a  corporation  cannot  purchase  shares  of  its  own  capital  stock.  In 
this  country  there  is  a  difference  of  opinion  as  to  the  law.  The  statutes 
governing  the  corporation,  however,  sometimes  prohibit  such  purchases. 
Such  is  the  case  with  national  banks.  In  any  case,  however,  whether 
the  corporation  purchased  the  stock  legally  or  illegally,  a  purchaser  of 
the  same  stock  from  the  corporation  itself  is  not  affected  by  the  invalidity 
of  the  title  of  the  corporation.  Again,  it  is  a  general  rule,  both  in  Eng- 
land and  America,  that  one  corporation  has  no  right  to  purchase  stock 
in  another  corporation.  Sometimes  the  statutes  allow  such  purchases, 
but  more  often  expressly  provide  to  the  contrary  by  prohibiting  them. 
Nevertheless,  whatever  rule  applies  to  a  purchase  by  a  corporation  of 
stock  in  another  corporation,  the  law  is  very  clear  that  a  purchaser  of 
such  stock  from  the  corporation  is  protected  in  his  purchase.  The 
unauthorized  act  of  the  corporation  in  purchasing  has  no  effect  upon 
the  legality  of  its  sale  of  the  stock. 

§  429.  Purchase  from  joint  owners,  partners,  and  agents}  —  One 
joint  owner  cannot  sell  stock  standing  in  the  name  of  two  or  more 
as  joint  owners.  One  partner  may  sell  and  convey  stock  standing  in 
the  partnership  name.  As  regards  purchases  of  stock  from  agents, 
greater  difficulty  occurs.  If  the  purchaser  does  not  know  that  the 
vendor  is  selling  as  an  agent,  but  supposes  he  is  buying  stock  owned 
by  the  person  with  whom  he  is  dealing,  the  purchaser  is  always  pro- 
tected. The  same  rule,  after  considerable  doubt  and  discussion,  has 
been  established,  even  though  the  purchaser  knows  that  the  agent  is 
selling  as  agent.  The  sale  is  valid,  and  the  purchaser  is  protected, 
provided  he  has  no  reason  to  suspect  that  the  agent  is  selling  in  fraud 
of  the  owner's  rights  or  in  contradiction  of  his  orders. 

§  430.  Purchase  of  stock  at  sheriff's  execution  sale,  or  from  as- 
signee in  bankruptcy,  or  for  benefit  of  creditors}  —  A  purchase  of 
stock  at  an  execution  sale  by  the  sheriff  is  a  dangerous  investment. 
Almost  always  the  judgment  debtor  has  already  sold  and  transferred 
his  certificates  of  stock  to  a  bona  fide  purchaser.  If  such  bona  fide 
purchaser  has  registered  the  transfer  on  the  corporate  books  before 
the  attachment  or  execution  is  levied,  the  purchaser  at  the  execution 
sale  gets  nothing.  If  no  such  registry  has  been  made,  but  the  judgment 
debtor  sold  and  transferred  the  certificate  before  the  levy  of  attachment 
or  execution,  in  most  of  the  states,  including  New  York,  such  a  pur- 
chaser takes  title  and  the  execution  purchaser  none.  In  Connecticut 
and  a  few  other  states  a  contrary  rule  prevails.  If,  however,  the  judg- 
ment debtor  sells  the  certificate  after  the  attachment  or  execution  is 

1  See  ch.  XIX,  supra.       ^  See  ch.  XIX,  supra.       ^  See  ch.  XXVII,  infra. 

1216 


CH.  XXIV.]  RISK   IN   PURCHASING   STOCK.  [§§431,  432. 

levied,  the  purchaser  takes  no  title  —  the  execution  purchaser  is  en- 
titled to  the  stock.  A  purchaser  of  stock  from  an  assignee  in  bank- 
ruptcy or  insolvency,  or  for  the  benefit  of  creditors,  takes  a  good 
title  if  he  obtains  the  certificates  of  stock.  If,  however,  the 
insolvent  has  sold  such  certificates  to  another,  the  latter  is  entitled 
to  the  stock. 

§  431.  Purchase  from  a  pledgee}  —  A  pledgee  of  stock  has  no  right 
to  sell  or  re-pledge  the  stock  held  as  collateral  by  him,  unless  the  pledgor 
agreed  that  he  might  do  so.  If,  however,  the  pledgee  sells  or  re-pledges 
the  stock  to  one  who  takes  it  in  good  faith,  for  value,  and  without  no- 
tice of  the  fact  that  he  is  dealing  with  a  pledgee  of  the  stock,  such  a 
bona  fide  purchaser  is  protected.  He  is  protected  absolutely,  and  can 
keep  the  stock  if  he  purchased  it.  If,  however,  he  merely  took  it  in 
pledge  from  the  pledgee,  he  is  obliged  to  give  up  the  stock  to  the  real 
owner,  where  the  latter  tenders  to  the  re-pledgee  the  amount  of  the  debt 
owed  by  the  pledgee  to  the  re-pledgee,  for  which  the  stock  was  given  as 
security.  Where,  however,  a  person  buys  or  takes  in  pledge  stock  from 
one  who  makes  known  the  fact  that  he  is  holding  the  stock  as  pledgee, 
the  former  is  not  a  bona  fide  purchaser.  Moreover,  he  is  not  a  bona 
fide  holder  where  he  would  not  be  a  bona  fide  holder  of  a  promissory 
note  transferred  under  similar  circumstances,  as,  for  instance,  where 
he  loans  the  money  at  an  usurious  rate  of  interest ;  or  where  he  knows 
that  the  person  with  whom  he  is  dealing  is  but  an  agent,  and  is  pledging 
his  principal's  stock.  In  all  these  cases,  where  the  purchaser  or  pledgee 
of  stock  is  not  a  bona  fide  holder,  the  real  owner  and  original  pledgor 
of  the  stock  may  reclaim  his  stock  from  the  re-pledgee,  or  purchaser 
from  the  pledgee,  where  the  original  pledgor  could  recover  it  from  the 
first  pledgee.  The  re-pledgee  or  purchaser  from  the  pledgee  in  such  a 
case  stands  in  the  shoes  of  the  first  pledgee,  and  has  no  better  rights 
than  the  latter. 

§  432.  Pledgee  is  protected  in  the  same  way  as  purchaser  of  stock} 
—  The  rules  contained  in  this  chapter  explain  the  rights,  dangers,  and 
liabilities  incurred  by  the  purchaser  of  stock.  The  same  rules  pre- 
vail for  the  most  part  in  favor  of  one  who  receives  stock  in  pledge. 
A  purchaser  and  a  pledgee  are  treated  in  the  cases  as  being  similarly 
protected  or  similarly  not  protected.  There  is,  however,  one  important 
exception  to  this  rule.  If  a  person  who  is  about  to  take  stock  from 
another  knows  that  the  latter  is  disposing  of  the  stock  as  an  agent,  the 
former  may  purchase  the  stock  and  be  protected,  but  cannot  take  it  in 
pledge  and  be  similarly  protected.  An  agent  to  sell  is  not  an  agent  to 
pledge.     Another  exception  to  the  similarity  of  position  of  the  vendee 

1  See  ch.  XIX,  supm,  and  ch.  XXVI,         -  See  ehs.  XIX,  supra,  and  XXVI, 
injra.  infra. 

(77)  1217 


§§  433-435.]  RISK  in  purchasing  stock.  [ch.  xxiv. 

and  pledgee  of  stock  is  that  by  statute,  frequently,  the  latter  is  not 
liable  on  stock  where  the  former  is  liable. 

§  433.  Danger  of  purchasing  from  an  executor,  administrator,  or 
guardian}  —  There  is  practically  little  danger  incurred  in  purchas- 
ing stock  from  any  one  of  these.  It  is  the  duty  and  right  of  the  exec- 
utors or  administrators  to  sell  the  personal  property  and  convert 
it  into -money.  As  regards  guardians,  they  have  the  right  to  change 
the  funds  from  one  investment  to  another,  unless  a  statute  prescribes 
otherwise.  Accordingly,  a  purchaser  of  stock  from  any  one  of  those 
is  protected  in  his  purchase,  even  though  he  knows  that  his  vendor  is 
selling  in  his  official  capacity.  If,  however,  the  vendee  knows  that  a 
breach  of  trust  is  involved  or  contemplated,  he  is  not  a  bona  fide  pur- 
chaser and  is  not  protected.  All  the  executors  or  administrators  need 
not  join  in  a  sale  of  the  stock  owned  by  the  estate.  A  sale  and  transfer 
by  one  is  sufficient. 

§  434.  Purchase  from  a  trustee?  —  An  entirely  different  rule  pre- 
vails as  regards  stock  held  by  a  trustee  as  trustee.  A  purchaser  of 
stock  which  he  knows  the  vendor  holds  as  belonging  to  a  trust  estate 
is  bound  to  ascertain  whether,  by  the  instrument  creating  the  trust, 
the  trustee  has  a  power  to  sell.  If  he  has  no  such  power,  and  the  vendee 
knows  that  he  is  buying  trust-estate  stock,  the  latter  is  not  protected, 
but  is  a  party  to  any  breach  of  trust  that  may  be  involved  by  the  sale. 
If,  however,  the  purchaser  has  no  notice  or  knowledge  that  his  vendor 
is  selling  trust  stock,  the  former  is  a  bona  fide  purchaser  to  that  extent. 
He  is  not  bound  to  know  that  the  stock  is  trust-estate  stock,  and  con- 
sequently he  is  protected  in  his  purchase.  Any  facts  that  would  put 
an  ordinarily  inteUigent  man  on  inquiry  as  to  whether  the  stock  belongs 
to  a  trust  estate  is  notice,  and  prevents  the  purchaser  from  claiming 
to  be  a  bona  fide  purchaser.  Thus,  such  a  notice  is  held  to  be  given  by 
the  fact  that  on  the  face  of  the  certificate  of  stock,  and  following  the 
name  of  the  stockholder,  the  word  "  trustee  "  or  equivalent  words  are 
written. 

§  435.  Sale  by  vendor  to  another  purchaser  without  delivery  of 
certificate  of  stock?  —  A  purchaser  of  certificates  of  stock  has  no 
reason  to  fear  that  the  vendor  can  sell  the  stock  to  another  person 
and  thereby  defeat"  the  rights  of  the  purchaser  with  the  certificates. 
If  the  purchaser  without  certificates  does  not  obtain  registry  on  the  cor- 
porate books,  he  obtains  nothing  as  against  a  bona  fide  purchaser  of 
the  certificates,  even  though  the  latter's  transaction  was  subsequent 
in  time  to  the  former.  If,  however,  the  former  obtains  registry  on  the 
corporate  books,  the  corporation  is  at  fault,  and  is  liable  to  the  pur- 

1  See  ch.  XIX,  su-pra,        ^  See  ch.  XIX,  supra.        ^  See  ch.  XXI,  supra. 

1218 


CH.  XXIV.]  RISK   IN    PURCHASING    STOCK.  [§§  43G,  437. 

chaser  with  the  certificates.     The  corporation  must  either  issue  new 
certificates  to  the  latter  or  pay  damages. 

§  436.  Danger  of  forgery}  —  Forgery  cannot  be  the  source  of  a 
good  title  to  any  chose  in  action,  w^hether  a  promissory  note,  bond 
and  mortgage,  or  a  certificate  of  stock.  Consequently  a  purchaser 
of  stock  takes  the  risk  that  some  previous  owner  of  the  stock,  whose 
name  appears  on  the  certificate  either  as  the  registered  owner  or  as 
transferee,  was  deprived  of  his  title  by  forgery.  If  the  forgery  has 
been  made,  the  purchaser  cannot  claim  or  hold  the  stock,  although  he 
had  no  actual  knowledge  of  the  forgery.  He,  however,  has  recourse  to 
his  vendor,  and  may  compel  him  to  repay  the  amount  paid  for  the  stock. 
Where,  however,  the  forgery  was  committed  prior  to  the  last  registered 
transfer  of  that  stock,  a  bona  fide  purchaser  from  or  subsequent  to  the 
last  registered  holder  of  that  stock  is  protected.  All  rights  and  equities 
to  particular  shares  of  stock  are  cut  off  by  a  registry  and  sale  of  the  new 
certificates.  The  party  whose  name  was  forged  has  recourse  then  only  to 
the  corporation,  or  to  the  party  obtaining  registry,  or  to  previous  holders. 
This  limitation  to  the  dangers  incidental  to  the  purchase  of  stock  ex- 
tends to  other  rights  and  wrongs  as  well  as  to  a  case  of  forgery,  and  is 
of  great  importance  in  protecting  a  bona  fide  purchaser  of  stock. 

§  437.  Loss  or  theft  of  certificates  indorsed  in  blank?  —  It  is  ex- 
tremely doubtful  whether  a  purchaser  of  a  certificate  of  stock  which 
was  indorsed  in  blank,  and  which  has  been  lost  by  the  owner  and  found 
by  another  who  sells  it,  or  which  has  been  stolen  by  the  latter,  would 
be  protected  in  his  purchase,  even  though  he  buys  in  good  faith.  In  a 
case  of  negotiable  paper,  such  a  purchaser  would,  of  course,  be  protected. 
But  probably  the  purchaser  of  the  certificate  of  stock  would  not  be. 
No  case  holds  that  he  would  be  protected,  while  many  hold  that  he 
would  not.  If  the  real  owner  was  guilty  of  gross  negligence,  perhaps 
the  purchaser  from  the  thief  or  finder  of  the  certificate  indorsed  in  blank 
would  be  protected.  In  one  case  this  question  of  negligence  was  sub- 
mitted to  the  jury.^  Again,  sometimes  a  person  sells  stock  without 
delivering  the  certificate,  the  vendor  telling  the  vendee  that  the  cer- 
tificates have  been  lost.  Such  a  title  is  very  precarious.  The  purchaser 
should  refuse  to  buy  until  new  certificates  are  issued  by  the  corporation 
to  the  vendor,  —  an  issue  which  the  corporation  will  make  upon  a  suit- 
able bond  of  indemnity  being  given  to  it  by  the  person  who  alleges  a 
loss.  If  the  purchaser  does  not  take  this  precaution  he  buys  subject 
to  having  his  title  defeated  by  another  purchaser  who  obtained  the 
certificates  which  are  alleged  to  have  been  lost. 

1  See  ch.  XXI,  sxipra.  Doran,  151  111.  App.  527,  532  (1909) ; 

'^  See  ch.  XXI,  supra-  aff'd,  245  lU.  200. 

*  Quoted  and  approved  in  Miller  v. 

1219 


§§  438-441.]  RISK   IN    PURCHASING   STOCK.  [cH.  XXIV. 

§  438.  Danger  that  a  -previous  holder  has  deen  deprived  of  that 
same  stock  by  fraud}  —  Shares  of  stock  are  the  same  as  other  kinds 
of  property,  in  that  a  person  who  has  been  deprived  of  his  stock  by  fraud 
cannot  follow  the  stock  and  take  it  from  the  hands  of  a  bona  fide  pur- 
chaser for  value.  The  remedy  of  the  defrauded  person  is  for  damages 
against  the  person  defrauding  him,  or  for  a  re-transfer  of  the  stock,  if 
the  latter  still  holds  it,  "together  with  an  injunction  against  the  transfer 
of  the  latter.  But  if  the  person  obtaining  the  stock  by  fraud  sells  it, 
even  in  violation  of  an  injunction,  the  bona  fide  purchaser  for  value 
and  without  notice  is  protected.  The  defrauded  party  may,  however, 
sue  the  person  defrauding  him  in  the  state  of  the  corporation,  and,  by 
an  attachment  or  execution,  obtain  the  stock  if  it  has  not  passed  into 
bona  fide  hands.  Such  a  danger,  however,  is  the  ordinary  danger  of 
an  attachment  or  execution.  A  lis  pendens  of  a  suit  involving  stock 
never  charges  the  vendee  of  the  stock  with  notice,  as  is  the  case  of  a 
lis  pendens  affecting  real  estate.  Cases  of  fraud  in  the  sale  of  stock 
frequently  arise  in  cases  of  sales  by  agents  and  an  appropriation  of  the 
proceeds  ;  also  when  fraudulent  representations  are  made  to  the  vendor. 

§  439.  Statute  of  frauds?  —  The  statute  of  frauds  requires  that 
sales  of  personal  property  exceeding  in  value  a  certain  amount,  generally 
fifty  dollars,  shall  be  valid  and  enforceable  only  when  the  property  is 
partly  or  wholly  delivered,  or  partly  or  wholly  paid  for  at  the  time  of  the 
sale,  or  the  terms  of  the  sale  are  reduced  to  writing.  In  this  country 
a  sale  of  stock  must  conform  to  this  statute.  Generally  the  sale  is 
made  by  a  delivery  of  the  certificate  indorsed  in  blank.  Such  a  sale 
constitutes  a  delivery,  and  is  legal,  and  is  not  void  by  the  statute  of 
frauds.  The  statute  applies  both  to  sales  of  stock  which  are  considered 
as  completed  and  to  sales  which  are  to  be  completed  in  the  future. 

§  440.  Gambling  sales  of  stock?  —  A  gambling  sale  or  contract  to 
sell  stock  is  void  absolutely,  and  cannot  be  enforced.  As  a  matter 
of  practical  experience,  however,  it  is  difficult  to  prove  that  a  stock 
sale  is  a  gambling  sale.  It  is  such  only  when  both  the  vendor  and 
vendee  intend,  not  to  actually  have  a  delivery  of  the  stock,  but  to 
wait  and  see  whether  the  stock  rises  or  falls  in  the  market,  and  then 
to  settle  the  contract  by  the  loser  paying  the  loss.  An  intent  by  one 
of  the  parties  that  there  shall  be  no  delivery  will  not  make  the  sale  a 
gambling  one.     It  must  be  the  intent  of  both. 

§  441.  Method  of  assigning  a  certificate  of  stock?  —  A  certificate 
of  stock  is  generally  assigned  by  the  owners  signing  the  blank  trans- 
fer and  power  of  attorney  on  the  back  of  the  certificate.  The  transfer 
gives  title  to  him  whose  name  is  afterwards  filled  into  the  blank  transfer 

1  See  eh.  XX,  supra.  ^  See  eh.  XX,  supra. 

2  See  eh.  XX,  supra.  ■•  See  eh.  XXII,  supra. 

1220 


CH.  XXIV.]  RISK   IN   PURCHASING   STOCK.  [§§  442-444. 

thus  signed.  The  blank  power  of  attorney  is  for  an  entirely  different 
purpose.  It  enables  the  person  whose  name  is  filled  in  to  register  the 
transferee  as  a  stockholder  in  the  corporate  books.  Generally  the  power 
of  attorney  is  filled  in  with  the  name  of  a  clerk  or  agent  of  the  transferee, 
or  a  clerk  of  the  corporation  who  has  charge  of  the  registry  books.  After 
the  registered  holder  has  signed  the  transfer,  leaving  the  transferee's 
name  in  blank,  the  certificate  passes  from  hand  to  hand  until  some  holder 
cares  to  fill  his  name  into  the  blank.  He  may  then  obtain  registry,  or 
he  may  execute  another  transfer  and  sell  the  certificate.  Transfers 
need  not  be  under  seal  in  this  country.  In  England,  by  statute,  they 
generally  are  required  so  to  be. 

§  442.  Registry  of  transfer}  —  A  registry  of  transfer  is  made  by 
surrendering  an  old  certificate  of  stock  to  the  corporation,  making  an 
entry  of  the  transfer  on  the  corporate  registry  and  taking  from  the  cor- 
poration a  new  certificate  issued  in  the  name  of  the  transferee.  The 
object  of  obtaining  the  registry  is  to  obtain  a  right  to  vote,  to  receive 
dividends,  and  various  other  incidental  stockholders'  rights ;  also  to 
cut  off  corporate  liens  and  the  rights  of  third  parties  who  may  attach 
or  claim  the  stock.  If  there  is  a  reasonable  legal  doubt  as  to  the  right 
of  the  applicant  to  obtain  registry,  the  corporation  may  refuse  it,  and 
thus  obtain  the  protection  of  being  compelled  to  make  it  by  legal  pro- 
ceedings. If  two  parties  claim  the  stock,  each  denying  the  right  of  the 
other,  the  corporation  may  interplead,  provided  there  is  a  reasonable 
legal  doubt  as  to  who  is  entitled  to  the  stock.  If  the  corporation  im- 
properly refuses  to  register  a  transfer  when  requested,  the  applicant 
may  have  his  remedy  in  damages,  but  in  most  states  cannot  have  a 
mandamus. 

§  443.  Purchaser  not  affected  hy  rights  of  holders  of  that  stock 
back  of  the  last  registry.-  —  This  rule  is  peculiar  to  stock  certificates, 
and  cuts  off  rights  even  of  a  former  owner  who  has  been  deprived  of 
the  stock  by  forgery.  The  person  who  obtains  a  registry  first,  after 
the  illegal  act  has  been  done,  is  not  protected  by  this  rule.  But  his 
bona  fide  purchaser  of  the  new  certificates  and  all  subsequent  purchasers 
are  protected,  and  cannot  be  compelled  to  give  up  the  stock  to  the  prior 
owner  who  was  deprived  of  it  illegally. 

§  444.  Summary.  —  It  w411  be  seen  by  a  review  of  the  sections  of 
this  chapter,  that  the  dangers  of  loss  incurred  by  the  purchase  of  a 
certificate  of  stock  are  not  serious  or  numerous ;  and  it  is  well  that 
such  is  the  result.  Perhaps  the  most  striking  industrial  feature  of 
modern  times  is  the  accumulation  of  personal  property,  and  the  invest- 
ment of  that  property,  not  in  landed  estates,  but  in  the  stocks  and  bonds 

1  See  eh.  XXII,  supra.  -  See  §§  367,  369,  supra. 

1221  I 


I  444,]  EISK   IN   PURCHASING   STOCK.  [cH.  XXIV. 

of  corporations.  Such  investments  are  made  not  alone  by  capitalists, 
but  by  thousands  whose  savings  have  no  other  satisfactory  mode  of 
disposition.  In  fact,  it  is  curious  to  note  how  the  different  kinds  of 
property  have  a  different  relative  importance  in  the  course  of  time. 
Five  hundred  years  ago  real  estate  was  the  only  property  that  brought 
wealth  and  standing  to  its  owner.  Personal  property  was  of  little 
consequence,  and  not  much  of  it  was  in  existence.  But  during  the 
past  two  hundred  years  personal  property  has  risen  to  the  ascendancy. 
The  banker,  merchant,  manufacturer,  and  capitalist  have  become 
wealthier  than  the  landowner.  The  banker  millionaire  is  greater  and 
more  powerful  than  the  nobility.  Land,  the  old  source  of  centralized 
wealth,  inordinate  power,  caste  privileges  and  hereditary  rights,  no 
longer  maintains  its  pre-eminent  importance. 

And  it  is  not  alone  the  capitalist  and  banker  that  purchases  and 
holds  stock  in  corporations.  The  surplus  wealth  of  the  people  at 
large  is  being  invested  in  corporate  stocks  and  bonds.  Consolida- 
tions of  railroad  and  manufacturing  institutions  are  taking  place  on 
a  colossal  scale,  and  each  consolidation  involves  the  issue  of  new  securi- 
ties. A  single  company,  The  United  States  Steel  Corporation,  has  issued 
bonds  and  stock  aggregating  over  one  and  a  half  billions  of  dollars. 
The  great  railroad  systems  are  annually  increasing  their  capitaliza- 
tion. Street  railways,  gas  companies,  electric-light  companies  and  water- 
works companies  are  continually  adding  to  the  list  of  these  securities. 
In  the  course  of  time  all  these  securities  pass  into  the  hands  of  investors, 
bona  fide  holders.  It  would  hardly  be  an  exaggeration  to  say  that  the 
law  governing  stocks  and  bonds,  in  the  magnitude  of  the  interests,  the 
number  of  persons  affected,  and  the  variety  of  legal  principles  involved, 
is  more  important  than  all  other  branches  of  law  combined.  Even  real 
estate,  so  far  as  the  cities  are  concerned,  is  being  absorbed  by  corpora- 
tions, which  issue  stock  to  represent  it.  In  the  great  moneyed  centers 
stock  constitutes  the  chief  basis  of  credit,  as  collateral  for  loans  at  banks 
and  trust  companies.  Hundreds  of  millions  of  dollars  are  loaned  with 
no  other  security  than  certificates  of  stock  transferred  in  blank  with  no 
registry  whatsoever  on  the  corporate  books.  Hence  it  is  with  reason 
that  the  constant  tendency  of  the  courts  is  to  protect  the  bona  fide 
purchasers  of  certificates  of  stock.  It  is  fitting,  in  these  days  of  the 
formative  period  of  the  law  governing  corporations  and  stock,  that 
the  principles  governing  the  transfer  of  certificates  should  favor  the  pro- 
tection and  security  of  the  investing  public,  and  should  be  against  secret 
liens,  attachments,  claims,  and  negligence  of  both  the  corporation  and 
third  persons.  The  circuit  court  of  appeals  of  the  United  States  has 
well  said  :  "  In  the  great  majority  of  cases  when  stock  is  merely  pledged 
for  a  loan,  no  record  of  the  transfer  is  made  on  the  books  of  the  corpo- 

1222 


CH.  XXIV.]  RISK   IN   PURCHASING    STOCK.  [§  444. 

ration,  and  in  tlie  judgment  of  laymen  the  making  of  such  a  record 
seems  to  be  a  needless  formality.  The  trend  of  modern  decisions  has 
been  to  encourage  the  free  circulation  of  stock  certificates  in  the  mode 
last  indicated,  on  the  theory  that  they  are  a  valuable  aid  to  commercial 
transactions,  and  that  the  public  interest  is  best  subserved  by  removing 
all  restrictions  against  their  circulation,  and  by  placing  them  as  nearly 
as  possible  on  the  plane  of  commercial  paper."  ^ 

1  Masury  v.  Arkansas  Nat.  Bank,  93  Fed.  Rep.  603  (1899). 


1223 


PART  III. 

MISCELLANEOUS    RIGHTS   OF   STOCKHOLDERS. 


CHAPTER   XXV. 
STOCK-BROKERS   AND   THEIR   CONTRACTS. 


§445. 
446. 
447. 
448. 
449, 
450, 
451, 
452, 

453 


Definitions  and  scope  of  the 
subject. 

Wlio  may  be  a  broker  and  cus- 
tomer. 

Facts  making  person  a  broker 
or  customer  unintentionally. 

Broker  must  obey  specific  or- 
ders of  customer. 

Must  act  in  good  faith  and  in 
reasonable  time. 

Cannot  purchase  from  or  sell  to 
himself. 

Duties  and  liabilities  of  cus- 
tomer towards  broker. 

Duties  and  liabUitiqs  of  a  broker 
towards  customer  — ■  Dis- 
charge in  bankruptcy  —  Ar- 
rest —  Criminal  liability. 

Broker's  customs  and  usages. 


§  454.  Privity     of    contract    between 
broker  and  opposite  parties. 

455.  Privity  of  contract  between  the 

opposite  customers. 

456.  Intermediate    sub-brokers    and 

sub-customers. 

457.  Purchases  or  sales  on  margins 

—  Broker  as  a  pledgee  — 
Bona  fide  purchasers  or  re- 
pledgees  —  Distribution  of  as- 
sets on  failure  of  broker. 

458.  Broker's  rights   and   duties   on 

failure  of  margin. 

459.  What  will  excuse  notice  and  de- 

mand for  more  margin. 

460.  Customer's  remedies  and  dam- 

ages herein. 

461.  462.  Broker's      remedies      and 

damages  herein. 


§  445.  Definitions  and  scope  of  the  subject.  —  By  far  the  greater 
part  of  purchases  and  sales  of  stock  is  made,  both  in  this  country  and 
in  England,  through  organizations  especially  formed  for  that  purpose 
and  called  stock  exchanges.  A  stock  exchange  is  a  place  of  business 
where  those  who  make  up  the  membership  of  the  exchange  buy  and  sell 
stocks  and  bonds.  These  persons  are  called  stock-brokers.  A  stock- 
broker is  one  who  buys  and  sells  stock  as  the  agent  of  another,  the  latter 
being  called  a  customer  of  the  stock-broker.^  Accordingly,  in  an  ordi- 
nary purchase  of  stock  through  stock-brokers,  there  are  generally  four 
persons  involved  —  the  two  brokers  and  their  respective  customers. 
Stock-brokers  have  a  language  of  their  own.     They  have  coined  and 


1  In  Sibbald  v.  Bethlehem  Iron  Co., 
83  N.  Y.  378  (1881),  Finch,  .].,  favors 
the  definition  from  Pott  v.  Turner,  6 
Bing.  702,  706  (1830),  where  a  broker 
is  defined  as  "one  who  makes  bar- 
gains for  another  and  receives  a  com- 
mission    for     so     doing."     Story     on 


Agency,  §28  (9th  ed.),  says:  "The 
true  definition  of  a  broker  seems  to  be 
that  he  is  an  agent  employed  to  make 
bargains  and  contracts  between  other 
persons  in  matters  of  trade,  com- 
merce, or  na\agation,  for  a  compensa- 
tion commonly  called  brokerage." 


1224 


CH.  XXV.] 


BROKERS  AND   THEIR   CONTRACTS. 


[§445. 


put  into  general  circulation  certain  phrases  and  terms  descriptive  of 
their  business.  These  terms  have  become  so  closely  identified  with  the 
subject  of  stock  and  transactions  in  stock  that  the  courts  have  defined 
their  meaning  and  explained  their  application.  Definitions  of  a  "  bull," 
"  bear,"  "  short  "  sale,  "  long  "  purchase,  "  put,"  "  call,"  "  straddle," 
"margin,"  and  "corner,"  are  given  in  the  notes  below.^     A  "loan" 


'  A  "bull"  is  a  dealer  who  endeavors 
to  make  the  price  of  stocks  go  higher. 

A  "bear"  is  a  dealer  who  endeavors 
to  make  the  price  of  stocks  go  lower. 

"A  sale  short  means  a  sale  of  that 
which  the  seller  has  not,  but  which  he 
expects  to  buy  in  at  a  lower  price  than 
that  for  which  he  sells."  Lamprecht  v. 
State,  84  Ohio,  32  (1911).  A  "short" 
sale  is  a  sale  of  stocks  which  the  seller 
does  not  possess,  but  which  he  expects 
to  purchase  later  on  at  a  lower  figure, 
thus  fulfilling  his  contract  and  making 
a  profit  by  the  decline.  In  the  mean- 
time the  broker  generally  borrows  the 
stock  from  other  parties  to  deliver  to 
the  vendee,  and  to  be  retm-ned  to  the 
person  loaning  the  stock  at  the  end  of 
the  transaction.  The  customer  de- 
posits with  the  broker  a  small  amount 
of  money  as  security,  called  a  "mar- 
gin," and  he  is  bound  to  keep  the  mar- 
gin good.  Hess  V.  Rau,  95  N.  Y.  359 
(1884) ;  White  v.  Smith,  54  N.  Y.  522 
(1874) ;  Knowlton  v.  Fitch,  52  N.  Y. 
288  (1873) ;  Appleman  v.  Fisher,  34 
Md.  540  (1871);  Sistare  v.  Best,  88 
N.  Y.  527, 533  (1882).  A  sale  for  future 
delivery,  although  a  "short"  sale,  is 
not  a  gambhng  contract  per  se.  Clews 
V.  Jamieson,  182  U.  S.  461,  489  (1901). 
A  short  sale  is  not  per  se  a  wager,  nor 
is  it  presumed  to  be.  See  §  341,  supra, 
notes.  A  short  sale  was  upheld  as  be- 
tween a  broker  and  customer  in  Arm- 
strong V.  Bickel,  217  Pa.  St.  173  (1907). 
A  stock-broker  may  recover  losses  due 
to  short  sales  which  were  afterwards 
covered  by  order  of  the  customer. 
Whittmore  v.  Malcomson,  155  Fed. 
Rep.  503  (1885).  The  question  of  the 
relations  between  a  customer  and 
stockholder  on  short  sales  was  dis- 
cussed in  Matter  of  Mills,  139  N.  Y. 
App.  Div.  54  (1910) ;  aff'd,  200  N.  Y. 
583. 

A  margin  "means,  in  the  broker's 
lexicon,   additional  collateral   security 


against  loss  to  the  broker  while  .  .  . 
carrying  stock  for  his  employer." 
McNeil  V.  Tenth  Nat.  Bank,  55  Barb. 
59  (1869);  s.  c.,46N.  Y.325.  A  check 
given  by  a  third  person  for  a  balance 
due  on  stock  transactions  can  be  en- 
forced as  to  any  margin  paid,  provided 
the  margin  can  be  distinguished  from 
the  profits.  Bauer  v.  Fabel,  221  Pa. 
St.  156  (1908). 

A  "long"  purchase  of  stock  is  a 
purchase  in  the  expectation  that  the 
stock  Tsnll  rise  in  value. 

Stock  options  are  of  three  kinds  — 
puts,  calls,  and  straddles.  A  "put" 
is  a  contract  whereby  a  person  has 
the  privilege  of  requiring  another  per- 
son to  take  from  the  former  certain 
specified  stock  at  a  specified  price  at 
any  time  within  a  specified  period  of 
time,  the  former  not  being  laound  to 
sell.  See  Bigelow  v.  Benedict,  70  N.  Y. 
202  (1877).  "  A  "call"  is  a  contract 
whereby  a  person  has  the  privilege  of 
requiring  another  person  to  sell  and 
deliver  to  the  former  certain  specified 
stock  at  a  specified  price  at  any  time 
within  a  certain  specified  period,  the 
former  not  being  bound  to  purchase. 
A  "call"  is  an  agreement  to  sell. 
Treat  v.  White,  181  U.  S.  264  (1901). 
A  call  is  legal  on  its  face.  Wiggin  v. 
Federal  Stock,  etc.  Co.,  77  Conn.  507 
(1905).  A  "straddle"  or  "spread- 
eagle"  is  a  combination  of  a  put  and 
a  call.  It  gives  a  person  the  double 
privilege  of  delivering  to  or  demanding- 
from  another  person  certain  stock  at 
a  certain  price  within  a  specified  time. 
Harris  v.  Tumbridge,  83  N.  Y.  92 
(1880);  Story  v.  Salomon,  71  N.  Y. 
420  ( 1 877 ) .  A  "  straddle  "  or  "  spread- 
eagle"  generally  runs  to  bearer  and  is 
bought  and  sold  by  delivery  without 
indorsement  or  formal  assignment, 
and  hence  an  action  will  lie  for  the 
conversion  thereof.  Hence  if  the 
holder  delivers  the  instrument  to  the 


1225 


§  446.] 


BROKERS   AND   THEIR   CONTRACTS. 


[CH.   XXV. 


of  stock  returnable  on  demand  transfers  the  title  in  one  sense,  inasmuch 
as  the  borrower  may  return  similar  stock  of  the  same  amount,  in  place 
of  returning  the  identical  stock  which  was  loaned  to  him.^ 

This  chapter  treats  of  the  rights,  duties,  and  liabilities  of  stock- 
brokers.- There  are  various  incidental  subjects,  however,  which  enter 
largely  into  brokers'  contracts,  such  as  pledges  of  stock  ^  and  gambling 
sales  of  stock.^    These  subjects  are  fully  treated  elsewhere. 

§  446.  Who  may  be  a  broker  and  customer.  —  Any  person  may 
be  a  stock-broker  who  may  make  a  contract,  but  it  is  beyond  the  power 
of  a  national  bank  to  act  as  a  broker.''  Strict  rules  prevail  as  to  who 
may  be  a  customer.  An  infant  is  not  bound  by  his  contracts  with  or 
through  a  stock-broker,  any  more  than  he  is  bound  by  his  other  con- 
tracts. Moreover,  if  the  broker  carries  on  stock  transactions  for  an 
infant  he  is  liable  to  the  latter  for  all  moneys  lost  thereby.^    Again,  a 


party  who  issued  it,  and  requests  him 
to  buy  at  a  specified  price  the  stock 
therein  referred  to,  in  order  that  the 
holder  may  deliver  the  stock  to  the 
party  issuing  it,  and  the  party  issuing 
it  buys  the  stock  at  a  higher  figure, 
he  is  guilty  of  converting  the  instru- 
ment. Vroom  V.  Sage,  100  N.  Y.  App. 
Div.  285  (1905),  giving  the  form  in 
full  of  such  an  instrument ;  aff'd,  184 
N.  Y.  542. 

A  "corner"  exists  where  the 
"bears"  have  sold  a  large  quantity 
of  stock  "short,"  and  cannot  borrow 
the  stock  to  fill  their  contracts,  but 
must  buy  it  from  those  who  have 
cornered  the  market  on  that  stock. 
See  Cameron  v.  Durkheim,  55  N.  Y. 
425,  438  (1874).  As  to  the  legality  of 
these  various  transactions,  and  as  to 
whether  they  are  gambling  contracts, 
see  §§  341-348,  supra,  especially  §  344, 
n.  It  is  not  fraud  for  the  owner  of 
the  larger  part  of  the  capital  stock  of 
a  corporation  to  "corner"  the  market, 
that  is,  to  enter  into  contracts  with 
various  parties  to  purchase  stock  of 
the  corporation,  although  he  knew 
that  such  contracts  could  not  be  ful- 
filled by  such  parties  by  reason  of  the 
fact  that  he  himself  held  such  stock, 
and  it  could  not  be  obtained  else- 
where. The  same  rule  prevails  al- 
though such  person  offered  the  stock 
for  public  subscription  and  purchased 
the  greater  part  himself.  Salaman  v. 
Warner,  64  L.  T.  Rep.  598  (1891); 
aff'd,  65  L.  T.  Rep.  132  (1891). 


»  Fosdiek  v.  Greene,  27  Ohio  St.  484 
(1875);  Dykers  v.  Allen,  7  Hill,  497 
(1844).  See  also  §  469,  infra.  When 
a  man  sells  stock  on  the  exchange  he 
must  deliver  it,  and  if  he  does  not 
own  any  he  must  borrow  it  of  some 
one  who  does.  When  he  borrows  the 
stock  he  advances  the  market  price 
of  it  to  the  lender,  who  pays  interest 
on  this  money.  The  transaction  is 
really  a  call  loan.  The  lender  of  the 
stock  can  call  for  his  stock  at  any 
time,  and  the  borrower  can  call  for 
his  money.  A  contract  to  return  bor- 
rowed money  or  pay  for  it  is  a  debt. 
Dibble  v.  Richardson,  171  N.  Y.  131 
(1902). 

2  See  also,  on  this  subject,  Lindley 
on  Companies,  6th  ed.,  pp.  688-709. 

3  Ch.  XXVI,  infra. 

*  See  ch.  XX,  supra. 

5  First  Nat.  Bank  v.  Hoch,  89  Pa. 
St.  324  (1879) ;  Weekler  v.  First  Nat. 
Bank,  42  Md.  581  (1875).  But  Wil- 
liamson V.  Mason,  12  Hun,  97  (1877), 
holds  that  a  bank  has  power  to  take 
stock  from  a  customer  and  agree  to 
sell  it  and  credit  the  customer  with 
the  proceeds,  and  that  the  bank  is 
liable  for  the  conversion  of  such 
stock  by  its  cashier.  A  brokerage 
corporation  is  liable  for  the  fraud  of  its 
officers  in  selling  stock  by  misrepre- 
sentations. Brite  v.  Penny,  157  N.  C. 
110  (1911). 

^  Ruchizky  v.  De  Haven,  97  Pa. 
St.  202  (1881).  The  transactions  in 
this   case   were   held   to   be   gambling 


1226 


CH.  XXV.] 


BROKERS  AND  THEIR  CONTRACTS. 


[§§  447,  448. 


broker  who  sells  or  buys  stock  in  the  name  of  an  infant  is  himself  liable 
to  the  other  party  in  case  the  contract  is  not  completed  by  reason  of  such 
infancy.^  On  the  other  hand,  if  the  broker's  customer  hands  in  the  name 
of  a  third  person,  an  infant,  as  the  seller  or  purchaser,  such  customer  is 
liable  to  the  broker  for  liabilities  thereby  incurred  by  the  latter.-  A 
proprietor  of  a  so-called  "  stock  exchange,"  unincorporated,  may  be 
held  liable  for  its  transactions.^ 

§  447.  Facts  making  person  a  broker  or  customer  unintentionally. 
—  The  relationship  of  broker  and  customer  may  be  established  and 
exist  altho-ugh  one  of  the  parties  is  personally  ignorant  of  such  a  rela- 
tionship.'' A  broker  also  may  be  liable  as  such  in  transactions  where  he 
had  no  intention  of  incurring  any  liability.^  A  broker  is  nothing  more 
nor  less  than  an  agent  for  a  special  purpose.  The  agency  may  arise 
by  the  acts  of  the  parties  without  any  specific  agreement. 

§  448.  Broker  must  obey  specific  orders  of  customer.  —  A  broker 
is  bound  to  obey  and  carry  out  strictly  the  orders  of  his  customer  in 
the  purchase  or  sale  of  stock.  This  rule  is  rigidly  insisted  upon  by  the 
courts.  The  orders  of  the  customer  may  be  such  as  he  wishes  to  give, 
and  when  given  they  must  be  obeyed,  or  liability  will  be  incurred  by 
the  broker.^    An  order  to  sell  at  market  means  the  market  at  the  time 


contracts.  Heath  v.  Mahoney,  12 
Week.  Dig.  404  (1881).  The  broker 
himself  may  be  an  infant  and  may 
repudiate  his  obligations.  See  4  Law 
Notes,  314. 

iNickalls  v.  Merry,  L.  R.  7  H.  L, 
530  (1875);  Heritage  v.  Paine,  L.  R. 
2  Ch.  D.  594  (1876).  The  first  ease 
holds  him  liable  although  ignorant  of 
the  infancy  of  his  customer.  See 
same  case,  Merry  v.  Nickalls,  L.  R.  7 
Ch.  App.  733  (1872).  The  broker  is 
liable  although  the  name  of  the  infant 
was  passed  to  him  by  another  broker. 
Dent  V.  Nickalls,  29  L.  T.  Rep.  536 
(1873) ;  aff'd,  30  L.  T.  Rep.  644  (1874). 
It  is  no  defense  to  the  broker  that  the 
infant's  father  was  the  real  customer. 
Nickalls  v.  Eaton,  23  L.  T.  Rep.  689 
(1871).  See  also  §  250,  supra,  as  to  the 
liability  to  the  corporation  itself. 

^  Peppercorne  v.  Clench,  26  L.  T. 
Rep.  656  (1872). 

3  Holbrook  v.  Quinlan  &  Co.,  84 
Vt.  411  (1911). 

*  Where  the  firm  does  a  brokerage 
business  through  its  agents,  the  trans- 
actions by  the  agents  on  their  own 
private  accounts,  but  ostensibly  for 
the  firm,  will  bind   the  firm.     Wells, 


etc.  Co.  V.  Welter,  15  Nev.  276  (1880). 
Cf.  Masterton  v.  Boyce,  6  N.  Y.  Supp. 
65  (1889).  A  customer's  statement 
that  he  would  like  to  make  a  dollar 
if  he  could  is  not  sufficient  authority 
for  a  broker  to  buy  stocks  for  him. 
Hopkins  v.  Clark,  7  N.  Y.  App.  Div. 
207  (1896);  aff'd,  158  N.  Y.  299 
(1899),  holding  also  that  the  customer 
is  not  liable  for  an  unreasonable  use 
of  discretion  by  the  broker. 

5  As  where  he  continues  to  allow 
his  name  to  remain  in  the  firm  name 
after  its  dissolution.  Hixon  v.  Pixley, 
15  Nev.  475  (1880).  Also  where  one 
of  the  firm  is  a  trustee  and  defaults 
therein,  the  firm  having  charge  of  the 
trust  estate's  stocks.  De  Ribeyre  v. 
Barclay,  23  Beav.  107  (1857).  As  a 
silent  partner  he  cannot  prevent  a 
customer  from  setting  off  against  a 
liability  a  debt  personal  to  the  osten- 
sible sole  broker.  Read  v.  Jaudon,  35 
How.  Pr.  303  (1868).  A  stock-broker 
is  bound  to  obey  orders  promptly. 
GaUgher  v.  Jones,  129  U.  S.  193  (1889). 

«  Parsons  v.  Martin,  77  Mass.  Ill 
(1858).  See  also  §452,  infra.  Thus, 
where  the  customer  authorizes  a  sale 
if  the  stock  goes  down  to  51,  but  the 


1227 


§  448.] 


BROKERS   AND   THEIR   CONTRACTS. 


[CH.  XXV. 


of  the  sale,  and  not  necessarily  the  market  at  the  time  of  the  order. ^ 
An  order  to  sell  five  hundred  shares  of  stock  may  be  executed  by  selling 
one  hundred  shares  at  a  time.-  When  the  customer  fixes  a  limit  at 
which  the  broker  may  purchase,  the  latter  cannot  bind  the  customer  by 
a  purchase  at  a  higher  figure.^  Frequently  the  customer  gives  to  the 
broker  a  "  stop  order,"  which  is  an  order  to  sell  or  buy,  as  the  case  may 
be,  at  a  certain  specified  figure,  or  upon  a  specified  contingency.  Under 
this  order  the  broker  must  sell  or  buy  when  the  price  or  contingency 
occurs,  but  not  until  after  it  occurs.  If  the  market  changes  too  quickly 
for  him,  he  must  sell  or  buy  at  the  market  price  immediately  after  the 
fixed  price  or  contingency  arises.^  Where  the  regular  certificates  of 
stock  are  not  yet  ready  for  issue  and  temporary  receipts  are  issued,  the 
purchase  of  the  temporary  receipts  may  be  a  compliance  by  a  broker 
with  an  order  from  his  customer  to  buy  the  stock. ^  A  broker  cannot 
defend  against  a  suit  for  not  executing  an  order  on  the  ground  that 
the  money  would  have  been  lost  if  it  had  been  executed.^    The  cus- 


broker  sells  when  it  goes  down  to 
52,  lie  is  liable  for  an  unauthorized 
sale.  Clarke  v.  Meigs,  10  Bosw.  337 
(1863).  Cf.  Whelan  v.  Lynch,  60  N.  Y. 
469  (1875);  Jones  v.  Marks,  40  111. 
313  (1866).  But  the  broker  may  cor- 
rect a  palpable  error  in  the  order  given 
him  by  his  customer.  Luffman  v. 
Hoy,  13  N.  Y.  Week.  Dig.  324  (1881). 
Where  the  customer  tells  the  broker 
that  unless  he  sells  at  once  he  must 
bear  any  further  loss,  the  customer  is 
not  liable  for  further  losses.  Zimmer- 
man V.  Heil,  86  Hun,  114  (1895); 
aff'd,  156  N.  Y.  703.  A  broker  failing 
to  sell  as  instructed,  is  liable  only  for 
actual  loss.  King  v.  Zell,  etc.,  105 
Md.  435   (1907). 

1  Fairbairn  v.  Rausch,  104  N.  Y. 
App.  Div.  2.59  (1905). 

2  Evans  v.  Wrenn,  93  N.  Y.  App. 
Div.  346  (1904);  aff'd,  181  N.  Y. 
566. 

^  Whether  a  limit  was  fixed  is  a 
question  for  the  jury,  if  the  facts  are 
disputed.  Cf.  Smith  v.  Bouvier,  70 
Pa.  St.  325  (1872).  The  customer  may 
ratify  the  unauthorized  purchase. 
Genin  v.  Isaacson,  6  N.  Y.  Leg.  Obs. 
213  (1848).  If  the  power  to  sell 
depends  on  the  construction  of  writings, 
it  is  a  question  of  law  only.  Davis  v. 
Gwynne,  57  N.  Y.  676  (1874) ;  s.  c, 
4  Daly,  218  (1871).  But  the  written 
order  may   be  subsequently   modified 


by  parol.  Burkitt  ;;.  Taylor,  13  N.  Y. 
Week.  Dig.  75  (1881);  Clarke  v. 
Meigs,  10  Bosw.  3-37  (1863).  Or  be 
waived.  Hope  v.  Lawrence,  50  Barb. 
258  (1867). 

'  Porter  v.  Wormser,  94  N.  Y.  431 
(1884) ;  Bertram  v.  Godfray,  1  Knapp 
P.  C.  381  (1830).  The  latter  ease  in- 
volved an  absolute  order  to  sell  should 
the  stock  reach  a  certain  price.  A 
"stop  order"  is  an  order  to  sell  at 
the  best  available  price  after  a  stock 
has  touched  the  price  specified,  and  a 
"stop  order"  does  not  prevent  the 
broker  calling  for  additional  margin. 
Richter  v.  Poe,  109  Md.  20  (1908). 
Where  a  broker  is  carrying  a  "short" 
sale  on  a  "stop  order,"  and  purchases 
before  the  price  of  the  "stop  order"  is 
reached,  and  the  customer,  a  week 
later,  then  orders  the  broker  to  pur- 
chase, the  purchaser  may  recover  the 
profit  that  a  purchase  at  the  latter 
date  would  have  netted.  Campbell  v. 
Wright,  118  N.  Y.  594  (1890).  Brok- 
ers cannot  disregard  a  "stop  order," 
and  act  before  that  price  is  reached, 
even  though  prices  are  fluctuating 
rapidly.  Campbell  v.  Wright,  118 
N.  Y.  594  (1890).  See  also  §459, 
infra. 

5  Gund  V.  Logan,  187  Fed.  Rep.  932 
(1911). 

6  Des  Jardins  v.  Hotchkin,  142  N.  Y. 
App.  Div.  845  (1911). 


1228 


BROKERS   AND   THEIR   CONTRACTS. 


[§  449. 


tomer  may  leave  it  in  the  discretion  of  the  broker  as  to  the  best  time 
for  buying  or  selling.^  When  this  is  done  the  broker  must  exercise 
such  discretion  in  good  faith  and  with  reasonably  good  judgment  and 
care.^  A  stock-broker  is  not  liable  for  contracts  which  he  knew  noth- 
ing about,  and  which  were  agreed  to  in  his  name  by  an  assistant  of  one 
of  his  employees,  especially  where  the  customer  knew  such  to  be  the 
fact.^  Even  though  the  broker  buys  stock  for  the  customer  without 
an  order,  yet  if  the  customer  ratifies  it  and  pays  for  the  stock  he  cannot 
afterwards  object  to  the  purchase.^  Where  for  two  and  a  half  years  a 
woman  buys  and  sells  stocks  through  brokers,  the  orders  being  given 
by  her  son  who  is  in  their  employ,  she  is  bound  by  his  orders.^ 

§  449.  Must  act  in  good  faith  and  in  reasonable  time.  —  The  broker 
must  make  the  purchase  or  sale  in  good  faith  on  the  best  terms  pos- 
sible, and  must  give  the  customer  the  advantage  of  the  transaction 
as  actually  made.  Any  material  failure  to  do  this,  or  to  make  the 
sale  or  purchase  as  directed,  will  release  the  customer  from  the  transac- 
tion, although  it  was  reported  to  him  as  made  in  accordance  with  orders.® 


1  Such  discretion,  when  given,  is 
revoked  only  by  clear  notice  of  revoca- 
tion. Davis  V.  Gwynne,  4  Daly,  218 
(1871). 

2  Harris  v.  Tumbridge,  83  N.  Y.  92 
(1880) ;  Hopkins  v.  Clark,  158  N.  Y. 
299  (1899). 

3  Timpson  v.  Allen,  149  N.  Y.  513 
(1896).  A  manager  of  a  broker's 
office  may  bind  him  by  a  contract  with 
a  customer  whereby  a  discretionary 
order  is  taken.  Newman  i'.  Lee,  87 
N.Y.App.Div.  116(1903).  Abroker's 
bookkeeper  who  has  purchased  stock 
at  various  times  for  customers  of  the 
firm,  and  apparently  had  authority  to 
do  so,  may  bind  the  firm  by  another 
purchase.  Merkel  v.  Lazard,  114  N.  Y. 
App.  Div.  25  (1906).  The  customer 
may  be  bound  by  the  acts  of  his  clerk. 
Webb  V.  Challoner,  2  Fost.  &  F.  120 
(I860).  As  to  dealings  with  a  stock- 
broker's clerk,  see  Spooner  v.  Brown- 
ing, [1898]  1  Q.  B.  528. 

^Buck  V.  Houghtaling,  110  N.  Y. 
App.  Div.  52  (1905). 

*  Small  V.  Housman,  142  N.  Y.  App. 
Div.  760(1911).  Sees.c.  208N.Y.  115. 

8  Where  the  broker  buys  in  his  own 
name  at  a  price  less  than  the  price 
reported  to  the  customer,  sells  with- 
out notice,  and  subsequently  pretends 
to  sell  again,  the  whole  transaction  is 


void  as  to  the  customer.  Levy  v.  Loeb, 
85  N.  Y.  365  (1881) ;  89  N.  Y.  386.  So, 
likewise,  where  he  purchases  an  option 
instead  of  cash  purchase,  and  reports 
a  higher  price  than  that  paid.  Voris 
V.  McCredy,  16  How.  Pr.  87  (1856). 
So,  likewise,  where  the  broker  varies 
the  order  from  a  cash  purchase  to  an 
option,  he  himself  taking  the  risk  of 
the  option.  Day  v.  Holmes,  103 
Mass.  306  (1869);  Pickering  v.  De- 
merritt,  100  Mass.  416  (1868).  A 
broker  who  sells  bonds,  and  then 
reports  no  sale,  but  loans  money  to  the 
customer  on  the  bonds  as  collateral, 
may  be  held  liable  to  account  for  the 
sale.  Bischoffsheim  v.  Brown,  34  Fed. 
Rep.  156  (1888).  Where  an  agent  or 
broker  is  employed  to  buy  stock  for 
a  "pool,"  and  agrees  to  do  so  for  a 
compensation  consisting  of  a  part  of 
the  profits,  he  is  liable  in  damages  for 
fraud  if  he  charges  the  "pool"  more 
than  the  stock  cost  him.  Manville  v. 
Lawton,  19  N.  Y.  Supp.  587  (1892). 
A  customer's  suit  against  three  suc- 
cessive stock-broking  firms,  some  of 
the  partners  having  been  partners  in 
all  three,  the  complaint  being  that 
one  or  the  other  of  the  firm  had  made 
secret  profits  out  of  the  plaintiff's 
stocks,  is  multifarious.  Sprague  v. 
Currie,  133  N.  Y.  App.  Div.  17  (1909). 


1229 


§  450.] 


BROKERS   AND   THEIR   CONTRACTS. 


The  broker  is  allowed  a  reasonable  time  within  which  to  make  the  sale 
or  purchase.^  Where  the  principal  gives  an  order  to  the  broker  to  sell 
certain  stock  which  the  principal  owns,  and  the  broker,  by  fraudulent 
representations,  dissuades  him  from  selling,  the  principal  may  hold 
the  broker  liable  in  damages.-  An  agreement  with  brokers  by  which 
a  person  is  to  cause  a  legislative  investigation,  and  in  case  certain  stock 
decline,  such  person  is  to  share  in  the  profits  of  short  sales,  is  illegal  and 
not  enforceable.^  A  broker  who  sends  circular  letters  of  advice  to  his 
customers  cannot  enforce  a  contract  to  influence  his  customers  to  pur- 
chase a  certain  stock. ^ 

§  450.   Cannot  purchase  fro7n  or  sell  to  himself.  —  A  broker  cannot, 
in  behalf  of  his  customer,  buy  from  or  sell  to  himself  as  the  other  prin- 


A  customer  may  maintain  a  suit  in 
equity  against  his  broker  to  recover 
back  the  money  paid  to  the  broker  to 
invest  where  it  appears  that  the  broker 
purchased  securities  merely  by  taking 
stock  which  another  customer  of  the 
broker  had  ordered  the  broker  to  sell, 
there  being  no  actual  sale  excepting 
these  bookkeeping  entries.  A  stip- 
ulation with  the  broker  that  any  other 
customer  of  the  broker  may  be  pur- 
chaser or  seller  does  not  apply  to 
such  bookkeeping  transactions.  Haight 
V.  Haight,  etc.  Co.,  112  App.  Div.  475 
(190G);  aff'd,  190  N.  Y.  540.  See 
also  §  452,  infra. 

1  Fletcher  v.  Marshall,  15  M.  &  W. 
755  (1846).  Cf.  Dickenson  v.  Lilwal, 
1  Starkie,  128  (1815),  which  holds 
that  the  transaction  must  be  carried 
out  on  the  day  of  the  order.  The 
broker  is  entitled  to  his  commission 
although  his  customer  fails  before  the 
transaction  is  made.  Inchbald  v.  West- 
ern, etc.  Co.,  34  L.  J.  (C.  P.)  15 
(1864).  The  contract  is  to  be  carried 
out  within  a  reasonable  time.  A 
broker's  custom  is  evidence  as  to  what 
is  reasonable  time.  Stewart  v.  Cauty, 
8  M.  &  W.  160  (1841).  A  few  hours' 
notice  held  insufficient.  Johnson  v. 
Mulvy,  51  N.  Y.  634  (1872).  "Usu- 
ally the  broker  is  entitled  to  a  fair 
and  reasonable  opportunity  to  per- 
form his  obligation,  subject  of  course 
to  the  right  of  the  seller  to  sell  inde- 
pendently. But  that  having  been 
granted  him,  the  right  of  the  principal 
to  terminate  his  authority  is  absolute 
and  unrestricted,  except  only  that  he 

12 


may  not  do  it  in  bad  faith  and  as  a 
mere  device  to  escape  the  payment  of 
the  broker's  commissions."  Sibbald 
V.  Bethlehem  Iron  Co.,  83  N.  Y.  378, 
384  (1881).  A  customer  is  under  no 
obligation,  when  he  learns  that  his 
broker  has  not  sold  stock  as  ordered, 
to  notify  the  broker  that  he  abandoned 
any  claim  to  the  stock  and  held  the 
broker  responsible  for  their  value. 
Nor  is  he  obliged  to  redeem  the  stock 
from  the  sub-broker.  Allen  v.  McCon- 
ihe,  124  N.  Y.  342  (1890).  In  this 
case  the  court  allowed  as  damages 
against  a  broker  who  delayed  selling 
when  ordered  to  sell,  the  difference 
between  the  price  when  the  order  was 
given  and  the  price  when  the  sale  was 
actually  made.  Where  for  four  years 
both  the  broker  and  the  customer  have 
apparently  abandoned  an  alleged  pur- 
chase of  stock  on  a  margin,  it  is  a 
question  for  the  jury  whether  there 
was  an  abandonment  or  whether  the 
customer  continued  to  be  liable. 
Seligman  v.  Rogers,  113  Mo.  642 
(1893).  A  broker  ordered  to  pur- 
chase stock  on  a  margin  need  not 
actually  purchase  at  once.  It  is  suf- 
ficient if  he  is  ready  to  fulfill  when 
called  upon  so  to  do  at  the  price  on 
the  day  of  the  giving  of  the  order. 
Ingraham  v.  Taylor,  58  Conn.  503 
(1889). 

-  Fottler  V.  Moseley,  179  Mass.  295 
(1901). 

^Veazey   v.  Allen,    173  N.   Y.   359 
(1903). 

*  Ridgely  v.  Keene,  134  N.  Y.  App. 
Div.  647  (1909). 
50 


CH.   XXV. 


BROKERS   AND   THEIR   CONTRACTS. 


[§  451. 


cipal.  The  law  will  not  allow  him  to  act  both  as  agent  and  as  principal 
at  the  same  time.  Such  an  act  is  a  constructive  fraud  on  account  of 
his  fiduciary  relation,  and  will  be  set  aside.^  Custom  or  usage  cannot 
legalize  such  a  transaction.^  The  broker  may,  however,  show  by  parol 
evidence  that  he  did  not  deal  with  himself,  though  writings  indicate 
otherwise.^  And  there  is  no  rule  which  prevents  the  broker  from  act- 
ing as  agent  both  for  the  selling  and  the  buying  customer.^  AYhere  the 
broker  turns  over  his  own  stock  to  the  client's  account  instead  of  buy- 
ing, and  sells  the  client's  stocks  without  orders  so  to  do,  and  afterwards 
buys  them  back,  all  without  his  client's  knowledge,  he  cannot  recover 
commissions.^ 

§  451.  Duties  and  Uahilities  of  customer  towards  broker.  — A 
broker  is  not  entitled  to  a  commission  merely  upon  the  making  of  an 
optional  contract  which  the  seller  agrees  to.*^     The  statute  of  frauds 


1  Mayo  V.  Knowlton,  134  N.  Y.  250 
(1892)  TConkey  v.  Bond,  36  N.  Y.  427 
(1867) ;  Brookman  v.  Rothschild,  3 
Sim.  153  (1829) ;  Marye  v.  Strouse,  5 
Fed.  Rep.  483  (1880);  Robinson  v. 
MoUett,  L.  R.  7  H.  L.  802,  818,  826 
(1875).  Even  though  the  purchase 
was  in  good  faith  and  at  a  lower  figure 
than  the  market  price.  Taussig  v. 
Hart,  58  N.  Y.  425  (1874) ;  Gillett  v. 
Peppereorne,  3  Beav.  78  (1840).  In 
Bryan  v.  Baldwin,  52  N.  Y.  232  (1873), 
the  court  said:  "The  plaintiff,  being 
pledgee  of  the  stock,  and  in  that  char- 
acter exposing  it  for  sale,  could  not  be- 
come the  purchaser  unless  the  defendant 
assented  to  such  purchase.  Story  on 
Bailments,  §  319 ;  Torrey  v.  Bank  of 
Orleans,  9  Paige,  649  (1842) ;  Hawley  v. 
Cramer,  4  Cow.  717,  736  (1825).  This 
sale  to  the  plaintiff  was  not  void,  but 
voidable  at  the  election  of  the  defendant. 
Edwards  on  Bailments,  260,  261.  The 
defendant  was  at  liberty  to  ratify  the 
sale,  and  had  he  done  so  it  would  have 
been  valid  for  all  purposes.  The 
ratification  would  have  made  it  lawful, 
and  relieved  it  from  any  imputation 
of  being  tortious  as  to  him.  .  .  . 
But  the  defendant  has  not  done  this, 
but  has  elected  to  treat  the  purchase 
by  the  plaintiff  as  illegal.  This  avoids 
the  sale,  and,  that  being  avoided  by 
the  defendant,  the  parties  are  remitted 
to  their  rights  the  same  as  though  no 
sale  had  been  attempted."  It  seems 
that  where  a  broker  has  an  order  to 
sell  from  one  customer  and  an  order 


to  buy  from  another,  he  may  employ 
a  fellow  broker  to  purchase  on  the 
exchange  when  the  sale  is  made.  Terry 
t'.  Birmingham,  etc.  Bank,  99  Ala.  566 
(1893).  Even  though,  in  closing  an 
account  on  the  death  of  the  customer, 
the  broker  sells  to  a  jobber  and  agrees 
to  repurchase  at  the  same  price  later 
on,  yet  if  the  price  is  the  fair  market 
price  the  broker  may  recover  from  the 
customer  the  loss.  Macoun  v. 
Erskine,  etc.  Co.,  [1901]  2  K.  B.  493. 
But  where  the  broker  immediately 
repiirehases  and  obtains  the  stock  at  a 
less  price  than  the  price  at  which  ho 
sold,  he  must  account  to  his  customer 
for  the  profit.  Erskine,  etc.  Co.  v. 
Sachs,  etc.,  [1901]  2  K.  B.  504. 

-  Commonwealth  v.  Cooper,  130 
Mass.  285  (1881).  The  custom  of 
brokers  to  buy  in  large  quantities  and 
sell  in  small  quantities  is  illegal.  Robin- 
son V.  Mollett,  L.  R.  7  H.  L.  802  (1875). 
3  Porter  v.  Wormser,  94  N.  Y.  431 
(1884). 

*  Knowlton  v.  Fitch,  52  N.  Y.  288 
(1873). 

5  Skelton  v.  Wood,  71  L.  T.  Rep.  616 
(1894).  Where  a  broker,  instead  of 
selling  directly  to  a  purchaser,  sells 
through  another  person  at  a  less  figure 
in  order  to  cheat  his  customer,  he  can- 
not collect  commissions  unless  the 
customer  knew  of  the  fraud  at  the 
time  he  closed  the  transaction.  Hafner 
V.  Herron,  165  111.  242  (1896). 

®  Warnekros  v.  Bowman,  128  Pac. 
Rep.  49  (Ariz.  1912). 


1231 


§451. 


BROKERS   AND   THEIR   CONTRACTS. 


[CH. 


does  not  apply  to  a  broker's  sale  of  stock  as  regards  his  right  to  collect 
a  commission  from  the  vendor  who  fails  to  deliver,  even  though  the 
broker's  pay  was  to  be  all  he  received  above  a  certain  price.^     The  oral 
order  of  a  customer  to  a  broker  to  buy  stock  may  be  shown,  even  though 
part  of  it  was  afterwards  reduced  to  writing.-     A  claim  of  the  customer 
that  the  broker  agreed  to  carry  stock  without  additional  margin  may  be 
for  the  jury  to  pass  upon.^     A  stock-broker  is  but  the  agent  of  his  cus- 
tomer.    As  such  he  may  bind  his  customer  by  acts  within  the  scope  of 
his  authority,  and  compel  the  customer  to  respond  to  his  liability.     Thus, 
the  broker  may  proceed  to  close  the  transaction,  paying  out  his  own 
money  as  though  it  was  his  own  business,  and  may  then  compel  the  cus- 
tomer to  repay  to  him  the  money  so  expended  in  the  customer's  behalf.'* 
Or,  if  his  customer  refuses  to  carry  out  the  transaction,  the  broker  may 
settle  with  the  opposite  party  by  pacing  the  loss  incurred  by  buying  or 
selling  the  stock  elsewhere,  and  may  then  sue  his  customer  for  the 
differences  thus  paid.^     He  may  also  recover  his  disbursements,  com- 
missions, and  interest.^     The  customer  is  liable  to  tlie  broker  for  stock 
purchased,  although  the  stock  turns  out  to  be  spurious  or  unauthorized.^ 
If  the  broker  seeks  to  recover  the  full  value  of  stock  which  he  has  pur- 

On  commissions,  see  Inelibald  v.  West- 
ern, etc.  Co.,  34  L.  J.  (C.  P.)  15 
(18G4).  Excessive  expenses  will  not 
be  allowed,  although  customary. 
Marye  v.  Strouse,  5  Fed.  Rep.  4S3 
(1880).  The  broker  is  entitled  to  com- 
missions only  when  he  has  rendered 
some  service  to  the  customer.  Sib- 
bald  V.  Bethlehem  Iron  Co.,  83  N.  Y. 
378  (1881);  HolTman  v.  Livingston, 
46  N.  Y.  Super.  Ct.  .552  (1880).  The 
case  Hatch  v.  Douglas,  48  Conn.  116 
(1880),  holds  that  the  broker's  cus- 
tomary monthly  charges  and  interest 
thereon  are  not  usurious.  The  broker 
may  recover  from  the  principal  the 
purchase  price  of  stocks  bought  by 
the  broker,  but  not  delivered,  before 
the  corporation  became  insolvent. 
Chapman  r.  Shepherd,  L.  R.  2  C.  P. 
228  (1867).  ISIembers  of  a  syndicate 
are  jointly  liable  to  a  broker  employed 
by  them.  Sternberger  r.  Bernheimer, 
121  N.  Y.  194  (1890j. 

"  See  Adamson  v.  Jarvis,  4  Bing.  66 
(1827)  ;  Peckham  r.  Ketchum,  5  Bosw. 
506  (1859).  So,  also,  for  spurious 
stock  innocently  given  to  the  broker 
to  sell.  Westropp  r.  Solomon,  8  C.  B. 
345  (1849).     See  also  §  452,  infra. 


Light,     170     Ind.     550 
Beers,    195   JSIass. 


419 


'  Reed     v. 
(1908). 

"  Picard    v 
(1907). 

3  Keller  v.  Halsey,  202  N.  Y.  588 
(1911). 

^Bayley  v.  Wilkins,  7  C.  B.  886 
(1849) ;  Whiteliouse  r.  Moore,  13  Abb. 
Pr.  142  (1861) ;  Dails  v.  Lloyd,  12  Q.  B. 
531  (1848).  Cf.  Ex  rartc  Neilson,  3 
De  0.,  M.  &  G.  556  (1853).  See  also 
§461,  infra.  An  order  to  buy  stock 
binds  tlu>  purchaser  to  pay  the  whole 
price  to  the  intermediary  and  he  can- 
not claim  that  lie  is  liable  only  for  the 
dilTerence  between  the  market  value 
and  the  contract  price.  Bellows  v. 
McKenzie,  212  Mass.  601   (1912). 

^  Durant  v.  Burt,  98  ISIass.  161 
(1867);  Bayliffe  v.  Butterworth,  1 
Exch.  425  (1S47),  per  Parke,  B. ;  Mar- 
ten V.  C!il)l)on,  33  L.  T.  Rep.  5()1 
(1875);  Biederman  v.  Stone,  L.  R.  2 
C.  P.  504  (1S()7). 

*  Where  the  commissions  and  inter- 
est were  paid  to  otlier  brokers,  they 
m;iy  be  charged  to  the  customer.  Rob- 
inson V.  Norris,  51  How.  Pr.  442 
(1874);  atY'd,  6  Hun,  233.  Even 
though  the  interest  was  usurious. 
Smith  I'.  Heath,  4  Daly,   123   (1871). 


1232 


CH.   XXV.] 


BROKERS   AND   TUEIR   CONTRACTS. 


[§  451. 


chased  for  liis  customer,  he  must  first  tender  the  stock  to  the  customer,' 
or  he  may  sell  it  after  due  notice  to  the  customer,  and  sue  for  the  loss.- 
If  he  is  seeking  to  recover  for  differences  paid  the  opposite  broker  in 
settlement,  assumpsit  is  his  remedy.^  He  must  clearly  prove  that 
the  customer  authorized  the  order.''  Where  a  broker  converts  his 
customer's  securities,  the  customer  is  not  liable  for  loss  which  would 
have  occurred  if  the  customer's  orders  had  been  carried  out.''  The 
broker' has  a  lien  on  the  customer's  property  in  his  hands  for  all  debts 
due  to  the  former.^  Where  the  customer  retains  an  account  for  nine 
months  without  complaint,  it  is  an  account  stated,  and  where  he  ad- 
mitted to  the  broker  that  the  account  was  correct,  this  is  a  ratification 
of  any  unauthorized  acts  of  the  broker.'^  A  customer  in  dealing  with  a 
broker  corporation  cannot  agree  to  give  the  agent  of  the  corporation 
an  interest  in  the  transactions.^ 


1  Merwin  v.  Hamilton,  6  Duer,  244 
(1856);  Bowlby  v.  Bell,  3  C.  B.  284 
(1846).  But  after  once  tendering  it 
he  need  not  continually  keep  it  on 
hand.  Wynkoop  v.  Seal,  64  Pa.  St. 
361  (1870).  A  broker  in  suing  a 
customer  on  the  latter's  agreement 
to  hold  the  broker  harmless  in  repur- 
chasing certain  stock  need  not  tender 
the  stock.  Rawle  v.  Moore,  142  N.  Y. 
App.  Div.  429  (1911). 

2  Monroe  v.  Peck,  3  Daly,  128 
(1869).  In  Rosenstock  v.  Tormey,  32 
Md.  169  (1869),  the  necessary  alle- 
gations were  held  to  be  a  purchase  of 
stock  according  to  an  order,  at  fair 
market  price,  which  was  paid,  and 
the  customer  notified  and  payment 
demanded  ;  willingness  to  deliver  the 
stock ;  refusal  of  customer  to  pay ; 
notice  of  sale ;  a  proper  sale ;  and  loss. 
Where  the  broker  sells  on  an  order 
from  the  customer  and  the  customer 
does  not  furnish  the  stock,  and  the 
purchaser  buys  the  stock  at  a  higher 
price  and  the  broker  has  to  pay  the 
difference,  he  may  recover  that  amount 
from  his  customer.  Zimmermann  v. 
Weber,  135  N.  Y.  App.  Div.  428 
(1909).  Where  the  customer  tells  the 
broker  to  sell  stock  and  the  customer 
does  not  deliver,  the  broker  may 
buy  an  equal  amount  of  the  stock  in 
the  open  market  and  make  delivery 
and  hold  the  customer  liable  for  the 


difference.     Bank   of   Bisbee   v.   Graf, 
12  Ariz.  156  (1909). 

3  Pollock  V.  Stables,  12  Q.  B.  765 
(1848).  Contra,  Child  v.  Morley,  8 
T.  R.  610  (1800). 

4  Ward  V.  Van  Duser,  2  Hall  (N.  Y.), 
162  (1829).  In  White  v.  Baxter,  71 
N.  Y.  254  (1877),  the  court  held  that 
a  customer's  contract  with  his  broker 
to  protect  the  latter  against  loss  by 
expulsion  from  the  stock  exchange  for 
non-compliance  with  its  rules  is  a  valid 
and  enforceable  contract. 

6  Re  Ennis,  187  Fed.  Rep.  726 
(1911). 

*  Jones  V.  Peppercorne,  Johns. 
(V.-C.)  (18.58).  Brokers  have  a  gen- 
eral lien  upon  all  securities  of  their 
customers  which  come  into  their  hands 
in  the  ordinary  course  of  business 
and  this  lien  applies  to  all  sums  due 
to  them  from  such  customers.  Re 
London,  etc.  Corp.,  [1902]  2  Ch.  416. 

7  Stiebel  v.  Haigney,  134  N.  Y.  App. 
Div.  516  (1909).  An  account  rendered 
to  a  customer  by  an  assignee  for  the 
benefit  of  creditors  of  brokers  becomes 
an  account  stated  if  it  is  not  disputed 
for  a  month.  Little  v.  McClain,  134 
N.  Y.  App.  Div.  197  (1909).  A 
broker  executing  an  order  by  pur- 
chasing through  another  broker,  there- 
by enabling  the  latter  to  have  a  lien 
on  the  securities  for  debts  due  from  the 
first  broker   to   the  second,  acts   ille- 


(78) 


8  Stephens  v.  Gall,  179  Fed.  Rep.  938  (1910). 
1233 


§452. 


BROKERS  AND  THEIR  CONTRACTS. 


§  452.  Duties  and  liabilities  of  a  broker  towards  customer  —  Dis- 
charge in  bankruptcy — Arrest — Criminal  liability. — The  broker  also 
owes  certain  duties  and  incurs  certain  liabilities  in  his  relations  with  his 
customer.  It  is  said  that  he  cannot  sell  on  credit,  since  that  is  not  the 
usual  course  of  his  business.^  He  is  liable  in  damages  for  failure  to  buy  or 
sell  in  accordance  with  his  express  orders.-  Where  the  customer  fails  to 
carry  out  the  transaction,  but  the  broker  does  carry  it  out  at  a  profit,  the 
profit  belongs  to  the  customer.^  But  the  customer  is  not  entitled  to  stock 
held  for  him  by  the  broker  until  he  pays  the  broker  all  his  reasonable 
disbursements  thereon."^  But  he  has  no  such  lien  if  he  knows  that  the 
customer  is  acting  as  agent  for  another.^  The  broker  may  deposit  a 
margin  with  the  opposite  broker,  according  to  custom,  and  not  be 
responsible  to  his  customer  if  it  is  lost,^  although  the  rule  may  be  other- 
wise as  to  a  delivery  of  the  stocks  themselves.^  A  broker  is  not  bound 
to  call  for  margins  from  a  lender  of  stock  borrowed  to  cover  a  short 
sale.^  The  broker  is  required  to  exercise  reasonable  diligence  and  care, 
and  no  more.^  It  is  a  question  of  doubt  whether  a  broker  who  has 
received  in  good  faith  commissions  from  a  person  guilty  of  embezzle- 
ment is  liable  to  pay  over  to  the  persons  injured  by  his  customer  com- 
missions so  received. ^°    Where  a  broker  has  with  notice  dealt  with  a 


gaily,  and  even  though  he  has  sent  an 
account  to  his  customer,  and  the 
customer  has  paid  it,  the  customer 
may  have  the  account  reopened  for 
fraud  discovered  after  settlement.  Des 
Jardins  v.  Hotchkin,  142  N.  Y.  App. 
Div.  845  (1911). 

12  Kent,  Com.  6222  (b),  14th  ed. 

2  Speyer  v.  Colgate,  4  Hun,  622 
(1875);  Whelan  v.  Lynch,  60  N.  Y. 
469  (1875),  the  case  of  a  wool-broker. 
See  also  Jones  v.  Marks,  40  111.  313 
(1866),  and  §448,  supra.  The  dam- 
ages may  sound  in  tort,  thus  prevent- 
ing a  release  in  bankruptcy  from  bar- 
ring the  action.  Parker  v.  Crole, 
5  Bing.  63  (1828).  Under  the  New 
York  code  he  may  be  arrested  if  he 
does  not  use  the  money  for  the  pur- 
pose designated.  Dubois-  v.  Thomp- 
son, 1  Daly,  309  (1863).  And  in  Eng- 
land he  is  liable  criminally.  Regina 
V.  Cronmire,  54  L.  T.  Rep.  580  (1886). 

3  Fowler  v.  New  York  Gold  Exch. 
Bank,  67  N.  Y.  138  (1876). 

*See  McEwen  v.  Woods,  11  Q.  B. 
13  (1847),  where  the  broker  paid  eaUs 
made  on  the  stock  after  its  sale. 

6  Fisher   v.  Brown,   104   Mass.  259 


(1870) ;  Pearson  v.  Scott,  L.  R.  9  Ch. 
D.  198  (1878). 

s  Gheen  v.  Johnson,  90  Pa.  St.  38 
(1879). 

"Brown  v.  Boorman,  11  CI.  &  F.  1 
(1844). 

^  Morris  v.  Jamieson,  205  III.  87 
(1903). 

»  PhiUips  V.  Moir,  69  111.  155  (1873) ; 
Gheen  v.  Johnson,  90  Pa.  St.  38  (1879). 
As  to  the  construction  of  a  contract 
wherein  the  broker  invests  the  cus- 
tomer's money  as  the  broker  sees  fit, 
and  the  broker  guarantees  the  return 
of  the  capital  and  interest  and  all 
profits  made,  see  Vermilye's  Case, 
43  N.  J.  Eq.  146  (1887).  As  to  the 
liability  of  stock-brokers  and  jobbers 
and  vendees  towards  the  vendors,  see 
also  1  White  &  T.  Lead.  Cas.,  6th 
Eng.  ed.,  pp.  922-929. 

1"  See  Butler  v.  Finck,  21  Hun,  210 
(1880).  The  case  Taft  v.  Chapman, 
50  N.  Y.  445  (1872),  seems  to  hold 
that  the  broker  is  not  liable  where  he 
acted  without  knowledge  of  his  cus- 
tomer's acts.  See  also  s.  c,  sub  norn. 
Brownson  v.  Chapman,  63  N.  Y.  625 
(1875).     See  also  Porter  v.  Parks,  49 


1234 


CH.  XXV.] 


BROKERS  AND  THEIR  CONTRACTS. 


[§  452. 


trustee  who  was  using  trust  securities  illegally,  the  broker  may  be  held 
liable  at  law  for  conversion,  or  in  equity  to  reach  the  securities  and  ac- 
count for  the  dividends  and  their  value.^  A  broker  may,  by  bill  of 
discovery,  be  compelled  to  disclose  acts  amounting  to  misconduct,- 
and  may  be  compelled  to  open  his  books  in  certain  cases.^  In  con- 
tempt proceedings  for  breach  of  an  injunction  restraining  a  broker 
from  using  a  board  of  trade's  stock  quotations,  the  broker's  confi- 
dential relations  with  customers  will  not  be  inquired  into.^  Where  the 
brokers  do  not  make  actual  purchases  and  sales  as  ordered,  but  carry 
the  same  on  their  books  and  report  fictitious  transactions,  they  are 
guilty  of  fraud,  and  the  customer  may  recover  back  money  paid,  even 
though,  if  the  transactions  had  been  carried  out,  the  customer  would 
have  lost  his  money.  The  records  of  the  stock-exchange  clearing-house 
may  be  competent  evidence.^  A  customer  may  maintain  a  suit  in 
equity  against  his  broker  to  recover  back  the  money  paid  to  the  broker 
to  invest  where  it  appears  that  the  broker  purchased  securities  merely 
by  taking  stock  which  another  customer  of  the  broker  had  ordered  the 


N.  Y.  564  (1872);  §350,  n.,  supra. 
The  case  Kissam  v.  Anderson,  145 
U.  S.  435  (1892),  reversed  the  deci- 
sion below  (Anderson  v.  Kissam,  35 
Fed.  Rep.  699,  holding  the  broker  lia- 
ble) on  the  ground  that  it  was  for 
the  jury  to  say  whether  the  bank, 
whose  funds  were  used  by  the  presi- 
dent to  pay  the  broker,  had  notice  of 
payment  by  the  broker  to  the  presi- 
dent. A  broker  who  takes  money  as 
a  margin,  knowing  that  the  money 
comes  from  a  trustee  and  is  trust- 
estate  money,  is  liable  to  the  estate 
for  money  lost  thereby.  Leake  v.  Wat- 
son, 58  Conn.  332  (1890).  A  broker 
taking,  in  payment  of  losses  by  an 
individual,  checks  drawn  by  him  as 
an  officer  of  a  corporation,  must  refund 
the  money.  Huie  v.  Allen,  87  Hun, 
516  (1895) ;  aff'd,  156  N.  Y.  658. 

1  English  V.  Mclntyre,  29  N.  Y.  App. 
Div.  439  (1898).  A  stock-broker  who 
sells  stock  which  on  its  face  runs  to 
a  person  as  trustee  and  who  knows 
it  belongs  to  a  trust  estate  and  who 
pays  the  proceeds  to  the  trustee  indi- 
vidually may  be  compelled  to  repay 
the  money  to  the  trust  estate  if  the 
trustee  has  embezzled  the  same,  and 
such  liability  may  be  enforced  by  a 
suit  in  equity.  Safe,  etc.  Co.  v.  Cahn, 
102   Md.    530    (1906).     Even   though 


brokers  in  sending  stock  to  a  customer 
indorse  it  in  blank  and  intrust  it 
to  a  messenger,  and  the  messenger 
converts  it  to  his  use  by  having  other 
brokers  sell  it  in  good  faith,  yet  such 
latter  brokers  are  liable  to  the  customer 
for  the  value  of  the  stock.  Hall 
V.  Wagner,  111  N.  Y.  App.  Div.  70 
(1906). 

-  Green  v.  Weaver,  1  Sim.  404 
(1827).  See  Rawlings  v.  Hall,  1  Car. 
&P.  11  (1823). 

3  A  receiver  may  by  a  bill  in  equity 
compel  a  broker  to  disclose  the  names 
of  his  clients  for  whom  he  purchased 
unpaid  stock  in  a  corporation,  the 
receiver  intending  to  enforce  the  un- 
paid liability.  Brown  v.  Huey,  166 
Fed.  Rep.  483  (1908).  A  member  of  a 
pool  is  entitled  to  examine  the  books,  ac- 
counts, and  papers  of  the  stock-brokers 
who  opei-ated  for  the  pool.  Hotchkiss 
V.  Levi,  HON.  Y.  App.  Div.  525  (1910). 

*  Board  of  Trade  v.  Tucker,  202 
Fed.  Rep.  288  (1913). 

sPi-out  V.  Chisolm,  21  N.  Y.  App. 
Div.  54  (1897).  Where  the  broker 
does  not  buy  the  stocks,  but  merely 
makes  entries  on  his  books,  the  cus- 
tomer may  recover  back  margins  and 
commissions  paid.  Fuller  v.  Munici- 
pal, etc.  Co.,  117  N.  Y.  App.  Div.  352 
(1907) ;  aff'd,  192  N.  Y.  .546. 


1235 


§  452.]  BKOKERS   AND   THEIR   CONTRACTS.  [cH.  XXV. 

broker  to  sell,  there  being  no  actual  sale  excepting  these  bookkeeping 
entries.  A  stipulation  with  the  broker  that  any  other  customer  of  the 
broker  may  be  purchaser  or  seller  does  not  apply  to  such  bookkeeping 
transactions.^  A  broker  is  not  responsible  where  he  in  good  faith  loans 
his  customer's  money,  in  compliance  with  his  authority,  on  certificates 
of  stock  as  collateral,  even  though  they  turn  out  to  be  forged,  provided 
he  was  not  guilty  of  negligence.  The  latter  is  a  question  for  the  jury, 
and  the  burden  of  proof  is  on  the  broker.  The  broker  is  not  bound 
to  present  the  certificates  to  the  company  for  verification.^  A  customer 
whose  money  has  been  misappropriated  by  the  manager  of  his  broker 
waives  his  claim  against  the  broker  by  taking  security  from  the  manager 
and  concealing  the  facts.^  Where  the  broker  deposits  money  in  a  bank, 
the  bank  has  a  banker's  lien  on  it,  although  the  money  really  belongs  to 
the  broker's  client."  Where  a  person  has  several  accounts  w4th  his 
broker,  and  he  informs  the  broker  that  one  of  them  is  for  another  per- 
son, the  broker  has  no  right  to  apply  a  balance  in  that  particular  account 
to  a  deficit  in  another  account.^  After  a  broker  has  purchased  according 
to  order,  but  his  customer  dies  before  the  stock  is  paid  for,  it  is  the  duty 
of  the  broker  to  sell  immediately  upon  the  death  of  his  client,  and  not  to 
carry  the  transaction  along  and  afterwards  sell.^  An  executor  is  bound 
to  close  at  once  a  speculative  account.^ 

Where  a  customer  orders  a  broker  to  buy  certain  stocks  and  the  broker 

1  Haight  V.  Haight,  etc.  Co.,  112  §  459,  infra.  The  express  power  of  an 
App.  Div.  475  (1906) ;  aff'd,  190  N.  Y.  agent  to  sell  securities  is  revoked  by 
540.  A  broker  cannot  legally  charge  a  the  death  of  the  principal,  and  if  he 
commission  to  both  buyer  and  seller,  sells  thereafter  he  is  liable  for  dam- 
Haight  V.  Haight,  etc.  Co.,  46  N.  Y.  ages  in  conversion.  Matter  of  Mitch- 
Misc.  Rep.  501  (1905).  A  broker  is  ell,  36  N.  Y.  App.  Div.  542  (1899); 
bound  to  have  on  hand  all  the  stock  aff'd,  161  N.  Y.  654.  Where  a  person 
of  his  customers,  and  if  not,  it  is  evi-  sells  stock,  nothing  being  paid  down, 
dence  that  he  has  not  purchased  the  but  by  the  contract  on  specified  dates 
stock  and  he  is  not  allowed  to  offset  any  decline  in  the  market  price  of  the 
sales  and  purchases  unless  the  trans-  stock  should  be  paid  by  the  vendee  to 
actions  are  real.  Greene  v.  Corey,  97  the  vendor  and  any  rise  should  be 
N.  E.  Rep.  70  (Mass.  1912).  paid  by  the  vendor  to  the  vendee,  and 

2  Isham  V.  Post,  141  N.  Y.  100  the  vendor  dies,  his  estate  is  entitled 
(1894).  See  also  §§  296,  369,  451,  to  the  full  selling  price  on  the  next 
supra,  and  §  454,  infra,  and  Andrews  accounting  day,  and  if  the  vendee  does 
V.  Clark,  72  Md.  396  (1890).  As  to  a  not  pay  on  a  demand  at  that  time,  and 
broker's  liability  on  stolen  and  lost  the  stock  subsequently  advances  in 
certificates  of  stock,  see  §  358,  supra,  price,  the  vendee  cannot  have  specific 

3  Ramsey  v.  Miller,  202  N.  Y.  72  performance,  neither  can  he  recover 
(1911).  damages  if  the  contract  price  exceeded 

*  Thomson  v.  Clydesdale  Bank,  the  market  value  when  payment  should 
[1893]  A.  C.  282.  have  been  made.     Re  Schwabacher,  98 

*  Conklin  v.  Raymond,  127  N.  Y.  L.  T.  Rep.  127  (1907).  See  Re  Finlay, 
App.  Div.  663  (1908) ;  aff'd,  197  N.  Y.  108  L.  T.  Rep.  248  (1912). 

509.  '  Matter  of  Hirseh,  116  N.  Y.  App. 

«  Re  Overweg,  [1900]  1  Ch.  209.     Cf.     Div.  367  (1906) ;   aff'd,  188  N.  Y.  584. 

1236 


CH.  XXV.]  BROKERS   AND   THEIR   CONTRACTS.  [§  452. 

reports  he  has  done  so,  and  the  customer  gives  a  check  for  the  amount, 
and  the  broker  deposits  the  check  in  his  firm's  account  and  uses  the 
money  to  pay  individual  and  firm  debts,  without  paying  for  the  stock 
or  obtaining  it  for  his  customer,  the  stock  being  held  by  a  correspondent 
broker  firm  as  a  margin  on  general  account,  the  broker  is  guilty  of  the 
crime  of  embezzlement,  he  having  become  bankrupt  and  never  having 
delivered  the  stock. ^  A  broker  who  receives  an  order  to  buy  stock  and 
does  so  through  another  broker,  and  then  collects  from  the  customer 
the  whole  price  and  uses  the  funds  for  other  purposes,  and  shortly 
thereafter  is  adjudged  a  bankrupt,  is  guilty  of  grand  larceny .^  It  is 
larceny  for  a  broker  to  pledge -for  his  own  debts  stock  which  has  been 
deposited  with  him  by  a  customer  to  secure  the  broker  against  loss 
from  the  transactions  on  the  market  for  the  customer's  account,  and 
hence  the  customer  may  recover  the  certificates  of  stock  from  the  pledgee 
of  the  broker  if  the  latter  has  satisfied  the  broker's  debt  out  of  other 
assets.^  A  broker  who  wrongfully  pledges  his  customer's  stock  is 
guilty  of  conversion  and  may  be  arrested  therefor.^  A  customer  whose 
stock  has  been  converted  by  his  broker  who  bought  the  stock  for  the  cus- 
tomer on  a  margin,  may  hold  him  liable  for  conversion,  and  the  measure 
of  damages  is  the  same  as  if  he  sued  him  on  contract,  namely,  the  value  of 
the  stock  at  the  time  and  place  of  the  conversion,  with  interest  from  that 
date,  unless  special  circumstances  call  for  more  complete  indemnity, 
the  amount  due  to  the  broker  at  the  time  of  trial  to  be  deducted.^ 

*  People  V.  Meadows,  199  N.  Y.  1  tomer  as  collateral  and  was  instructed 

(1910).     A    broker    cannot    be    con-  not  to  sell  it  on  any  account,  but  he 

victed  of  embezzlement  merely  because  does  sell  it  the  same  day,  although  the 

he  has  not  kept  on  hand  certain  stock  customer's  account  showed  a  profit,  he 

which  he  has  purchased  on  the  order  is  guilty  of  larceny.     People  v.  Flynn, 

of    a    customer    and    which    the    eus-  64  N.  Y.  Misc.  Rep.  276  (1909).     See 

tomer    has    paid    for.     Lamprecht    v.  also  §  4.57,  mfra.     It  is  criminal  for  a 

State,  84  Ohio  St.  32  (1911).  broker    to    pledge    stock    which    his 

2  People  V.  Meadows,  199  N.  Y.  1  customer  leaves  with  him  for  safe- 
(1910).  It  is  a  criminal  offense  in  keeping  or  transfer.  Austin  i;.  Hayden, 
Massachusetts  for  a  pledgee  to  rehy-  137  N.  W.  Rep.  317  (Mich.  1912). 
pothecate  a  pledge.  It  is  larceny  for  ^  Oregon,  etc.  Co.  v.  Hilmers,  20 
the  pledgee  to  sell  the  pledged  securities  Fed.  Rep.  717  (1884) ;  Barry  v. 
before  the  pledgor  is  in  default,  even  Calder,  48  Hun,  449  (1888) ;  aff'd.  111 
though  the  agreement  of  pledge  gives  N.  Y.  684.  See  also  §§  471,  576,  infra. 
the  pledgee  the  right  to  use  the  securi-  Brokers  holding  a  certificate  of  stock 
ties  as  he  may  desire,  subject  to  his  as  security  for  the  balance  of  the  pur- 
obligation  to  deliver  the  same  or  similar  chase  price  due  from  the  customer  are 
securities  to  the  pledgor,  unless  the  pledgees,  and  if  the  broker,  in  viola- 
sale  was  made  honestly  under  a  claim  tion  of  the  e.xpress  contract,  repledges 
of  right.  Commonwealth  v.  Althause,  or  sells  such  stock  without  authority 
207  Mass.  32  (1910).  from  the  customer,  he  is  guilty  of  a 

^  Re  Mclntyre  &  Co.,  181  Fed.  Rep.  conversion  for  which   trover  will  lie. 

955   (1910).     See  s.  c,  185  Fed.  Rep.  Chew  v.  Louchheim,  80  Fed.  Rep.  500. 

96  and  189  Fed.  Rep.  46.     Where  a  *  McIntjTe  v.  Whitney,  139   N.  Y. 

broker  received   stock   from   his   cus-  App.  Div.  557  (1910)  ;  aff'd,  201  N.  Y. 

1237 


§  452. 


BROKERS   AND   THEIR   CONTRACTS. 


A  discharge  in  bankruptcy  does  not  exempt  brokers  from  arrest  in  a 
suit  by  a  customer  for  whom  the  brokers  purchased  stock  and  held  it 
as  security  for  a  balance  due  on  the  purchase  price,  it  being  shown  that 
the  brokers  sold  the  stock  from  time  to  time  without  knowledge  of  the 
owner,  and  continued  to  do  so  even  after  they  had  sold  enough  to  pay 
the  balance  due  them,  and  that  they  applied  the  surplus  arrears  to  their 
own  purposes  so  that  their  acts  constituted  larceny,  the  suit  being  for 
conversion.^  A  margin  held  by  a  broker  is  not  a  trust  fund  and  hence 
the  broker  is  not  guilty  of  conversion,  even  though  he  fails  and  is  unable 
to  repay  it.^  A  customer  who  sends  money  to  a  broker  to  invest  in  a 
certain  stock  cannot  rescind  and  recover  the  money  back  as  a  trust 
fund  after  the  broker  has  passed  into  a  bankruptcy  court,  but  he  may 
follow  the  stock  or  its  proceeds  if  he  can  trace  the  same.^  Even  though 
a  broker  sells  stocks  held  on  margin  and  does  not  pay  over  to  his  cus- 


526 ;  s.  c,  Matter  of  Peck,  206  N.  Y. 
55  (1912) ;  Clappe  v.  Taylor,  125  N.  Y. 
App.  Div.  605  (1908).  A  customer 
dealing  with  one  who  is  held  out  as 
the  clerk  of  a  broker  may  hold  the 
broker  liable  if  the  clerk  converts  the 
customer's  securities,  and  if  they  re- 
ceive the  same  as  margin  for  the  clerk's 
speculations  trover  lies  against  them 
for  the  conversion.  Especially  is  this 
the  case  where  the  customer  had  died 
and  the  securities  were  obtained  from 
his  personal  representatives.  Kilmer 
V.  Hutton,  131  N.  Y.  App.  Div.  625 
(1909). 

1  Kavanaugh  v.  McIntjTe,  128  N.  Y. 
App.  Div.  722  (1908).  Where  cer- 
tificates of  stock  had  been  turned  over 
by  one  broker  to  another,  representing 
an  account  upon  which  there  was  due 
a  balance  of  about  one  sixth  of  the 
actual  value  of  such  stock,  and 
immediately  thereafter  the  brokers 
advancing  the  balance  due  upon 
such  stocks  began  to  sell  the  same 
to  third  parties  without  knowledge 
of  the  owner,  and  continued  to  do 
so  after  they  had  realized  enough  to 
pay  the  balance  due  and  applied  the 
avails  to  their  own  uses  and  purposes, 
so  that  their  acts  in  fact  constitute 
larceny,  a  claim  for  such  conversion  of 
the  stock  is  not  discharged  by  bank- 
ruptcy proceedings  and  the  bankrupts 
are  liable  to  arrest  in  a  civil  action  for 
conversion  brought  in  a  state  court. 
Kavanaugh    v.    McIntjTe,    74    Misc. 


Rep.  222  (1911),  holding  also  that  the 
act  of  a  broker  who  converts  his  cus- 
tomer's stock  is  "willful  and  mali- 
cious" within  the  meaning  of  the  bank- 
ruptcy act,  and  hence  is  not  released 
by  the  bankrupt's  discharge.  Even 
though  a  broker  has  converted  the 
stock  of  his  customer,  yet  his  dis- 
charge in  bankruptcy  discharges  that 
liability,  and  such  is  the  rule,  even 
though  the  plaintiff  also  charges  fraud 
in  connection  with  the  conversion. 
Re  Ennis  &  Stoppani,  171  Fed.  Rep. 
755  (1909).  A  claim  for  the  conver- 
sion of  stock  by  the  borrower  of  the 
same,  the  loan  of  the  stock  not  having 
been  induced  by  any  false  representa- 
tions, is  discharged  by  a  discharge  of 
the  borrower  in  bankruptcy.  Maxwell 
V.  Martin,  130  N.  Y.  App.  Div.  80 
(1909).     See  156  id.  497. 

2  Kinsey  v.  Meaney,  98  N.  Y.  App. 
Div.  420  (1904).  A  broker  holding 
stock  as  collateral  security  on  a  mar- 
gin does  not  hold  the  stock  in  a  fidu- 
ciary capacity.  IMcBurney  v.  Martin, 
6  Rob.  (N.  Y.)  502  (1866) ;  Lambert- 
son  V.  Van  Boskerk,  49  How.  Pr.  266, 
4  Hun,  628  (1875). 

3  Gorman  r.  Littlefield,  229  U.  S.  19 
(1913).  A  customer  who  files  a  claim 
in  the  bankrupt  court  for  stock  which 
his  banlo-upt  brokers  have  pledged 
without  authority  cannot  afterwards 
reclaim  the  stock  itself.  Re  Jacob 
Berry  &  Co.,  174  Fed.  Rep.  409  (1909). 


1238 


CH.  XXV.]  BROKERS   AND   THEIR   CONTRACTS.  [§  453. 

tomer  the  balance  due,  yet  he  is  not  indebted  in  a  fiduciary  capacity, 
within  the  meaning  of  the  bankruptcy  act,  and  hence  such  a  claim  is 
barred  by  a  discharge  in  bankruptcy.^  A  contract  of  a  person  to  pur- 
chase stock  on  or  before  a  certain  date  is  not  canceled  by  his  becoming 
bankrupt  before  the  date,  the  purchase  not  having  been  made  before  that 
date,  even  though  a  subsequent  discharge  in  bankruptcy  is  granted  to 
him.  The  obligation  was  not  absolute  at  the  time  of  bankruptcy  within 
the  meaning  of  the  bankrupt  act.^  A  charge  of  conspiracy  in  a  suit 
by  a  customer  against  brokers  is  only  important  to  connect  all  of  them 
with  the  transaction  and  render  each  liable  for  the  acts  of  the  others.^ 
Even  though  a  broker  sells  stock  held  on  margin  and  does  not  pay  over 
to  his  customer  the  balance  due,  yet  he  is  not  indebted  in  a  fiduciary 
capacity,  within  the  meaning  of  the  bankruptcy  act,  and  hence  such 
a  claim  is  barred  by  a  discharge  in  bankruptcy.^ 

§  453.  Brokers'  customs  and  usages.  —  It  has  been  a  greatly  dis- 
puted question  as  to  how  far  and  when  a  custom  or  usage  among  stock- 
brokers or  at  stock  exchanges  may  enter  into  and  govern  stock-brokers' 
contracts.  At  an  early  day  the  rule  was  laid  down  by  the  English  courts 
that  he  who  buys  or  sells  stock  through  a  stock-broker  must  be  consid- 
ered as  dealing  with  him  according  to  the  usages  of  the  market  in  which 
lie  deals,  and  the  customs  which  prevail  in  relation  to  that  species  of 
business.^    A  later  decision,   however,   seems  to  hold  that  a  stock- 

1  Crawford  v.  Burke,  195  U.  S.  176  (1875).  Cf.  Pollock  v.  Stables,  12 
(1904).     See  also  §  452,  supra.  Q.  B.  765  (1848) ;    Taylor  v.  Stray,  2 

2  Phenix  National  Bank  v.  Water-  C.  B.  (N.  S.)  175  (1857) ;  Morrice  v. 
bury,  197  N.Y.  161  (1910).  Hunter,    14   L.   T.    Rep.   897    (1866); 

2  Lee    V.  Brown,   139    N.    Y.  App.  Kingsbury  v.  Kirwin,  43  N.  Y.  Super. 

Div.  669  (1910).  Ct.  451   (1878);    afif'd,  77  N.  Y.  612. 

■*  Crawford  v.  Burke,  195  U.  S.  176  But    the   usage   must   not    be   illegal. 

(1904).  Robinson  v.  MoUett,  L.  R.  7  H.  L.  802, 

5  In  Biederman  v.   Stone,   L.   R.  2  818,  826  (1875) ;   Hodgkinson  v.  Kelly, 

C.  P.  504  (1867),  the  court  said  :    "It  L.  R.  6  Eq.  496  (1868) ;  Tayler  v.  Great 

has  been  held  in  a  great  number  of  Indian,  etc.  Ry.,  4  De  G.  &  J.  559,  573 

cases   that   persons   bujang  or   selling  (1859).     Nor  may  the  custom  be  estab- 

stock  or  shares  through  members  of  lished  by  that  one  transaction.     West- 

the  stock  exchange  are  bound  by  the  ropp  v.   Solomon,  8  C.  B.  345  (1849). 

rules  which  govern  the  transactions  of  It  must  be  reasonable.     Goldschmidt  v. 

that  body."     To  the  same  effect,  see  Jones,  22   L.   T.  Rep.  220  (1870).     A 

Bayliffe  v.  Butterworth,   1   Exch.  425  usage   that   is   contrary  to   an  act   of 

(1847),    per    Parke,    B. ;     Mitchell    v.  parliament,    requiring    the    broker    to 

Newhall,  15  M.  &  W.  308  (1846) ;  Max-  notify  his  customer  of  the  particular 

ted  V.  Paine,  L.  R.  6  Exch.  132  (1871) ;  numbers  of  the  shares  purchased  on 

Grissell   v.   Bristowe,    L.    R.   4   C.    P.  his  account,   is   void.     Perry   v.   Bar- 

36,   47    (1868) ;    Appleman  v.   Fisher,  nett,  L.  R.  15  Q.  B.  D.  388  (1885).     Cf. 

34  Md.  540  (1871) ;   Coles  v.  Bristowe,  Seymour  v.  Bridge,  L.  R.  14  Q.  B.  D. 

L.  P.  4  Ch.  App.  3  (1868) ;     Stray  v.  460  (1885).     Thus,  a  usage  by  which 

Russell,  1  El.  &  El.  888  (1859) ;   Davis  the     ultimate     purchaser's     name     is 

V.  Haycock,  L.  R.  4  Exch.  373  (1869) ;  handed  to  the  seller  for  the  purpose 

Nickalls  v.  Merry,  L.  R.  7  H.  L.  530  of  having  the  latter  execute  a  transfer 

1239 


§453. 


BROKEKS   AND   THEIR   CONTRACTS. 


[cH.  XXV. 


exchange  custom  does  not  bind  the  customer  unless  he  knew  of  it  and 
agreed  to  it.^  The  American  rule  allows  usages  of  brokers  to  interpret 
the  language  of  the  contract,  and  where  it  is  obscure  to  ascertain  its 
nature  and  extent,  but  not  to  vary  its  terms,  introduce  new  conditions, 
or  authorize  acts  contrary  to  its  provisions.^  The  customer  may,  how- 
ever, by  express  agreement,  waive  his  common-law  rights  and  allow 
usage  to  govern  the  transaction.^    A  customer  directing  a  purchase  of 


to  the  former  is  upheld.  Sheppard 
V.  Murphy,  16  W.  R.  948  (1868) ;  s.  c, 
Ir.  Rep.  2  Eq.  .544. 

1  Blackburn  v.  Mason,  68  L.  T.  Rep. 
510  (1893). 

2  "Usage  can  be  admitted  to  inter- 
pret the  language  of  a  contract  where 
it  is  obscure,  but  not  to  change  its 
legal  character,  or  derogate  from  the 
rights  of  parties,  or  authorize  acts 
contrary  to  its  provisions."  German 
Sav.  Bank  v.  Renshaw,  78  Md.  475 
(1894)  ;  Parsons  v.  Martin,  77  Mass. 
Ill  (18.58) ;  Hopper  v.  Sage,  112  N.  Y. 
530  (1889) ;  Lombardo  v.  Case,  30 
How.  Pr.  117  (1865) ;  1  Addison,  Con- 
tracts (Sth  Eng.  ed.,  1883),  *p.  60;  21 
Am.  L.  Reg.  (N.  S.)  176,  note;  Marye 
V.  Strouse,  5  Fed.  Rep.  483  (1880).  Cf. 
Winans  v.  Hassey,  48  Cal.  634  (1874). 
The  case  Baker  v.  Drake,  66  N.  Y. 
518  (1876),  holds  that  stock-brokers' 
usage  cannot  add  to  or  make  part  of 
the  contract.  CJ.  Horton  v.  Morgan, 
19  N.  Y.  170  (1859) ;  Peckham  v.  Ket- 
ehum,  5  Bosw.  506  (18.59) ;  White- 
house  V.  Moore,  13  Abb.  Pr.  142 
(1861).  If  there  is  doubt  as  to  the  ex- 
istence of  the  usage  the  question  is 
for  the  jury.  Dent  v.  Nickalls,  29 
L.  T.  Rep.  536  (1873) ;  aff'd,  30  L.  T. 
Rep.  644  (1874).  The  usage  may  be 
introduced  in  evidence  to  show  how 
the  business  is  to  be  transacted,  but 
it  must  not  be  unreasonable.  Rosen- 
stock  V.  Tormey,  32  Md.  169  (1869), 
holding  also  that  the  broker's  corre- 
spondence with  his  city  broker  is  not 
competent  to  prove  purchases  and 
sales.  Upon  the  effect  of  usage  in 
other  transactions,  see  Corn  Exchange 
Bank  v.  Nassau  Bank,  91  N.  Y.  74 
(1883) ;  Richmond  v.  Union  Steam- 
boat Co.,  87  N.  Y.  240  (1881) ;  Walls 
V.  Bailey,  49  N.  Y.  464  (1872) ;  Vail 
V.  Rice,  5  N.  Y.  155  (1851) ;  Delafield 
V.  Illinois,  26  Wend.  192  (1841) ;   Daw- 


son V.  Kittle,  4  Hill,  107  (1843); 
Boardman  v.  Gaillard,  1  Hun,  217 
(1874);  aff'd,  60  N.  Y.  614;  Minne- 
sota Cent.  Ry.  v.  Morgan,  52  Barb. 
217  (1868);  Sipperly  v.  Stewart,  50 
Barb.  62,  68  (1867);  Duguid  v.  Ed- 
wards, 50  Barb.  288  (1867) ;  Haskins 
V.  Warren,  115  Mass.  514,  536  (1874) ; 
Dickinson  v.  Gay,  89  Mass.  29  (1863) ; 
Parrott  v.  Thacher,  26  Mass.  426 
(1830) ;  Greenleaf  v.  Moody,  95  Mass. 
363  (1866);  Tilley  v.  Cook  County, 
103  U.  S.  1.55  (1880) ;  National  Bank 
V.  Burkhardt,  100  U.  S.  686  (1879); 
Vermilye  v.  Adams  Exp.  Co.,  21  Wall. 
138  (1874) ;  Forrestier  v.  Bordman,  1 
Story,  43  (1839);  s.  c,  9  Fed.  Cas. 
459;  Oeh-icks  v.  Ford,  23  How.  49 
(1859) ;  Renner  v.  Bank  of  Columbia, 
9  Wheat.  581  (1824) ;  Cope  v.  Dodd,  13 
Pa.  St.  33  (1850) ;  Corbett  v.  Under- 
wood, 83  111.  324  (1876);  Phillips  v. 
Moir,  69  111.  155  (1873);  Bissell  v. 
Ryan,  23  111.  566  (1860) ;  Williams  v. 
Gilman,  3  Me.  276  (1825) ;  Partridge 
V.  Forsyth,  29  Ala.  200  (1856) ;  Hal- 
werson  v.  Cole,  1  Spears  (S.  C),  321 
(1843) ;  Hogg  v.  Snaith,  1  Taunt.  346 
(1808) ;  Gibson  v.  Crick,  1  Hurlst.  & 
C.  142  (1862) ;  Fleet  v.  Murton,  L.  R. 
7  Q.  B.  126  (1871).  Brokers'  usages 
cannot  vary  fixed  principles  of  law. 
Hopper  V.  Sage,  112  N.  Y.  530  (1889). 
The  custom  (in  the  oil  trade)  of  giv- 
ing the  seller  time  to  investigate  and 
object  to  a  purchaser  may  be  insisted 
on  by  the  seller.  Sumner  v.  Stew- 
art, 69  Pa.  St.  321  (1871). 

^  In  Robinson  v.  Norris,  51  How.  Pr. 
442  (1874) ;  aff'd,  6  Hun,  233,  the  court 
said  :  "It  has  been  settled  bj^  our  court 
of  appeals  that  no  custom  among 
brokers  can  deprive  parties  of  rights 
which  the  law  gives  them,  but  they 
have  not  decided  that  those  rights 
may  not  be  waived  by  agreement.  I 
think    it    perfectly    clear    that   if    the 


1240 


CH.  XXV.]  BROKERS   AND   THEIR   CONTRACTS.  [§  453. 

stock  in  the  New  York  Stock  Exchange  is  bound  by  the  usages  and  cus- 
toms of  that  exchange.^  The  rules  of  the  New  York  Stock  Exchange 
that  a  seat  owned  by  a  bankrupt  shall  be  sold  and  the  profits  applied 
first  to  exchange  debts  is  legal,  even  in  a  court  of  bankruptcy."  An 
order  to  a  New  York  stock-broker  to  sell  stock  is  presumed  to  authorize 
a  sale  in  accordance  with  the  usages  of  the  New  York  Stock  Exchange, 
and  hence  the  broker  may  borrow  stock  to  complete  a  sale  made  by  the 
customer,  and  may  close  the  transaction  and  hold  the  customer  liable 
for  the  loss  if  the  customer  does  not  deposit  sufficient  margin  after  notice 
so  to  do,  providing  the  notice  states  the  amount  required.^  Although 
a  transfer  of  stock  is  on  a  separate  piece  of  paper,  and  is  not  acknowledged 
as  required  by  a  rule  of  the  stock  exchange,  nevertheless  the  pledgee 
may  be  a  bona  fide  holder.'*  A  witness  to  a  power  of  attorney  authoriz- 
ing the  transfer  of  registered  bonds  is  liable,  if  such  power  of  attorney 
was  unauthorized,  where  such  witness  was  a  stock-exchange  firm  and  by 
custom  such  a  witness  is  considered  a  guarantor.^  Where  a  broker 
identifies  to  a  corporation  a  person  as  a  stockholder,  in  order  that  the 
latter  may  transfer  stock,  and  such  transfer  is  forged,  the  broker  is 
liable  to  the  corporation  for  the  cost  of  the  stock  which  the  corporation 
had  to  purchase  on  the  market  for  the  benefit  of  the  real  owner  of  the 
stock. ^  A  broker  who  has  been  authorized  to  sell  stock  at  a  fixed  price 
may  give  the  seller  the  right  to  a  dividend  declared  after  the  broker  had 
received  the  order,  if  that  is  customary.^ 

broker  informs  his  customer  of  the  376  (1902).  Where  a  customer  pur- 
terms  upon  which  he  vnW  act  for  him  chases  of  a  firm  of  stock-brokers 
as  his  broker,  and  in  view  of  that  no-  and  members  of  the  New  York  Stock 
tice  the  customer  gives  an  order,  he  is  Exchange  stocks  on  margin,  the  pre- 
bound  by  the  terms  on  which  the  sumption  is  that  the  transactions 
broker  proposed  to  act  for  him."  See  are  to  be  in  accordance  with  the  rules 
also  Baker  v.  Drake,  66  N.  Y.  .518  and  usages  of  that  exchange.  Ling  v. 
(1876).  See,  in  general,  Colket  v.  El-  Maleom,  77  Conn.  517  (1905).  Thecus- 
lis,  10  Phila.  375  (1875) ;  Sutton  r.  toms  and  rules  of  the  stock  exchange 
Tatham,  10  Ad.  &  El.  27  (1839) ;  are  not  binding  upon  a  customer  of  a 
Bayley  v.  Wilkins,  7  C.  B.  886  (1849) ;  broker  except  as  the  by-laws  of  a  cor- 
Duncan  v.  Hill,  L.  R.  6  Exch.  255  poration  are  binding  upon  a  person 
(1871);  Sheppard  t'.  Murphy,  Ir.  Rep.  dealing  with  a  corporation;  in  other 
2  Eq.  .544  (1868) ;  s.  c,  16  W.  R.  948;  words,  the  party  is  bound  only  when 
Bowring  v.  Shepherd,  L.  R.  6  Q.  B.  309  he  knew  of  such  customs,  rules,  or  by- 
(1871) ;  Evans  i-.  Wain,  71  Pa.  St.  laws.  Newman  v.  Lee,  87  N.  Y.  App. 
69  (1872) ;  Sweeting  v.  Pearce,  7  C.  B.  Div.  116  (1903). 

(N.  S.)  449  (18.59);    Shaw  v.  Spencer,  ^  Smith   v.   Savin,    141    N.    Y.    315 

100  Mass.  382  (1868) ;  Day  v.  Holmes,  (1891). 

103  Mass.  306  (1869).     See  also  §  477,  ^  ciarkson  Home  v.  Missouri,   etc. 

infra.  Ry.,  182  N.  Y.  47  (1905). 

1  Taylor    v.    Bailey,    169    111.    181  e  Bank  of  England  r.  Cutler,  [1907] 
(1897).  1    K.   B.   889;    aff'd,   [1908]   2    K.  B. 

2  Re  McGregory,  174  Fed.  Rep.  629  208. 

(1909).  "  Cronan  v.  Hornblower,  211  Mass. 

3  Boyle  V.  Henning,   121  Fed.  Rep.    538  (1912). 

1241 


I  454.]  BROKERS   AND   THEIR    CONTRACTS.  [cH.  XXV. 

§  454.  Privity  of  contract  between  broker  and  opposite  parties.  — 
A  broker  who  buys  or  sells  stock  does  so  subject  to  certain  liabilities 
towards  the  parties  to  whom  he  sells  or  from  whom  he  buys.  If  he 
does  not  send  in  the  name  of  his  customer,  he  is  liable  on  the  transac- 
tion as  though  he  were  the  principal  himself.^  He  has  been  held  liable 
for  a  forgery  perpetrated  by  his  customer.-  Where  stock  stands  in  the 
name  of  two  trustees  and  one  of  them  signs  a  transfer  and  forges  the 
name  of  the  other  trustee  and  sells  the  stock  through  a  broker,  the  other 
trustee  whose  name  was  forged  may  hold  the  corporation  liable  for  the 
stock,  if  it  has  allowed  a  transfer,  and  the  corporation  may  hold  the 
broker  liable.^  Where  the  treasurer  of  a  charitable  corporation  forges 
a  resolution  of  the  board  of  trustees  authorizing  him  to  sell  bonds  regis- 
tered in  the  name  of  the  corporation,  and  he  executes  fraudulently  a 
power  of  attorney  from  the  corporation  to  him  as  treasurer  to  make  such 
sale,  the  corporation  which  issued  the  bonds  and  then  allowed  a  transfer 
on  such  forged  resolution  is  liable  to  the  charitable  corporation  for  so 
doing.  The  charitable  corporation  may  hold  liable  a  broker  who  wit- 
nessed the  power  of  attorney  even  in  good  faith.  If  the  corporation 
which  issued  and  registered  the  bonds  is  held  liable  it  has  recourse  against 
the  broker  by  reason  of  the  stock-exchange  rules  which  render  liable 
a  broker  who  witnesses  signatures  to  transfers  of  stock  or  bonds.'*  A 
broker  who  has  guaranteed  the  signature  of  the  vendor  of  stock  is  liable 
to  a  purchaser,  even  though  the  purchaser  bought  through  an  intermedi- 
ate broker,  the  sale  having  been  by  the  second  broker  without  a  disclosure 
of  the  name  of  the  vendor,  and  the  commission  of  the  intermediate 
broker  having  been  paid  by  the  first  broker.^  A  customer  cannot  hold 
the  opposite  broker  liable  where  the  latter  had  acted  on  the  insolvency 
of  the  customer's  broker  before  knowing  the  customer  or  that  the  first 


1  Wynne  v.  Price,  3  De  G.  &  Sm.  closed  the  trustee  is  liable.     McClure 

310  (1849).     Where  a  prospectus,  of-  v.  Central  Trust  Co.,  165  N.  Y.   108 

fering   for   sale    trustee's    transferable  (1900). 

certificates,    states    that    such    eertifi-         -  Royal  Exch.  Ins.  Co.  v.  Moore,  11 

cates   represent   stock  deposited  with  W.  R.  592  (1863).     The  broker  herein 

the  trustee,  the  stock  being  in  an  Eng-  sold  in  his  own  name,  but  the  opposite 

lish   corporation,    the    trustee   is   per-  party  knew  he  acted  as  a  broker.     See 

sonally  liable  if  it  turns  out  that  the  also  §  452,  supra. 

English   corporation  had  a  prior   lien         ^  Oliver  v.  Governor,  etc.,  [1901]   1 

on  the  stock  to  the  full  extent  of  its  Ch.  652 ;   aff'd,  [1902]  1  Ch.  610 ;   and 

value.     The  trustee  was  bound  to  take  sub  nom.  Starkey  v.  Governors,  etc.  of 

notice  of  the  lien  created  by  the  by-  Bk.  of  England,  [1903]  App.  Cas.  114. 

laws  of  the  English  corporation.     The  See  also  §  327,  supra. 
rule    of    caveat    emptor    has    been    re-  ^  Clarkson   Home  v.   Missouri,   etc. 

laxed  so  as  to  create  an  implied  war-  R.  R.,  182  N.  Y.  47  (1905). 
ranty  of  title  on  the  part  of  the  seller.  ^  Bassett  v.  Perkins,  65  N.  Y.  Misc. 

Even    though    the    trustee    acted    as  Rep.  103  (1909). 
agent,  yet  the  principal  not  being  dis- 

1242 


CH.  XXV.]  BROKERS   AND   THEIR   CONTRACTS.  [§  454. 

broker  was  representing  a  customer.^  WTiere  tlie  broker  hands  in  the 
name  of  his  customer,  and  that  name  is  accepted,  the  broker  is  thereby 
discharged,-  unless,  of  course,  the  name  is  unauthorized,  or  is  that  of  an 
infant.^  Upon  the  disclosure  by  the  broker  of  his  customer's  name, 
the  opposite  party  has  the  option  of  holding  either  the  broker  or  his 
customer  responsible,  but  cannot  hold  both.^  A  purchaser  of  stock 
through  a  broker  may  defend  against  a  suit  brought  by  the  broker  for 
the  price  on  the  ground  that  the  vendor,  a  customer  of  the  broker,  was 
guilty  of  fraud,  but  such  defense  is  not  good  so  far  as  the  broker  advanced 
money  to  his  customer  on  such  stock. ^  A  broker  who  claims  to  be  acting 
for  an  undisclosed  principal  in  contracting  for  the  purchase  of  bonds, 
and  who  stipulates  that  he  shall  not  be  personally  liable,  cannot  enforce 
such  contract,  if  in  fact  he  was  the  principal  himself.^  Even  though  a 
person  accepts  the  offer  of  a  broker  to  sell  securities,  and  afterwards 
buys  them  direct  from  the  broker's  principal,  the  broker  cannot  maintain 
a  suit  against  the  vendee.^  Where  the  broker  buying  stock  does  not 
have  it  transferred  on  the  books  and  does  not  divulge  the  name  of  his 
principal,  and  the  vendor  is  obliged  to  pay  a  statutory  liability  on  the 
stock,  the  broker  is  personally  liable  to  him.^  But  a  broker  buying 
for  a  customer  is  not  liable  to  corporate  creditors  on  the  statutory 
liability,  even  though  he  did  not  give  up  the  name  of  the  customer,  the 
broker's  name  not  having  appeared  on  the  corporate  books.^  Even 
though  stock,  the  subscription  price  of  which  has  not  been  paid,  is 
transferred  after  lA^inding  up  has  been  commenced,  to  an  infant  with 

1  Kent  V.  DeCoppet,  149  N.  Y.  App.  custom  or  usage  releasing  the  broker 
Div.  589  (1912).  from  this  liability  is  void.     Magee  v. 

2  Maxted  v.  Paine,  L.  R.  6  Exch.  132  Atkinson,  2  M.  &  W.  440  (1837).  Cf. 
(1871),  holding  that  the  broker  does  Jones  v.  Littledale,  1  Nev.  &  P.  677 
not  guarantee  his  customer's  respon-  (1837),  the  sale  being  of  hemp.  Also 
sibility,  nor  that  he  is  the  real  pur-  Thomson  v.  Davenport,  9  B.  &  C.  78 
chaser.  So  also  of  the  stock-jobber.  (1829),  holding  that  the  purchaser's 
Grissell  v.  Bristowe,  L.  R.  4  C.  P.  36  option  remains  open  until  the  naftie 
(1868).  Contra,  Cruse  v.  Paine,  L.  R.  of  the  undisclosed  principal  is  given. 
6  Eq.  641  (1868).  It  is  for  the  jury  to  say  which  one 

5  See  §  446,  supra.     A  broker  hand-  the  opposite  customer  gave  credit  to, 

ing  in  the  name  of  a  customer  with-  irrespective  of   a   stock-exchange  cus- 

out  authority  is  himself  liable.     Max-  torn.     Mortimer  v.  McCallan,  6  M.  & 

sted  V.  Morris,   21    L.    T.    Rep.    53.5  W.  58  (1840). 

(1869).    Cf.  Shepherd  v.  Gillespie,  L.  R.  ^  Leo  v.  McCormack,  186  N.  Y.  330 

5  Eq.  293  (1867).  (1906). 

*  Watson   V.   Miller,    11   W.   X.    18  « Paine  v.  Loeb,  96  Fed.  Rep.   164 

(1876).     Where  a  broker,  who  executes  (1899). 

an  order  from  another  broker  for  an         ^  Mason  v.  Chicago,  B.  etc.  Ry.,  156 

undisclosed      principal,      brings      suit  Fed.  Rep.  9.59  (1907). 
against  the  other  broker  after  discov-         ^  Boultbee  v.   Gzowski,   29  Canada 

ering  the  principal  he  cannot  sue  the  S.  C.  Rep.  54  (1898). 
principal    also    for    a    loss.     Barrel    v.  ^  Joecken    v.    Cuyahoga,    etc.    Co., 

Newby,  127  Fed.  Rep.  656  (1904).     A  Ohio  Circuits  (1903),  p.  605. 

1243 


§  455.] 


BROKERS   AND   THEIR   CONTRACTS. 


[CH.  XXV. 


the  consent  of  the  liquidators,  yet  stock-brokers  who  brought  about 
the  transaction  are  not  hable  on  the  stock.^  A  stock-broker  is  hable 
to  the  owner  for  the  value  of  mining  shares  received  for  sale  from  one 
who  had  stolen  them,  although  he  acted  in  good  faith,  without  notice, 
and  paid  the  proceeds  to  the  thief,  relying  on  his  representations  of 
ownership.-  Where  a  person  secretly  speculates  in  stock  in  the  name  of 
another  person,  the  latter  having  accounts  with  brokers,  in  some  of 
which  accounts  the  former  is  not  interested,  the  former  cannot  main- 
tain a  bill  for  accounting  against  the  brokers.^ 

§  455.  Privity  of  contract  between  the  opposite  customers.  —  Wlien 
the  broker  of  one  customer  has  agreed  with  the  broker  of  another 
customer  on  the  terms  of  a  purchase  and  sale  of  stock,  there  immedi- 
ately arises  a  privity  of  contract  between  the  two  customers.  A  cus- 
tomer buying  through  brokers  may  be  held  liable  for  the  price  in  a  suit 
by  the  vendor  against  him.^  A  customer  may  be  sued  by  a  dealer  from 
whom  his  broker  has  purchased  specific  stock,  and  the  dealer  may  sell 
the  stock  after  notice,  and  recover  the  loss.^  The  purchasing  customer 
is  liable  to  the  selling  customer  for  all  calls  and  liabilities  arising  on  the 
stock  after  the  broker's  contract  is  made,  if  the  selling  customer  is  obliged 
to  pay  such  liabilities  by  reason  of  his  being  the  registered  stockholder.^ 


1  Re  National  Bank,  etc.,  Ltd., 
119071  1  Ch.  582. 

2  Swim  V.  Wilson,  90  Cal.  126 
(1891).  Even  though  brokers  in  send- 
ing stock  to  a  customer  indorse  it  in 
blank  and  intrust  it  to  a  messenger, 
and  the  messenger  converts  it  to  his 
use  by  having  other  brokers  sell  it  in 
good  faith,  yet  such  latter  brokers  are 
liable  to  the  customer  for  the  value 
of  the  stock.  Hall  v.  Wagner,  111 
N.  Y.  App.  Div.  70  (1906). 

3  MacKay  v.  Hudson,  118  Fed.  Rep. 
919  (1902). 

^  Re  Consolidated,  etc.  v.  Spiegel  & 
Co.,  100  L.  T.  Rep.  3.51  (1909). 

6  Anderson  v.  Beard,  [1900]  2  Q.  B. 
260.  A  broker's  client  is  not  liable 
to  a  stock-jobber  of  whom  the  broker 
has  purchased  stock,  a  portion  of  such 
stock  to  go  to  the  broker's  client. 
No  usage  of  the  stock  exchange  can 
create  such  liabilitv.  Beckhuson  v. 
Hamblet,  [1900]  2  Q.  B.  18;  aff'd, 
[1901]  2  K.  B.  73.  Where  a  client 
buys  stock  on  the  stock  exchange 
through  his  broker,  and  the  broker 
fails  before  the  delivery  of  the  stock, 
the  jobbe;  selling  the  stock  may  hold 


the  client  liable  for  any  loss  due  to 
the  client  refusing  to  accept  the 
stock.  Levitt  v.  Hamblet,  [1901]  2 
K.  B.  53  ;  compare  Beckhuson  v.  Ham- 
blet, [1901]  2  K.  B.  73,  aff'g  [1900]  2 
Q.  B.  18. 

«  Hawkins  v.  Maltby,  L.  R.  4  Ch. 
App.  200  (1869),  aff'g  s.  c,  L.  R.  6 
Eq.  .505 ;  Evans  v.  Wood,  L.  R.  5  Eq. 
9  (1867) ;  Hodgkinson  v.  Kelly,  L.  R. 
6  Eq.  496  (1868);  Remfrey  v.  But- 
ler, 1  E.,  B.  &  E.  887  (18.58) ;  Allan  v. 
Graves,  L.  R.  5  Q.  B.  478  (1870).  A 
stock-exchange  custom  making  the 
broker  a  principal  does  not  prevent 
the  customer  suing  as  principal.  Lang- 
ton  V.  Waite,  L.  R.  6  Eq.  165  (1868). 
The  refusal  of  the  directors  to  regis- 
ter the  sale  does  not  enable  the  pur- 
chasing customer  to  recover  back  the 
purchase  price.  Stray  v.  Russell,  1 
El.  &  El.  888  (18.59).  The  purchaser 
may  be  compelled,  by  a  bill  in  equity, 
to  register  the  transfer  made  through 
brokers.  Paine  v.  Hutchinson,  L.  R.  3 
Eq.  257  (1866) ;  aff'd,  L.  R.  3  Ch.  App. 
388.  Where  a  broker  by  instructions 
from  his  customer  arranges  with  an- 
other party   to   carry   the   customer's 


1244 


CH.  XXV.]  BROKERS   AND   THEIR   CONTRACTS.  [§  456. 

So  also  the  purchasing  customer  may  hold  the  selling  customer  respon- 
sible for  the  carrying  out  of  the  contract.^  It  has  been  held  that  the  rem- 
edy may  be  an  action  at  law  -  or  in  equity.^  Even  though  brokers  on 
the  stock  exchange  are  acting  for  undisclosed  principals,  yet  one  of  the 
principals  can  sue  the  other  principal  for  breach  of  the  contract.^  The 
right  of  set-off  for  other  debts  applies  as  between  the  two  customers,^ 
but  not  for  debts  due  from  one  of  the  brokers  to  the  opposite  customer.^ 
§  456.  Intermediate  suh-brokers  and  sub-customers.  —  A  broker 
may  employ  a  sub-broker  unless  his  instructions  are  to  the  contrary,  and 
may  allow  the  sub-broker  to  retain  the  stock  if  the  main  broker  has 
deposited  sufficient  money  with  the  sub-broker  to  protect  it  and  can 
take  up  the  stock  at  any  time  he  wishes,  but  the  main  broker  is  liable 
to  his  customer  if  he  does  not  produce  the  stock  on  demand  and  pay- 
ment therefor.."  A  broker  in  suing  a  customer  cannot  prove  that  he 
purchased  certain  stock  by  proving  letters  from  a  broker  in  another  city 
showing  such  purchase.^  \Miere  a  customer's  broker  employs  another 
broker  to  transact  the  business,  the  customer  cannot  compel  the  second 
broker  to  complete  the  contract  as  he  might  compel  the  first  broker.^ 
The  second  broker  cannot  claim  a  lien  on  the  stock  for  debts  due  him 
from  the  first  broker.^*^  The  broker  cannot  offset  against  the  customer  of 
the  sub-broker  a  debt  due  the  broker  from  the  sub-broker.  Not  even 
a  custom  of  the  stock  exchange  to  that  effect  binds  the  customer  unless 
he  agreed  to  it.^^     If  the  first  broker  merely  introduces  the  parties  he 

stocks  and  also  other  stocks  of  the  possibly,  where  the  customer  sup- 
same  kind  carried  by  the  broker,  and  posed  the  opposite  broker  was  the 
the  broker  fails  and  the  customer  re-  principal.  See  Kelley  v.  Munson,  7 
fuses  to  protect  his  own  stock,  the  Mass.  319  (1811),  and  §  456,  i7ifra. 
party  carrying  the  same  may  hold  '  Hoogewerff  v.  Flack,  101  Md.  371 
him  liable  for  the  loss  on  his  part.  (1905).  A  broker  making  a  purchase  or 
Scott,  etc.  V.  Godfrey,  [1901]  2  K.  B.  sale  through  another  takes  the  risk. 
726.  Greene  v.  Corey,  210  Mass.  536  (1912). 

I  Even  though  the  selling  customer  »  Hately  v.  Kiser,  253  111.  288  (1912). 

did  not  authorize  the  use  of  his  name,  ^  Booth  v.   Fielding,    1   W.   N.   245 

but  knew  of  it  and  did   not  object.  (1866).     The     sub-broker    cannot    be 

Shepherd  v.  Gillespie,  L.  R.  5  Eq.  293  held    Uable    for    stock    purchased    for 

(1867).  the  customer  unless  the  chief  broker 

^  Street  v.  Morgan,  L.  R.  4  Exch.  is     also     made     a     party     defendant. 

384  (1869),  cited  in  Davis  v.  Haycock,  Jenney  v.  Hayden,  171  Fed.  Rep.  898 

L.  R.  4  Exch.  373  (1869).  (1909). 

'  Sheppard   v.   Murphy,    16   W.    R.  lo  Fisher   v.  Brown,  104  Mass.  259 

948  (1868) ;   s.  c,  Ir.  Rep.  2  Eq.  544.  (1870).     See  also  §  455,  supra. 

*  Clews  V.  Jamieson,  182  U.  S.  461  ^  Blackburn  v.  Mason,  68  L.  T.  Rep. 

(1901).  510   (1893).     He  may  hold  an  inter- 

^  Carr  v.  Hinchliff,  4  B.  &  C.  547  mediate  customer  or  agent  liable  for 

(1825).  set-off    due    from    the    latter    to    the 

6  Fish    V.    Kempton,    7   C.    B.    687  broker.     Jaycox  v.  Cameron,  49  N.  Y. 

(1849).     See  also  Sweeting  i'.  Pearce,  645  (1872). 
7  C.  B.   (N.  S.)  449  (1859).     Unless, 

1245 


§  456.]  BROKERS   AND   THEIR    CONTRACTS.  [cH.  XXV. 

cannot  charge  a  commission  therefor,  although  custom  allows  it.^ 
The  real  customer  may  hold  an  intermediate  customer  hable.  A  sub- 
broker  or  correspondent  broker  is  not  obliged  to  ascertain  the  relations 
and  agreements  between  the  chief  broker  and  the  customer.  Where 
brokers  send  the  stock  of  their  clients  indorsed  in  blank  to  corresponding 
brokers  in  exchange  for  stock  given  up  by  the  latter,  the  latter,  having 
acted  in  good  faith  and  without  notice,  are  protected.-  But  Boston 
brokers  are  not  bona  fide  pledgees  of  Detroit  brokers  as  to  stocks  be- 
longing to  customers  of  the  latter  where  the  Boston  brokers  bought 
the  eastern  business  of  the  Detroit  brokers  with  knowledge  that  cus- 
tomers' stocks  were  involved,  and  the  Boston  brokers  knowing  that  the 
Detroit  brokers  were  insolvent  and  were  imposing  on  their  customers 
are  personally  liable  to  the  latter.^  A  stock-broker  receiving  an  order 
from  other  stock-brokers  to  buy  stock  and  put  it  in  the  name  of  a  cer- 
tain person  and  draw  on  them  for  the  price,  with  the  certificate  attached, 
is  entitled  to  payment  on  delivery  of  the  certificate,  even  though  the 
stock-brokers  who  gave  the  order  had  collected  from  their  customer 
and  embezzled  the  funds. ^  The  sub-broker  may  hold  all  stocks  as 
security  for  all  accounts  between  himself  and  the  chief  broker,  there 
being  no  notice  given  of  the  customer's  rights.  If  there  is  any  surplus 
after  the  sub-broker's  debt  is  paid,  a  customer  who  placed  his  own  stock 
in  the  chief  broker's  hands  to  sell  is  preferred  to  another  customer  who 
had  purchased  on  a  margin  and  left  the  stock  as  security.'^  A  broker 
is  liable  to  his  customer  for  the  misconduct  of  his  sub-broker  in  selling 
the  stock  to  himself.^  Where  the  customer  orders  his  broker  to  buy 
stock,  and  the  broker  does  buy  it  through  a  sub-broker,  and  the  broker 
then  notifies  the  customer  that  the  stock  has  been  bought,  the  broker's 
title  to  the  stock  thereby  passes  to  the  customer,  subject  to  any  amount 
due  from  the  customer  to  the  broker  and  to  any  lien  of  the  sub-broker. 
The  subsequent  insolvency  of  the  broker  does  not  prevent  a  customer 
notifying  the   sub-broker  not  to  sell  out  the  stock  without  notifying 

1  Gibson  v  Crick,  1  Hurl.  &  C.  142  ther    orders,    and    it    transpires    that 

(1862).  such  use  of  the  stock  was  unauthor- 

^EUiott  V.  Miller  &  Co.,  158  Fed.  ized.     Ryman  v.  Gerlach,  153  Pa.  St. 

Rep.  868  (1908).  197(1893).     Dealings  in  stock  between 

3  Austin  V.  Hayden,  137  N.  W.  Rep.  a  broker  and  a  correspondent  broker 

317  (Mich.  1912).  are   dealings   between   principals,    the 

*  Burnham  v.  Eyre,  123  N.  Y.  App.  customers  not  being  named  or  known, 

Div.  777  (1908) ;   aff'd,  196  N.  Y.  560.  and  hence  subject  to  the  United  States 

^  Willard   v.    White,   56    Hun,   581  government    tax    on    sales    of    stock. 

(1890).     See   also    §§  460,    473,    infra.  Municipal,  etc.  Co.  v.  Ward,  133  Fed. 

A    sub-broker    who    knows    that    the  Rep.  70  (1904) ;    aff'd,  138  Fed.  Rep. 

stock  deposited  as  collateral  with  the  1006. 

chief  broker  belongs  to  the  customer  ^  Evans    v.   Wrenn,  93   N.    Y.  App. 

is  liable  in  damages  for  conversion  Div.  346  (1904) ;  aff'd,  181  N.  Y.  506. 
where  he  receives  such  stock  on  fur- 

1246 


CH.  XXV.]  BROKERS   AND   THEIR   CONTRACTS.  [§  456. 

him,  the  customer;  and  the  customer  may  insist  that  the  sub-broker 
resort  to  other  stocks  belonging  to  the  broker  and  remaining  in  the  sub- 
broker's  hands  to  pay  the  broker's  debts  to  the  sub-broker  before  resort- 
ing to  the  above  stock.^  Where  the  customer  has  paid  for  the  stocks  and 
the  sub-broker  has  had  them  transferred  into  the  customer's  name, 
the  customer  is  entitled  to  them  as  against  a  trustee  in  bankruptcy 
of  the  main  broker.^  If  a  broker  pays  a  sub-broker  for  stock  and  directs 
the  latter  to  deliver  it  to  the  former's  customer  and  then  the  first  broker 
fails,  the  second  broker  cannot  hold  the  stock  as  against  the  general 
account  of  the  first  broker.^  A  broker  is  the  agent,  and  not  the  creditor, 
of  his  customer,  and  if  he  becomes  bankrupt  his  customer's  securities 
in  the  hands  of  the  broker's  New  York  correspondent  may  be  identified 
and  also  the  surplus  proceeds  from  their  sale,  including  any  margin  in 
the  hands  of  the  New  York  correspondent.''  If  a  customer  orders  a 
purchase  of  stock  by  his  broker,  and  the  broker  makes  a  purchase  through 
a  sub-broker,  the  sub-broker  retaining  the  stock  as  security,  and  the 
customer  then  pays  the  main  broker,  and  the  main  broker  then  fails, 
and  the  sub-broker  sells  out  the  stock,  the  proceeds  belong  to  the  cus- 
tomer, there  being  that  much  surplus  in  the  hands  of  the  sub-broker 
in  closing  his  general  account  with  the  main  broker.^  Where  a  cus- 
tomer delivers  stock  to  his  broker  to  sell,  and  the  broker  sells  it  through 
a  sub-broker,  and  the  sub-broker  credits  the  main  broker  on  the  general 
account,  and  the  main  broker  then  fails,  the  creditor  has  no  prior  lien 
on  a  general  surplus  in  the  hands  of  the  sub-broker,  even  though  the 
customer  had  directed  that  other  stock  be  purchased,  and  it  was  pur- 
chased, but  was  never  delivered.^  If  brokers  in  New  York  take  orders 
through  a  local  broker  in  another  place,  they  are  liable  for  false  and 
fictitious  orders  given  to  them  by  him  in  the  name  of  a  customer.^  A 
broker  cannot  recover  from  his  principal  for  losses  due  to  purchases 
and  sales  where  the  broker  charged  not  only  his  own  commission,  but 
the  commission  of  a  sub-broker,  thus  compelling  the  customer  to  pay 
two  commissions  without  knowledge  thereof.^     Even  though  an  inter- 

1  Le  Marchant  v.  Moore,  150  N.  Y.  209  «  Johnson  v.  Kearley,  [1908]  2  K.  B. 

(1896).    SeeSGAtl.  Rep.  715(Pa.  1913).  82.     Even  though  a  customer  in  a  small 

2  Re  Meadows,   etc.   Co.,    173  Fed.  town  knows  that  the  broker  is  employ- 
Rep.  694  (1909).  ing  a  sub-broker  on  the  stock  exchange, 

sParnall  v.    Paine,   209  Mass.    181  yet   where   the   broker  had   issued    a 

(1911).  circular     stating     that     the     business 

*  Re  Carothers  &  Co.,  182  Fed.  Rep.  would  be  transacted  on  the  very  best 

501  (1910).  terms  he  is  bound  to  disclose  to  the 

^  Harmon  v.  Sprague,  163  Fed.  Rep.  customer  that  the  city  broker  made  a 

486  (1908).  charge,  and  if  he  fails  to  do  so  he  can- 

8  Harmon  v.  Sprague,  163  Fed.  Rep.  not    recover    the    balance    due    him. 

486  (1908).  Johnson   v.    Kearley,    [1908]   2    K.   B. 

'  CasweU  v.  Putnam,  120  N.  Y.  153  514. 
(1890). 

1247 


X  457.]  BROKERS    AND   THEIR    CONTRACTS.  [cH.  XXV. 

mediate  party  between  two  brokers  brings  about  a  sale  by  one  broker 
to  the  other  by  false  representations,  this  does  not  enable  the  vendee 
to  rescind  and  recover  the  money  back.^ 

§  457.  Purchases  or  sales  on  margins  —  Broker  as  a  pledgee  — 
Bona  fide  purchasers  or  repledgees  —  Distribution  of  assets  on 
failure  of  broker.  —  By  far  the  larger  part  of  a  stock-broker's  business 
consists  of  purchases  and  sales  of  stock  on  what  is  called  a  "  margin."  ^ 
The  customer  deposits  with  the  broker,  as  security,  a  sum  of  money 
equal  to  but  a  small  part  of  the  value  of  the  stock  involved.  This  sum 
of  money  is  the  "  margin."  If  the  customer's  order  is  to  purchase, 
then  the  broker  keeps  both  the  margin  and  the  purchased  stock  as  se- 
curity against  loss  in  the  final  closing  of  the  transaction.  If  the  cus- 
tomer's order  is  to  sell,  then  the  broker  sells ;  but,  having  no  stock  to 
deliver,  he  borrows  the  same  from  other  parties  and  delivers  it  to  the 
purchaser,  the  broker  still  keeping  the  margin  as  security.  Frequently 
no  stock  passes,  nor  is  intended  to  pass,  but  merely  the  ultimate  profit 
or  loss,  called  "  differences,"  is  paid  ;  the  losing  customer  loses  the  whole 
or  part  of  his  margin,  the  winning  customer  getting  back  his  margin 
and  also  the  profits,  less  commissions.  This  in  some  of  the  states  is 
held  to  be  a  gambling  contract,  and,  like  all  gambhng  contracts,  not 
enforceable.^  But  a  purchase  or  sale  of  stock  on  margins,  where  there 
is  no  proof  of  an  intent  not  actually  to  deliver  the  stock,  is  legal.^    A 

1  Ball  V.  Shepard,  202  N.  Y.  247  Conn.  116  (1880),  clearly  sets  out  the 
(1911).  legality  of  such  contracts.     The  court 

2  A  margin  "means,  in  the  broker's  said:  "It  is  pretty  evident  that  the 
lexicon,  additional  collateral  security  parties  did  not  contemplate  that  the 
against  loss  to  the  broker  while  .  .  .  stock  should  be  actually  transferred 
carrying  stock  for  his  employer."  to  the  defendant.  .  .  .  The  defendant 
McNeil  V.  Tenth  Nat.  Bank,  55  Barb,  [customer],  through  his  agents,  the 
59  (1869) ;   s.  c,  46  N.  Y.  325.  plaintiffs,      actually      purchased      the 

3  McBurney  v.  Martin,  6  Rob.  stock,  and  there  was  an  actual  deliv- 
(N.  Y.)  502  (1866).  A  broker  cannot  ery  —  not  to  the  principal,  but  to  the 
recover  commissions  or  disbursements  agents  for  the  principal."  The  brokers 
from  his  customer  where  the  trans-  "knew  that  the  defendant  was  specu- 
actions  were  gambling  and  intended  so  lating,  and  that  they  advanced  him 
to  be  by  both.  Harvey  v.  Merrill,  150  money  for  that  purpose.  But  that 
Mass.  1  (1889).  The  question  of  the  was  neither  illegal  nor  immoral.  .  .  . 
relations  between  a  customer  and  No  ease  has  been  cited  which  declares 
stockholder  on  short  sales  was  dis-  such  a  contract  illegal.  If  we  should 
cussed  in  Matter  of  Mills,  139  N.  Y.  so  hold,  it  would  be  difBcult,  if  not 
App.  Div.  .54  (1910).  See  also  §  445,  impossible,  to  draw  the  line  between 
note,  supra.  legal     and     illegal     transactions."     A 

*  See  ch.  XX,  supra,  where  the  char-  bankrupt  broker  cannot  defend  on  the 

acter,     effect    and    non-enforceability  ground  that  a  statute  prohibiting  places 

of  a  broker's  gambling  contracts  are  from  dealing  in  stocks  on  margin  applied 

fully  treated.     A  "max-gin"  transaction  to  the  stock  exchange.     Re  Dorr,  186 

is    not    necessarily   gambling   and   in-  Fed.  Rep.  276  (1911).     The  California 

valid.     See  §  344,  supra.     The  impor-  constitution  renders  void  a  transaction 

tant    case    of    Hatch    v.    Douglas,    48  wherein  a  broker  buys  stock  for  the 

1248 


CH.  XXV. 


BROKERS    AND   THEIR   CONTRACTS. 


[§  457. 


"  stop  order  "  is  an  order  to  sell  at  the  best  available  price  after  a  stock 
has  touched  the  price  specified,  and  a  "  stop  order  "  does  not  prevent 
the  broker  calling  for  additional  margin.^ 

The  relation  between  a  customer  and  his  broker,  in  cases  where  the 
broker  buys  for  his  customer  and  retains  the  stock  as  security,  is  in  most 
jurisdictions  held  to  be  that  of  a  pledgor  towards  a  pledgee,  the  customer 
being  the  pledgor,  the  broker  being  the  pledgee,  and  the  stock  being 
the  article  pledged.-  In  New  York  the  rule  is  clearly  adhered  to  that 
the  relation  between  a  stock-broker  and  his  customer  is  that  of  pledgor 
and  pledgee,  even  though  the  stock-broker  advances  the  whole  pur- 
chase price  without  requiring  any  margin,  and  hence  a  sale  by  the 
broker  on  a  notice  of  intent  to  sell,  without  specifying  the  time  and 
place,  is  a  conversion,  there  being  no  waiver  by  the  customer.^  It  seems 
to  be  still  an  open  question  in  New  York  whether  a  broker  has  implied 


customer  with  the  broker's  money 
and  holds  the  stock  as  security  and 
charges  the  customer  interest  and 
commissions.  Cashman  v.  Root,  89 
Cal.  373  (1891). 

1  Richter  v.  Poe,  109  Md.  20  (1908). 

2  Approved  in  Skiff  v.  Stoddard,  63 
Conn.  198  (1893) ;  Markham  v.  Jau- 
don,  41  N.  Y.  235  (1869);  Baker  v. 
Drake,  66  N.  Y.  518  (1876).  The 
broker  is  bound  to  keep  constantly  on 
hand  the  amount  of  stock  so  held  on 
margin,  i.e.,  pledged.  Taussig  v. 
Hart,  58  N.  Y.  425  (1874);  Rogers 
V.  Gould,  6  Hun,  229  (1875).  See 
also  §  469,  infra.  In  fact,  the  broker 
is  obliged  to  conform  to  the  rules 
governing  pledges  of  stock  —  a  sub- 
ject treated  in  ch.  XXVI,  infra.  The 
broker  is  a  pledgee,  and  ^vithout  express 
contract  has  a  lien  on  the  stock  for 
the  balance  due  under  a  purchase,  but 
not  for  any  general  balance  due. 
Leahy  v.  Lobdell,  etc.  Co.,  80  Fed. 
Rep.  665  (1897).  Where  stock  is 
purchased  by  a  broker  on  a  margin  he 
is  a  pledgee  and  his  customer  a  pledgor 
of  the  stock.  Austin  v.  Hayden,  137 
N.  W.  Rep.  317  (Mich.  1912).  The 
customer  as  pledgor  may  claim  his 
stock  from  the  broker's  assignee  for 
the  benefit  of  creditors  if  the  customer 
can  identify  it.  Chamberlain  v.  Green- 
leaf,  4  Abb.  N.  Cas.  178  (1878).  See 
Boylan  v.  Huguet,  8  Nev.  345  (1873). 
A  broker  holding  as  pledgee  stock  pur- 
chased for  a  customer  on  margin  need 


not  keep  that  identical  stock  on  hand, 
and  it  is  sufficient  if  he  keeps  an  equal 
quantity  on  hand  over  and  above 
stock  of  the  same  kind  held  by  him 
for  other  customers.  Caswell  v.  Put- 
nam, 120  N.  Y.  153  (1890).  A  clerk  in 
the  outer  office  of  stock-brokers  has 
no  authority  to  bind  them  by  an  agree- 
ment with  a  customer  that  extra 
margins  will  not  be  called  for.  Barber 
V.  EUingwood,  135  N.  Y.  App.  Div. 
549  (1909) ;  s.  c,  144  N.  Y.  App.  Div. 
513. 

3  Content  v.  Banner,  184  N.  Y.  121 
(1906).  Stock  purchased  by  a  broker 
on  margin  belongs  to  the  customer 
and  the  broker  holds  it  as  security 
for  the  balance  due.  Tompkins  v. 
Morton  T.  Co.,  91  N.  Y.  App.  Div. 
274  (1904) ;  aff'd,  181  N.  Y.  578.  In 
New  York  a  broker  must  have  either 
in  possession  or  control  an  amount 
of  stock  equal  to  that  which  he  is 
carrying  for  a  purchaser  on  a  margin. 
If  he  repledges  it  without  authority 
and  it  then  passes  into  the  hands  of 
one  who  takes  it  with  notice  of  the 
customer's  claim,  the  customer  may 
reclaim  the  stock.  Strickland  v.  Ma- 
goun,  119  N.  Y.  App.  Div.  113  (1907) ; 
aff'd,  190  N.  Y.  545.  A  broker  carry- 
ing stocks  on  a  margin  is  a  pledgee, 
and  a  sale  by  him  without  demand  or 
notice  is  a  conversion.  Clappe  v. 
Taylor,  125  N.  Y.  App.  Div.  605 
(1908). 


(79) 


1249 


§457. 


BROKERS   AND   THEIR    CONTRACTS. 


[CH.  XXV. 


power  to  pledge  his  customer's  stocks,  which  the  broker  is  carrying  on  a 
margin.^  In  Massachusetts,  and  it  seems  also  in  California,  the  rule  is 
clearly  laid  down  that  a  broker  is  not  a  pledgee  of  stocks  which  he  buys 
for  his  customer  on  a  margin,  but  that,  on  the  contrary,  the  broker  is 
the  owner  of  the  stock,  and  that  he  is  not  bound  to  keep  the  stock  of 
one  customer  distinct  from  that  of  another,  but  may  take  a  single  certifi- 
cate in  his  own  name  for  several  customers  and  may  pledge  the  stock 
for  advances  made  to  himself,  and  that  he  is  the  person  to  be  taxed 
on  such  stock.2  'pj-^g  supreme  court  of  the  United  States  finally  passed 
upon  this  subject  in  1908,  and  held  that  a  broker  is  an  agent,  and  not 
the  owner  of  stocks,  purchased  by  him  on  a  margin,  and  that  while  he 
might  not  be  strictly  a  pledgee,  as  understood  at  common  law,  he  was 
essentially  a  pledgee,  and  hence  might  turn  over  similar  stock  to  his 
customer  and  receive  payment  therefor,  and  that  such  an  act  would  not 
be  a  preference  within  the  meaning  of  the  bankruptcy  law.  The  court 
approved  the  New  York  rule  and  declined  to  follow  the  Massachusetts 
rule  on  this  subject.^ 


1  See  §  467,  infra. 

2  The  court  realized,  however,  that 
its  decision  was  not  in  accord  with 
the  current  of  authority,  and  said  : 
''The  English  doctrine  seems  to  be  the 
same  as  that  of  this  commonwealth, 
so  that  we  are  not  left  quite  alone  in 
a  desert  of  logic."  Chase  v.  City  of 
Boston,  180  Mass.  4.58  (1902).  In 
Massachusetts  it  is  held  that  a  broker 
carrying  stocks  on  a  margin  is  not 
a  pledgee.  Covell  v.  Loud,  135  Mass. 
41  (1883).  A  printed  statement  by  a 
broker  to  his  customer  reciting  that 
the  stock  in  the  account  may  be  carried 
in  the  broker's  general  loans,  and 
bought  or  sold  at  public  or  private  sale 
without  notice,  supported  by  proof 
that  it  is  the  custom  of  brokers  to 
pledge  stock  deposited  by  the  customer 
on  margin,  sustains  such  pledge. 
Furber  v.  Dane,  203  Mass.  108  (1909). 
A  broker  who  purchases  stock  for  a 
customer  on  a  margin  is  not  a  pledgee, 
but  is  merely  under  contract  to  deliver 
the  stock  on  payment  of  the  balance ; 
and  hence  he  may  pledge  the  stock  or 
sell  it,  and  is  not  in  default  until  the 
customer  has  tendered  the  balance  and 
demanded  the  stock.  If  the  broker  is 
adjudicated  a  bankrupt  the  customer 
may  treat  this  as  a  breach  of  contract 
and  prove  his  claim.  In  re  Swift,  105 
Fed.    Rep.    493    (1900).     In   a   bank- 


ruptcy court  sitting  in  Massachusetts 
the  relation  between  a  broker  and  a 
customer  was  defined  to  be  that  of 
debtor  and  creditor.  In  re  Topliff,  114 
Fed.  Rep.  323  (1902).  The  relation 
between  a  broker  and  his  customer  in 
a  purchase  of  stock  on  margin  is 
not  that  of  a  pledgee  and  pledgor, 
but  of  parties  to  an  executory  contract 
for  the  sale  and  purchase  of  stock, 
whenever  demand  and  payment  is 
made  by  the  purchaser,  or  after  the 
broker  has  tendered  the  stock  and 
made  demand  for  payment  after  rea- 
sonable notice.  The  bankruptcy  of 
the  broker  is  a  breach  of  the  contract 
by  him.  In  re  Todd,  112  Fed.  Rep. 
315  (1901).  By  written  agreement 
even  in  Massachusetts  the  title  may 
remain  in  the  purchaser,  the  broker 
being  merely  a  pledgee,  and  the  statute 
of  Massachusetts  passing  title  by  a 
transfer  and  delivery  of  the  certificate 
has  no  application.  Chase  v.  City  of 
Boston,  193  Mass.  .522  (1907).  In 
California  the  relation  of  a  broker 
and  customer  is  that  of  vendor  and 
vendee,  and  hence  a  completed  deliv- 
ery of  stock  is  not  in  violation  of  the 
constitutional  provision  against  sales 
of  stock  on  margin.  Conradt  v.  Lep- 
per,  13  Wyo.  473  (1905). 

3  Richardson  v.  Shaw,  209  U.  S.  365 
(1908).     A  broker  may  sell  a  customer's 


1250 


CH.  XXV. 


BROKERS  AND  THEIR  CONTRACTS. 


[§  457. 


In  England  a  customer,  by  employing  a  broker  to  do  business  on  the 
stock  exchange,  is  presumed  to  have  authorized  him  to  do  business  on 
the  terms  of  such  exchange.  Hence  the  broker  may  have  the  right  to 
sell  his  customer's  stock  upon  the  customer's  failure  to  pay  therefor, 
without  observing  the  rules  applicable  to  pledgees  of  stock.^  In  Eng- 
land, also,  where  certificates  of  stock  have  not  the  quasi-negotiability 
that  they  have  in  America,  a  mortgage  of  stock  is  common  and  is  en- 
forced as  a  mortgage,  and  the  mortgagee  after  a  reasonable  time  may 
sell  without  notice  to  the  mortgagor,  the  law  being  laid  down  as  follows  : 
"  Express  powers  were  not  formerly  necessary  on  mortgages  of  stock, 
or  in  the  instruments  of  defeasance  executed  by  the  transferee  ;  nor  need 
a  mortgagee  of  stock  now  rely  on  his  statutory  power  in  order  to  realize 
his  security  by  sale.  If  stock  is  itself  made  the  security  for  money, 
and  the  day  appointed  for  payment  is  passed,  the  mortgagee  may  at 
once  proceed  to  sell  the  stock,  and  repay  himself,  principal  and  interest, 
without  any  authority  from  the  mortgagor,  and  without  commencing 
an  action  of  foreclosure."  -    In  America  some  of  the  most  important 


stock  certificate  if   the  broker  has  a    i'.  National  City  Bank,  etc.,  201  Fed 


similar  amount  of  that  stock  on  hand 
free  and  clear.  Re  Brown  &  Co.,  183 
Fed.  Rep.  861  (1910) ;  s.  c,  193  Fed. 
Rep.  24.  A  certificate  of  stock  pur- 
chased for  a  customer  may  be  sold 
by  the  broker  if  the  broker  has  another 
similar  certificate  to  meet  the  cus- 
tomer's demand  at  any  time.  Re 
Brown  &  Co.,  189  Fed.  Rep.  432 
(1911);  B.  c,  193  Fed.  Rep.  24. 
A  broker  buying  stock  for  a  customer 
on  margin  is  the  pledgee  of  the  stock, 
and  if  he  sells  it  without  the  customer's 
knowledge  or  consent  and  thereafter 
closes  the  account  because  the  customer 
does  not  respond  to  a  demand  for 
margins,  he  cannot  hold  the  customer 
liable  for  any  loss.  Katz  v.  Nast,  187 
Fed.  Rep.  529  (1910).  In  Rhode 
Island  a  broker  purchasing  stock  on  a 
margin  is  a  pledgee  of  the  customer. 
United  Nat.  Bank  v.  Tappan,  33  R.  I. 
1  (1911).  In  a  dictum  in  Re  Ennis, 
187  Fed.  Rep.  720  (1911),  the  court 
said  that  a  broker  has  an  implied 
right  to  rehypothecate  securities 
pledged  with  him  ;  s.  c,  187  Fed.  Rep. 
726-728.  The  usual  arrangement  be- 
tween a  broker  and  a  bank  for  substi- 
tuting collateral,  etc.,  as  affected  by 
the  bankruptcy  act  prohibiting  prefer- 
ences, was  passed  upon  in  Hotchkiss 


Rep.  664  (1912). 

1  Forget  V.  Baxter,  [1900]  A.  C.  467. 
In  England  the  carrying  of  stock 
by  a  broker  on  a  margin  is  called 
"contango,"  and  the  broker  is  held 
to  be  the  owner  of  the  stock.  In  the 
case  Bentinck  v.  London,  etc.  Bank, 
[1893]  2  Ch.  120,  the  court  said:  "In 
all  these  transactions,  therefore,  when 
money  is  borrowed  from  a  stock- 
broker in  this  way  on  '  contango'  or  con- 
tinuation, whether  the  money  is  ob- 
tained from  the  dealer  or  from  other 
stock-brokers,  or  from  bankers,  the 
result  is  the  same ;  the  arrangement 
is  one  by  which  the  broker  becomes, 
as  between  himself  and  his  client, 
the  owner  of  the  shares  in  question, 
although  he  is  under  a  contract  to 
provide  an  equal  amount  of  similar 
shares  at  a  future  date."  The  rule  in 
the  stock  exchange  as  between  mem- 
bers, that  in  case  of  a  default  the 
official  assignee  shall  fix  the  price, 
does  not  apply  to  the  relation  between 
a  broker  and  a  customer.  The  cus- 
tomer is  not  bound  by  such  price. 
The  customer  is  a  mortgagor  to  the 
broker  as  mortgagee.  Ponsolle  v. 
Webber,  [1908]  1  Ch.  2.54. 

2  Deverges   v.   Sandeman,   etc.   Co., 
[1901]  1  Ch.  70  ;  aff'd,  [1902]  1  Ch.  579. 


1251 


I  457.]  BROKERS   AND   THEIR   CONTRACTS.  [cH.  XXV. 

questions  connected  with  brokers'  contracts  arise  out  of  the  pledgee 
relationship.  This  subject,  however,  is  fully  treated  in  the  following 
chapter.  Like  an  ordinary  pledgee  of  stock,  the  broker  may  have  the 
stock  transferred  into  his  own  name ;  ^  and  he  can  put  his  customer  in 
default  only  by  tendering  the  stock  and  demanding  payment  for  their 
whole  value  less  the  margin. ^  A  receipt  given  by  a  broker  to  a  cus- 
tomer reciting,  first  that  certain  stocks  had  been  deposited  as  security, 
and,  second,  that  certain  stocks  purchased  on  a  margin  might  be 
hypothecated,  will  be  strictly  construed,  and  the  first-mentioned 
stocks  cannot  legally  be  rehypothecated  under  such  receipt ;  hence 
the  title  does  not  pass  except  to  a  bona  fide  pledgee  or  purchaser, 
and  if  they  have  passed,  any  surplus  in  such  stocks  will  be  applied 
to  the  first-mentioned  stock. ^ 

There  is  a  difference  of  opinion  as  to  whether  the  broker  may  repledge 
stock  held  by  him  on  a  margin.  This  subject  is  considered  elsewhere.'' 
A  customer  cannot  claim  stock  which  he  left  with  his  broker  as  security 
and  which  the  broker  has  repledged  without  authority  unless  he  pays 
the  amount  which  he  owes.^  A  broker  or  pledgee  need  not  sell  the 
stock  held  as  collateral  before  bringing  an  action  against  the  pledgor 
for  the  amount  due,  and  brokers'  custom  cannot  compel  it.^  A  bona 
fide  purchaser  or  pledgee  of  certificates  of  stock  from  a  broker  is  pro- 
tected against  a  broker's  customer  the  same  as  he  would  be  protected 
against  any  other  person.^     But  where  a  banker  taking  stock  in  pledge 

iHorton  v.  Morgan,  19  N.  Y.  170  the  pledgee  is  protected.     Re  Tracy, 

(1859).  185   Fed.    Rep.   844    (1911).     Cf.    191 

2  Read  v.  Lambert,  10  Abb.  Pr.  (N.  S.)  Fed.  Rep.  810.  A  person  taking  stock 
428  (1871).  in   pledge  from   the   cashier  of   stock- 

3  Thomas  v.  Taggart,  209  U.  S.  385  brokers  is  bound  to  inquire  as  to  his 
(1908).  authority  to  make  the  pledge  for  his 

*  See  §  467,  infra.  own  benefit.     Menardi  v.  Wacker,  32 

5  Tompkins  v.  Morton  T.  Co.,  91  Nev.  169  (1909).  Bone  fide  pledgees 
N  Y  App.  Div.  274  (1904) ;  aff'd,  181  from  brokers  are  protected.  Furber 
N.  Y.  578.  V.    Dane,  203   Mass.    108    (1909).     In 

6  De  Cordova  v.  Barnum,  130  N.  Y.  Maryland  a  pledgee  of  a  certificate  of 
615  (1892).  stock  from  a  broker  is  bound  to  take 

7  See  §  473,  infra.  A  bank  taking  notice  of  the  rights  of  the  broker's 
stock  in  pledge  from  a  broker  in  customer,  and  the  customer  may  sue 
exchange  for  stock  ah-eady  held  is  a  the  broker  and  pledgee  jointly  for 
bona  fide  holder  as  against  the  owner  of  conversion  of  the  stock,  but  the  defend- 
the  stock  who  intrusted  it  to  the  ants  may  deduct  any  sums  actually 
broker.  King  v.  Mellon  Nat.  Bank,  due,  and  the  damages  in  trover  are 
227  Pa.  St.  22  (1910).  Even  though  the  value  of  the  stocky  at  the  time  of 
a  bank  sells  securities  to  a  broker  the  conversion  with  interest  to  the 
with  a  request  for  a  certified  check  date  of  the  verdict.  Merchants'  Nat. 
therefor,  yet  if  the  broker  sends  an  Bank  y.  Williams,  110  Md.  334  (1909). 
uncertified  check  and  the  bank  holds  A  bank  which  accepts  a  check  from  a 
it  until  the  next  day -and  in  the  mean-  broker  and  delivers  to  him  negotiable 
time  the  broker  pledges  the  securities,  securities  which  the  bank  had  held  as 

1252 


XXV.] 


BROKERS   AND   THEIR   CONTRACTS. 


[§  457. 


from  a  broker  knows  that  the  stock  belongs  to  the  latter's  customer,  and 
that  the  pledge  is  authorized  only  for  money  to  be  used  on  the  customer's 
account,  the  banker  cannot  hold  the  stock  for  a  general  over-draft  of 
the  broker.^  Where  the  owner  of  stock  which  is  indorsed  in  blank 
leaves  it  with  his  broker  for  safe  keeping  and  the  broker  fraudulently 
pledges  it,  the  pledgee,  being  bona  fide,  is  protected.^  Such  stock, 
however,  may  be  redeemed  from  the  assignee  of  the  broker,  provided 
the  stock  can  be  identified.^  Where  a  customer  deposits  with  a  broker 
a  certificate  of  stock  running  to  the  former  and  not  indorsed  by  him, 
the  purpose  of  the  deposit  being  to  show  that  he  is  financially  responsible, 
and  the  broker  forges  his  signature  to  a  transfer  and  then  pledges  the 
certificate,  the  pledgee  is  not  protected.^  Where  a  broker  has  pur- 
chased bonds  for  various  customers,  their  title  is  superior  to  that  of  an 
assignee  for  the  benefit  of  creditors.^  Where  a  customer  delivers  stock 
to  a  broker,  and  the  broker  without  his  consent  transfers  it  into  his 


security  for  his  debt  cannot  afterwards 
claim  a  lien  on  the  securities,  they 
having  passed  from  the  broker  to 
bona  fide  holders.  Lloyds  Bank,  Ltd.  v. 
Swiss  Bankverein,  107  L.  T.  Rep.  309 
(1912).  Even  though  a  broker  re- 
deems negotiable  bonds  from  a  bank  by 
giving  his  check,  and  the  check  is  not 
good,  yet  if  the  broker  has  pledged  the 
bonds  to  other  parties,  the  latter  are 
protected.  Lloyds  Bank,  Ltd.  v.  Swiss 
Bankverein,  108  L.  T.  Rep.  143  (1913). 
A  bona  fide  pledgee  of  a  certificate  of 
stock  from  a  broker  with  a  blank 
transfer  from  the  broker's  customer  is 
protected  even  though  the  customer 
had  given  such  transfer  in  a  previous 
transaction  relating  to  the  same 
stock.  Taleott  v.  Standard  Oil  Co., 
149  N.  Y.  App.  Div.  694  (1912). 

1  Cuthbert  v.  Robarts,  etc.  Co.,  100 
L.  T.  Rep.  62  (1908).  A  broker  sub- 
pledgee  is  bound  to  inquire  as  to  the 
broker's  authority  where  the  situation 
would  cause  a  reasonably  prudent  man 
to  make  inquiry.  Austin  v.  Hayden, 
137  N.  W.  Rep.  318  (Mich.  1912). 
Boston  brokers  are  not  bona  fide 
pledgees  of  Detroit  brokers  as  to  stocks 
belonging  to  customers  of  the  latter 
where  the  Boston  brokers  bought  the 
eastern  business  of  the  Detroit  brokers 
with  knowledge  that  customers'  stocks 
were  involved,  and  the  Boston  brokers 
knowing  that  the  Detroit  brokers  were 
insolvent  and  were  imposing  on  their 


customers  are  personally  liable  to  the 
latter.  Austin  v.  Hayden,  137  N.  W. 
Rep.  317  (Mich.  1912). 

2  Shattuck  V.  American  Cement  Co., 
205  Pa.  St.  197  (1903). 

'  Sk-iff  V.  Stoddard,  63  Conn.  198 
(1893).  Even  though  a  broker  re- 
pledges  the  stocks  of  various  custom- 
ers without  authority  from  them,  the 
pledgee  is  protected  if  he  had  no 
knowledge  of  the  fact  that  the  broker 
did  not  own  the  stocks,  and  if  the 
pledgee,  after  selling  out  the  stocks 
on  notice,  has  a  balance  remaining 
both  of  money  and  stocks,  the  cus- 
tomers prorate  as  to  such  balance, 
even  though  the  stocks  of  some  of 
them  were  not  sold  by  the  pledgee. 
This  rule  is  based  on  the  principle  that 
if  they  all  had  united  in  redeeming 
from  the  pledgee  they  would  have 
borne  the  loss  pro  rata.  Whitlock  v. 
Seaboard  Nat.  Bank,  29  N.  Y.  Misc. 
Rep.  84  (1899).  Where  an  insolvent 
bank  illegally  sells  collateral  which  it 
holds  to  secure  a  note,  and  at  all  times 
thereafter  the  bank  has  sufficient  funds 
to  replace  the  collateral,  the  maker  of 
the  note  may  claim  the  full  value  of 
the  stock  even  as  against  the  receiver. 
Brennan  v.  Tillinghast,  201  Fed.  Rep. 
609  (1913). 

*  Unity,  etc.  Co.  v.  Bettman,  217 
U.  S.  127  (1910). 

5  Hunt  V.  Marquand,  109  N.  Y. 
App.  Div.  729  (1905). 


1253 


§458. 


BROKERS   AND   THEIR   CONTRACTS. 


[CH.  XXV. 


own  name,  the  customer  may  claim  the  new  certificate  upon  satisfac- 
torily identifying  the  stock. ^  \Miere  stock-brokers  have  pledged  their 
customer's  securities  and  become  bankrupt,  the  bankruptcy  court  may 
enjoin  the  pledgees  from  selling  the  securities  pending  an  investigation 
as  to  the  right  of  the  customer  to  redeem.^  Questions  relative  to  mar- 
shaling the  assets  and  controversies  between  various  customers  claiming 
the  same  securities  are  considered  elsewhere.^ 

§  458.  Broker's  rights  and  duties  on  failure  of  margin.  —  When 
the  "  margin  "  which  the  customer  deposits  with  his  broker  happens 
to  become  exhausted  by  the  fluctuations  of  the  market  adversely  to  the 
customer,  difficult  questions  arise  as  to  the  several  rights  and  duties  of 
the  broker  and  of  the  customer.  If  the  broker  is  under  orders  to  close 
the  transaction  when  the  margin  becomes  exhausted,  he  of  course  is 
obliged  to  do  so.*  But,  otherwise,  the  rule  is  that  the  broker  cannot 
summarily  close  the  transaction,  even  though  he  has  fear  of  greater 
loss,  involving  a  loss  by  himself.  He  is  obliged  to  demand  further 
margin  from  his  customer,  at  the  same  time  notifying  him  that  the  pre- 
vious margin  is  exhausted ;  also  that,  in  case  the  margin  is  not  made 
good,  he  will  close  the  transaction,  holding  the  customer  liable  for  the 
loss ;  also  stating  the  time  and  place  of  such  threatened  sale.^    The  no- 


1  Mould  V.  Importers',  etc.  Bank,  72 
N.  Y.  App.  Div.  30  (1902). 

2  Re  Carothers  &  Co.,  192  Fed. 
Rep.  691  (1912).     Cf.  §  475,  infra. 

'  See  §  473,  infra. 

*  See  §  448,  supra.  Where  the  cus- 
tomer and  the  broker  agree  that  the 
former  shall  not  be  liable  for  any- 
thing beyond  his  margin,  this  is  bind- 
ing on  the  broker.  Zell  v.  Corkran,  5 
Penn.  (Del.)  312  (190.5).  A  "stop 
order"  is  an  order  to  sell  at  the  best 
available  price  after  a  stock  has  touched 
the  price  specified,  and  a  "stop  order" 
does  not  prevent  the  broker  calling 
for  additional  margin.  Richter  v. 
Poe,  109  Md.  20  (1908). 

5  In  New  York  the  rule  is  clearly 
adhered  to  that  the  relation  between 
a  stock-broker  and  his  customer  is 
that  of  pledgor  and  pledgee,  even 
though  the  stock-broker  advances  the 
whole  purchase  price  without  requir- 
ing any  margin,  and  hence  a  sale  by 
the  broker  on  a  notice  of  intent  to  sell 
without  specifying  the  time  and  place 
is  a  conversion,  there  being  no  waiver 
by  the  customer.  Content  v.  Banner, 
184  N.  Y.  121   (1906).     In  the  usual 


short  sale  of  stock  through  a  broker 
on  a  margin,  the  brokers  "were 
bound  to  carry  the  stock  until  plain- 
tiff directed  them  to  close  the  trans- 
action, so  long  as  he  complied  with 
the  terms  of  the  contract  on  his  part, 
and  to  give  the  plaintiff  reasonable 
notice  of  the  want  of  sufficient  mar- 
gin, and  of  their  intention  to  buy  in 
the  stock  and  cover  his  short  ac- 
count if  the  margin  was  not  made 
good,  in  accordance  with  the  terms 
of  the  notice."  Rogers  v.  Wiley,  131 
N.  Y.  527  ( 1892) ;  holding  also  that 
where  a  customer  who  is  selling  on 
a  margin  desires  to  close  the  transac- 
tion, but  his  broker  dissuades  him  by 
promising  to  carry  the  stock,  the 
broker  cannot  close  the  transaction 
without  notice.  There  is  no  duress 
in  brokers  threatening  to  sell  stock 
unless  they  are  given  additional  secu- 
rity, inasmuch  as  the  law  allows 
them  to  sell,  proper  notice  being 
given.  Buck  v.  Houghtaling,  110  N.  Y. 
App.  Div.  52  (1905).  A  broker  has 
no  legal  right  to  sell  out  the  stock 
without  notice,  even  though  there  is 
a   decline  in   the   market.     Wiggin   v. 


1254 


CH.  XXV.] 


BROKERS  AND  THEIR  CONTRACTS. 


[§  458. 


tice  must  be  given  a  reasonable  time  before  such  closing  of  the  transac- 
tion, and  notice  sent  by  mail  is  sufficient  if  actually  received.^  If  the 
broker  fails  to  comply  with  these  rules,  and  sells,  he  is  guilty  of  conver- 
sion of  the  stock.^    A  broker  in  selling  his  customer's  stock  to  repay  the 


Federal  Stock,  etc.  Co.,  77  Conn.  507 
(1905).  An  order  to  a  New  York 
stock-broker  to  sell  stock  is  pre- 
sumed to  authorize  a  sale  in  accord- 
ance with  the  usages  of  the  New  York 
Stock  Exchange,  and  hence  the  broker 
may  borrow  stock  to  complete  a  sale 
made  by  the  customer,  and  may  close 
the  transaction  and  hold  the  customer 
liable  for  the  loss  if  the  customer  does 
not  deposit  sufficient  margin  after 
notice  so  to  do,  provided  the  notice 
states  the  amount  required.  Boyle  v. 
Ilenning,  121  Fed.  Rep.  376  (1902). 
Brokers,  before  selling  a  customer's 
stock  which  they  hold  as  pledgees,  the 
stock  having  been  purchased  on  a 
margin,  are  bound  to  demand  further 
margin  and  give  notice  of  intent  and 
time  and  place  of  sale.  If  they  fail 
to  do  so,  but  sell  and  then  sue  the 
customer  for  the  loss,  they  cannot 
recover  anything.  They  cannot  claim 
that  their  loss  has  been  greater  than 
defendant's  loss  due  to  their  conver- 
sion. Gillett  V.  Whiting,  120  N.  Y. 
402  (1890) ;  Markham  v.  Jaudon,  41 
N.  Y.  235  (1869),  overruling  Hanks 
V.  Drake,  49  Barb.  186  (1867),  and 
Sterling  v.  Jaudon,  48  Barb.  459 
(1867).  See  also  Kenfield  v.  Latham, 
2  Cal.  Leg.  Ree.  235  (1879),  and 
§  461,  infra.  Cf.  Worthington  v.  Tor- 
mey,  34  Md.  182  (1870) ;  and  see  ch. 
XXVI,  i7ifra.  A  formal  demand  for 
further  margin  is  insufficient  where, 
subsequently  to  that  demand,  the 
broker  negotiates  with  the  customer 
and  tells  him  that  he  will  consider 
what  to  do.  McGinnis  v.  Smythe,  1 
Silvern.  23  (1886).  The  broker's  tele- 
grams and  conversations  with  his  cus- 
tomers may  amount  to  a  waiver  of 
his  right  to  demand  further  margin. 
Rogers  v.  Wiley,  14  N.  Y.  Supp.  622 
(1891);  aff'd,  131  N.  Y.  527  (1892). 
When  called  upon  for  further  margin, 
a  customer  may  make  a  "stop-order," 
the  price  fixed  in  such  order  being 
within  the  margin  already  furnished. 
Campbell  v.  Wright,   118  N.   Y.    594 


(1890).  The  giving  of  a  note  to  a 
broker  pledgee  does  not  extend  the 
time  within  which  the  pledgor  was  to 
deposit  further  margin.  Gould  v. 
Trask,  10  N.  Y.  Supp.  619  (1890). 
A  clerk  in  the  outer  office  of  stock- 
brokers has  no  authority  to  bind  them 
by  an  agreement  with  a  customer  that 
extra  margins  will  not  be  called  for. 
Barber  v.  EUingwood,  135  N.  Y.  App. 
Div.  549  (1909) ;  s.  c,  144  N.  Y.  App. 
Div.  513. 

1  Worthington  v.  Tormey,  34  Md. 
182  (1870).  Two  days  is  a  sufficient 
notice  of  demand  of  further  margin 
by  brokers.  Small  v.  Housman,  142 
N.  Y.  App.  Div.  760  (1911).  Leaving 
a  notice  at  the  office  was  held  insuffi- 
cient where  it  did  not  reach  the  cus- 
tomer. Bryan  v.  Baldwin,  52  N.  Y. 
232  (1873).  Two  days'  notice  held 
sufficient.  Stewart  v.  Drake,  46  N.  Y. 
449  (1871).  See  also,  in  general, 
§  477,  infra.  A  notice  after  the  sale  is 
insufficient,  and  the  question  of 
whether  a  notice  was  given  is  for  the 
jury  if  it  is  denied.  Gillett  v.  Whiting, 
120  N.  Y.  402  (1890).  The  broker  is 
bound  to  give  the  customer  reasonable 
notice  to  furnish  more  margin.  Lazare 
V.  Allen,  20  N.  Y.  App.  Div.  616  (1897). 
Actual  notice  of  failure  of  margin  need 
not  be  given  if  the  customer  gives  his 
address  at  a  hotel  and  he  cannot  be 
found  after  diligent  effort,  especially 
where  there  was  no  pledge  as  in  the 
case  of  cotton  purchased  on  a  margin. 
Smith  V.  Craig,  151  N.  Y.  App.  Div. 
648  (1912).  The  amount  of  notice 
to  be  given  by  a  broker  to  a  customer 
to  put  up  more  margin  must  be  rea- 
sonable in  the  absence  of  proof  of 
usage  to  the  contrary.  Ling  v.  Mal- 
com,  77  Conn.  517  (1905). 

2  Baker  v.  Drake,  66  N.  Y.  518 
(1876).  Cf.  Gregory  v.  Wendell,  40 
Mich.  432  (1879),  involving  a  pur- 
chase of  corn.  It  is  only  in  stock 
transactions  that  the  relation  of 
pledgor  and  pledgee  arises.  Where  the 
broker  closes  the  transaction  without 


1255 


§459. 


BROKERS  AND  THEIR  CONTRACTS. 


[CH.  XXV. 


former's  advances  on  default  of  the  customer  to  pay,  may  sell  all  the 
stock  and  need  not  confine  himself  to  the  amount  necessary  to  repay 
such  advances,  there  being  but  one  certificate  of  stock  involved.^  Where 
the  broker  is  merely  authorized  to  sell  he  is  not  bound  to  sell.^  Where 
on  a  short  sale  the  customer  refuses  to  advance  further  margin,  the 
broker  may  buy  to  cover  the  transaction,  but  must  buy  at  once  at  the 
then  existing  market  price,  and  he  is  not  allowed  to  wait  and  take  the 
chances.^  In  Massachusetts  all  these  rules  are  different  because  there 
the  broker  is  held  to  be  the  owner  of  the  stock. **  Stock  deposited  by 
the  customer  with  his  brokers  not  as  collateral  security,  but  as  a  margin, 
may  be  sold  by  the  broker,  and  is  not  affected  by  the  Massachusetts 
statute  prohibiting  the  holder  of  collateral  security  from  selling  or 
pledging  it  before  maturity  of  the  debt.^ 

§  459.  What  will  excuse  7iotice  and  demand  for  more  margin. 
—  All  these  rights  of  the  customer  to  notice  of  failure  of  margin,  de- 
mand of  more  margin,  notice  of  intent  to  sell,  and  of  time  and  place 
of  sale,  may  be  waived ;  and  brokers  generally  require  their  customers 
to  sign  written  contracts  to  that  effect.^     But  mere  memoranda  on 


notice,  and  later  the  customer  gives 
an  order  which,  if  the  transaction  had 
not  been  closed,  would  have  yielded  a 
profit,  the  customer  may  recover  dam- 
ages to  the  amount  of  that  profit. 
Rogers  v.  Wiley,  131  N.  Y.  527  (1892). 
A  broker  buying  stock  for  a  customer 
on  margin  is  the  pledgee  of  the  stock, 
and  if  he  sells  it  without  the  customer's 
knowledge  or  consent  and  thereafter 
closes  the  account  because  the  customer 
does  not  respond  to  a  demand  for 
margins,  he  cannot  hold  the  customer 
liable  for  any  loss.  Katz  v.  Nast, 
187  Fed.  Rep.  529  (1910).  Cf.  §  461, 
infra. 

1  Stubbs  V.  Slater,  [1910]  1  Ch.  195. 

2  Robinson  v.  Norris,  51  How.  Pr. 
442  (1874);  aff'd,  6  Hun,  233;  Esser 
V.  Linderman,  71  Pa.  St.  76  (1872). 
Cf.  Harris  v.  Tumbridge,  83  N.  Y. 
92  (1880).  On  a  short  sale  of  grain 
the  broker  is  not  bound  to  sell  as 
soon  as  the  principal  refuses  to  ad- 
vance more  margin.  Perin  v.  Parker, 
126  111.  201  (1888). 

3  Norden  v.  Duke,  129  N.  Y.  App. 
Div.  158  (1908);  aff'd,  198  N.  Y. 
562. 

*  See  §  457,  supra.  Where  a  person 
in  Michigan  buys  stock  in  Boston 
through   Boston   brokers,    the   Massa- 

12 


chusetts  rule  as  to  the  right  of  brokers 
to  sell  without  notice  on  failure  of 
margin  applies,  even  though  the  pur- 
chase was  through  a  Michigan  agent 
of  the  Boston  brokers.  Douglass  v. 
Paine,  141  Mich.  485  (1905). 

^Furber  v.  Dane,  203  Mass.  108 
(1909). 

6  Thus,  a  written  authority  to  the 
brokers  "to  sell  in  their  discretion,  at 
public  or  private  sale,  .  .  .  without 
any  notice  whatever,  the  stocks, 
bonds,  or  gold  which  they  might  be 
carrying  [for  the  plaintiff]  whenever 
my  margin  shall  fall  below"  a  certain 
figure,  waives  all  the  customer's 
rights  herein.  Wicks  v.  Hatch,  62 
N.  Y.  535  (1875).  See  also  Cameron  v. 
Durkheim,  ,55  N.  Y.  425  (1874).  See 
also  §  477,  infra.  The  customer  may 
waive  his  rights  after  the  broker  has 
made  the  unauthorized  sale.  Stewart 
V.  Drake,  46  N.  Y.  449  (1871) ;  MiUi- 
ken  V.  Dehon,  27  N.  Y.  364  (1863). 
But  authority  "to  close  the  account 
without  notice,  by  purchase  or  sale,  at 
public  or  private  sale"  does  not  waive 
right  to  notice  of  failure  of  margin 
and  demand  for  more.  Stenton  v. 
Jerome,  54  N.  Y.  480  (1873) ;  Kenfield 
V.    Latham,    2    Cal.    Leg.    Rec.    235 


(1879). 
56 


The  demand  for  further  mar- 


CH.   XXV.] 


BROKERS   AND   THEIR   CONTRACTS. 


[§  459. 


accounts  stated  from  a  broker  to  a  customer  that  the  broker  reserves 
the  right  to  close  out  transactions  when  margins  are  running  out,  with- 
out further  notice,  may  not  amount  to  a  waiver  by  the  customer  of  his 
right  to  notice  and  demand  for  margin.^  Where  the  customer,  upon 
being  presented  with  his  account,  does  not  object,  but  promises  to  pay 
the  amount,  he  thereby  waives  his  right  to  object  to  a  sale  as  being  with- 
out notice.^  Where  the  customer  is  called  upon  for  more  margin  and 
replies  "  I  will  have  to  let  my  stocks  go,"  this  is  sufficient  authority 
to  sell.^  It  is  doubtful  whether  the  death  of  the  customer  will  authorize 
the  broker  to  close  the  transaction  without  notice.^  After  a  broker  has 
purchased  according  to  order,  but  his  customer  dies  before  the  stock  is 
paid  for,  it  is  the  duty  of  the  broker  to  sell  immediately  upon  the  death 
of  his  client,  and  not  to  carry  the  transaction  along  and  afterwards 
sell.^  A  custom  of  brokers  to  dispense  with  these  notices  is  void,  and 
not  binding  on  the  customer.^    The  fact  that  a  panic  occurs,  or  unusual 


gin  may  be  waived,  and  waiver  may 
be  inferred  from  the  negotiations  and 
proposition.  Harris  v.  Pryor,  18  N.  Y. 
Supp.  128  (1892).  Even  though  a 
broker's  contract  authorizes  him  to 
close  any  deal  without  notice  on  the 
margin  running  out,  yet  if  for  four 
years  he  has  not  exercised  that  right 
he  waives  it.  Miller  &  Co.  v.  Lyons,  74 
S.  E.  Rep.  194  (Va.  1912).  For  form 
of  broker's  contract  with  customer,  see 
Vol.  V,  infra. 

1  Bosoian  v.  Hubbard,  121  N.  Y. 
App.  Div.  510  (1907);  s.  c,  129 
N.  Y.  App.  Div.  637.  See  also  §  477, 
infra.  Where  a  broker  in  reporting 
to  his  customer  purchases  of  stock 
does  so  by  what  is  called  a  confirma- 
tion notice,  which  stated  that  the 
broker  reserved  the  right  to  sell  the 
stock  at  his  discretion  at  any  time 
when  in  his  opinion  the  condition  of 
the  market  warranted  it,  and  the 
customer  had  agreed  to  pay  a  margin 
of  five  per  cent.,  but  allowed  it  to  fall 
below  one  per  cent.,  and  he  knew  that 
to  be  a  fact,  the  broker  may  sell  with- 
out notice.  Estes  v.  Perkins,  137 
N.  Y.  App.  Div.  367  (1910).  Where 
the  reports  of  stock-brokers  to  the 
customer  contain  the  words  "subject 
to  the  rules  of  the  stock  exchange" 
whether  this  was  sufficient  notice  of  de- 
mand for  further  margin  is  for  the  jm-y. 
Small  V.  Housmann,  208  N.  Y.  115 
(1913),  rev'g  142  N.  Y.  App.  Div.  760. 


Where  the  broker  has  made  every 
effort  to  reach  a  customer  and  obtain 
further  margin,  he  may  sell  with- 
out actual  notice  to  the  customer, 
especially  where  on  various  occasions 
the  broker  had  sent  notices  of  sales 
with  a  statement  on  the  notices  that 
the  broker  reserved  the  right  to  close 
out  the  transactions  without  further  no- 
tice when  margins  were  failing.  Smith 
V.  Craig,  151  N.  Y.  App.  Div.  648 
(1912).     See  203  Mass.  108. 

2Gillett  V.  Whiting,  141  N.  Y.  71 
(1894). 

3  Evans  v.  Wrenn,  93  N.  Y.  App. 
Div.  346  (1904) ;  aff'd,  181  N.  Y.  566. 
Where  a  customer  says  he  can  put 
up  no  more  margin,  this  amounts  to 
a  waiver  of  demand.  Small  v.  Hous- 
man,  142  N.  Y.  App.  Div.  760  (1911). 

^  The  broker  will  be  protected  in 
continuing  the  transaction  until  per- 
sonal representatives  are  appointed. 
Hess  V.  Rau,  95  N.  Y.  359  (1884).  The 
broker  may  immediately  sell  the 
stock.  Lacey  v.  Hill,  L.  R.  8  Ch. 
App.    921    (1873).     See    §322,    supra. 

'  Re  Overweg,  [1900]  1  Ch.  209. 

6  Markham  v.  Jaudon,  41  N.  Y.  235 
(1869) ;  Taylor  ;;.  Ketchum,  35  How. 
Pr.  289  (1867);  s.  c,  5  Rob.  (N.  Y.) 
507.  Contra,  Appleman  v.  Fisher,  34 
Md.  540  (1871),  a  case  of  a  gold- 
broker;  also  Colket  v.  Ellis,  10  Phila. 
375  (1875),  where  both  parties  were 
brokers  and  knew  the  custom.     If  the 


1257 


§460. 


BROKERS   AND   THEIR   CONTRACTS. 


fluctuations  of  the  market  happen,  does  not  excuse  a  broker  from  giving 
such  notice.^ 

§  460.  Customer's  remedies  and  damages  herein.  —  For  an  un- 
authorized sale  by  a  broker  of  stock  held  upon  a  margin,  the  customer 
has  ample  remedies.  He  may  claim  the  benefit  of  the  sale,  or  may  claim 
the  value  of  the  stock.^  Or  the  customer  may  require  the  broker  to 
replace  the  stock,  and,  upon  his  failure  so  to  do,  the  customer  may  re- 
place it  himself  and  charge  the  broker  with  the  loss.^  Or  the  customer 
may  recover  the  advance  in  the  market  price  from  the  time  of  the  sale 
up  to  a  reasonable  time  to  replace  the  stock  after  notice  of  the  sale.* 


customs  are  expressly  made  part  of 
the  contract,  insolvency  of  the  cus- 
tomer authorizes  sale  without  notice, 
such  being  the  custom.  Lacey  v.  Hill, 
L.  R.  18  Eq.  182  (1874). 

1  Markham  v.  Jaudon,  41  N.  Y.  235 
(1869) ;  Brass  v.  Worth,  40  Barb.  648 
(1863);  Ritter  v.  Cushman,  7  Rob. 
(N.  Y.)  294  (1867).  See  also  §448, 
supra. 

2  Taussig  V.  Hart,  58  N.  Y.  425 
(1874) ;  Strong  v.  National,  etc.  Assoc, 
45  N.  Y.  718  (1871).  A  customer 
whose  stock  has  been  converted  by 
his  broker,  who  bought  the  stock  for 
the  customer  on  a  margin,  may  hold 
him  liable  for  conversion,  and  the 
measure  of  damages  is  the  same  as  if 
he  sued  him  on  contract,  namely, 
the  value  of  the  stock  at  the  time  and 
place  of  the  conversion,  with  interest 
from  that  date,  unless  special  circum- 
stances call  for  more  complete  indem- 
nity, the  amount  due  to  the  broker  at 
the  time  of  trial  to  be  deducted. 
Melntyre  v.  Whitney,  139  N.  Y.  App. 
Div.  557  (1910) ;  aff'd,  201  N.  Y.  526 ; 
8.  c,  Matter  of  Peck,  206  N.  Y.  56 
(1912). 

3  Baker  v.  Drake,  53  N.  Y.  211,  217 
(1873) ;  Colt  V.  Owens,  90  N.  Y.  368 
(1882). 

*  Colt  t'.  Owens,  90  N.  Y.  368  (1882), 
holding  that  prices  within  thirty  days 
after  the  sale  is  a  reasonable  rule. 
See  also  Gruman  v.  Smith,  81  N.  Y. 
25  (1880);  Capron  v.  Thompson,  86 
N.  Y.  418  (1881).  A  customer  whose 
stock  has  wrongfully  been  sold  by  a 
broker  need  not  repurchase  it  at  once 
on  discovering  conversion  in  order  to 
measure  the  loss,  but  may  recover 
the  difference  between  the  price  of  the 


sale  and  the  highest  price  within  three 
weeks  of  the  time  of  sale.  Miller  & 
Co.  V.  Lyons,  74  S.  E.  Rep.  194  (Va. 
1912).  Cf.  Andrews  v.  Clerke,  3 
Bosw.  585  (1858).  The  measure  of 
damages  in  a  suit  by  a  customer 
against  a  broker  for  an  unauthorized 
sale  of  stock  is  the  difference  between 
the  price  at  which  it  was  sold  and  the 
highest  price  within  a  reasonable 
time  thereafter,  which,  in  this  case, 
the  court  fixed  at  thirty  days.  Bur- 
horn  V.  Lockwood,  71  N.  Y.  App. 
Div.  301  (1902).  Where  a  broker  sells 
his  client's  stock  illegally,  the  measure 
of  damages  in  a  suit  by  the  client 
is  the  difference  between  the  price  at 
which  the  stock  was  sold  and  the 
highest  market  price  within  a  reason- 
able time  thereafter.  Wolff  v.  Lock- 
wood,  70  N.  Y.  App.  Div.  569  (1902). 
A  customer's  measure  of  damages  for 
an  illegal  sale  by  a  broker  is  the  highest 
price  within  a  reasonable  time  after 
the  customer  learned  of  the  sale  in 
which  time  he  could  have  repur- 
chased the  stock.  Burnham  v.  Law- 
son,  118  N.  Y.  App.  Div.  389  (1907). 
The  measure  of  damages  in  a  suit 
by  a  customer  against  a  broker  for 
illegally  selling  collateral,  is  the  dif- 
ference between  the  price  realized  by 
the  broker  and  the  highest  market 
price  attained  within  a  reasonable 
time  thereafter  during  which  the  cus- 
tomer might  have  replaced  the  secu- 
rities. Ling  V.  Malcom,  77  Conn. 
517  (1905).  A  broker's  contract  to 
deliver  certain  bonds  "when,  as  and 
if  issued"  is  vahd,  and  the  measure  of 
damages  for  breach  thereof  is  the  dif- 
ference between  the  contract  price  and 
the   value   of   the   bonds   in   the   best 


1258 


BROKERS  AND  THEIR  CONTRACTS. 


[§  460. 


The  unauthorized  sale  by  the  broker  herein  is  not  necessarily  a  fraudu- 
lent sale.^  The  customer  cannot  enjoin  the  broker  unless  the  latter  is 
insolvent.^  The  suit  should  be  at  law,^  and  demand  and  tender  need 
not  be  alleged.^  A  customer  who  has  notified  his  broker  that  a  sale 
was  unauthorized  does  not  waive  the  objection  by  retaining  the  account 
of  the  sale  subsequently  sent  to  him  by  the  broker.^    A  delay  by  the 


available  market  for  the  bonds  at  the 
time  of  the  breach,  and  fictitious  sales 
on  the  New  York  market  will  not  be 
regarded.  Zimmermann  v.  Timmer- 
mann,  193  N.  Y.  486  (1908).  The 
measure  of  damages  to  a  customer  by 
reason  of  a  broker  illegally  selling  his 
stock,  the  broker  having  become 
bankrupt,  is  the  value  of  the  stock  on 
the  day  of  filing  the  petition  in  bank- 
ruptcy, the  exact  time  of  the  sale 
not  being  ascertainable.  In  re  Graff, 
117  Fed.  Rep.  343  (1902).  In  some 
jurisdictions  the  measure  of  damages 
is  different.  See  ch.  XXXV,  infra. 
Thus  where  a  broker  illegally  sells 
out  his  customer's  stocks  which  he  is 
carrying  as  pledgee,  he  is  liable  for 
the  highest  price  of  the  stock  in  the 
market  up  to  the  date  of  the  trial 
in  a  suit  for  conversion,  the  court  say- 
ing that  this  was  by  reason  "of  the 
shifting  character  of  the  prices  of  stock 
in  our  stock  exchanges."  Learock 
V.  Paxson,  208  Pa.  St.  602  (1904). 
The  court  said:  "The  foundation  of 
this  rule  rests  upon  the  changing 
character  of  the  value  of  such  prop- 
erty as  evidenced  by  the  varying  quo- 
tations in  the  different  stock  markets, 
and  sometimes  the  advances  in  valua- 
tion are  made  with  astonishing  rapid- 
ity. Political  action  or  material  or 
financial  combinations  often  are  the 
occasion  of  such  exceptional  advances. 
The  very  nature  of  such  property,  with 
its  constantly  changing  valuations, 
indicates  the  necessity  of  a  measure  of 
damages  shifting  in  character,  and 
hence  it  has  been  made  to  differ  from 
that  in  the  case  of  ordinary  chattels, 
where  it  is  based  upon  their  valua- 
tion at  the  time  of  the  conversion,  be- 
cause such  value  is  not  so  changeable." 

1  Stratford  v.  Jones,  97  N.  Y.  586 
(1885). 

2  Park  V.  Musgrave,  2  Thomp.  &  C. 
571  (1874). 


3  Delevan  v.  Simonson,  35  N.  Y. 
Super.  Ct.  243  (1873).  In  Butts  v. 
Burnett,  6  Abb.  Pr.  (N.  S.)  302  (1869), 
invohdng  the  arrest  of  a  broker  who 
had  sold  the  pledge  before  the  note 
was  due,  the  court  said:  "It  is  very 
questionable,  I  think,  whether  a 
demand  after  default  in  payment  of 
the  debt  for  which  property  is  pledged 
as  security  vill  render  a  refusal  to 
deliver  the  pledged  property  a  tor- 
tious conversion  of  it.  No  doubt  the 
pledgor  can  redeem  upon  a  tender  of 
the  debt,  or  he  may  recover  the  dif- 
ference between  the  value  of  the  pledge 
and  the  debt.  But  to  lay  the  founda- 
tion for  an  action  for  conversion, 
I  am  of  opinion  that  an  offer  and 
demand  must  be  made  on  the  day, 
and  is  not  sufficient  if  made  after 
the  day  on  which  the  debt  has  become 
payable."  A  customer  cannot  main- 
tain a  bill  in  equity  against  his  broker 
for  non-delivery  of  stock  when  an 
action  at  law  for  damages  would  be 
sufficient.  Morrison  v.  Chapman,  63 
N.  Y.  Misc.  Rep.  195  (1909). 

^  Clarke  v.  Meigs,  22  How.  Pr.  340, 
13  Abb.  Pr.  467  (1861) ;  s.  c,  10  Bosw. 
337.  No  tender  need  be  made  by  the 
customer  where  the  broker  has  sold 
his  stock  illegally.  Learock  v.  Pax- 
son,  208  Pa.  St.  602  (1904).  Under  the 
California  code,  the  pledgor,  in  order 
to  redeem,  must  tender  the  amount 
due  even  though  the  pledgee  has  con- 
verted the  stock.  Bell  v.  Bank  of 
California,  153  Cal.  234  (1908).  Where 
a  broker  has  converted  the  customer's 
stock,  the  customer  need  not  tender 
the  balance  of  the  purchase  price  of 
the  stock  nor  make  demand  for  the 
stock  before  commencing  suit.  Mullen 
V.  Quinlan  &  Co.,  195  N.  Y.  109  (1909). 
5  Burhorn  v.  Lockwood,  71  N.  Y. 
App.  Div.  301  (1902).  A  customer 
after  learning  of  an  illegal  sale  can- 
not object  if  for  six  months  he  does 


1259 


§  460.] 


BROKERS   AND   THEIR   CONTRACTS. 


customer  of  twelve  days  in  objecting  to  an  irregular  sale  by  the  broker 
is  not  ratification  thereof  where  the  customer  was  not  fully  informed  of 
the  facts.^  Two  weeks'  delay  by  the  customer  in  ascertaining  his  loss 
after  conversion  by  the  broker  may  be  an  unreasonable  time.^  On  the 
other  hand,  in  a  customer's  suit  against  a  broker  for  conversion  of  the 
stock,  the  highest  price  of  the  stock  within  periods  varying  from  a  few 
days  to  within  two  months  of  the  conversion  may  be  shown,  and  the 
court  may  determine  as  a  matter  of  law,  what  is  a  reasonable  time  within 
which  such  value  may  be  shown. ^  The  ratification  by  the  customer  of 
an  illegal  sale  by  the  broker  does  not  bind  the  customer  if  the  broker 
sends  a  subsequent  statement  changing  the  sale.'^  An  illegal  sale  of  the 
pledge  by  th6  pledgee  is  a  conversion,  and  a  complaint  for  such  conver- 
sion will  not  be  construed  as  a  complaint  for  breach  of  contract.'*  The 
margin  held  by  a  broker,  however,  is  not  a  trust  fund,  and  hence  the 
broker  is  not  guilty  of  conversion,  even  though  he  fails  and  is  unable 
to  repay  it.®  Even  though  a  broker  sells  stocks  held  on  margin  and 
does  not  pay  over  to  his  customer  the  balance  due,  yet  he  is  not  indebted 
in  a  fiduciary  capacity,  within  the  meaning  of  the  bankruptcy  act, 
and  hence  such  a  claim  is  barred  by  a  discharge  in  bankruptcy.^ 

Where  a  broker  buys  or  sells  stock  on  his  customer's  account  in  viola- 


not  tender  the  amount  due  the  broker 
and  demand  the  stock.  Swann  v. 
Baxter,  36  N.  Y.  Misc.  Rep.  233  (1901). 

1  Burnham  v.  Lawson,  118  N.  Y. 
App.  Div.  389  (1907). 

2  Hurt  V.  MiUer,  120  N.  Y.  App. 
Div.  833  (1907) ;  aff'd,  190  N.  Y.  553. 

3  Mullen  V.  Quinlan  &  Co.,  195 
N.  Y.  109  (1909).  The  question  of 
what  is  a  reasonable  time  within 
which  the  purchaser  might  have  gone 
into  the  market  and  repurchased  his 
stock  which  his  broker  has  converted, 
is  a  question  of  law,  and  nine  days  is 
a  reasonable  time,  but  each  conver- 
sion by  the  broker  will  be  considered 
by  itself.  KeUer  v.  Halsey,  130  N.  Y. 
App.  Div.  598  (1909)  :  reversed  on 
another  point  in  202  N.  Y.  74.  The 
question  of  how  much  time  the  cus- 
tomer is  entitled  to  in  repurchasing  the 
stock  which  has  been  sold  by  his  broker 
without  his  authority  is  a  question 
of  law.  Barber  v.  Ellingwood,  135 
N.  Y.  App.  Div.  549  (1909) ;  s.  c,  144 
N.  Y.  App.  Div.  513.  In  the  ease 
Rosenbaum  v.  Stiebel,  137  N.  Y.  App. 
Div.  912  (1910),  where  theeustomer was 
out  of  town  at  the  time  of  the  sale  by 


the  broker,  the  court  took  the  market 
price  two  weeks  after  the  customer 
learned  of  the  sale,  the  customer 
having  returned  at  the  expiration  of 
those  two  weeks. 

^  Stewart  v.  Harris,  101  N.  Y.  App. 
Div.  181  (1905).  A  customer  in 
repudiating  a  broker's  account  which 
he  has  accepted,  and  in  suing  for  secret 
profits  of  the  broker,  must  allege 
repudiation  as  soon  as  he  learned  the 
facts.  Sprague  v.  Currie,  133  N.  Y. 
App.  Div.  18  (1909). 

5  Smith  V.  HaU,  67  N.  Y.  48  (1876), 
distinguishing  Austin  v.  Rawdon,  44 
N.  Y.  63  (1870).  A  customer  may 
hold  his  broker  liable  where  the 
customer  dealt  in  good  faith,  even 
though  the  broker  violated  a  "bucket 
shop"  statute,  and  even  though  the 
suit  is  brought  for  conversion  and  no 
conversion  is  proven,  yet  recovery  may 
be  for  breach  of  contract.  Goodspeed 
V.  Smith,  162  Mich.  641  (1910). 

*  Kinsey  v.  Meaney,  98  N.  Y.  App. 
Div.  420  (1904). 

'  Crawford  v.  Burke,  195  U.  S.  176 
(1904).     See  also  §  452,  supra. 


1260 


CH.  XXV.] 


BROKERS  AND  THEIR  CONTRACTS. 


[§  460. 


tion  of  the  terms  of  his  contract,  and  thereby  makes  a  profit,  the  cus- 
tomer has  his  option  either  to  repudiate  the  transaction  altogether  and 
sue  for  damages,  or  he  may  adopt  it  and  claim  for  himself  the  benefit 
made  by  his  agent. ^  It  has  been  held  that,  where  the  broker  fails  to 
buy  according  to  the  instructions  of  his  customer,  and  the  customer  suf- 
fers a  loss  by  reason  of  the  failure,  the  object  of  the  purchase  being  to 
cover  a  short  sale,  the  measure  of  damages  is  the  difference  between  the 
price  at  which  the  stock  was  sold  short  and  the  market  price  upon  the 
day  when  the  order  was  given  to  the  broker  to  buy  in.  In  other  words, 
the  plaintiff  may  in  such  a  case  recover  the  profits  which  he  would  have 
made  had  his  order  been  properly  executed.-  And  the  rule  is  the  same 
w^hen  the  loss  to  the  customer  results  from  the  failure  of  the  broker 
to  sell  as  instructed,  or  where  the  broker  sells  at  an  improper  or  mani- 
festly unfavorable  time.^    ^^^lere  a  broker  agrees  to  carry  stocks  to  a 


1  Kiraber  v.  Barber,  L.  R.  8  Ch.  App. 
56  (1872) ;  Marsh  v.  Keating,  1  Bing. 
N.  C.  198  (1834) ;  Taussig  v.  Hart,  49 
N.  Y.  301  (1872) ;  s.  c,  58  N.  Y.  425 
(1874) ;    Pickering   v.    Demerritt,    100 
Mass.  416  (1868) ;  Day  v.  Holmes,'  103 
Mass.    306    (1869).     In    the    case    of 
Clews  V.  Jamieson,   89  Fed.   Rep.   63 
(1898),  where  the  broker  was  author- 
ized to  sell  at  229  and  actually  did 
sell  at  221,   the  court  held   that   the 
principal  could  not  adopt  and  enforce 
the  contract,  inasmuch  as  the  broker 
was    not    authorized    to    sell    at    that 
price,  and    the   contract    not    binding 
the  principal  when  made  did  not  bind 
the   other   parties.     For   the   measure 
of  damages  where  a  broker  converts 
his  customer's  securities,  and  then  is 
unable  by  reason  of  his  insolvency  to 
replace     them,     see     Chamberlain     v. 
Greenleaf,  4  Abb.  N.  Cas.  178  (1878). 
Sometimes  an  advance  in  the  price  of 
the   stock,   within   a   reasonable   time 
after     notice     of     the     conversion    is 
received,      is     allowed.      Gruman     v. 
Smith,  81  N.  Y.  25  (1880).     See  §  475. 
And  what  is  a  reasonable  time  in  such 
a    case    is    a    question    for    the    jury. 
Baker  v.  Drake,  66  N.  Y.  518  (1876) ; 
Stevens   v.   Hurlbut   Bank,   31    Conn. 
146   (1862);  Stewart  v.  Cauty,  8  M. 
&  W.  160  (1841) ;  Field  v.  Lelean,  6  H. 
&  N.  617  (1861).     Cf.  Allen  v.  Dykers, 


securities,  see  James  v.  Work,  70  Hun, 
296  (1893). 

-  In  an  action  to  recover  damages, 
where  a  firm  of  stock-brokers  sold  for 
a  customer,  upon  his  order  and  for 
his  account,  three  hundred  shares  of 
stock,  short,  at  186,  and  subsequently, 
without  the  customer's  order  or 
knowledge,  bought  in  stock  to  cover 
the  sale,  and  then  a  few  days  later, 
the  stock  having  declined  several 
points,  the  customer  ordered  them  to 
cover  their  sale,  to  which  order  no 
attention  was  paid,  it  was  held  that 
the  proper  measure  of  damages  was 
the  difference  between  the  price  at 
which  the  stock  was  sold  short  and 
the  market  price  upon  the  day  when 
the  order  was  received  to  purchase, 
with  interest,  deducting  commissions, 
etc.  White  v.  Smith,  54  N.  Y.  522 
(1874).  See  Magee  v.  Atkinson,  2  M. 
&  W.  440  (1837).  In  Allen  v.  McCon- 
ihe,  124  N.  Y.  342  (1891),  the  court 
allowed  as  damages  against  a  broker 
who  delayed  selling  when  ordered  to 
sell,  the  difference  between  the  price 
when  the  order  was  given  and  the  price 
when  the  sale  was  actually  made. 

^  In  Harris  v.  Tumbridge,  83  N.  Y. 
92  (1880),  it  appears  that  the  plain- 
tiff purchased  through  the  agency  of 
the  defendant  a  stock  option,  a  priv- 
ilege   known   as    a    "straddle,"    upon 


3  Hill,  593  (1842).  As  to  the  measure  which  the  defendant  guaranteed  that 
of  damages  in  an  action  against  a  the  fluctuations  in  the  stock  during 
broker  for  fraud,  inducing  the  plain-  the  pendency  of  the  contract  should 
tiff  to  invest  in  "Grant  and  Ward"    amount    to    eight    per    cent.     On  the 

1261 


§460. 


BROKERS  AND  THEIR  CONTRACTS. 


[CH.  XXV. 


certain  time,  but  he  sells  them  before  that  time,  the  damage  is  based 
upon  the  prices  at  the  time  to  which  he  agreed  to  carry  the  stocks.^ 
If  a  broker  covers  a  short  sale  without  authority  the  customer  may 
ignore  the  purchase  by  the  broker  and  consider  the  short  sale  as  con- 
tinued until  the  customer  gives  an  order  to  purchase,  the  customer 
in  the  meantime  keeping  the  margin  good.  If,  however,  the  broker 
does  not  wish  to  carry  the  account  any  longer  the  rule  may  be  different.^ 
Where  a  customer  sends  to  his  brokers  the  entire  price  of  stock  to  be 
purchased,  and  they  purchase  the  stock  on  margin,  and  when  he  de- 
mands the  stock  they  delay  delivery,  they  are  liable  for  a  decline  in  the 
price  of  the  stock  in  the  meantime.^ 

Where  a  party  telegraphs  to  sell  a  certain  stock,  the  sale  to  be  "  short  " 
and  speculative,  the  damages  for  failure  of  the  telegraph  company  to 
deliver  the  message  are  too  remote  and  speculative,  even  though  the 
stock  goes  down  on  the  market.^    A  bona  fide  purchaser  or  pledgee  of 


next  day  after  the  purchase  defendant 
sold  the  stock  short,  which  resulted  in 
a  loss  to  the  plaintiff,  who  had  at  the 
time  of  the]  purchase  authorized 
defendant,  as  her  agent,  to  exercise  the 
option.  As  to  the  measure  of  damages 
the  court  said:  "An  objection  is 
taken  to  the  rule  of  damages.  It  is 
insisted  that,  as  plaintiff  never  gave 
any  directions  to  'put'  or  'call'  the 
stock,  she  should  not  have  recovered 
as  if  she  had.  But  in  the  absence  of 
such  directions  it  was  defendant's 
duty,  under  the  circumstances  of  this 
case,  as  we  have  already  said,  to  have 
closed  the  'straddle'  contract  by  exer- 
cising the  option  at  the  most  favor- 
able time,  and  to  have  acted  for  her 
in  that  respect  with  reasonable  care 
and  skill.  As  he  did  not  do  so,  she 
is  entitled  to  recover  what  she  has 
lost  by  his  neglect ;  and  the  price  of 
the  stock  from  day  to  day  during  the 
running  of  the  option  having  been 
shown,  it  was  for  the  jury  to  deter- 
mine that  amount."  C/.  Speyer  v. 
Colgate,  4  Hun,  622  (1875).  Where  a 
broker  sold  stock  for  his  customer 
without  authority  and  in  violation  of 
an  agreement  not  to  sell,  and  it 
appeared  that  for  thirty  days  after 
notice  was  given  to  the  customer  of  the 
sale  the  stock  could  have  been  pur- 
chased in  the  market  for  the  price 
at  which  it  was  sold  or  even  for  less, 
it  was  held,  in  an  action  to  recover 


damages,  that  the  customer,  having 
had  a  reasonable  time  after  he  was 
notified  of  the  sale  of  his  stock  to 
replace  it  at  the  same  or  a  lower  price, 
was  entitled  only  to  nominal  damages. 
Colt  V.  Owens,  90  N.  Y.  368  (1882). 
Cf.  Randall  v.  Albany  City  Nat.  Bank, 
1  N.  Y.  St.  Rep.  592  (1886).  See  also 
McArthur  v.  Seaforth,  2  Taunt.  257 
(1810).  But  when  the  action  of  the 
broker  is  fraudulent  the  customer 
may,  upon  obtaining  knowledge  of  the 
facts,  repudiate  the  whole  transaction 
and  recover  back  the  money  paid. 
Levy  V.  Loeb,  89  N.  Y.  386  (1882), 
reversing  s.  c,  47  N.  Y.  Super.  Ct.  61. 
Cf.  Stewart  v.  Drake,  46  N.  Y.  449 
(1871).  In  Baker  v.  Drake,  66  N.  Y. 
518  (1876),  where  a  broker,  unauthor- 
ized to  do  so,  sold  stock  which  he  was 
carrying  for  his  customer,  it  was  held, 
in  an  action  for  damages,  that  the 
measure  of  damages  was  the  advance 
in  the  market  price  from  the  time  of 
the  sale  up  to  a  reasonable  time  to 
replace  it  after  notice  of  sale. 

1  Michael  v.  Hart  &  Co.,  [1902]  1 
K.  B.  482. 

2  Barber  v.  Ellingwood,  135  N.  Y. 
App.  Div.  .549  (1909) ;  s.  c,  144  N.  Y. 
App.  Div.  513. 

^Wahl  V.  Tracy,  139  Wis.  668 
(1909). 

*  Cahn  V.  Western  U.  Tel.  Co.,  48 
Fed.  Rep.  810  (1891);  s.  c,  46  Fed. 
Rep.    40.     The    measure    of    damages 


1262 


CH.  XXV.] 


BROKEKS  AND  THEIR  CONTRACTS. 


[§§  461,  462. 


certificates  of  stock  from  a  broker  is  protected  against  a  broker's  cus- 
tomer the  same  as  he  would  be  protected  against  any  other  person.^ 

§§  461,  462.  Broker's  remedies  and  damages  herein.  —  If  a  broker 
sells  out  his  customer's  stock  without  notice,  he  may  recover  any 
loss  from  the  customer,  w^here  the  broker's  loss  is  greater  than  the 
customer's  damages  for  the  conversion.-  But  where  the  broker's 
act  is  strictly  according  to  law,  he  is  of  course  entitled  to  recover  from 
his  customer  any  loss  that  has  been  sustained  in  excess  of  the  margin.* 
And  where  a  broker  purchases  stock  on  an  order  and  demands  pay- 
ment of  the  price,  the  broker  may  sell  the  stock  for  non-payment, 
after  waiting  a  reasonable  time,  such  being  the  custom  of  the  market."* 
Where  the  customer  fails  to  deliver  to  the  broker  stock  which  the  former 
has  ordered  the  latter  to  sell,  the  broker  may  purchase  in  the  open  market 
in  order  to  fulfill  the  contract,  and  may  hold  the  customer  liable  for 
the  loss.^  Where  brokers  allow  stock  to  be  placed  in  their  names  they 
are  liable  on  the  subscription  liability,  and  even  though  they  did  not 
know  of  it  when  the  transfer  was  made,  yet  if  they  afterward  ascertained 
the  facts  and  did  not  object,  they  are  bound.^     It  is  a  well-settled  rule 


for  error  in  the  delivery  of  telegraph 
messages  to  buy  stock  "is  the  differ- 
ence between  the  market  value  of  the 
shares  at  the  time  when  the  dispatch 
should  have  been  delivered  and  the 
sum  paid  for  them  in  the  market  on 
the  receipt  of  the  message."  Pearsall 
V.  Western  U.  Tel.  Co.,  124  N.  Y. 
256  (1891). 

1  See  §  457,  supra;  and  §  473,  infra. 

2  Minor  v.  Beveridge,  141  N.  Y.  399 
(1894),  practically  overruling  Gillett 
V.  Whiting,  120  N.  Y.  402,  and  holding 
that  the  broker  7nay  sue  the  customer 
for  losses,  even  though  he  sold  without 
notice,  and  that  the  customer  is  enti- 
tled to  a  counter-claim  only.  To  same 
effect,  see  Gruman  v.  Smith,  81  N.  Y. 
25  (1880).  See  also  Capron  v.  Thomp- 
son, 86  N.  Y.  418  (1881) ;  §  458,  supra; 
and  §  475,  infra.  Where  the  customer 
sues  the  broker  for  selling  the  stock 
illegally  the  broker  may  set  up  the 
amount  due  from  the  customer,  not  by 
way  of  recoupment,  but  by  way  of  a 
lien  on  the  stock.  Farrar  v.  Paine, 
173  Mass.  58  (1899).  In  Ellis  v.  Pond, 
[1898]  1  Q.  B.  426,  the  court  held  that 
even  though  a  broker  sold  his  prin- 
cipal's stock,  which  the  broker  held 
as  pledgee,  prior  to  the  time  to  which 
the  broker  had  agreed   to   carry   the 


stock,  yet  that  the  broker  might 
recover  from  his  principal  any  loss  in 
such  sale  as  compared  with  the  price 
at  which  the  broker  originally  bought 
the  stock,  but  that  the  chent  could 
counter-claim  for  the  damage  due  to 
the  sale  being  made  prior  to  the 
agreed  time.  The  court  held,  how- 
ever, that  where  by  the  contract  the 
broker  was  to  accept  delivery  of  cer- 
tain stock  at  a  certain  time  for  his 
principal,  but  before  that  time  the 
broker  sold  such  stock,  contrary  to 
his  agreement  with  his  principal,  the 
broker  could  not  recover  any  dam- 
ages for  the  loss.  A  broker  buying 
stock  for  a  customer  on  margin  is 
the  pledgee  of  the  stock,  and  if  he 
sells  it  without  the  customer's  knowl- 
edge or  consent  and  thereafter  closes 
the  account  because  the  customer  does 
not  respond  to  a  demand  for  margin, 
he  cannot  hold  the  customer  liable  for 
any  loss.  Katz  v.  Nast,  187  Fed.  Rep. 
529  (1910). 

3  Schepeler  v.  Eisner,  3  Daly,  1 1 
(1869). 

^Taylor  v.  Bailey,  169  111.  181 
(1897). 

^Baily  v.  Cardnuff,  14  Colo.  App. 
169  (1899). 

f^  Brown     v.     AUebach,     166     Fed. 


1263 


§§  461,  462.]  BROKERS   AND   THEIR   CONTRACTS.  [cH.  XXV. 

that  if  a  broker,  acting  in  good  faith  and  without  default,  incurs  per- 
sonal loss  or  damage  in  the  course  of  transacting  the  business  of  his 
agency,  or  in  following  the  instructions  of  his  principal,  he  may  recover 
from  the  principal  full  compensation  therefor.^  Accordingly,  where  a 
broker  buys  stock  upon  his  customer's  order  and  pays  for  it,  and  upon 
a  decline  in  value  the  customer  refuses  to  accept  it,  the  broker  may 
recover  the  price  paid  by  him,  and  not  merely  the  difference  between 
that  price  and  the  market  value  on  the  day  of  his  demand.-  The  guar- 
anty by  a  third  party  of  the  customer's  account  may  be  enforced.^ 
A  broker  cannot  interplead  between  his  customer  and  an  indorser  of 
the  customer's  note,  in  regard  to  stocks  deposited  with  the  broker  by 
the  customer,  even  though  the  administrator  of  the  indorser  claims  that 
he  has  an  interest  in  such  stock.^  A  broker  carrying  a  joint  account 
of  two  persons  cannot  be  compelled  to  accept  the  separate  liability 
of  each  for  one  half.^  A  broker  cannot  recover  from  his  customer  the 
commissions  on  stock  transactions  unless  there  is  proof  that  the  stock 
was  actually  purchased  or  sold.^  In  a  suit  by  stock-brokers  against  a 
customer,  entries  in  their  books  are  not  admissible,  such  books  not  being 
the  same  as  shop  books  of  sale  and  delivery  of  merchandise  on  credit, 
but  if  proof  is  given  that  the  entries  were  correct,  this  is  sufficient.'' 
A  stock-broker  in  suing  for  the  balance  of  account  may  in  testifying 
use  memoranda  showing  the  sales  and  his  clerk  may  testify  as  to  tele- 
phoning the  same  to  the  office,  and  the  clerk  in  the  office  may  testify 
as  to  entries  in  the  books  in  accordance  therewith.^ 

Rep.  488  (1908) ;    s.  c,  182  Fed.  Rep.  ^  Giddings  v.  Sears,   103  Mass.  311 

264.  (1869).     Cf.  Field  v.  Kinnear,  4  Kan. 

1  Sedgwick  on  Damages   (7th  ed.),  476  (1868).     Where  there  is  a  rescis- 

86;  Lindley  on  Companies   (5th  ed.),  sion  of  a  contract  for  the  sale  of  stock, 

pp.  512-516 ;  Sutton  v.  Tatham,  10  Ad.  the   measure   of   the   damages   is    the 

&  E,   27    (1839);   Bayliffe   i^.  •  Butter-  value  of   the  stock  at   the   time   and 

worth,  1  Exch.  425  (1847) ;  Bowlby  v.  place  of  the  proposed  delivery.     White 

Bell,  3  C.   B.  284   (1846) ;   Bayley  v.  v.  Salisbury,  33  Mo.  150  (1862) ;  Vance 

Wilkins,  7  C.  B.  886  (1849) ;  McEwen  v.  Tourne,  13  La.  225  (1839). 

V.   Woods,   2   Car.   &   K.  330   (1846) ;  ^  Qppenheim  v.  Waterbury,  86  Hun, 

Taylor  v.  Stray,  2  C.  B.   (N.  S.)   175  122  (1895) ;   aff'd,  155  N.  Y.  684. 

(1857) ;  Stray  v.  Russell,  1  El.  &  El.  *  Post  v.  Emmett,  40  N.   Y.  App. 

888  (1859) ;  Chapman  v.  Shepherd,  L.  Div.  477  (1899). 

R.  2  C.  P.   228    (1867) ;   Biederman  v.  ^  Levy  v.  Popper,  104  N.  Y.  App. 

Stone,  L.  R.  2  C.  P.  504  (1867) ;  Rob-  Div.  457  (1905). 

inson  v.  Mollett,   L.   R.  7  H.   L.  802  « Hurd    v.    Taylor,  181    N.  Y.    231 

(1875);  s.  c,  L.  R.  7  C.  P.  84;  L.  R.  (1905). 

5  C.   P.  646 ;    Pollock  v.   Stables,    12  ^  Rathborne    v.    Hatch,    80    N.    Y. 

Q.  B.  765  (1848) ;  Lacey  v.  Hill,  L.  R.  8  App.  Div.  115  (1903). 

Ch.   App.   921    (1873).     See  also   Dos  s  Rathborne  i'.  Hatch,  90  N.  Y.  App. 

Passes  on  Stock-brokers,  pp.  123,  802.  Div.  151  (1904) ;   aff'd,  181  N.  Y.  526. 


1264 


CHAPTER   XXVI. 


PLEDGES  AND  MORTGAGES  OF  STOCK. 


§  463.  Definitions  of  pledge,  mortgage, 
and  lien. 

464.  Mortgages  and  pledges  of  stock. 

—  Trust  mortgages  covering 
stocks. 

465.  How  a  pledge  of  stock  arises  or 

is  made  —  Pledge,  bj'  the  cor- 
poration itself,  of  its  own 
stock. 

466.  Pledgee    may    have    the    stock 

registered  in  his  own  name 
or  in  the  name  of  another. 

467.  Stock-broker   pm-ehasing   stock 

for  a  customer  on  a  margin 
is  a  pledgee. 

468.  Miscellaneous  rights  of  pledgee 

and  pledgor  —  Dividends  — 
Reorganizations  —  The  equity 
of  redemption. 

469.  Pledgee  need  not  retain  or  re- 

turn to  the  pledgor  the  iden- 
tical certificates  or  shares 
of  stock  which  were  pledged, 
but  must  have  equal  quan- 
tity always  on  hand. 

470.  Pledgee's  liability  on  subscrip- 

tion and  statutory  liability 
on  stock. 


§471. 


472. 


473. 


474. 


475. 
476. 


477. 


478. 
479. 


Pledgee  has  no  right  to  sell  or 
repledge  the  stock,  even 
temporarily,  except  upon 
notice,  unless  the  debt  is  as- 
signed with  the  stock. 

Purchasers  or  pledgees  of  stock 
from  pledgee  v.ath  notice  are 
not  protected. 

Bona  fide  repledgees  or  pur- 
chasers of  pledged  stock  are 
protected  —  Pledgor's  reme- 
dies —  Marshaling  the  assets. 

Pledges  by  agents,  trustees,  ex- 
ecutors, etc.,  legally  and  in 
breach  of  trust. 

Pledgor's  remedies. 

Pledgee's  remedies  when  debt 
secured  is  not  paid  —  Sale 
and  deficiency. 

Notice  of  sale  of  stock  by 
pledgee  to  apply  to  debt  se- 
cured —  Waiver  of  notice. 

Formalities  of  sale. 

If  the  pledgee  himself  purchases 
at  the  sale,  then  the  sale  is 
voidable. 


§  463.  Definitions  of  pledge,  mortgage,  and  lien.  —  A  pledge  may- 
be defined  to  be  a  delivery  of  personal  property  as  a  security  for  some 
debt  or  engagement.  A  mortgage  of  personalty,  on  the  other  hand, 
is  a  sale  with  the  condition  attached  that  if  the  mortgagor  performs 
some  act,  the  sale  shall  be  void.  In  a  pledge  the  title  remains  in  the 
pledgor,  and  the  pledgee  has  a  special  property  in  the  thing  pledged.^ 
In  a  mortgage  the  title  passes  to  the  mortgagee,  subject  to  being  revested 
in  the  mortgagor  upon  payment  of  the  debt.  In  pledges  the  thing 
pledged  must  be  delivered  to  the  pledgee.  In  mortgages,  generally, 
the  possession  of  the  thing  mortgaged  remains  with  the  mortgagor. 
A  mortgage  of  stock  is  the  same  as  a  pledge  of  stock  in  that  the  mort- 
gagee may  sell  the  stock  upon  default  and  after  proper  notice.^    In 


1  See  Pars.  Cont.,  I,  p.  569 ;  II,  p. 
113  ;  III,  p.  272.  Where  an  employee 
is  by  contract  entitled  to  a  certain  sal- 
ary so  long  as  he  should  own  certain 
stock,  he  does  not  break  the  contract 


by  pledging  his  stock.  McMuUan  v. 
Dickinson  Co.,  63  Minn.  405  (1896). 
2  Deverges  v.  Sandeman,  etc.  Co., 
[1902]  1  Ch.  579;  aff'g  [1901]  1  Ch. 
70. 


(80) 


1265 


§  464.]  PLEDGE   OF   STOCK.  [cH.  XXVI, 

England  a  deposit  of  certificates  of  stock  is  an  equitable  mortgage  and 
not  a  pledge,  and  hence  while  foreclosure  would  not  lie  as  regards  a 
pledge,  it  does  lie  as  regards  such  an  equitable  mortgage.^ 

A  pledge  differs  also  from  a  lien.  A  pledge,  by  implication,  gives 
the  pledgee  a  power  to  sell  on  due  notice,  in  case  the  debt  is  not  paid 
at  maturity,  while  a  lien  gives  merely  the  power  of  detention  until 
the  debt  is  paid.- 

Where  a  corporation  is  in  financial  difficulties  and  its  mortgage  is 
due,  and  the  stockholders  make  an  agreement  with  the  mortgagee 
whereby  they  turn  over  to  him  a  majority  of  the  stock  to  become  his 
absolute  property  if  the  debts  of  the  corporation  are  not  then  paid,  in 
consideration  of  which  he  agrees  to  advance  further  additional  moneys, 
such  a  contract  is  a  conditional  sale  of  the  stock  and  is  not  a  pledge.^ 
A  contract  to  return  borrowed  stock  or  pay  for  it  is  a  debt.^  A  person 
loaning  stock  may  take  a  mortgage  to  secure  the  return  of  the  same  and 
may  at  any  time  demand  back  the  stock  if  no  time  is  fixed.'' 

§  464.  Mortgages  and  pledges  of  stock  —  Trust  mortgages  cover- 
ing stocks.  —  Shares  of  stock  may  be  the  subject  of  a  mortgage  or 
pledge.^  A  collateral  trust  indenture  is  often  made  to  cover  stock 
as  security  for  a  debt,  but  such  an  instrument  would  hardly  be  called 
a  mortgage.  A  mortgage  of  stock  is  not  often  made,  and,  unless  there 
is  a  clear  intent  to  the  contrary,  the  courts  will  treat  the  transaction  as 
a  pledge  rather  than  a  mortgage.^     In  fact  it  is  difficult  to  ascertain 

1  Harold  v.  Plenty,  [1901]  2  Ch.  314.     sires  to  return  the  stock.     Haskins  v. 

2  Donald  v.  Suckling,  L.  R.  1  Q.  B.  Dern,  19  Utah,  89  (1899).  See  also 
585,    604    (1866).     "A    simple   lien —     §  445,  supra,  and  §  469,  infra. 

that  is  to  say,  a  right  to  detain  chattel  ^  Walker  v.  Bement,  94  N.  E.  Rep. 

property  until  a  given  debt  be  paid,  339  (Ind.  1911). 

but  without  any  right  to  sell  and  ap-  ®  "Nothing   is   better   settled    than 

ply  the  proceeds  in  payment  —  is  one  that  shares  in  the  capital  stock  of  a 

thing;    a  pledge,  since  it  implies  the  corporation  are  the  subject  of  pledge." 

right  in  the  depositary  to  sell  the  de-  Dayton  Nat.  Bank  v.  Merchants'  Nat. 

posit  and  apply  the  proceeds  to   the  Bank,   37   Ohio   St.   208   (1881).     "It 

debt    it    was   given  to  secure,  is    an-  was     formerly     doubted     whether     it 

other.     Shares    of    stock    put    up    as  [stock]    could    be    the    subject    of    a 

collateral  security  constitute  a  pledge."  pledge,  but  it  is  now  held  that  it  can 

First  Nat.   Bank  v.   Illinois   T.   &   S.  be."     Newton  v.   Fay,   92  Mass.   505 

Bank,  84  Fed.  Rep.  34  (1897).  (1865).     As  to  pledges  to  secure  par- 

3  Ware  v.  Hooper,  98  Fed.  Rep.  160  ties  who  advance  money  to  the  com- 
(1899).  pany,  see  ch.  XX,  and  §  76,  supra. 

*  Dibble  v.  Richardson,   171  N.  Y.  '  Newton    v.    Fay,    92    Mass.    505 

131    (1902).     A    contract    whereby    a  (1865);    Nabring  v.  Bank  of  Mobile, 

person   receives   stock   and   agrees   to  58  Ala.  204  (1877) ;   Merchants'  Bank 

return   it  within   a   specified   time   or  v.  Cook,  21  Mass.  405   (1826) ;     Me- 

else  pay  a  specified  sum  is  not  a  bail-  chanics',  etc.  Assoc,  v.  Conover,  14  N. 

ment,   and  hence  if  the  stock  is  not  J.  Eq.  219  (1862) ;    Doak  v.  Bank  of 

returned    at    the    specified    time    the  the    State,    6    Ired.    L.    (N.    C.)    309 

specified  price  may  be  recovered,  even  (1846).     In  England  security  is  given 

though  the  party  at  a  later  time  de-  by  a  process  called  a  sale  with  a  con- 

1266 


CH.   XXVI.] 


PLEDGE   OF   STOCK. 


[§  464. 


from  the  cases  how  shares  of  stock  may  be  mortgaged  ;  and  transactions 
which,  in  a  few  early  decisions,  were  held  to  be  mortgages,  would  to-day 
be  held  to  be  pledges.^  There  are  but  few  clear  cases  of  a  mortgage 
of  stock  to  be  found.  It  seems  that  a  formal  instrument  of  chattel 
mortgage  of  stock,  duly  executed  and  registered  at  the  municipal  clerk's 
office,  as  required  by  law  in  case  of  chattel  mortgages,  would  not  con- 
stitute an  effectual  mortgage  of  stock,  and  the  mortgagee  would  not  be 


tract  of  repurchase.  The  court  holds 
that  this  is  not  a  pledge.  "An  essen- 
tial term  of  a  pledge  is  that  on  ful- 
fillment by  the  pledgor  of  the  condi- 
tions of  the  bargain,  commonly  called 
redemption,  the  pledgee  is  bound  to 
hand  back  to  the  pledgor  the  very 
thing  deposited  with  him,"  whereas 
in  a  sale  and  contract  of  repurchase, 
the  identical  property  in  numbers, 
etc.,  need  not  be  returned.  Simmons 
V.  London  J.  S.  Bank,  [1891]  1  Ch.  270. 
1  Quoted  and  approved  in  Irving,  etc. 
Assoc,  t;.  Watson,  41  Oreg.  95  (1902). 
Thus,  in  Huntington  v.  Mather,  2 
Barb.  538  (1848),  the  court  said: 
."There  are  two  leading  considera- 
tions to  be  regarded  in  determining 
whether  the  transaction  is  a  pledge 
or  a  mortgage ;  namely,  the  title  and 
the  possession.  If  it  is  a  mortgage, 
the  legal  title  passes  to  and  is  vested 
in  the  creditor.  With  a  pledge  it  is 
different ;  the  legal  title,  until  a  sale 
on  default  of  payment  or  redemption, 
continuing  in  the  pledgor.  .  .  .  The 
essential  difference  as  to  matter  of 
right  is  that  in  one  the  title  passes 
and  in  the  other  it  does  not.  But  the 
difference  in  substance  and  fact  is 
that,  in  the  case  of  a  pawn  or  pledge 
the  possession  must  pass  out  of  the 
pawner,  but  in  the  case  of  a  mortgage 
it  need  not."  The  court,  however, 
influenced  probably  by  the  equities  of 
the  case,  held  the  transaction  to  be 
a  mortgage,  and  that  the  right  of  the 
debtor  to  redeem  was  barred  by  the 
ten-year  statute  of  limitations.  In  the 
case  Smith  v.  Forty-nine  and  Fifty- 
six  Quartz  Min.  Co.,  14  Cal.  242 
(1859),  the  court  held  the  transaction 
to  be  a  mortgage  rather  than  a  con- 
ditional sale  of  the  stock.  The  ques- 
tion of  pledge  was  not  considered. 
Manns  v.  Brookville  Nat.  Bank,  73 
Ind.  243  (1881),  speaks  of  the  trans- 


action as  a  mortgage ;  and  William- 
son V.  New  Jersey,  etc.  R.  R.,  26  N.  J. 
Eq.  398  (1875),  says  that  such  a  mort- 
gage need  not  be  recorded  in  the 
municipal  clerk's  office,  as  required  by 
the  chattel-mortgage  act.  In  both 
cases  the  transaction  might  better 
have  been  treated  as  a  pledge.  In 
Adderly  v.  Storm,  6  Hill  (N.  Y.),  624 
(1844),  the  court  said:  "I  have  al- 
ready said  that  this  was  not  a  pawn 
or  pledge  of  the  stock ;  neither  was 
it  strictly  a  mortgage."  At  the  pres- 
ent day  it  would  be  held  to  be  a 
pledge.  Wilson  v.  Little,  2  N.  Y.  443 
(1849) ;  Hasbrouek  v.  Vandervoort,  4 
Sandf.  74  (1850).  In  Brewster  v.  ' 
Hartley,  37  Cal.  15  (1869),  the  court 
said:  "The  transfer  in  writing  of 
shares  of  stock  not  only  does  not 
prove  that  the  transaction  is  not  a 
pledge,  but  the  stock,  unless  it  is 
expressly  made  assignable  by  the 
delivery  of  the  certificates,  cannot  be 
pledged  in  any  other  manner."  In 
Thompson  v.  HoUaday,  15  Oreg.  34 
(1887),  a  chattel  mortgage  on  shares 
of  stock  was  involved.  It  was  de- 
clared void  because  it  was  given  to  a 
receiver  who  previously  held  the  stock 
as  receiver.  Sometimes  a  chattel 
mortgage  of  stock  arises  where  a  rail- 
road mortgage  covers  not  only  real 
estate,  but  also  all  personal  propertj% 
bonds,  and  stock  which  are  or  shall  be 
owned  by  the  mortgagor  corporation. 
A  deposit  of  bonds  as  security  for  the 
payment  for  rolling  stock,  but  to  be 
used  only  to  pay  any  deficiency  after 
the  rolling  stock  had  been  sold  and 
the  proceeds  credited,  is  a  pledge  and 
not  a  mortgage,  and  hence  if  the 
pledgee  takes  back  the  rolling  stock 
without  selling  it  the  pledge  ceases. 
Hermann  v.  Central,  etc.  Co.,  101 
Fed.  Rep.  41  (1900). 


1267 


§464. 


PLEDGE   OF   STOCK. 


[cH.  xxvr. 


protected  where  he  does  not  receive  the  certificate  of  stock  from  the 
mortgagor,  or  does  not  obtain  a  registry  of  transfer  on  the  corporate 
books. ^  WTiere  a  raihoad  company  owns  shares  of  stock  in  an  elevator 
company,  such  stock  is  not  subject  to  the  general  mortgage  executed 
bv  the  railroad  company.^    A  pledge  of  stock  without  a  delivery  is  not 


1  The  clearest  and  most  satisfactory    428  (1829) ;    s.  c,  28  Fed.  Cas.  1308. 


case  is  Spaulding  v.  Paine,  81  Ky.  416 
(1883),  where  a  chattel  mortgage  of  a 
share  of  stock  was  duly  recorded  in 
the  proper  county,  the  mortgagor 
retaining  the  certificate  of  stock.  The 
mortgagor  subsequently  sold  and 
transferred  the  certificate  of  stock  to 
a  bona  fide  purchaser.  The  court  held 
that  the  recording  of  the  mortgage 
was  of  no  avail ;  that  there  could  be 
no  mortgage  of  ehoses  in  action,  and 
that  the  bona  fide  transferee  took  the 
stock.  Pry  or,  J.,  well  said  :  "Much  of 
the  business  of  the  country  is  con- 
ducted on  the  faith  of  the  pledge  of 
such  stock  as  collaterals ;  and  to  ad- 
judge that  the  holder  of  the  stock  by 
transfer  on  the  books  of  the  corpora- 
tion, or  by  indorsement  and  delivery 
by  the  owner,  is  subordinate  in  his 
claim  to  the  mortgagee,  upon  the 
doctrine  of  constructive  notice,  would 
paralyze  trade  and  open  a  wide  field 
for  the  fraudulent  disposition  of  such 
valuable  interests  at  the  expense  of 
honest  and  confiding  purchasers."  In- 
asmuch as  a  mortgage  on  shares  of 
stock  is  not  a  recordable  instrument, 
the  record  thereof  does  not  operate  as 
constructive  notice.  Shuster  v.  Jones, 
58  S.  W.  Rep.  595  (Ky.  1900).  Stocks 
are  not  goods  and  chattels  within  the 
meaning  of  the  act  concerning  chattel 
mortgages.  State  v.  King  County 
Super.  Ct.,  13  Wash.  607  (1896).  The 
right  of  a  subscriber  to  demand  a  cer- 
tificate of  stock  may  be  attached 
before  such  certificate  is  issued  and 
delivered,  and  such  attachment  has 
precedence  over  a  mortgage  even 
though  the  mortgage  is  recorded  with 
the  register  of  deeds,  no  notice,  how- 
ever, of  such  mortgage  being  given  to 
the  corporation  itself.  Gates  v.  Baxter, 
97  Tenn.  443  (1896).  Cf.  Manns  v. 
Brookville  Nat.  Bank,  73  Ind.  243 
(1881);  Foster  v.  Potter,  37  Mo.  525 
(1866) ;  Vowell  v.  Thompson,  3  Cranch, 


See  also  Holyoke  v.  McMurtry,  33  Neb. 
548  (1891).  A  mortgage  of  stock  is 
valid  as  between  mortgagor  and  mort- 
gagee without  a  transfer  of  certifi- 
cates. The  mortgagee  after  foreclos- 
ure may  compel  the  corporation  to 
transfer  without  making  the  trans- 
feree a  party.  Tregear  v.  Etiwanda 
Water  Co.,  76  Cal.  537  (1888).  Stock 
may  be  mortgaged  and  no  delivery  of 
the  certificates  need  be  made.  Though 
a  foreclosure  is  made  irregularly  the 
mortgagor  may  ratify  it,  or  may  be 
barred  by  the  six-year  statute  of  lim- 
itations. Campbell  v.  Woodstock  Iron 
Co.,  83  Ala.  351  (1887).  The  pledgor 
may,  by  an  instrument  in  writing, 
assign  his  equity  of  redemption  to  one 
of  his  creditors.  Such  assignment 
need  not  be  recorded  as  a  chattel 
mortgage  and  is  not  fraudulent,  even 
though  it  be  kept  secret  from  the 
other  creditors  of  the  pledgor.  Na- 
tional H.  R.  Bank  v.  Chaskin,  28  N.  Y. 
App.  Div.  311  (1898).  Where  an 
unincorporated  partnership  issues  so- 
called  certificates  of  stock  represent- 
ing a  specified  interest  in  such  part- 
nership, and  one  of  the  partners 
assigns  his  certificates  as  collateral 
security,  and  afterwards  sells  them, 
the  purchaser  is  entitled  to  his  share  of 
the  partnership  property  and  to 
demand  an  accounting,  even  though 
the  certificates  provided  that  they 
were  not  transferable.  The  transfer 
of  such  certificates  as  security  need  not 
be  recorded  as  a  chattel  mortgage. 
Rommerdahl  v.  Jackson,  102  Wis.  444 
(1899). 

2  Humphreys  v.  McKissock,  140 
U.  S.  304  (1891).  A  chattel  mortgage 
does  not  include  shares  of  stock,  al- 
though broad  enough  in  its  terms  to 
do  so,  where  both  parties  testify  that 
it  was  not  the  intent  to  include  the 
stock,  and  the  mortgagee  allowed  the 
mortgagor's  assignee  to  take  away  the 


1268 


CH.  XXVI.] 


PLEDGE   OF   STOCK. 


[§  464. 


strictly  and  legally  a  pledge.^  It  "  may  have  amounted  to  a  mort- 
gage, but  it  could  amount  to  nothing  more ;  and  if  a  mortgage,  it  did 
not  place  the  mortgagee  in  possession,  but  gave  him  merely  a  naked 
right  to  have  the  property  appropriated  and  applied  to  the  payment  of 
his  debt."  2 

Where,  on  the  other  hand,  the  certificate  of  stock  is  delivered  to 
the  creditor  as  security,  it  is  evident  that  possession  of  the  property 
is  given  to  the  creditor,  but  that  the  debtor  still  considers  the  stock 
to  be  his.  Such  a  transaction  is  a  pledge  and  not  a  mortgage ;  and 
consequently,  since  the  giving  of  stock  certificates  as  security  is  almost 
invariably  effected  by  a  delivery  of  the  certificates,  a  mortgage  of  stock 
may  be  said  to  be  possible,  but  is  not  technically  a  correct  use  of  the 
word.  The  delivery  of  a  certificate  of  stock  with  a  blank  power  of  attor- 
ney, as  collateral  security,  constitutes  a  pledge  and  not  a  mortgage ;  ^ 
and  the  same  rule  prevails  even  though  an  absolute  transfer  or  registry 
is  made  on  the  corporate  books.^  A  mortgage  on  shares  of  stock  is 
sometimes  made  by  transferring  the  stock  to  the  trustee  of  the  mort- 
gage.^ The  rights  and  duties  of  the  trustee  in  such  cases  are  considered 
elsewhere.^    Where  stock  in  several  corporations  is  put  in  trust  by  a 


stock.  Younkin  v.  Collier,  47  Fed. 
Rep.  571  (1891).  See  also  §  317,  supra. 
A  mortgage  on  the  real  estate  of  a 
land  company  may  also  cover  shares 
of  stock  in  a  water  company,  the  lat- 
ter being  a  water  right  appurtenant 
to  the  land,  and  hence  passing  with 
it.  San  Gabriel,  etc.  v.  Lake  View 
Town  Co.,  4  Cal.  App.  630  (1906). 

1  See  §  465,  infra. 

2  Christian  v.  Atlantic,  etc.  R.  R., 
133  U.  S.  233,  242  (1890). 

2  Mechanics',  etc.  Assoc,  v.  Conover, 
14  N.  J.  Eq.  219  (1862);  Lewis  v. 
Graham,  4  Abb.  Pr.  106  (1857) ;  Irv- 
ing, etc.  Assoc.  V.  "Watson,  41  Oreg.  95 
(1902).  But  see  Greene  v.  Dispeau, 
14  R.  I.  575  (1884).  A  delivery  of  the 
certificates  as  security  is  a  pledge  and 
not  a  mortgage.  George,  etc.  Co.  v. 
Range,  etc.  Co.,  16  Utah,  59  (1897). 

^  Nabring  v.  Bank  of  Mobile,  58  Ala. 
204  (1877) ;  Wilson  v.  Little,  2  N.  Y. 
443  (1849).  The  question  of  whether 
a  sale  or  pledge  was  involved  in  the 
relations  between  a  contractor  and 
the  party  who  financed  the  matter 
for  him  was  discussed  in  Griggs  v. 
Day,  58  N.  Y.  Super.  Ct.  385  (1890), 
finally  decided  in  1.58  N.  Y.  1  (1899). 

^  See  §  317,  supra,  and  §§  777,  852, 


infra.  Where  stock  is  mortgaged  and 
delivered  to  the  trustee  of  the  mort- 
gage, this  is  a  mortgage  and  not  a 
pledge.  Toler  v.  East  Tennessee,  etc. 
Ry.,  67  Fed.  Rep.  168,  178  (1894). 
Where  the  pledgee  takes  out  a  new 
certificate  of  stock  it  is  a  pledge  and 
not  a  chattel  mortgage,  even  though 
the  instrument  creating  the  pledge 
was  a  mortgage  on  real  estate  and  the 
stock.  Richardson  v.  Longmont,  etc. 
Co.,  19  Colo.  App.  483  (1904). 

fi  See  §  317,  supra.  Where  stock  is 
deposited  with  one  trust  company  as 
additional  security  for  a  mortgage 
given  to  another  trust  company,  and 
upon  default  the  former  company 
refuses  to  deliver  the  stock,  and  the 
latter  trust  company  then  commences 
a  suit  in  equity  to  compel  the  former 
trust  company  to  deliver  the  stock, 
and  during  that  suit  the  stock  de- 
clines in  value,  a  bondholder  secured 
by  such  mortgage  cannot  hold  liable 
the  trust  company  holding  the  stock, 
on  account  of  the  decline  in  value,  in- 
asmuch as  the  suit  in  equity  deter- 
mined all  questions,  including  the 
amount  of  damage.  Bracken  v.  At- 
lantic T.  Co.,  167  N.  Y.  510  (1901).  A 
pledge   of    securities    to    a    trustee    to 


1269 


§  465.]  PLEDGE    OF   STOCK.  [cH.  XXVI. 

deed  acknowledged,  delivered,  and  accepted  by  the  trustees  in  New  York, 
where  the  grantor  resided,  the  trust  deed  is  governed  by  the  law  of 
New  York,  without  reference  to  the  residence  of  the  trustees  or  the 
subsequent  residence  of  the  grantor.^  A  mortgage  on  shares  of  stock 
does  not  prevent  the  corporation  controlled  by  such  stock  from  issuing 
a  mortgage  on  its  property ;  and  it  is  no  breach  of  trust  for  the  trustee 
of  the  first  mortgage  to  be  the  trustee  of  the  second  mortgage,  where  the 
first  mortgage  does  not  prohibit  such  second  mortgage,  the  stock,  by 
the  terms  of  the  mortgage,  remaining  in  the  name  of  the  mortgagor.^ 
A  contract  whereby  a  stockholder  delivers  certain  stock  for  money  to 
be  paid  to  the  corporation,  the  money  to  be  repaid  out  of  dividends  and 
in  other  ways  and  the  stock  then  to  be  returned,  is  a  conditional  sale, 
and  not  a  loan  to  the  corporation.^  It  seems  that  a  stockholder  may 
lease  his  stock.  He  may  for  a  certain  sum  assign  to  another  all  dividends 
during  the  specified  time,  and  give  to  the  lessee  the  right  to  vote  the 
stock  during  that  time.^ 

In  England,  where  certificates  of  stock  have  not  the  quasi-negotia- 
bility  that  they  have  in  America,  a  mortgage  of  stock  is  common  and 
is  enforced  as  a  mortgage,  and  the  mortgagee  after  a  reasonable  time 
may  sell  without  notice  to  the  mortgagor.^ 

§  465.  How  a  'pledge  of  stock  arises  or  is  made  —  Pledge,  by  the 
corporation  itself,  of  its  own  stock.  —  A  pledge  of  stock  is  generally 
made  by  a  delivery  of  the  certificates  of  stock  indorsed  in  blank  to 
the  pledgee,  and  a  memorandum  in  waiting  to  the  effect  that  the  stock 

secure  the  payment  of  bonds  may  be  ^  Gasquet  v.  Fidelity,  etc.  Co.,  75 

foreclosed  by  the  trustee  by  a  suit  in  Fed.  Rep.  343  (1896). 

equity.     The  trustee  is  not  bound  to  '  Crimp  v.  MeCormiek  Const.  Co., 

sell   at   public    auction   without   such  71  Fed.  Rep.  356  (1896). 

suit.     Land  Title,  etc.  Co.  v.  Asphalt  *  Zachry  v.  Nolan,  66  Fed.  Rep.  467 

Co.,  127  Fed.  Rep.  1  (1903).     Where  (1895). 

in  connection  with  the  giving  of  a  cor-  ^  "Express    powers    were    not    for- 

porate    mortgage    a    majority    of    the  merly  necessary  on  mortgages  of  stock, 

stock  is  placed  in  the  hands  of  a  trustee  or   in   the   instruments   of   defeasance 

with  the  right  to  the  trustee  to  vote  executed  by  the  transferee;    nor  need 

the   stock    as    he    deems    best    if    the  a  mortgagee  of  stock  now  rely  on  his 

parties    could    not    agree,    and    subse-  statutory  power  in  order  to  realize  his 

quently    the    corporation    refuses    to  security   by   sale.     If    stock    is    itself 

allow   the  trustee  to   vote  the  stock,  made  the  security  for  money,  and  the 

the   mortgagee   may    treat    this   as    a  day  appointed  for  payment  is  passed, 

default    on    the    mortgage    and    then  the  mortgagee  may  at  once  proceed  to 

foreclose,  and  it  is  immaterial  that  the  sell    the    stock,    and    repay    himself 

trustee   was    interested    in    the   mort-  principal    and    interest,    without    any 

gage.     Thompson-Starrett  Co.  v.  Ellis  authority    from    the    mortgagor,    and 

Granite   Co.,  84  Atl.  Rep.   1017   (Vt.  without    commencing    an    action    for 

1912).  foreclosure."     Deverges  v.  Sanderman, 

1  Mercer  v.  Buchanan,  1.32  Fed.  Rep.  etc.  Co.,  [1901]  1  Ch.  70 ;   aff'd,  [1902] 

501   (1904).     Cf.  s.  c,  137  Fed.  Rep.  1  Ch.  579. 
1019. 

1270 


CH.  XXVI.] 


PLEDGE  OF  STOCK. 


[§  465. 


is  held  in  pledge  is  generally  signed  and  given  by  the  pledgor  to  the 
pledgee.  The  pledge  may  be  to  a  third  person  for  the  benefit  of  the 
creditor.^  A  mere  direction  to  the  corporation  cannot  constitute  a 
pledge.^  But  where  no  certificate  has  been  issued  to  the  stockliolder 
he  may  pledge  the  stock  by  an  instrument  in  writing.^  And  the  pledgee 
may  foreclose  by  a  suit  in  equity.^  A  verbal  statement  by  the  owner  of 
stock  to  a  person  loaning  him  money  that  the  stock  is  security  for  the 
loan,  there  being  no  delivery  of  the  certificates,  is  not  a  valid  pledge  as 
against  a  subsequent  bona  fide  pledgee  of  the  certificates.^  Actual 
delivery  is  necessary  to  constitute  a  pledge.^    But  a  New  York  bank 

pledgee  was  protected  against  a  third 
person  who  had  advanced  the  money 
to  the  pledgor  to  purchase  the  stock. 
See  also  Brigham  v.  Mead,  92  Mass. 
245  (1865) ;  Thorp  v.  Woodhull,  1 
Sandf.  Ch.  411  (1844),  and  §360,  supra. 
Unissued  stock  may  be  pledged  by  the 
person  entitled  to  it.  When  issued,  it 
at  once  becomes  a  pledge.  Harris's 
Appeal,  12  Atl.  Rep.  743  (Pa.  1888). 

*  South  Dakota  v.  North  Carolina, 
192  U.  S.  286  (1904). 

5  Third  Nat.  Bank  v.  Buffalo,  etc. 
Co.,  193  U.  S.  581  (1904). 

^  Christian  v.  Atlantic,  etc.  R.  R., 
133  U.  S.  233  (1890),  the  court  say- 
ing: "A  pledge,  in  the  legal  sense,  re- 
quires to  be  delivered  to  the  pledgee. 
He  must  have  the  possession  of  it. 
He  may  then,  in  default  of  payment 
of  the  debt  for  which  the  thing  is 
pledged,  sell  it  for  the  purpose  of  rais- 
ing the  amount,  by  merely  giving 
proper  notice  to  the  pledgor.  In  the 
ease  of  stocks  and  other  choses  in 
action,  the  pledgee  must  have  posses- 
sion of  the  certificate  or  other  docu- 
mentary title,  with  a  transfer  exe- 
cuted to  himself,  or  in  blank  (unless 
payable  to  bearer),  so  as  to  give  him 
the  control  and  power  of  disposal  of 
it.  Such  things  are  then  called 
pledges,  but  more  generally  collat- 
erals, and  they  may  be  used  in  the 
same  manner  as  pledges  properly  so 
called.  If  there  is  no  transfer  at- 
tached to  or  accompanying  the  docu- 
ment, it  is  imperfect  as  a  pledge,  and 
requires  a  resort  to  a  court  of  equity 
to  give  it  effect."  The  certificate  of 
stock  must  be  actually  delivered  in 
order  to  constitute  a  pledge.  Robert- 
son   V.     Robertson,     186    Mass.     308 


1  See  §  317,  supra,  also  §  476,  infra, 
as  to  stock  placed  under  a  mortgage 
deed  of  trust.  A  party  receiving 
money  paid  on  subscriptions  for  stock 
does  not,  merely  because  he  places  in 
a  tin  box  in  a  safe-deposit  company  .a 
declaration  that  certain  securities 
owned  by  him  are  held  as  collateral 
security  therefor,  create  a  pledge  for 
the  benefit  of  the  corporation  to  secure 
the  paying  over  of  such  subscriptions 
to  the  corporation.  Girard  Trust  Co. 
V.  Mellor,  156  Pa.  St.  579  (1893). 

2  Gumming  v.  Prescott,  2  Y.  &  C. 
Exch.  488  (1837) ;  Lallande  v.  Ingram, 
19  La.  Ann.  364  (1867),  the  court 
saying:  "In  all  cases  of  pledges  the 
pledgee  must  be  put  in  possession  of 
the  thing  pledged ;  and,  if  it  be  a 
claim,  the  evidence  of  the  obligation 
must  be  transferred  and  delivered. 
Shares  in  stock  cannot  be  pledged  un- 
less they  be  evidenced  by  certificates, 
which  must  be  transferred  and  deliv- 
ered to  the  pledgee."  If  the  certifi- 
cates of  stock  are  not  delivered  to  the 
pledgee  nor  to  any  one  for  him  there 
is  no  pledge.  Succession  of  Lanaux, 
46  La.  Ann.  1036  (1894).  The  pledgee 
who  does  not  receive  the  certificate 
of  stock,  but  takes  a  separate  written 
assignment  thereof  and  files  that  with 
the  company  and  obtains  from  the 
company  a  certificate  that  the  shares 
have  been  transferred  on  the  books, 
may  hold  the  company  liable  if  sub- 
sequently the  company  on  presenta- 
tion of  the  original  certificate  of  stock 
duly  indorsed  transfers  the  same  to 
a  purchaser  thereof.  Equitable,  etc. 
Co.  V.  Johnson,  36  Colo.  377  (1906). 

'  First  Nat.  Bank  v.  Gifford,  47 
Iowa,    575     (1877),     where     such     a 


1271 


§  465. 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


may  make  a  valid  pledge  to  a  London  bank  by  setting  aside  in  the 
former's  safe  deposit  vaults  a  marked  package  containing  the  securities 
so  pledged  for  loans  made  by  the  London  bank  to  the  New  York  bank, 
and  the  pledge  continues,  although  the  securities  are  varied  from  time 
to  time,  and  although  the  New  York  bank  becomes  insolvent.^  A 
pledge  does  not  exist  although  the  president  of  a  railroad  company  has 
its  bonds  in  his  possession  and  states  that  he  holds  them  in  pledge  for 
a  syndicate  of  which  he  is  a  member.  An  equitable  pledge  may  be 
enforced  by  the  court,  but  only  where  there  is  a  contract  by  the  pledgor 
corporation  applying  to  specific  property.^  A  pledgee  does  not  waive 
his  pledge  although  he  returns  the  stock  to  the  pledgor  to  be  sold.^    A 


(1904).  An  agreement  that  certain 
bonds  in  the  possession  of  a  third 
party  shall  be  held  in  pledge  is  not  a 
good  pledge.  Actual  delivery  is  nec- 
essary to  constitute  a  pledge.  Sey- 
mour V.  Hendee,  54  Fed.  Rep.  563 
(1893).  Where  stock  is  placed  in  a 
trustee's  hands,  and  a  trustee's  cer- 
tificate is  taken  therefor,  a  pledge  of 
the  trustee's  certificate  is  not  a  pledge 
of  the  stock  sufficient  to  cut  off  sub- 
sequent attachments  of  the  stock. 
Bidstrup  v.  Thompson,  45  Fed.  Rep. 
452  (1891).  Where  one  party  loans 
money  to  another  party  to  buy  stock 
in  a  certain  company,  such  stock  to 
be  delivered  to  the  former  party  in 
pledge,  and  the  latter  party  uses  the 
stock  for  another  purpose,  the  loan  of 
the  money  is  not  a  mere  loan,  but  the 
money  is  impressed  with  a  trust,  and 
this  trust  follows  the  stock  except  as 
against  bona  fide  holders.  Barnard  v. 
Hawks,  111  N.  C.  333  (1892).  A 
pledge  made  by  a  separate  written 
assignment  of  the  stock,  the  certifi- 
cates remaining  in  the  pledgor's  pos- 
session and  continuing  to  stand  in  his 
name  on  the  corporate  books,  is  not 
good  as  against  the  pledgor's  receiver 
who  takes  possession  of  the  certifi- 
cates. Atkinson  v.  Foster,  134  111.  472 
(1890).  A  mere  letter  of  instruction 
to  the  custodian  of  a  stock  certificate 
that  he  should  hold  it  in  pledge  for  a 
debt  to  a  third  person,  may  not  com- 
plete the  pledge.  Andrews  v.  Guaya- 
quil, etc.  R.  R.,  73  N.  J.  Eq.  150 
(1907).  The  pledgee  of  certificates 
of  stock  who  returns  them  and  takes 
in  exchange  other  certificates  running 


to  a  trustee,  cannot  thereafter  claim  a 
lien  on  the  first-named  certificates. 
Hickok  V.  Cowperthwait,  137  N.  Y. 
App.  Div.  94  (1910) ;  s.  c,  147  N.  Y. 
App.  Div.  122.  Where  a  New  York 
banking  house  sets  aside  certain  stock 
and  bonds  as  security  for  loans  to  it 
from  a  European  house  and  changes 
such  securities  from  time  to  time,  but 
always  notifies  the  European  house 
thereof,  and  being  about  to  fail  delivers 
the  securities  to  an  agent  of  the  Euro- 
pean house,  this  is  not  a  preference 
prohibited  by  the  Bankruptcy  Act. 
Sexton  V.  Kessler  &  Co.,  172  Fed.  Rep. 
535  (1909). 

1  Sexton  V.  Kessler  &  Co.,  225  U.  S. 
90  (1912) ;  holding  also  that  the  finance 
bill,  namely,  an  arrangement  by  which 
a  foreign  bank  loans  money  to  a  New 
York  banking  firm,  and  as  security  the 
New  York  firm  puts  aside  certain 
securities,  is  a  pledge  which  is  good  as 
against  the  bankruptcy  of  a  New  York 
firm,  even  though  the  pledgor  con- 
tinued to  have  possession  of  the  pledge. 
See  227  U.  S.  575. 

2  Hook  V.  Ayers,  80  Fed.  Rep.  978 
(1897).  On  the  question  of  the  neces- 
sity of  a  delivery  in  order  to  con- 
stitute a  pledge,  see  also  Fidelity,  etc. 
T.  Co.  V.  Roanoke,  etc.  Co.,  81  Fed. 
Rep.  4.39  (1896). 

^  Winslow  V.  Harriman  Iron  Co.,  42 
S.  W.  Rep.  698  (Tenn.  1897).  Even 
though  a  pledgee  who  holds  the  cer- 
tificates indorsed  in  blank  sends  them 
to  the  pledgor  to  be  executed  for  new 
certificates  in  a  consolidated  company, 
and  even  though  the  pledgor  takes 
out  such  new  certificates  in  his  own 


1272 


CH.   XXVI.] 


PLEDGE    OF   STOCK. 


[§  465. 


mere  delivery  of  the  certificate  without  a  written  transfer  is  sufficient 
to  constitute  a  pledge,  but  such  a  pledge  is  imperfect,  and  to  enforce 
it  a  suit  in  equity  is  necessary.^  A  delivery  of  the  certificate  of  stock 
indorsed  in  blank  is  sufficient  to  constitute  a  pledge,  without  any  memo- 
randum in  writing  to  that  effect  and  without  a  registry  of  the  same  being 
made  on  the  corporate  books.^     Not  even  a  provision  of  the  charter  or 

name,  j^et  this  is  not  a  waiver  of  the  without  transferring  the  same  on  the 
pledge  entitling  attaching  creditors  of  back  thereof,  does  not  raise  a  federal 
the   pledgor    to    precedence   over   the    question,  even  though  the  stock  was 


pledgee.  McClung  v.  Colwell,  107 
Tenn.  592  (1901).  If  the  pledgee 
delivers  back  the  pledge  to  the  pledgor 
the  pledge  is  waived.  First  Nat. 
Bank  v.  Bradshaw,  135  N.  W. 
Rep.  830  (Neb.  1912).     A  transaction 


national-bank  stock.  Leyson  v.  Davis, 
170  U.  S.  36  (1898).  In  a  suit  by  the 
pledgee  to  have  a  judicial  sale  of  the 
stock,  an  assignee  of  the  pledgor's  in- 
terest is  a  necessary  party,  where  the 
pledgee    knows    of    such    assignment, 


whereby  a  debtor  delivers  certificates  and  the  pledge  was  made  merely  by 

of  stock  to  its  creditor  in  pledge,  and  delivery  of  the  certificate  without  any 

the  creditor  immediately  returns  them  transfer  on  the  back  thereof.     Brown 

to  the  debtor,  is  not  a  valid  pledge,  v.  Hotel  Assoc,  63  Neb.  181    (1901). 

even  though  the  debtor  told  the  cor-  A  pledge  of  policies  of  fii*e  insurance 

porate  officers  of  the  pledge,  but  said  may  be  made  by  delivery.     I?i  re  Little 

he  did  not  want  the  transaction  to  ap-  River,    etc.    Co.,    92    Fed.    Rep.    585 

pear  on  the  books,  and  even  though  (1899).     Where  a  pledge  of  the  cer- 

the  secretary  makes  a  note  of  the  fact  tificate    is    made   without    a    transfer 

on  the  stubs  of  the  eertificate-of-stock  and  the  pledgee  forges  the  transfer,  a 

book.       An     execution     subsequently  bank    taking    the    stock    in   repledge 

levied  upon  the  stock  as  the  property  is  not  a  bona  fide  owner.     Unity,  etc. 

of  the  debtor  takes  precedence  over  Co.    v.    Boydeu,    159    Fed.    Rep.    916 

the  alleged  pledge.     IMcFall  r.  Buck-  (1908).     Where  a  person  owning  two 

eye,  etc.  Assoc,  122  Cal.  468  (1898).  thirds    of    the    stock    of    a    company 

A  pledge  to  secure  the  debt  of  another  intends   to   pledge  it,   but  iustead  he 

is  not  waived  by  temporarily  allowing  gives    a    mortgage    on    the    corporate 

that  other  to  have   the  pledge  for  a  property,  the  court  will  have  the  stock 

short  time.     Wing  v.  Holland  T.  Co.,  sold  to  pay  the  debt.     Thompson  v. 


5  N.  Y.  Supp.  384  (1889). 

1  See  Brewster  v.  Hartley,  37  Cal.  15 
(1869)  ;  Robinson  v.  Hurley,  11  Iowa, 
410  (1860) ;  Christian  v.  Atlantic,  etc. 
R.  R.,  133  U.  S.  233,  242  (1898).  See 
also  §  476,  infra;  but  see  Lallande  r. 
Ingram,  19  La.  Ann.  364  (1867). 
Contra,  Nisbit  v.  Macon,  etc.  Co.,  12 
Fed.  Rep.  686  (1882).     See  also  §  375, 


Grace,  91  Ark.  52  (1909). 

-  Spreckels  v.  Nevada  Bank,  113 
Cal.  272  (1896) ;  Masurv  v.  Ai'kansas 
National  Bank,  93  Fed.  Rep.  603 
(1899);  Mount  Holly,  etc  Co.  v. 
Ferree,  17  N.  J.  Eq.  117  (1864) ;  Fin- 
ney's Appeal,  59  Pa.  St.  398  (1868) ; 
Jar\-i3  V.  Rogers,  13  JSIass.  105  (1816) ; 
s.  c,  15  ]SIass.  389 ;  Blouin  r.  Hart,  30 


supra.     A  pledge  of  the  certificates  of    La.  Ann.  714  (1878) ;  Alerchants'  Nat 


stock  is  effective  without  notice  to 
the  corporation.  Crescent  City,  etc. 
Co.  V.  Deblieux,  40  La.  Ann.  155 
(1888).  A  pledge  without  a  transfer 
confers  no  legal  title.  Wagner  v.  Mar- 
pie,  10  Tex.  Civ.  App.  505  (1895).  A 
decision  of  a  state  court  that  a  dona- 
tio causa  mortis  of  bank  stock  was 
effective,  although  the  donor  merely 
dehvered     the     certificates     of     stock 


Bank  r.  Richards,  6  Mo.  App.  454 
(1879);  aff'd,  74  Mo.  77;  Broadway 
Bank  v.  McElrath,  13  N.  J.  Eq.  24 
(1860) ;  Cornick  v.  Richards,  3  Lea 
(Tenn.),  1  (1879);  Baldwin  v.  Can- 
field,  26  Minn.  43  (1879);  Bitot  v. 
Johnson,  33  La.  Ann.  1286  (1881); 
New  Orleans,  etc.  Assoc,  v.  Wiltz,  10 
Fed.  Rep.  330  (1881)  ;  Continental  Nat. 
Bank  v.  Eliot  Nat.  Bank,  7  Fed.  Rep. 


1273 


§465. 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


a  by-law  of  the  corporation  to  the  effect  that  transfers  are  not  valid 
until  registered  on  the  corporate  books  can  prevent  a  pledge  of  stock 
being  made  by  a  mere  delivery  of  the  certificates  indorsed  in  blank,  or 
indorsed  to  the  pledgee,  without  such  registry.^  The  provision  requir- 
ing such  registry  would  seem  not  to  concern  the  pledgee  in  any  way, 
except  that  without  the  registry  he  could  not  claim  the  dividends 
from  the  corporation ;  ^    and  in  a  few  states,  where  an  attachment  of 


369  (1881) ;  U.  S.  v.  Cutts,  1  Sumner, 
133  (1832) ;  s.  c,  25  Fed.  Cas.  745.  Cf. 
State  V.  Jeffersonville  Nat.  Bank,  89 
Ind.  302  (1883).  A  pledge  may  be 
made  by  transfer  of  the  certificate 
without  any  transfer  on  the  books. 
Hill  V.  Kerstetter,  43  Ind.  App.  1  (1909). 
A  pledge  may  be  made  by  signing  in 
blank  on  the  back  of  the  certificate  and 
pinning  the  certificate  to  the  note. 
McClintock  v.  Central  Bank,  120  Mo. 
127  (1894).  As  to  how  a  pledge  may 
be  made,  see  also  Winslow  v.  Harri- 
man  Iron  Co.,  42  S.  W.  Rep.  698 
(Tenn.  1897).  The  pledgor  may,  by 
word  of  mouth,  extend  stock  already 
pledged  to  further  advancements  by 
the  pledgee.  Van  Blarcom  i\  Broad- 
way Bank,  9  Bosw.  532  (1862). 

1  McNeil  V.  Tenth  Nat.  Bank,  46 
N.  Y.  325  (1871) ;  Dickinson  v.  Central 
Nat.  Bank,  129  Mass.  279  (1880); 
Eraser  v.  Charleston,  11  S.  C.  486 
(1878) ;  Factors',  etc.  Ins.  Co.  v.  Ma- 
rine, etc.  Co.,  31  La.  Ann.  149  (1879) ; 
Pitot  V.  Johnson,  33  La.  Ann.  1286 
(1881) ;  Continental  Nat.  Bank  v. 
Eliot  Nat.  Bank,  12  Rep.  35  (1881); 
s.  c,  7  Fed.  Rep.  369 ;  Lowry  v.  Com- 
mercial, etc.  Bank,  Taney,  310  (1848) ; 
s.  c,  15  Fed.  Cas.  1040;  Blouin  v. 
Hart,  30  La.  Ann.  714  (1878) ;  Light- 
ner's  Appeal,  82  Pa.  St.  301  (1876); 
U.  S.  V.  Cutts,  1  Sumner,  133  (1832) ; 
s.  c,  25  Fed.  Cas.  745;  Leitch  v. 
Wells,  48  N.  Y.  585  (1872) ;  Commer- 
cial Bank  r.  Kortright,  22  Wend.  348 
(1839),  affg  20  Wend.  91;  Otis  v. 
Gardner,  105  111.  436  (1883).  As 
regards  such  provisions  requiring  regis- 
try, a  pledge  of  stock  stands  on  the 
same  footing  as  a  sale  of  stock.  See 
also  §§  379,  432,  supra.  Where  a  per- 
son, as  preliminary  to  making  a  loan 
with  stock  as  collateral,   indorses  his 


stock  over  to  the  lender  and  leaves  it 
with  the  corporate  secretary,  and  then 
the  loan  is  abandoned,  the  secretary  is 
bound  to  deliver  back  the  stock. 
Galvin  v.  Mac  Mining,  etc.  Co.,  14 
Mont.  508  (1894).  The  unregistered 
pledgee  is  protected  against  the 
pledgor's  assignee  in  bankruptcy.  Re 
Shelley,  34  L.  J.  (Bankr.)  6  (1864). 
Under  the  New  Hampshire  statute  a 
pledge  of  stock  to  secure  a  previously 
existing  debt  is  void  if  made  within 
three  months  of  insolvency.  Hackett 
V.  Leominster,  etc.  Bank,  68  N.  H.  274 
(1895).  In  Vermont  where  a  pledge  of 
stock  may  be  made  only  by  transfer  on 
the  books  or  notice  to  the  corporation, 
a  pledge  without  such  transfer  or 
notification  or  any  assigninent  in 
writing  is  not  good  as  against  a  trustee 
in  bankruptcy.  French  v.  White,  78 
Vt.  89  (1905).  In  England  certifi- 
cates of  stock  have  little  of  the  quasi- 
negotiability  which  they  have  in 
America.  See  §  412,  supra.  In  Eng- 
land, even  if  the  secretary  by  mistake 
delivers  the  old  certificates  back  to  the 
transferrer  and  he  pledges  them,  the 
pledgee  is  not  protected,  the  basis  of 
this  decision  being  that  the  proximate 
cause  of  the  loss  was  the  transferrer 
and  not  the  secretary,  but  in  England 
the  transfers  are  made  by  instruments 
separate  from  the  certificates.  Long- 
man V.  Bath,  etc.  Ltd.,  [1905]  1  Ch. 
646.  In  England  shares  of  the  capital 
stock  cannot  be  transferred  without 
the  production  of  the  certificate,  where 
the  certificate  recites  on  its  face  that 
no  transfer  can  be  registered  with- 
out its  production,  and  hence  the  com- 
pany is  liable  to  a  pledgee  of  the  cer- 
tificate, even  though  he  does  not  apply 
for  a  transfer  until  after  the  owner 
has  transferred  the  shares  to  a  third 


2  See  §  468,  infra. 
1274 


CH.  XXVI. I 


PLEDGE  OF  STOCK. 


[§  465. 


the  stock  for  the  pledgor's  debts  would  cut  off  a  previous  unregistered 
vendee's  or  pledgee's  rights,  he,  by  not  registering,  encounters  that 
risk.^  The  Arkansas  statute  requiring  the  registry  of  a  transfer  of 
stock  does  not  apply  to  a  pledge  of  a  certificate  of  stock.^  Although  a 
transfer  is  on  a  separate  piece  of  paper,  and  is  not  acknowledged  as 
required  by  a  rule  of  the  stock  exchange,  nevertheless  the  pledgee  may 
be  a  bona  fide  holder.^  A  pledge  of  stock  to  secure  a  note  applies  also 
to  a  renewal  of  the  note.^  A  transfer  need  not  be  on  the  back  of  the 
certificate.  A  statement  in  a  collateral  note  that  the  stock  has  been 
deposited  as  security,  and  that  on  default  the  pledgee  might  sell  the 
same  at  public  auction,  is  sufficient  to  give  the  purchaser  at  such  sale 
sufiicient  title  to  entitle  him  to  a  transfer  on  the  corporate  books.^ 
An  apparently  absolute  transfer  of  stock,  whether  registered  on  the 
corporate  books  or  not,  may  be  shown  to  be  a  pledge,  and  parol  evi- 
dence is  admissible  to  prove  that  fact.^     A  transfer  of  stock  under  a  con- 


person,  without  producing  the  original 
certificate.  Rainford  v.  Keith,  etc. 
Co.,  Ltd.,  [1905]  2  Ch.  147,  rev'g 
[1905]  1  Ch.  296. 

1  Thus,  in  states  where  an  attach- 
ment has  precedence  over  not  only 
transfers  without  registry  made  after 
the  attachment  is  levied,  but  over 
unregistered  transfers  made  before 
the  levy  of  attachment,  a  pledge,  like 
a  sale  of  stock,  is  protected  against 
attachment  on  the  pledgor's  debts  only 
by  registry.  Weston  v.  Bear  River, 
etc.  Co.  5  Cal.  186  (1855) ;  Williams 
V.  Mechanics'  Bank,  5  Blatchf.  59 
(1862);  s.  c,  29  Fed.  Cas.  1376; 
State  Ins.  Co.  v.  Sax,  2  Tenn.  Ch.  507 
(1875);  State  v.  First  Nat.  Bank,  89 
Ind.  302  (1883);  Shipman  v.  .Etna 
Ins.  Co.,  29  Conn.  245  (1860) ;  Pinker- 
ton  V.  Manchester,  etc.  R.  R.,  42  N.  H. 

424  (1861);  Oxford  Turnp.  Co.  v. 
Bunnell,  6  Conn.  552  (1827).  Cf. 
Strout  V.  Natoma  W.  &  M.  Co.,  9  Cal. 
78  (1858).  But  the  purchaser  at  the 
execution  sale  is  not  protected  against 
the  pledge,  if  he  purchased  with  notice. 
Weston  V.  Bear  River  etc.  Co.,  6  Cal. 

425  (1856).  And  if  notice  of  the  pledge 
is  given  to  the  corporation,  the  pledgee 
is  protected  against  the  attachments, 
although  no  registry  is  had.  States 
Ins.  Co.  V.  Gennett,  2  Tenn.  Ch.  100 
(1874).  See  also  §  486  et  seq.,  infra. 
As  to  the  dividends,  the  pledgee  is 
entitled  to  them  as  against  the  pledgor. 


but  of  course  can  obtain  them  from  the 
corporation  only  by  obtaining  registry. 

2  Loeb  V.  German  Nat.  Bank,  88 
Ark.  108  (1908).  A  pledgee  of  certifi- 
cates of  stock  in  Massachusetts  is 
protected  by  the  statute  in  that  state, 
even  though  the  stock  is  not  transferred 
on  the  corporate  books.  Athol,  etc. 
Bank  v.  Bennett,  203  Mass.  480  (1909). 
A  pledge  of  stock  need  not  be  recorded 
in  the  county  clerk's  ofl&ce,  under  the 
Arkansas  statute.  Brady  v.  Irby,  142 
S.  W.  Rep.  1124  (Ark.  1912). 

3  Smith  V.  Savin,  141  N.  Y.  315 
(1894). 

*  Warrior,  etc.  Co.  v.  National 
Bank,  etc.,  53  S.  Rep.  997  (Ala.  1910). 

5  Bank  of  CuUoden  v.  Bank  of 
Forsvth,  120  Ga.  575  (1904). 

6  Brick  V.  Brick,  98  U.  S.  514 
(1878) ;  Wilson  v.  Little,  2  N.  Y.  443 
(1849) ;  Ginz  v.  Stumph,  73  Ind.  209 
(1880) ;  Newton  v.  Fay,  92  Mass.  505 
(1865) ;  McMahon  v.  Macy,  51  N.  Y. 
155  (1872) ;  Becher  v.  Wells,  etc.  Co., 
1  Fed.  Rep.  276  (1880);  Burgess  v. 
Seligman,  107  U.  S.  20  (1882) ;  Pinker- 
ton  V.  Manchester,  etc.  R.  R.,  42  N.  H. 
424  (1861);  Butman  v.  Howell,  144 
Mass.  66  (1887) ;  Ayer  v.  Seymour,  5 
N.  Y.  Supp.  650  (1889).  An  absolute 
transfer  of  stock  may  be  shown  to 
have  been  in  trust  only,  the  stock  to 
be  returned  upon  the  termination  of  a 
lease.  Town  of  Mt.  Morris  v.  Thomas, 
158  N.  Y.  450  (1899).     A  depositor  in 


1275 


§  465.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


tract  reciting  that  it  was  a  sale,  but  giving  the  transferrer  the  right  to 

purchase  it  within  one  year,  may  be  construed  as  a  pledge  where  no 

consideration  passed  and  no  obligation  of  the  transferrer  was  canceled.^ 

A  corporation  may  pledge  its  unissued  stock,^  and  the  pledgee  is  not 


a  bank  who  has  been  induced  to  take 
from   the   bank  its   stock  as   security 
may  show  by  parol  evidence  that  he 
took  such  stock  as  collateral  security, 
and  not  in  liquidation  of  his  deposit. 
Williams  v.  American  Nat.  Bank,  85 
Fed.  Rep.  376  (1898) ;   aff'd,  101  Fed. 
Rep.  943  (1900).     A  certificate  of  stock 
indorsed  in  blank  may  be  shown  to 
have  been  delivered  in  pledge.     Riley 
V.  Hampshire  County  Nat.  Bank,  164 
Mass.  482  (1895).     It  may  be  a  ques- 
tion of  fact  whether  the  delivery  of 
certificates  of  stock  is  made  as  a  sale 
or    as    collateral    security.     The    pre- 
sumption is  that  it  is  collateral  security 
where  the  facts  show  a  prior  debt,  and 
there  is  no  proof  as  to  the  purpose  of 
the  transfer.     Borland  v.  Nevada  Bank, 
99  Cal.  89  (1893).     A  transfer  of  stock 
absolute  on  its  face  may  be  shown  to 
be  only  a  pledge.     Murray  v.  Butte, 
etc.  Co.,  41  Mont.  449   (1910).     This 
subject    is    somewhat    similar    to    the 
claim  of  a  person  that  another  person 
purchasing  stock  did  so  as  agent  for 
the  former.     ' '  Loose,  vague,  and  indefi- 
nite   expressions    are    insufficient    to 
create    such    a    trust.     The    intention 
must   be  evinced   with   clearness  and 
certainty."     Levi    v.   Evans,   57   Fed. 
Rep.    677    (1893).     See    §321,    supra. 
An  apparent  sale  of  stock  is  not  proven 
to    be   a   pledge   on   the   evidence   of 
plaintiff,    contradicted   by    defendant, 
when  the  full  value  of  the  stock  was 
paid  and  a  receipt  therefor  given  by 
the     plaintiff.     Travers     v.     Leopold, 
124  111.  431    (1888).     A  pledgor  may 
bring  a  suit  for  an  acccounting  and  to 
establish  the  fact  that  the  transfer  of 
stock  was  a  pledge,  and  he  may  restrain 
a  suit  by  the  pledgee  against  the  cor- 
poration  for   the   stock.     McDowell's 
Appeal,  123  Pa.  St.  381  (1889).     What 
appears  to  be  an  absolute  sale  may  be 
shown  to  be  a  pledge,  but  the  proof 
must  be  clear  and  conclusive.     McLeod 
V.  Weldon,  1  New  Brunswick  Eq.  Rep. 
181   (1895).     The  relation  of  pledgor 
and  pledgee  may  be  proved  by  oral 


testimony  of  the  pledgee  that  he  bought 
the  stock  in  the  name  of  the  pledgor, 
and  became  surety  on  money  bor- 
rowed for  that  purpose,  and  that  the 
stock  was  deposited  in  a  certain  way 
as  security.  Schwind  v.  Boyce,  94  Md. 
510  (1902).  W^here  a  written  contract 
constitutes  a  sale  of  stock  it  cannot 
be  shown  to  be  a  pledge  unless  a  mu- 
tual mistake  or  fraud  or  other  in- 
equitable conduct  is  shown.  Miller  v. 
Carpenter,  68  N.  Y.  App.  Div.  346 
(1902).  In  a  suit  by  a  person  to  re- 
deem stock  which  has  been  trans- 
ferred absolutelj^  but  which  he  claims 
was  a  pledge,  the  proof  being  oral,  he 
must  allege  that  the  absolute  assign- 
ment was  made  by  mutual  mistake  or 
that  there  was  fraud.  Miller  v.  Car- 
penter, 79  N.  Y.  App.  Div.  1.30  (1903). 
An  absolute  written  contract  of  sale 
may  be  shown  by  parol  to  be  in 
pledge  merely  or  a  conditional  sale. 
Farmer  v.  Farmer,  etc.  Co.,  83  N.  Y. 
App.  Div.  218  (1903).  An  apparently 
absolute  sale  of  stock  cannot  be  shown 
to  be  merely  a  pledge,  unless  the  proof 
is  clear,  plain,  and  convincing.  Wilson 
V.  Cunningham,  24  Utah,  167  (1901). 
Where  the  owner  of  stock  has  pledged 
all  of  it  to  different  parties,  and  ar- 
ranges with  one  of  them  to  take  up  aU 
the  stock  and  the  latter  does  so,  and  for 
several  years  treats  it  as  his  own,  and 
the  lower  court  finds  that  the  agree- 
ment was  that  the  pledgee  should  own 
it,  the  upper  court  will  not  disturb 
the  decision,  especially  where  the 
pledgor  claims  that  he  transferred  the 
stock  to  avoid  paying  other  creditors. 
Hukill  V.  Yoder,  189  Pa.  St.  233  (1899). 

1  Keifer  v.  Myers,  5  Cal.  App.  668 
(1907). 

=  Burgess  v.  Seligman,  107  U.  S.  20 
(1882) ;  Combination  Trust  Co.  v. 
Weed,  2  Fed.  Rep.  24  (1880) ;  Melvin 
V.  Lamar  Ins.  Co.,  80  111.  446  (1875) ; 
Protection  Life  Ins.  Co.  v.  Osgood,  93 
111.  69  (1879);  Re  City  Terminus 
Hotel  Co.,  14  Eq.  10  (1872) ;  Union 
Sav.  Assoc.  V.  Seligman,  92  Mo.  635 


1276 


CH.   XXVI.] 


PLEDGE   OF   STOCK. 


[§  465. 


liable  as  an  absolute  stockholder  on  such  stock. ^     Even  though  a  bank 
is  prohibited  by  statute  from  taking  its  own  stock  as  collateral  security, 


(1884),  overruling  Griswold  v.  Selig- 
man,  72  Mo.  116.  Contra,  Brewster  v. 
Hartley,  37  Cal.  15  (1869).  See  §  247, 
supra,  p.  708,  note  7.  Where  a  cor- 
poration pledges  its  own  stock,  the 
pledgee  may  sell  that  stock  for  non- 
payment of  the  debt  at  less  than  par. 
This  rule  prevails  even  though  the 
charter  provides  that  the  stock  shall 
not  be  sold  below  par.  Peterborough 
R.  R.  V.  Nashua,  etc.  R.  R.,  59  N.  H. 
385  (1879).  Unissued  stock  may  be 
issued  by  the  corporation  as  a  pledge 
to  secure  a  loan,  and  the  corporation 
cannot  set  up  that  it  was  issued  at 
less  than  par  in  violation  of  the  con- 
stitution. The  issue  is  good  in  the 
hands  of  the  pledgee  to  the  extent  of 
the  loan.  Gasquet  v.  Crescent  City  B. 
Co.,  49  Fed.  Rep.  496  (1892) ;  aff'd,  148 
U.  S.  31.  Where  the  company  issues 
its  stock  as  collateral  security  to  notes 
given  to  it  by  its  subscribers  in  pay- 
ment for  such  stock,  and  then  sells 
the  notes,  the  stock  follows  the  notes 
and  may  be  subjected  to  the  payment 
of  judgments  on  the  notes.  If  the  cor- 
poration has  issued  the  stock  to  others 
it  must  pay  the  judgments.  Hous- 
ton, etc.  Ry.  V.  Bremond,  66  Tex.  159 
(1886).  A  mortgage  is  valid  as  against 
the  corporation  giving  it,  although  the 
officers  give  to  the  mortgagee  their 
individual  notes  as  additional  security 
and  cause  the  corporation  to  issue 
stock  to  themselves  T^dthout  payment, 
which  they  deposit  also  as  collateral 
with  the  mortgagee.  The  giving  of  the 
mortgage  is  not  an  increase  of  indebted- 
ness such  as  is  prohibited  by  the  Penn- 
sylvania constitution.  Powell  v.  Blair, 
133  Pa.  St.  550  (1890).  The  unissued 
stock  of  the  corporation  may  be  issued 
to  one  of  its  creditors  as  collateral 
security.  Parberry  v.  Woodson  Sheep 
Co.,  18  Mont.  317  (1896).  The  ap- 
pointment of  a  receiver  does  not  affect 
the  rights  of  a  pledgee  from  the  cor- 
poration prior  to  such  appointment. 
The  pledgee  may  sell.  National,  etc. 
Bank  v.  Benbrook,  etc.  Co.,  27  S.  W. 
Rep.  297  (Tex.  1894).     A  New  York 


corporation  cannot  issue  its  stock  in 
pledge  to  secure  its  obligations.     Haule 
V.  Consumers',  etc.  Co.,  150  N.  Y.  App. 
Div.  582  (1912).     A  corporation  may 
pledge   treasury   stock   to   a   director. 
Where  treasury  stock,  instead  of  be- 
ing given  to  the  corporation,  is  placed 
in  the  hands  of  trustees  under  a  trust 
agreement,    such    agreement    may  be 
modified  by  a  new  agreement,  and  the 
stock  turned  over  to  the  corporation. 
Kinsman  v.  Fisk,  83  Hun,  494  (1895). 
Questions  relative  to  the  pledge  by  a 
company  of  its  own  bonds  are  con- 
sidered   elsewhere.     See    §  763,    infra. 
A  corporation  may  pledge  its  bonds  at 
less  than  par.     Duncomb  v.  N.  Y.,  etc. 
R.  R.,  84  N.  Y.  190  (1881).     In  this 
case  $34,000  of  bonds  were  pledged  to 
secure  an  overdue  note  for  $5,000  and 
interest.     The  court  said  (p.  202)  that 
the  pledgee  "had  unquestionably  the 
right  to  take  as  large  a  'margin'  for 
his  loan  as   the   borrower  was  vailing 
to   grant.     Nor   can   we   discern   any 
valid  reason  why  a  railroad  corpora- 
tion may  not  dispose  of  its  bonds  by 
way  of  pledge  as  well  as  of  sale ;    and 
in  the  absence  of  proof  that  the  pro- 
ceeds   of    the    loan    were,    with    the 
knowledge  of  both  parties,  to  be  ap- 
plied to  some  purpose  not  authorized 
by  the  statute  permitting  their  issue, 
we  can  see  no  reason,  as  has  already 
been  said,  why  they  might  not  be  used 
as  a  pledge  to  secure  an  indebtedness 
already  existing. ' '     Where  underwriters 
have  agreed  to  purchase  the  bonds  of 
the  corporation  at  a  certain  price  with 
a  bonus  of  seventy-five  per  cent,  in 
stock,  the  corporation  may  pledge  the 
bonds    and    assign    the    underwriting 
agreement    to    the    pledgee,    and    the 
pledgee  in  order  to  enforce  the  under- 
writing   agreement    may    compel    the 
corporation  to  furnish  the  seventy-five 
per   cent,  in  stock   for   that   purpose. 
Kirkpatrick  v.  Eastern,  etc.  Co.,   135 
Fed.  Rep.  146  (1904) ;   aff'd,  137  Fed. 
Rep.   387.      Even    though    a    stock- 
holder pledges  his  stock  to  secure  a 
debt    of    the    corporation,    and    such 


1  See  §§  247,  309-313,  supra, 
1277 


§465. 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


except  to  save  a  doubtful  debt,  yet  if  it  does  accept  such  security,  the 
pledgor  cannot  claim  that  the  pledge  was  void.^ 

An  issue  of  stock  to  a  creditor  to  be  redeemed  within  eighteen  months 
is  a  pledge  and  not  a  sale.^  The  question  of  usury  in  a  note  secured 
by  a  pledge  of  stock  may  affect  the  pledge  itself.^  A  loan  of  money 
to  a  promoter  on  full  rates  of  interest  with  a  stock  bonus  may  be  usuri- 
ous.^   In  England  by  statute  money  loaners  will  be  compelled  by  the 


stock  is  sold  out,  yet  he  is  not  entitled 
to  an  equal  amount  of  stock  from  the 
corporation,  but  is  merely  a  creditor 
of  it.  Dempster  v.  Rosehill,  etc.  Co., 
206  111.  261  (1903).  A  corporation 
having  charter  power  to  purchase  the 
stock  of  other  corporations  may  give 
its  certificates  of  indebtedness  in  pay- 
ment therefor,  and  may  also  issue 
with  such  certificates  its  preferred 
stock,  the  dividends  to  be  used  to  pay 
the  principal  and  interest  of  such  cer- 
tificates, the  preferred  stock  then  to 
belong  to  the  vendors.  Ingraham  v. 
National  Salt  Co.,  130  Fed.  Rep.  676 
(1904),  overruling  122  Fed.  Rep.  40 ; 
s.  c,  139  Fed.  Rep.  684  ;  aff'd,  143  Fed. 
Rep.  805.  Stock  pledged  by  the  cor- 
poration itself  cannot  be  voted  under 
tlie  New  Jersey  statute,  especially 
where  the  purpose  of  the  pledge  was  to 
control  the  corporation.  Thomas  v. 
International,  etc.  Co.,  72  N.  J.  Eq. 
224  (1907).  A  contract  between  a 
New  .Jersey  land  company  and  a  rail- 
road company  by  which  the  latter  loans 
money  to  the  former  and  for  six  years  is 
to  name  three  of  the  seven  directors, 
one  of  the  three  to  be  president  and 
general  manager,  and  the  other  four 
directors  to  be  satisfactory  to  it,  is 
illegal,  even  though  a  majority  of  the 
stock  of  the  New  Jersey  company  is 
pledged  to  the  railroad  company  to 
secure  the  loans  and  is  to  be  voted  by 
the  railroad  company.  A  minority 
stockholder  of  the  land  company  may 
maintain  a  bill  to  cancel  such  a  eon- 
tract.  Holt  V.  California,  etc.  Co.,  161 
Fed.  Rep.  3  (1908).  A  pledge  of  se- 
curity by  a  bank  to  a  clearing  house 
association  to  secure  clearing  house 
certificates  was  upheld  in  Booth  v. 
Atlanta,  etc.  Assn.,  132  Ga.  100  (1909), 
and  the  court  refused  to  put  the  secur- 
ities in  the  hands  of  a  receiver. 

1  Meholin  v.  Carlson,  17  Idaho,  742 


(1910).  See  also  §  315,  supra.  A  cor- 
poration which  has  taken  a  note  in  pay- 
ment for  its  stock  may  pledge  the  note 
with  the  stock  as  security,  and  where  a 
part  of  the  note  has  been  paid,  may 
borrow  money  from  a  mining  company 
to  redeem  the  pledge  and  the  mining 
company  may  collect  the  debt.  Stam- 
baugh  V.  Refugio  Syndicate,  196  Fed. 
Rep.  143  (1912). 

-  In  re  United,  etc.  Co.,  153  Fed. 
Rep.  169  (1907).     Cf.  §  167,  supra. 

3  See  Little  v.  Barker,  1  Hoffm.  Ch. 
487  (1840);  and  see  Frost  v.  Stokes, 
55  N.  Y.  Super.  Ct.  76  (1887),  holding 
that  the  New  York  statute  of  1882  al- 
lows any  interest  if  the  debt  is  on  de- 
mand and  is  over  $5,000,  and  stock  is 
pledged.  The  New  York  statute  of 
1882,  as  to  bankers  loaning  on  col- 
lateral, was  applied  in  Thomas  v. 
Coffin,  62  Fed.  Rep.  665  (1894),  a  case 
in  which  the  taking  of  commissions 
was  also  involved.  If  stock  is  pledged 
to  secure  an  usurious  note,  the  pledgor 
may,  under  the  New  York  statute,  sue 
to  recover  back  the  stock  without  pay- 
ing the  debt.  Dickson  v.  Valentine,  6 
N.  Y.  Supp.  540  (1889) ;  Cousland  v. 
Davis,  4  Bosw.  619  (1859).  The  New 
York  statute  allowing  any  rate  of  inter- 
est on  demand  collateral  notes  for 
S5,000  and  upwards  was  applied  in 
Wright  V.  Toomey,  137  N.  Y.  App. 
Div.  401  (1910) ;  aff'd,  204  N.  Y.  661. 
Even  though  the  charter  requires 
corporate  notes  to  be  signed  by  the 
president  and  secretary,  yet  a  note 
signed  by  the  secretary  alone  is  suffi- 
cient if  that  has  been  the  custom  of 
the  company.  Moreover,  a  pledge 
of  property  to  secure  the  note  may  be 
good,  even  though  the  note  is  void. 
Blanc  V.  Germania  Nat.  Bank,  114  La. 
739  (1905). 

*  Laws  V.  Fleming,  177  Fed.  Rep. 
450  (1910). 


1278 


CH.  XXVI.]  PLEDGE   OF   STOCK.  [§  4GG. 

courts  to  return  harsh  and  unconscionable  interest  or  bonuses  and  this 
apphes  to  a  person  who  loans  money  to  a  promoter  and  takes  excessive 
bonuses  of  stock  in  payment.^  A  pledge  is  not  illegal  though  it  secures 
a  greater  amount  than  the  pledgee  bank  is  entitled  to  loan  to  one  per- 
son.- A  bona  fide  pledgee  of  stock  is  protected  against  claims  of  former 
owners  of  that  stock  to  the  same  extent  that  an  absolute  purchaser 
of  the  stock  would  be  protected,  with  the  single  exception  that  the 
power  of  a  trustee  or  agent  to  sell  stock  does  not  give  him  power  to 
pledge  it.^  The  quasi-negotiability  of  certificates  of  stock  protects 
a  pledgee  and  a  vendee  alike.^  The  negotiability  of  a  note  is  not  de- 
stroyed by  a  provision  that  certain  bonds  are  given  as  collateral  security 
for  its  payment.^  Where  a  trust  company  has  orally  agreed  to  hold 
certain  bonds  for  delivery  in  accordance  with  certificates  issued  by 
another  company,  and  subsequently  the  trust  company  loans  money 
to  such  other  company  and  takes  such  bonds  as  security,  the  holders 
of  the  certificates  may  hold  the  trust  company  liable  for  not  protecting 
the  certificates.^  Where  a  pledgee  knows  at  the  time  of  the  pledge 
that  the  securities  should  have  been  placed  under  a  mortgage  he  is 
liable  to  the  mortgagee,  and  if  the  pledgee  sells  his  security  he  is  liable 
to  the  mortgagee  to  the  amount  realized,  even  though  thereafter  the 
securities  became  valueless.^  And  where  a  pledgee  brings  suit  to  obtain 
possession  of  the  pledge,  which  had  been  wrongfully  diverted,  and 
during  the  suit  the  pledge  becomes  worthless,  a  supplemental  com- 
plaint may  be  served  alleging  that  fact  and  demanding  the  value  of  the 
pledge  at  the  time  demand  was  made  therefor.^ 

Where  a  pledge  is  made  by  depositing  stock  in  the  hands  of  a  third 
party,  or  where  stock  is  delivered  to  a  trustee  of  a  mortgage  deed  of 
trust,  various  questions  arise,  which  are  considered  elsewhere.^ 

§  466.  Pledgee  may  have  the  stock  registered  in  his  own  name  or 
the  name  of  another.  —  W^here  certificates  of  stock  indorsed  in  blank 

1  Bonnard  v.  Dott,  92  L.  T.  Rep.  822  trustee  as  security  for  its  notes,  bona 
(1905);  s.  c,  [1906]  1  Ch.  740.  See  ^de  holders  of  the  notes  are  not  affected 
also  §  705,  injra.  by  the  trustee's  knowledge  of  defenses 

2  McClintoek  v.  Central  Bank,  etc.,  to  the  notes,  and  such  a  trustee  does  not 
120  Mo.  127  (1894).  represent   the   noteholders   in   a   fore- 

^  See  §§  326,  351,  supra.  closure    suit.      Central    Trust    Co.    v. 

*  See  §  432,  supra.  Cincinnati,  etc.  Ry.,  169  Fed.  Rep.  466 

5  Valley  Nat.  Bank  v.  Crowell,  148  (1908). 

Pa.  St.  284  (1892).     The  fact  that  a  «  Hubbard  y.  Manhattan  Trust  Co., 

promissory    note    negotiable    in    form  87  Fed.  Rep.  51  (1898). 

recites  that  it  is  secured  by  collateral  ^  Central   T.  Co.  v.  West,  etc.  Co., 

and  that  the  latter  may  be  sold  does  144  N.  Y.  App.  Div.  560  (1911). 

not   destroy   the   negotiability   of   the  »  Central  T.  Co.  v.  West  India,  etc. 

note.     1   Daniel  Neg.    Inst.,  4th  ed.,  Co.,  109  N.  Y.  App.  Div.  517  (1905). 

§§  1774-1784.       Where      a      raih-oad  » See  §  317,  supra. 
company    deposits    its    bonds    with    a 

1279 


466. 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


are  delivered  to  a  person  in  pledge  as  collateral  security  for  a  debt 
or  for  any  other  purpose,  the  pledgee  has  a  right  to  fill  in  the  blanks 
and  have  the  stock  registered  in  his  own  name  on  the  corporate  books ;  ^ 
or  the  pledgee  may  have  the  stock  registered  in  the  name  of  another 
person,  in  order  that  he  may  protect  his  special  property  in  the  stock 
and  at  the  same  time  not  be  liable  thereon.^    Where  the  pledgee  presents 


1  Skiff  V.  Stoddard,  63  Conn.  198 
(1893) ;  Donnell  v.  Wyckoff,  49  N.  J. 
L.  48  (1887);  Hubbell  v.  Drexel,  11 
Fed.  Rep.  115  (1882);  Re  Angelo,  5 
De  G.  &  S.  278  (1852);  Horton  v. 
Morgan,  19  N.  Y.  170  (1859) ;  Union, 
etc.  Bank  v.  Farrington,  13  Lea  (Tenn.), 
•333  (1884) ;  Heath  v.  Griswold,  5  Fed. 
Rep.  573  (1881),  holding  also  that  a 
surety  is  not  thereby  discharged ; 
Smith  V.  Traders'  Nat/Bank,  82  Tex. 
368  (1891) ;  Day  v.  Holmes,  103  Mass. 
306  (1869);  Fitehburg  Sav.  Bank  v. 
Torrey,  134  Mass.  239  (1883),  also 
holding  that  a  release  of  the  stock  by 
the  pledgee  releases  a  surety ;  Fay  v. 
Gray,  124  Mass.  500  (1878).  Cf.  State 
V.  Smith,  15  Oreg.  98,  114  (but  see  p. 
132)  (1887).  The  pledgee  may  sue  to 
have  the  pledge  transferred  to  him- 
self and  determine  the  rights  of  other 
claimants.  Newcombe  v.  Lottimer,  12 
N.  Y.  Supp.  381  (1890).  The  corpora- 
tion must  allow  the  registry.  Cornick 
V.  Richards,  3  Lea  (Tenn.),  1  (1879). 
Where  a  contract  does  not  merely 
pledge  stock,  but  gives  the  creditor 
the  legal  title  and  unlimited  power 
of  disposition,  the  creditor  may,  by 
suit  in  equity,  compel  the  company  to 
allow  a  transfer,  and  the  transferrer 
need  not  be  made  a  party  to  the  suit. 
Skinner  v.  Fort  Wayne,  etc.  R.  R.,  58 
Fed.  Rep.  55  (1893).  In  California  a 
pledgor  may  enjoin  a  pledgee  from 
transferring  stock  into  his  name  for  the 
purpose  of  controlling  an  election, 
which  otherwise  the  pledgor  would 
control,  where  the  statutes  of  the  state 
provide  for  recording  such  a  pledge 
without  a  transfer  of  the  stock  itself. 
Spreckels  v.  Nevada  Bank,  113  Cal.  272 
(1896) ;  Tom,  etc.  Co.  v.  Green,  11  Colo. 
App.  447  (1898).  A  pledgee  has  power 
to  have  the  stock  transferred  on  the 
corporate  books,  and  if  it  has  agreed  to 
hold  cortciiu  stock  as  security  for  a 
third  person's  note  and  fails  to  obtain 


a  proper  transfer,  it  is  liable.  First 
Nat.  Bank  v.  Park,  117  Iowa,  552 
(1902).  A  pledgee  is  entitled  to  have 
stock  transferred  into  his  own  name. 
Davis  V.  Hardwick,  43  Tex.  Civ.  App. 
71  (1906).  Even  though  the  pledgee 
eight  years  after  the  pledge  was  made 
obtained  judgment  for  the  amount 
due,  yet  if  for  twenty-two  years  he 
takes  no  further  action,  he  cannot 
compel  the  corporation  to  transfer  the 
stock  to  him  unless  the  pledgor  is 
made  a  party,  the  stock  not  ha-ving 
been  transferred  in  the  meantime. 
Wadlinger  v.  First  Nat.  Bank,  209  Pa. 
St.  197  (1904).  A  pledgee  cannot  in- 
sist on  a  transfer  of  the  stock  to  him- 
self on  the  corporate  books  where  the 
corporation  has  a  lien  on  the  stock, 
even  though  such  lien  is  subject  to 
the  pledge.  White  River,  etc.  Bank  v. 
Capital,  etc.  Co.,  77  Vt.  123  (1904).  A 
pledgee  of  bonds  has  a  right  to  have 
them  registered  in  his  own  name. 
Ritchie  v.  Burke,  109  Fed.  Rep.  16 
(1901).  A  pledgee  cannot  maintain  a 
bill  to  compel  a  transfer  of  the  stock  to 
the  pledgee  on  the  books,  and  to  re- 
strain the  corporation  from  paying 
dividends  to  the  pledgor.  American, 
etc.  Co.  V.  Pacific,  etc.  Co.,  34  Wash.  10 
(1904).  A  pledgee  cannot  maintain  a 
bill  in  equity  against  the  corporation 
to  compel  a  transfer  of  the  stock  to  him 
where  in  his  pleading  he  claims  to  be 
owner  of  the  stock,  and  upon  the  trial 
states  that  he  holds  the  stock  in 
pledge,  but  fails  to  prove  any  debt  for 
which  he  holds  the  stock  in  pledge,  it 
appearing  that  the  stock  had  been 
held  by  him  for  a  continuing  credit. 
State  V.  North,  etc.  Co.,  112  La.  441 
(1904). 

2  Day  V.  Holmes,  103  Mass.  306 
(1869);  Heath  v.  Griswold,  5  Fed. 
Rep.  573  (1881);  Anderson  v.  Phila- 
delphia Warehouse  Co.,  Ill  U.  S.  479 
(1884).     See     also     §  470,     infra.     A 


1280 


CH.  XXVI. 


PLEDGE  OF  STOCK. 


[§  467. 


the  stock  to  the  corporation  for  transfer,  but  the  pledgor  forbids  the 
transfer,  and  thereafter  the  stock  goes  down,  the  pledgee  may  hold 
the  pledgor  liable  for  loss  caused  by  interfering  with  the  transfer.^ 
It  is  proper  and  legal  for  a  corporation  to  add  to  the  name  appearing 
on  the  stock  certificate  the  words  "  as  pledgee,"  or  "  as  collateral  se- 
curity," or  similar  words.-  In  some  states  there  are  statutes  as  well  as 
decisions  to  the  effect  that  notice  to  the  corporation  that  a  person  holds 
as  pledgee  certain  certificates  of  stock,  which  stand  on  the  books  of  the 
company  in  the  pledgor's  name,  prevents  an  attachment  against  the 
pledgor  from  reaching  more  than  the  equity  of  redemption  in  such 
stock.^ 

§  467.  Stock-broker  purchasing  stock  for  a  customer  on  a  margin 
is  a  pledgee  of  the  stock.  —  It  has  been  well  established  that,  where 
a  stock-broker  purchases  stock,  on  an  order  from  his  customer,  and 
the  customer  does  not  pay  for  the  stock,  but  deposits  with  the  broker 
a  sum  of  money  called  a  "  margin,"  to  protect  the  broker  against  loss, 
the  broker  is  bound  to  have  on  hand  the  stock  so  purchased  during  the 
entire  time  of  the  contract,  and  has  the  rights,  duties,  and  liabilities 
of  a  pledgee,  with  the  customer  as  a  pledgor .^  The  broker  under  such 
circumstances  must  conform  to  all  the  rules  governing  a  pledgee's 


pledgee  is  not  guilty  of  conversion 
merely  because  he  transfers  the  stock 
into  the  name  of  an  employee.  Jones  v. 
Seaman,  133  N.  Y.  App.  Div.,  127 
(1909);  aff'd,  200  N.  Y.  553.  The 
pledgee  of  certificates  of  stock  who 
returns  them  and  takes  in  exchange 
other  certificates  running  to  a  trustee, 
cannot  thereafter  claim  a  lien  on  the 
first  named  certificates.  Hickok  v. 
Cowperthwait,  137  N.  Y.  App.  Div. 
94  (1910) ;  s.  c,  147  N.  Y.  App.  Div. 
122. 

1  Hooper  v.  Herts,  [1906]  1  Ch.  549. 

2  See  §  247,  supra,  and  ch.  XXVII, 
infra.  A  court  will  not  at  the  in- 
stance of  a  pledgee  order  a  transfer 
to  be  recorded  on  the  books  to  the 
pledgee  as  pledgee,  and  giving  the 
pledgor  the  right  to  vote  the  stock, 
inasmuch  as  this  would  complicate 
the  title  as  between  the  corporation 
and  its  stockholders  and  interfere 
with  the  business  of  the  corporation. 
American,  etc.  Co.  v.  Pacific,  etc.  Co., 
34  Wash.  10  (1904). 

3  See  ch.  XXVII,  infra. 

^  Baker  v.  Drake,  66  N.  Y.  518 
(1876) ;  Markham  v.  Jaudon,  41  N.  Y. 


235  (1869) ;  and  see  §  457,  ch.  XXV, 
supra.  A  broker  holding  stock  as  col- 
lateral security  on  a  margin  does  not 
hold  the  stock  in  a  fiduciary  capacity. 
McBurney  v.  Martin,  6  Rob.  (N.  Y.) 
502  (1866) ;  Lambertson  v.  Van  Bos- 
kerk,  49  How.  266 ;  4  Hun,  628  (1875). 
Securities  deposited  by  the  customer 
with  the  broker  as  collateral  create 
the  relation  of  pledgor  and  pledgee 
and  not  the  relation  of  debtor  and 
creditor.  In  re  Jacob  Berry  &  Co., 
149  Fed.  Rep.  176  (1906) ;  aff'd,  sub 
nam.  Thomas  v.  Taggart,  209  U.  S. 
385  (1908).  A  broker  carrying  stock 
on  margin  is  a  pledgee,  and  hence  a 
transfer  of  the  stock  by  him  to  his 
customer  within  four  months  of  his 
bankruptcy  is  not  a  preference,  the 
court  pointing  out  that  practically  all 
the  states,  excepting  Massachusetts, 
hold  that  the  broker  is  not  an  owner 
of  stock  carried  by  him  on  a  margin. 
Richardson  v.  Shaw,  147  Fed.  Rep. 
6.59  (1906) ;  aff'd,  209  U.  S.  365.  If  a 
broker,  who  is  carrying  stock  on  mar- 
gin, becomes  bankrupt,  his  customer 
may  redeem  it.  In  re  Boiling,  147 
Fed.  Rep.  786  (1906). 


(81) 


1281 


§  467.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


attitude  towards  a  pledgor.  He  cannot  repledge,  nor  can  he  sell  with- 
out due  notice,  unless  such  rights  are  given  by  the  customer,  the  pledgor, 
A  broker  has  no  right  to  repledge  his  customer's  stocks  or  bonds,  carried 
by  the  broker  as  collateral  or  on  a  margin,  unless  the  debt  is  transferred 
at  the  same  time,  or  unless  an  express  contract  authorizes  such  repledge.^ 
In  New  York  it  is  still  held  that  the  broker  is  but  a  pledgee,  but 
is  entitled  to  pledge  his  customer's  stock  to  raise  money  to  pay  for  the 
stock,  it  having  been  purchased  for  the  customer*  on  margin  and  the 
broker  being  ready  at  all  times  to  produce  that  amount  of  the  stock.^ 


1  Dykers  v.  Allen,  7  Hill,  497 
(1844).  A  broker  has  no  right  to 
repledge  stock  held  by  him  for  a  cus- 
tomer to  secure  margins,  and,  even 
if  the  customer  authorizes  him  to 
repledge,  this  authority  sustains  a 
repledge  only  to  the  extent  of  the 
amount  due  from  the  customer,  and 
the  broker  must  be  ready  at  all  times 
to  return  the  stock  to  the  customer 
upon  the  latter  paying  the  debt.  The 
repledgee,  under  the  usual  transfer  in 
blank  on  the  back  of  the  certificate,  is 
not  a  bona  fide  pledgee.  German  Sav. 
Bank  v.  Renshaw,  78  Md.  47.5  (1894). 
Where  it  was  understood  between  a 
firm  of  brokers  and  its  customers,  for 
whom  and  on  whose  order  it  bought 
stocks  on  the  security  of  a  margin, 
that  the  firm  might,  according  to  the 
usual  course  of  business,  pledge  or 
hypothecate  as  security  for  loans  to 
the  firm  the  stocks  thus  bought,  it  was 
held  that  a  mere  pledge  of  such  stocks 
would  not  be  of  itself  a  conversion. 
Chamberlain  v.  Greenleaf,  4  Abb.  N. 
Cas.  178  (1878).  See  also  Lawrence 
V.  Maxwell,  58  Barb.  511  (1871);  6 
Lans.  469 ;  5.3  N.  Y.  19.  The  decided 
weight  of  authority  holds  that,  unless 
-the  power  is  expressly  given  to  the 
broker  to  repledge  the  stock,  he  can- 
not legally  repledge  it.  A  broker  has 
no  right  to  repledge  the  stocks  held 
by  him  as  collateral  to  advances  to  a 
customer,  especially  so  after  the  cus- 
tomer has  repaid  the  advances.  Van 
Voorhis  v.  Rea,  1.5.3  Pa.  St.  19  (1893). 
Where  the  pledgee  converts  the  pledge 
by  selling  it,  and  then  assigns  for  the 
benefit  of  creditors,  the  pledgor  comes 
in  as  any  other  creditor,  and  not  as 
a  preferred  creditor.  Re  .Jamison's 
Estate,  163  Pa.  St.  143  (1894),  holding 


also  that  the  debt  due  from  the 
pledgor  to  the  pledgee  may  be  set  off. 
Where  a  broker,  a  gratuitous  bailee 
of  corporate  stock,  delivers  the  same 
to  the  company  without  authority, 
and  the  stock  is  converted  to  the  use 
of  the  company,  the  bailee  is  liable 
for  its  value,  irrespective  of  what  his 
intentions  were  in  the  premises.  In 
such  ease  the  bailor  may  recover  the 
value  of  the  stock  at  the  time  of  con- 
version, with  all  dividends  paid  from 
the  time  of  delivery,  together  with 
interest  on  the  value  of  the  stock  from 
date  of  conversion,  and  on  the  divi- 
dends from  date  of  respective  pay- 
ments. Hubbell  V.  Blandy,  87  Mich. 
209  (1891).  A  broker  has  no  implied 
power  to  repledge.  Skiff  v.  Stoddard, 
63  Conn.  198  (1893).  Where  a  broker 
repledges  stock  carried  by  him  on  a 
margin,  the  customer  cannot,  upon 
the  failure  of  the  broker,  have  all  the 
broker's  stock  of  that  class  first  applied 
in  discharge  of  the  claim.  Skiff  v. 
Stoddard,  63  Conn.  198  (1893) ;  Jami- 
son's Assigned  Estate,  3  Pa.  Dist. 
217  (1894).  On  this  subject,  see  also 
§  471,  infra,  and  §  457,  supra. 

2  Tompkins  v.  Morton  T.  Co.,  91 
N.  Y.  App.  Div.  274  (1904) ;  aff'd,  181 
N.  Y.  578.  Stock  purchased  by  a 
broker  on  margin  is  held  by  the  broker 
as  pledgee.  The  broker  has  a  right  to 
repledge  the  stock,  provided  he  is  in 
a  position  at  all  times  to  deliver  the 
stock  to  his  customer  on  payment  of 
the  balance  due,  and  it  is  sufficient 
that  the  broker  is  able  to  take  up  the 
repledge  at  any  time.  If  he  does  not 
do  so,  however,  and  the  stock  is  sold 
by  the  repledgee,  the  broker  is  guilty 
of  conversion  upon  payment  being 
tendered  for  the  stock  and  it  not  being 


1282 


CH.  XXVI. J 


PLEDGE  OF  STOCK. 


[§  467. 


In  Massachusetts  still  different  rules  prevail.  In  that  state  the  rule 
is  clearly  laid  down  that  a  broker  is  not  a  pledgee  of  stocks  which  he 
buys  for  his  customer  on  a  margin,  but  that,  on  the  contrary,  the  broker 
is  the  owner  of  the  stock  and  that  he  is  not  bound  to  keep  the  stock  of 
one  customer  distinct  from  that  of  another,  but  may  take  a  single  cer- 
tificate in  his  own  name  for  several  customers,  and  may  pledge  the  stock 
for  advances  made  to  himself,  and  that  he  is  the  person  to  be  taxed 
on  such  stock.^    The  supreme  court  of  the  United  States  finally  passed 


delivered  to  the  customer,  and  a 
sale  by  the  repledgee  without  notice 
renders  the  broker  guilty  of  conver- 
sion. Rothschild  v.  Allen,  90  N.  Y. 
App.  Div.  233  (1904) ;  aflf'd,  180  N.  Y. 
561.  A  broker  carrjnng  stock  on  a 
margin  is  not  bound  to  retain  the 
identical  stock,  but  may  deliver  other 
stock  purchased  subsequently  at  a 
lower  price.  Helm  v.  Ennis,  109  N.  Y. 
App.  Div.  42  (1905).  A  broker  may 
pledge  his  customer's  securities  for  an 
amount  not  exceeding  the  amount  due 
from  the  customer,  but  the  broker 
must  not  put  the  securities  beyond 
the  reach  of  the  customer,  nor  mingle 
such  securities  with  others  and  hypoth- 
ecate aU  of  them  for  a  large  amount ; 
the  reason  of  this  decision  being  that, 
so  long  as  the  customer  could  go  to  the 
pledgee  and  redeem  the  securities 
without  loss,  he,  the  customer,  was  not 
injured.  Douglas  v.  Carpenter,  17 
N.  Y.  App.  Div.  .329  (1897).  Where 
the  pledgee,  without  the  knowledge 
of  the  pledgor,  sells  one  of  the  notes, 
and  gives  with  it  a  part  of  the  collat- 
eral as  secm-ity,  the  pledgor  may  pay 
that  note  and  take  all  the  security 
so  given  to  the  repledgee.  The  first 
pledgee  cannot  claim  any  lien  on 
the  part  so  repledged.  JSIcDonald  v. 
Grant,  N.  Y.  L.  J.,  July  16,  1895, 
Supr.  Ct.  Sp.  T.  A  broker  may  sell 
a  customer's  stock  certificate  if  the 
broker  has  a  similar  amount  of  that 
Btock  on  hand  free  and  clear.  Re 
Brown  &  Co.,  183  Fed.  Rep.  861 
(1910);  s.  c,  193,  Fed.  Rep.  24. 
See  also  §  469,  infra.  In  the  ease 
Mayer  v.  Monzo,  151  X.  Y.  App.  Div. 
866  (1912),  it  was  held  that  a  broker 
has  implied  power  to  pledge  stock 
purchased  by  him  for  a  customer  on 
margin,   provided   the  broker  has  on 


hand  or  under  his  control  similar 
stock  ready  for  delivery  to  the  cus- 
tomer, and  that  the  broker  may  mingle 
such  pledged  stock  with  the  stock  of 
other  customers  in  obtaining  loans. 
In  the  case  Des  Jardins  i;.  Hotchkin, 
142  N.  Y.  App.  Div.  845  (1911),  there 
is  a  dictum  that  a  broker  holding  se- 
curities purchased  on  a  margin  may 
pledge  them  for  advances,  provided 
it  is  done  so  that  the  broker  can  return 
them.  A  broker  in  purchasing  the 
stocks  of  the  customer  on  margin, 
need  not  keep  on  hand  those  identical 
certificates  if  he  has  on  hand  or  under 
his  control  a  like  amount  and  kind, 
so  as  to  be  ready  to  deliver  them  at  any 
time  upon  demand.  Sprague  v.  Cur- 
rie,  133  N.  Y.  App.  Div.  18  (1909). 
A  broker  may  pledge  his  customer's 
stock,  together  with  other  customers' 
stock,  to  obtain  a  loan  to  carry  the 
balance  due  from  the  customer,  but 
he  must  be  prepared  to  deliver  back 
stock  of  that  kind  in  that  amount 
whenever  the  customer  offers  full  pay- 
ment. Austin  V.  Hayden,  137  N.  W. 
Rep.  317  (Mich.  1912).  A  broker 
may  employ  a  sub-broker  unless  his 
instructions  are  to  the  contrary,  and 
may  allow  the  sub-broker  to  retain  the 
stock  if  the  main  broker  has  deposited 
sufficient  money  with  the  sub-broker 
to  protect  it  and  can  take  up  the  stock 
at  any  time  he  wishes,  but  the  main 
broker  is  liable  to  his  customer  if  he 
does  not  produce  the  stock  on  demand 
and  pavment  therefor.  Hoogewerff  v. 
Flack,  101  Md.  371  (1905). 

1  The  court  realized,  however,  that 
its  decision  was  not  in  accord  with  the 
current  of  authority  and  said:  "The 
English  doctrine  seems  to  be  the  same 
as  that  of  this  commonwealth,  so  that 
we  are  not  left  quite  alone  in  a  desert 


1283 


468. 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


upon  this  subject  in  1908,  and  held  that  a  broker  is  an  agent,  and  not 
the  owner  of  stocks,  purchased  by  him  on  a  margin,  and  that  while  he 
might  not  be  strictly  a  pledgee,  as  understood  at  common  law,  he  was 
essentially  a  pledgee,  and  hence  might  turn  over  similar  stock  to  his 
customer  and  receive  payment  therefor,  and  that  such  an  act  would  not 
be  a  preference  within  the  meaning  of  the  bankruptcy  law.  The  court 
approved  the  New  York  rule  and  declined  to  follow  the  Massachusetts 
rule  on  this  subject.^  Where  a  broker  sells  his  client's  stock  illegally, 
the  measure  of  damages  in  a  suit  by  the  client  is  the  difference  between  • 
the  price  at  which  the  stock  was  sold  and  the  highest  market  price  within 
a  reasonable  time  thereafter.^  Even  though  a  broker  sells  stock  held 
on  margin  and  does  not  pay  over  to  his  customer  the  balance  due,  yet 
he  is  not  indebted  in  a  fiduciary  capacity,  within  the  meaning  of  the 
bankruptcy  act,  and  hence  such  a  claim  is  barred  by  a  discharge  in 
bankruptcy.^    An  executor  is  bound  to  close  at  once  a  speculative 

account.^ 

§  468.  Miscellaneous  rights  of  pledgee  and  pledgor  —  Dimdends  — 
Reorganizations  —  The  equitij  of  redemption.  —  Dividends  declared 
during  the  continuance  of  the  pledge  belong  to  the  pledgee,^  and  even 


of  logic."  Chase  v.  City  of  Boston, 
180  Mass.  458  (1902).  In  Massachu- 
setts a  broker  who  purchases  stock 
for  a  customer  on  a  margin  is  not  a 
pledgee,  but  is  merely  under  contract 
to  deliver  the  stock  on  payment  of  the 
balance,  and  hence  he  may  pledge  the 
stock  or  sell  it,  and  is  not  in  default 
until  the  customer  has  tendered  the 
balance  and  demanded  the  stock.  If 
the  broker  is  adjudicated  a  bankrupt 
the  customer  may  treat  this  as  a 
breach  of  contract  and  prove  his 
claim.  In  re  Swift,  105  Fed.  Rep.  49.3 
(1900).  In  Wood  v.  Hayes,  81  Mass. 
375  (1860),  it  was  held  that  -'a  broker 
who  advanced  money  to  buy  stock  for 
another,  and  held  it  in  his  own  name, 
might,  so  long  as  he  had  not  been 
paid  or  tendered  the  amount  of  his 
advances,  pledge  it  as  security  for  his 
own  debt  to  a  third  person,  without 
making  himself  liable  to  an  action  by 
his  employer ;  and  this  upon  the 
ground  that  the  contract  was  condi- 
tional to  deliver  the  shares  upon  the 
payment  of  the  monev."  Approved 
in  Covell  v.  Loud,  135  Mass.  41  (1883), 
where  it  was  held  that,  where  the  cus- 
tomer is  unable  to  advance  further 
margin,  and  tells  the  broker  to  do  the 


best    he    can,    he    may    sell-  without 
notice.     See  also  §  457,  supra. 

1  Richardson  v.  Shaw,  209  U.  S.  365 
(1908). 

2  Wolff  V.  Loekwood,  70  N.  Y.  App. 
Div.  569  (1902).  The  measure  of  dam- 
ages in  a  suit  by  a  customer  against 
a  broker  for  an  unauthorized  sale  of 
stock  is  the  difference  between  the 
price  at  which  it  was  sold  and  the 
highest  price  within  a  reasonable 
time  thereafter,  which,  in  this  ease, 
the  court  fixed  at  thirty  days.  Bur- 
horn  V.  Lockm^ood,  71  N.  Y.  App.  Div. 
301  (1902). 

3  Crawford  v.  Burke,  195  U.  S.  176 
(1904).     See  §  452,  supra. 

4  Matter  of  Hirsch,  116  N.  Y.  App. 
Div.  367  (1906) ;  aff'd,  188  N.  Y.  584. 
See  also  §  452,  supra. 

5  Herrman  v.  Maxwell,  47  N.  Y. 
Super.  Ct.  347  (1881).  And  the 
pledgor  who  collects  them  holds  them, 
in  trust  for  the  pledgee.  Hill  v. 
Newichawanick  Co.,  8  Hun,  459; 
affirmed,  71  N.  Y.  593  (1877).  Where 
a  pledge  of  stock  is  renewed  and  a 
new  note  given,  dividends  accruing 
before  the  renewal  go  to  the  pledgor. 
Fairbank  v.  Merchants'  Nat.  Bank,  1.32 
111.  120  (1889).     A  pledgee  is  entitled 


1284 


en.  XXVI.] 


PLEDGE  OF  STOCK. 


[§  468. 


though  the  latter  is  not  registered  as  owner  on  the  corporate  books, 
yet,  if  the  corporation  has  notice  of  the  pledge,  it  must  pay  the  dividends 
to  the  pledgee.^    Where  a  certificate  of  stock  has  been  pledged,  but  no 


to  the  dividends  on  the  stock.  Reid 
V.  Caldwell,  120  Ga.  718  (1904).  A 
pledgee  may  collect  the  dividends  and 
must  account  therefor  to  the  pledgor 
on  final  settlement,  but  the  assignee 
of  the  pledgee  is  not  responsible  for 
dividends  so  collected  by  the  pledgee. 
Maxwell  v.  National  Bank,  etc.,  70 
S.  C.  532  (1905).  Dividends  and  inter- 
est on  stocks  and  bonds  pledged  by  a 
testator  do  not  constitute  income  for 
annuities.  Skinner  v.  Taft,  140  Mich. 
282  (1905). 

1  In  Central,  etc.  Bank  v.  Wilder, 
32  Neb.  454  (1891),  it  was  held  that 
not  only  was  the  pledgee  entitled  to 
the  dividends,  but  was  entitled  to 
them  although  the  stock  stood  on  the 
corporate  books  in  the  name  of  the 
pledgor,  where  the  officers  knew  all 
about  the  pledge.  A  pledgee  is  en- 
titled to  collect  the  dividends,  and 
in  some  instances  may  do  so  even 
though  the  stock  is  not  transferred  to 
him  on  the  books,  it  being  shown  that 
the  officers  knew  of  the  pledge.  Guar- 
antee Co.  V.  East  Rome  Town  Co., 
96  Ga.  511  (1895).  A  pledgee  of 
stock,  even  though  not  recorded  as  a 
stockholder,  is  entitled  to  dividends 
declared  after  the  pledge  was  made, 
as  against  a  claim  of  the  corporation 
against  the  pledgor  as  an  offset.  Gem- 
meU  V.  DaAds,  75  Md.  546  (1892). 
Where  a  stockholder  of  record  pledges 
his  certificates  of  stock,  and  no  trans- 
fer is  made  on  the  books,  and  subse- 
quently a  dividend  is  declared,  and 
after  such  dividend  is  payable,  but 
before  it  is  actually  paid,  the  pledgee 
presents  to  the  company  the  stock  for 
transfer,  with  a  written  request  of  the 
pledgor  to  the  same  effect,  together 
with  an  assignment  by  the  pledgor  to 
the  pledgee  of  the  dividend,  it  is  no 
defense  to  the  company  that  it  has  a 
claim  against  the  pledgor  for  a  per- 
sonal debt,  or  for  a  debt  of  a  fu'm  in 
which  he  is  interested.  American, 
etc.  Bank  v.  Nashville,  etc.  Co.,  36  S. 
W.  Rep.  960  (Tenn.  1896).  The  cor- 
poration   is    liable    to    a    pledgee,    to 


whom  the  stock  has  been  transferred 
on  the  books,  for  dividends  paid  to 
the  pledgor.  The  acceptance  of  part 
payment,  etc.,  by  the  pledgee  from  the 
pledgor  does  not  waive  his  cause  of 
action  against  the  company.  Boyd  v. 
Conshohocken  Worsted  Mills,  149  Pa. 
St.  .363  (1892).  In  Maine  it  has  been 
held  that  while  a  corporation  may  pay 
an  ordinary  dividend  to  a  stockholder 
of  record,  yet  that  a  dividend  paid  in 
the  liquidation  and  winding  up  of  the 
corporation  must  be  paid  to  the  holder 
of  the  certificate,  even  though  such 
holder  be  a  transferee  who  has  not 
been  recorded  as  such  on  the  books  of 
the  company,  and  that  the  company  is 
liable  to  him  for  dividends  in  liquida- 
tion, even  though  it  has  paid  them  to 
the  registered  stockholder,  and  that 
this  rule  applies  to  a  pledgee  of  a  cer- 
tificate of  stock  as  well  as  a  purchaser 
of  a  certificate  of  stock.  Bath  Sav. 
Inst.  V.  Sagadahoc  Nat.  Bank,  89  Me. 
500  (1897).  Even  though  pledged 
stock  is  not  transferred  on  the  corpo- 
rate books,  yet  as  between  pledgor  and 
pledgee,  the  pledgee  is  entitled  to  all 
dividends  and  persons  having  notice 
to  that  effect  cannot  retain  such  divi- 
dends as  against  the  pledgee,  whether 
in  cash  or  stock.  Brady  v.  Irby,  142 
S.  W.  Rep.  1124  (Ark.  1912).  Where 
a  certificate  is  issued  by  the  corpora- 
tion to  the  pledgee  as  pledgee,  on  the 
face  of  the  certificate,  the  dividends 
must  be  paid  to  him,  and  if  the  corpo- 
ration pays  the  dividends  to  the  pledgor 
it  is  liable  therefor  to  the  pledgee. 
Hunt  V.  Laconia,  etc.  Ry.,  68  N.  H.  561 
(1896).  The  pledgee  may  claim  the 
dividends  from  the  corporation,  even 
though  the  stock  has  not  been  trans- 
ferred into  his  name.  Page,  etc.  Co. 
V.  F.  H.  Prince  &  Co.,  74  N.  H.  262 
(1907).  In  insolvency  proceedings  a 
pledgee  is  entitled  to  dividends  with- 
out giving  up  his  secm-ity,  and  the 
federal  court  will  not  follow  the  state 
decisions  on  this  point  in  receivership 
cases.  London,  etc.  Bank  v.  Willa- 
mette, etc.  Co.,  80  Fed.  Rep.  226  (1897). 


1285 


§  468.]  PLEDGE    OF    STOCK.  [cH.  XXVI. 

transfer  has  been  made  on  the  corporate  books,  and  a  dividend  is  paid 
to  the  pledgor,  the  pledgee  may  bring  suit  against  the  pledgor  for  such 
dividend.^  The  pledgee,  however,  must  account  for  dividends  when 
the  pledge  is  redeemed.-  It  is  not  conversion  for  the  pledgee  to  accept 
a  stock  dividend  in  lieu  of  a  cash  dividend,  an  option  having  been  given.^ 
A  provision  in  the  contract  that  the  vendor  of  stock  shall  have  all  the 
dividends,  may  be  shown  to  mean  that  he  was  to  apply  the  dividends 
on  the  purchase  price.^  A  dividend  which  is  received  by  the  pledgee 
stops  the  running  of  the  statute  of  limitations  on  the  note.^  Where 
a  stockholder  who  has  pledged  his  stock  is  refused  permission  to  examine 
the  books  and  no  dividends  have  been  declared,  although  large  projfits 
have  been  made,  and  the  majority  stockliolders  are  planning  to  deprive 
him  of  his  stock,  he  may  file  a  bill  to  compel  the  declaration  of  a  divi- 
dend.^ A  pledgee  has  a  legal  right  to  surrender  the  certificate  to  the 
corporation  and  take  a  new  certificate  therefor,  running  either  to  him- 
self or  to  any  other  person  whom  he  may  designate."  A  pledgor  is 
entitled  to  examine  corporate  books,  even  though  the  stock  has  been 
transferred  into  the  name  of  the  pledgee.^  But  a  pledgee  is  not  liable 
for  loss  of  the  pledge  by  reason  of  the  transfer  not  having  been  made  on 
the  corporate  books. ^  The  executor  of  an  estate  owning  stock  in  a  cor- 
poration may  enjoin  the  corporation  from  paying  a  back  salary  to  its 
president,  who  is  a  co-executor  of  the  estate,  even  though  the  stock  of 
the  estate  was  pledged  by  the  decedent  and  was  transferred  into  the 
name  of  the  pledgee. ^'^ 

See  §  763,  infra,  on  this  point.     The  '  Meredith,  etc.  Bank  v.  Marshall, 

pledgee  is  entitled   to   the  dividends,  68  N.  H.  417  (1896). 

even  though  the  stock  stands  in  the  ^  Hasbrouek      v.     Vandervoort,      4 

name  of  the  pledgor  on  the  books  of  Sandf.  74  (1850) ;  Edw.  Bailm.,  §  300. 

the    company.     George,    etc.    Co.    v.  '  Whitney    v.    Whitney    Bros.    Co., 

Range,  etc.  Co.,  16  Utah,  59  (1897).  140  N.  W.  Rep.  35  (Wis.  1913). 

Where  stock  still  stands  in  the  name  *  Commercial,  etc.  Co.  v.  Pott,  150 

of  the  pledgor  and  an  attachment  is  Cal.  358  (1907). 

levied  upon  it,  dividends  that  accrue  *  Bosler   v.   McShane,   78   Neb.   86 

thereafter  belong  to  the  pledgee,  both  (1907) ;  s.  c,  78  Neb.  91  (1907).    Divi- 

as  against  the  pledgor  and  his  credi-  dends  received  by  the  pledgee  on  stock 

tors.     Farmers',  etc.  Bank  v.  Mosher,  held    as    collateral    are    sufficient    to 

63     Neb.     130     (1901).     Where     the  prevent  the  running  of  the  statute  of 

stock  still  stands  in  the  name  of  the  limitations  on  the  debt.     Fletcher  v. 

pledgor  there  is  no  duty  imposed  on  Brainerd,  75  Vt.  300  (1903). 

the  pledgee   to   collect   the   dividends  ^  Anderson  v.  W.  J.  Dyer  &  Bro.,  94 

declared  thereon.     McAulay  t'.  Moody,  Minn.  30  (1904).     Cf.  ^735,  infra. 

128  Cal.  202  (1900).     A  pledgee  is  not  "  See  §  466,  supra. 

entitled  to  past-due  coupons  which  were  *  Booth  v.  Consolidated  etc.  Co.,  62 

detached  from  the  bonds  before   they  N.  Y.  Misc.  Rep.  252  (1909). 

were  pledged,  even  though  such  coupons  ^  Loeb   v.    German   Nat.    Bank,   88 

are  entitled  to  payment  in  priority  to  Ark.  108  (1908). 

the  bonds  themselves.     Rhawn  v.  Edge  '"  Monmouth  Inv.  Co.  v.  Means,  151 

Hill,  etc.  Co.,  201  Pa.  St.  637  (1902).  Fed.  Rep.  159  (1906). 

1286 


CH.   XXVI.] 


PLEDGE   OF   STOCK. 


[§  468. 


A  pledgee  of  stock  may  bring  suit  to  set  aside  a  fraudulent  sale  of  all 
the  corporate  assets  which  will  result  in  destroying  the  value  of  his  stock.^ 
The  pledgee  of  a  majority  of  the  stock  of  a  corporation  may  take  con- 
trol of  its  board  of  directors  and  cause  it  to  bring  suit  against  the  direc- 
tors to  hold  them  personally  responsible  for  aiding  the  insolvent  pledgor 
to  fraudulently  borrow  the  money  of  the  corporation.-  A  pledgee  of 
stock  may  maintain  a  suit  to  have  illegal  assessments  declared  void, 
and  incidentally  the  court  may  order  the  corporation  to  make  a  transfer 
of  the  stock. ^ 

Where  the  pledgor  has  pledged  stock  to  secure  the  debts  of  another 
at  a  bank,  and  renewals  thereof,  the  pledge  continues  though  the  pledgor 
dies.''  But  a  pledge  of  stock  to  secure  another  person's  debt  is  released 
by  an  extension  of  that  debt.^  If  a  note  is  secured  by  collateral,  an 
accommodation  indorser  is  not  liable  if  the  collateral  is  released  from 
its  deposit  as  security  for  the  note.^  An  indorser,  however,  is  not  re- 
leased by  a  change  in  the  security,  except  to  the  extent  that  the  security 
is  decreased.'  If  a  note  secured  by  collateral  has  been  paid  by  a  surety, 
and  the  surety  claims  the  collateral,  and  the  collateral  is  also  claimed  by 
another  person,  the  pledgee  may  interplead.^  Where  the  pledgor  de- 
livers to  the  pledgee  a  certificate  of  stock  in  order  that  a  part  thereof  may 


1  Andrews   Co.    v.   National   Bank, 
etc.,  129  Ga.  53    (1907).     Where   one 
railroad   purchases   the   entire   capital 
stock  of  another  railroad  upon  credit, 
the  stock  being  deposited  with  a  trustee 
to  secure  payment  of  the  stock-trust 
certificates,  such  stock  may  be  voted  by 
the  purchaser  in  ratification  of  a  traffic 
contract  whereby   the  selling  railroad 
and  the  purchasing  raihoad  guarantee 
to  a  third  railroad,  in  which  the  purchas- 
ing railroad  is  interested,  traffic  enough 
to  pay  the  interest  on  the  bonds  and 
dividends  of  the  stock  of  the  third  rail- 
road.   Such   ratification   is  legal,  even 
though  the  holder  of  a  minority  of  the 
stock-trust    certificates    objects.     Kis- 
sel V.  Chicago,  etc.  Co.,  126  N.  Y.  App. 
Div.  852  (1908).     A  pledgee  of  bonds 
of  an  insolvent  corporation,  the  interest 
not  having  been  paid,  may  maintain 
a  suit  to  wind  up  the  company,  and 
change   the   trustee    of    the  mortgage 
(even  though  the  existing  trustee  was 
appointed  by  a  state  court  after  the 
pledgee's    suit   was    commenced)    and 
have  a  receiver  appointed  and  cancel 
fraudulent  bonds,  but  the  pledgor  is 
a  necessary  party  defendant.     Service 


on  non-resident  bondholders  may  be 
bv  publication.  State  Nat.  Bank,  etc. 
I'.'  Svndicate  Co.,  178  Fed.  Rep.  359 
(1910). 

2  Cream  City,  etc.  Co.  v.  Donahue, 
142  Wis.  651  (1910). 

3  Farmers',  etc.  Co.  v.  Henderson, 
46  Colo.  37  (1909). 

*  Cotton  V.  Atlas  Nat.  Bank,  145 
Mass.  43  (1887). 

5  Price  V.  Dime  Sav.  Bank,  124  111. 
317  (1888). 

6  Smith  V.  Traders'  Nat.  Bank,  82 
Tex.  368  (1891). 

'  Nelson  v.  First  Nat.  Bank,  69  Fed. 
Rep.  798  (1895).  A  pledgee  may 
enforce  his  claim  against  the  principal 
debtor,  although  the  stock,  which  had 
been  pledged  by  a  third  person  to  the 
pledgee  to  secure  the  debt,  has  been 
exchanged  for  stock  in  a  reorganized 
company  with  the  consent  of  the  owner 
of  the  stock,  but  without  the  consent 
of  the  debtor  or  its  receiver.  Windham, 
etc.  Bk.  V.  O'Gorman,  66  Minn.  361 
(1896). 

3  Sioux  Falls,  etc.  Bank  v.  Lien,  14 
S.  Dak.  410  (1901). 


1287 


§  468.]  PLEDGE   OF   STOCK.  [cH.  XXVI. 

be  transferred  to  the  pledgee,  and  the  latter  endeavors  to  keep  all  of 
the  stock  and  sues  the  corporation  for  not  transferring  the  same  to  him, 
the  corporation  may  bring  the  pledgor  into  the  suit  and  have  all  rights 
adjudicated.^  Where  a  pledge  is  deposited  in  third  parties'  hands  for 
the  benefit  of  both  parties,  the  creditor  is  not  bound  to  see  to  the  re- 
turn of  the  pledge."  A  pledge  to  secure  indebtedness  of  specified  parties 
is  not  security  for  their  individual  debts.^  A  pledge  to  secure  the  note 
of  another  person,  past  due,  is  not  binding  where  there  is  no  extension 
of  the  time  of  payment.^  If  a  person  agrees  to  deposit  stock  to  secure 
the  debt  of  another,  and  fails  to  do  so,  he  is  liable,  not  for  the  debt, 
but  for  the  value  of  the  stock.^  The  pledge  may  be  for  a  running  lia- 
bility, and  is  not  released  by  an  extension  of  any  particular  debt.^ 
Stock  may  be  given  by  the  debtor  to  his  creditor  to  sell  for  the  benefit 
of  the  creditor,  and  the  surplus  to  be  returned  to  the  debtor.^  A  deposit 
of  bonds  as  security  for  the  payment  for  rolling  stock,  but  to  be  used 
only  to  pay  any  deficiency  after  the  rolling  stock  has  been  sold  and  the 
proceeds  credited,  is  a  pledge  and  not  a  mortgage,  and  hence  if  the 
pledgee  takes  back  the  rolling  stock  without  selling  it  the  pledge  ceases.^ 
The  pledge  may  be  to  secure  the  carrying  out  of  a  contract.^  The  agree- 
ment of  the  pledgor  that  the  pledgee,  a  broker,  should  always  thereafter 
have  the  brokerage  business  of  the  company,  is  enforceable  even  after 
the  pledge  ceases,  and  for  breach  the  pledgee  may  recover  damages.^" 
The  pledge  of  stock  may  provide  that,  for  part  payments  of  the  debt, 
the  pledgor  may  withdraw  part  of  the  stock  pledged. ^^  A  pledge,  to 
secure  a  certain  note  and  all  other  present  or  future  demands  of  any 
kind,  due  or  not  due,  is  good  as  a  pledge  for  the  note  specified,  but  does 
not  apply  as  a  pledge  to  another  note  due  five  years  later,  the  payment 

1  Tom  Boy,  etc.  Co.  v.  Green,  11  294  (1881).  Such  action  would  prob- 
Colo.  App.  447  (1898).  ably  make  the  creditor  the  agent  of  the 

2  Robertson  ;;.  Sully,  2  N.  Y.  App.     debtor. 

Div.  152  (1896) ;  reversed  on  another  »  Herrmann  v.  Central,  etc.  Co.,  101 

point  in  157  N.  Y.  624.  Fed.  Rep.  41  (1900). 

3  Haldeman  v.  German,  etc.  Bank,  "  Vaupell  v.  Woodward,  2  Sandf.  Ch. 
44  S.  W.  Rep.  383  (Ky.  1898).  Where  143  (1844).  The  owner  of  stock  may 
one  of  the  makers  of  a  joint  note  pledge  it  to  secure  his  agreement  that 
gives  collateral  as  security  for  that  he  will  form  a  corporation  to  take 
note,  such  collateral  cannot  be  applied  over  certain  property,  and  he  may 
to  another  individual  note  given  by  agree  that  the  stock  shall  be  forfeited 
him.  First  Nat.  Bank  v.  Finck,  100  to  the  pledgee  if  the  agreement  is  not 
Wis.  446  (1898).  carried  out.     Electric,  etc.  Co.  t>.  Smith, 

^Haldeman   v.  German,  etc.   Bank,  113  N.  Y.  App.  Div.  615  (1906).     Cf. 

44  S.  W.  Rep.  383  (Ky.  1898).  §  479,  infra. 

sHite  Nat.  Gas  Co.'s  Appeal,  118  '»  Carritt    v.  Bradley  and   another, 

Pa.  St.  436  (1888).  [1901]  2  K.  B.  550. 

«  Merchants'  Nat.  Bank  v.  Hall,  83  '^  First  Nat.  Bank  v.  Root,  107  Ind. 

N.  Y.  338  (1881).  224  (1886). 

'  Beckwith   v.   Burrough,    13   R.    I. 

1288 


CH.   XXVI.] 


PLEDGE    OF   STOCK. 


[§  468. 


of  which  is  secured  by  real  estate.  Upon  payment  of  the  first  note  the 
pledgor  may  file  a  bill  in  equity  to  obtain  the  stock, ^ 

A  person  taking  stock  or  bonds  in  pledge,  with  knowledge  of  the  fact 
that  the  pledgor  is  under  contract  to  deliver  them  to  another  person, 
may  not  be  protected.-  By  a  custom  of  banks  in  a  particular  locality, 
stock  held  by  the  bank  against  the  pledgor  as  collateral  for  one  loan 
may  be  held  as  collateral  for  all  loans.^  The  statute  of  limitations  may 
be  a  bar  to  the  debt  and  yet  not  to  the  pledge.^ 

A  pledgee  has  a  right  to  vote  on  the  pledged  stock  where  he  is  regis- 
tered as  a  stockholder,^  but  the  pledgor  may  compel  him,  by  legal  pro- 
ceedings, to  give  a  proxy  for  voting  purposes  where  there  are  equitable 
reasons  for  so  doing.*"  The  pledgee  is  not  liable  to  the  pledgor  for  de- 
preciation in  the  value  of  the  stock,  there  being  no  agreement  that  the 
pledgee  was  to  sell  it."  A  pledgee  is  not  bound  to  protect  the  stock 
from  forfeiture  for  non-payment  of  calls.^     A  pledgee  may,  however. 


1  First  Nat.  Bank  v.  Illinois  T.  &  S. 
Bank,  84  Fed.  Rep.  34  (1897). 

2  See   §§317,   350,   472,   766c,   852. 
Even  though  a  party  agrees  to  make 
future  advances  of  money  and  is  to 
receive  bonds  as  security  therefor,  yet 
if,  prior  to  such  advances  being  made 
and   the  bonds  received,   the  pledgor 
has  contracted  with  another  party  to 
deliver  to  the  latter  said  bonds,   the 
latter    is    entitled    to    the    bonds    as 
against    the    first-named    party    who 
makes     such     advances     subsequently 
and  received  the  bonds  with  notice  of 
such  intervening  contract.     Columbia, 
etc.  Co.  V.  Mercer,  108  Ky.  766  (1900). 
Where  a  mortgage  covers  bonds  to  be 
thereafter    delivered,    and    instead    of 
such  delivery  the  mortgagor  deposits 
the  bonds  as  security  with  the  United 
States   government,   and   then   makes 
another  mortgage  covering  such  bonds, 
the  first  mortgagee  is  entitled  to  the 
bonds  upon  their  being  released  by  the 
United      States      government,      even 
though  such  bonds  are  delivered  under 
the  second  mortgage,  unless  the  bonds 
or  the  notes  secured  by  them  under  the 
second    mortgage    have    passed    into 
bona  fide   hands.     Central    T.    Co.    v. 
West  India,  etc.  Co.,  169  N.  Y.  314 
(1901).     A    person    purchasing    stock 
with    knowledge    that    there    was    an 
agreement  that  it  would  be  held  as  a 
pledge  for  a  certain  debt,  cannot  claim 
the  stock  free  from  the  pledge.     Birch, 


etc.  Bank  v.  Brown,  152  Mo.  App. 
589  (1911).  Where  the  government 
has  been  defrauded  by  one  of  its  offi- 
cials and  it  files  a  bill  in  equity  to 
recover  the  securities  in  which  the 
defaulter  has  invested  the  money, 
and  enjoins  his  lawyer  as  well  as  the 
corporation  from  transferring  the  stock, 
the  stock  being  in  the  possession  of  the 
lawyer,  and  he  being  made  a  party 
defendant,  it  is  not  too  late  four  years 
after  the  suit  has  been  commenced, 
for  a  person,  who  has  given  a  bond  of 
indemnity  to  the  official,  to  claim  that 
the  lawj'er  held  the  stock  in  pledge  to 
secm-e  him.  Leary  v.  United  States, 
224  U.  S.  567  (1912). 

3  Bacon's  Adm'r  v.  Bacon's  Trustees, 
94  Va.  686  (1897). 

*  See  §  476,  infra. 

*  See  §  612,  infra. 
^  See  §.612,  infra. 

'  Lake  v.  Little  Rock,  etc.  Co.,  77 
Ark.  53  (1905).     See  also  §476,  infra. 

8  Southwestern  R.  R.  Bank  v. 
Douglas,  2  Spears  (S.  C),  329  (1844). 
It  has  been  held  that  where  stock  is 
only  partly  paid,  and  the  corporation 
issues  a  certificate  reciting  on  its  face 
how  much  is  still  due,  and  the  holder 
pledges  it,  and  no  transfer  to  the 
pledgee  is  made  on  the  corporate 
books,  the  corporation  can  have  a  sale 
of  the  stock  for  non-payment  of  the 
balance  remaining  .due,  but  such  pro- 
portion of  the  proceeds  will  be  paid 


1289 


§  468.] 


PLEDGE   OF   STOCK. 


pay  assessments  levied  upon  the  stock,  such  assessments  being  a  hen 
prior  to  his  hen,  and  may  charge  such  payments  as  expenses  in  preserv- 
ing and  protecting  the  title  and  making  the  security  available  on  matur- 
ity.^ But  where  stock  is  worth  but  five  dollars  a  share  the  pledgee  is 
not  justified  in  paying  an  assessment  of  thirty  dollars  a  share  on  the 
theory  of  being  repaid  expenses  in  maintaining  and  keeping  available 
the  pledge.-  A  pledgee  of  certificates  of  stock  is  protected  against 
further  sales  or  pledges  of  the  same  stock  by  the  pledgor,  such  other 
sales  or  pledges  being  without  the  delivery  of  any  certificate,  the  same 
as  the  vendee  of  a  certificate  of  stock  is  protected  against  another  sale 
of  the  stock  to  a  purchaser  who  takes  without  any  certificate.^  The 
possession  of  the  certificate  protects  the  pledgee  herein.  The  pledgee 
is  not  liable  for  a  loss  of  the  pledge  by  theft,  there  being  no  negligence 
on  his  part."*     But  where  the  pledgee  is  a  corporation,  and  the  president, 

lost  the  pledgee  can  reclaim  the  stock 
without  paying  the  assessment  to  such 
third  party.  Moore  v.  Bank  of  British 
Columbia,  125  Fed.  Rep.  849  (1903). 

2  Iowa  Nat.  Bank  v.  Cooper,  101 
N.  W.  Rep.  4.59  (Iowa,  1904) .  The  pay- 
ment of  an  assessment  by  the  pledgee 
cannot  be  questioned  by  pledgors  who 
took  part  in  the  making  of  the  assess- 
ment. Iowa  Nat.  Bank  v.  Cooper, 
131  Iowa  556  (1906). 

3  Maybin  v.  Ku-by,  4  Rich.  Eq.  (S.  C.) 
105  (1851).  See  §§  321,  360,  supra. 
The  cases  therein  cited  are  partly 
cases  of  pledge  and  partly  of  sale  of 
certificates  of  stock.  The  rule  applies 
equally  to  both.  A  person  to  whom 
a  pledgor  fraudulently  transfers  his 
equity,  and  who  redeems  the  stock 
and  then  sells  it,  is  liable  only  for 
its  actual  value  less  the  amount  paid 
to  so  redeem.  Hamilton  Nat.  Bank 
V.  Halsted,  134  N.  Y.  520  (1892). 
The  pledgee  who  does  not  receive  the 
certificate  of  stock,  but  takes  a  sepa- 
rate written  assignment  thereof  and 
files  that  with  the  company  and  obtains 
from  the  company  a  certificate  that  the 
shares  have  been  transferred  on  the 
books,  may  hold  the  company  liable 
if  subsequently  the  company  on  presen- 
tation of  the  original  certificate  of 
stock  duly  indorsed  transfers  the 
same  to  a  purchaser  thereof.  Equi- 
table, etc.  Co.  V.  Johnson,  36  Colo.  377 
(1906). 

*  Fleming  v.  Northampton  Nat. 
Bank,  9  Fed.  Cas.  264  (1881). 


to  the  pledgee  as  the  amount  already 
paid  on  the  stock  bears  to  the  par 
value  of  the  stock.  Ingles,  etc.  Co.  v. 
Knoxville,  etc.  Co.,  53  S.  W.  Rep.  1111 
(Tenn.  1899).  It  is  the  duty  of  the 
pledgor  to  pay  any  assessment  levied 
on  the  stock.  Thomas  v.  Gilbert, 
55  Oreg.  14  (1909).  An  assessment  of 
stockholders  in  a  bank  by  the  secre- 
tary of  state  under  a  statute  author- 
izing the  assessment  to  restore  the 
capital  stock  is  a  lien  on  the  stock,  and 
while  a  pledgee  is  not  bound  to  pay 
the  assessment  he  may  surrender  the 
stock.  Corbin  Banking  Co.  v.  Mitch- 
ell, 141  Ky.  172  (1910). 

1  Wells,  etc.  Co.  v.  Walker,  9  New 
Mex.  456  (1898).  Where  the  pledgee 
of  irrigation  stock  pays  an  assessment 
in  order  to  save  the  pledge,  he  may 
recover  the  amount  from  the  pledgor. 
Mabb  V.  Stewart,  147  Cal.  413  (1905). 
A  surety  on  a  note  is  not  liable  for 
assessments  on  stock  pledged  to  secure 
such  note,  even  though  such  assess- 
ments are  paid  by  the  pledgee.  Iowa 
Nat.  Bank  v.  Cooper,  101  N.  W.  Rep. 
459  (Iowa,  1904) .  Where  a  third  party 
holds  the  pledged  stock  and  agrees 
with  the  pledgee  that  if  the  pledgee 
does  not  pay  any  assessments  the 
third  party  may  pay  them  and  obtain 
repayment  out  of  the  dividends,  hold- 
ing the  stock  as  security,  and  the 
third  party  pays  the  assessments  with- 
out the  pledgee  being  notified  of  such 
assessments,  and  the  third  party 
causes  the  identity  of  the  stock  to  be 


1290 


CH.  XXVI.] 


PLEDGE   OF   STOCK. 


[§  468. 


who  has  entire  charge  of  its  affairs,  steals  the  securities,  the  corporation 
is  Hable  to  the  pledgor  for  the  value  thereof,  on  the  principle  that  a 
bailee  for  hire  is  liable  for  negligence  in  regard  to  the  pledge.^ 

A  pledgee  of  a  certificate  of  stock  is  not  bound  by  an  agreement  of 
all  the  stockholders  to  surrender  to  the  corporation  a  part  of  their  stock, 
which  part  is  to  be  then  considered  preferred  stock  and  is  to  be  sold  by 
the  corporation  for  the  purpose  of  paying  corporate  debts.-  The  stock- 
holders of  a  corporation  may,  together  with  the  directors,  cause  the  cor- 
porate property  to  be  sold  to  a  new  corporation  in  exchange  for  the 
stock  of  the  latter.  A  pledgee  of  stock  in  the  former  corporation  cannot 
after  the  sale  undo  it,  nor  hold  the  latter  corporation  liable.  His  remedy 
is  against  the  pledgor  and  the  first  corporation.^  An  unrecorded  pledgee 
of  stock  is  not  entitled  to  be  notified  of  proceedings  for  a  consolidation 


1  Cutting  V.  Marlor,  78  N.  Y.  454 
(1879).  See  also  Ouderkirk  v.  Cen- 
tral National  Bank,  119  N.  Y.  263 
(1890). 

2  Although  all  the  other  stock  has 
had  this  agreement  stamped  on  the 
certificates,  yet  the  corporation  cannot 
insist  that  the  purchaser  of  the  stock 
so  pledged  shall  allow  the  same  agree- 
ment to  be  stamped  on  the  new  certifi- 
cates issued  to  such  purchaser.  The 
court  will  order  a  transfer  free  from 
the  agreement.  Campbell  v.  American 
Zylonite  Co.,  122  N.  Y.  455  (1890). 
Cf.  Farquhar  v.  Canada,  etc.  Co.,  212 
Mass.  278  (1912).  "A  stockholder  of 
a  corporation  is  so  far  a  privy  to  a 
judgment  against  the  corporation  that 
he  cannot  attack  the  judgment  in 
any  collateral  proceeding."  National 
Foundry,  etc.  Works  v.  Oconto  Water 
Co.,  68  Fed.  Rep.  1006  (1895),  apply- 
ing the  rule  to  pledgees  also.  See  also 
§  209,  supra.     77  S.  E.  Rep.  508. 

'  Quoted  and  approved  in  Elyea  v. 
Lehigh,  etc.  Co.,  45  N.  Y.  App.  Div. 
231  (1899),  holding  that  an  unregis- 
tered pledgee  of  stock  in  a  New  Jersey 
corporation  cannot  prevent  the  stock- 
holders, by  unanimous  consent,  selling 
the  entire  assets  of  the  company  to 
a  competing  company  in  good  faith, 
the  business  being  unprofitable. 

Where  by  the  -wTitten  consent  of 
all  the  stockholders  of  a  New  Jersey 
corporation,  and  the  action  of  its 
board  of  directors,  a  corporation  sells 
all  its  property  for  stock  and  bonds  of 
a    new    company    to    be    distributed 


among  the  old  stockholders,  a  pledgee 
of  one  of  the  old  stockholders  cannot 
object,  especially  where  the  statute 
authorizes  the  pledgor  of  stock  to  repre- 
sent the  stock  and  no  notice  had  been 
given  of  the  pledge.  Elyea  v.  Lehigh, 
etc.  Co.,  169  N.  Y.  29  (1901) ;  Leathers 
V.  Janney,  41  La.  Ann.  1120  (1889). 
A  pledgee  of  common  stock  cannot 
object  to  the  merging  of  preferred 
stock  into  mortgage  bonds.  Have- 
mever  v.  Bordeaux  Co.,  8  Nat.  Corp. 
Rep.  127  (111.  C.  C,  1894).  In  Allis 
V.  Jones,  45  Fed.  Rep.  148  (1891),  it 
is  intimated  that  a  pledgee  has  not 
the  same  right  to  attack  an  ultra  vires 
corporate  debt  that  the  pledgor  has, 
especially  where  the  stock  is  worth- 
less. Cf.  §735,  infra.  In  MeCaleb 
V.  Goodwin,  114  Ala.  615  (1897),  one 
street  railway  purchased  all  the  stock 
of  another  street  railway  and  paid 
the  stockholders  therefor  by  issuing 
the  mortgage  bonds  of  the  latter 
street  railway  company.  The  former 
then  placed  the  stock  under  its  own 
mortgage,  and,  this  mortgage  having 
been  foreclosed,  the  purchaser  attacked 
the  validity  of  the  first-mentioned 
mortgage.  The  court  sustained  the 
mortgage,  however,  on  the  ground 
that  all  the  stock  had  voted  therefor. 
Where  the  pledgor  of  stock  votes  at 
a  corporate  meeting  in  favor  of  selling 
the  property  the  pledgee  is  bound, 
the  corporation  having  had  no  notice 
of  the  pledge.  City  of  Spokane  v. 
Amsterdamsch,  etc.,  22  Wash.  172 
(1900). 


1291 


§  468.]  PLEDGE   OF   STOCK.  [cH.  XXVI. 

with  another  company.  A  corporation  is  not  Hable  to  an  unrecorded 
pledgee  of  its  stock,  even  though  a  consoHdation  is  brought  about  and 
the  new  stock  issued  to  the  pledgor,  thereby  depriving  the  pledgee  of 
the  value  of  the  stock  held  in  pledge,  the  corporation  having  acted  in 
good  faith. ^  Although  the  pledgor  of  stock  votes  the  stock  in  favor  of 
a  lease  of  the  corporate  property  on  such  terms  that  no  dividends  on 
the  stock  are  possible,  yet,  in  the  absence  of  fraud,  the  pledgee  is  bound.^ 
A  pledgor  of  bonds  may  take  part  in  the  purchase  at  the  reorganiza- 
tion without  any  obligations  towards  the  pledgee  as  to  such  purchase.^ 
After  default  by  the  pledgor  the  pledgee  may  put  the  bonds  which  he 
holds  as  collateral  under  a  reorganization  plan,  and  may  agree  that 
part  of  the  expense  of  foreclosure  shall  be  a  lien  on  the  bonds,  but  he 
cannot  do  so  where  he  is  to  receive  new  securities  instead  of  cash  on  the 
reorganization.'*  The  pledgee  of  securities,  who  turns  them  in  to  a  re- 
organization and  takes  new  securities  without  the  consent  of  the  pledgor, 
is  liable  to  the  pledgor,  but  the  pledgor  can  recover  only  the  actual 
value  of  the  securities  so  turned  in.  The  pledgee  is  not  bound  to  aid 
the  pledgor  in  using  the  pledge  in  a  reorganization,  nor  is  the  pledgee 
bound  to  delay  the  reorganization  on  account  of  any  demand  of  the 
pledgor.^  A  pledgee  of  bonds  secured  by  a  mortgage  which  is  fore- 
closed may  accept  the  amount  going  to  such  bonds  and  sue  the  pledgor 
for  the  balance,^  but  where  a  corporation  has  issued  bonds  and  passes 
into  bankruptcy,  a  pledgee  of  its  bonds  is  liable  to  the  pledgor  if  the 
former  fails  to  present  the  bonds  in  the  bankruptcy  proceedings,  and 
turns  the  bonds  in  at  eight  per  cent,  of  their  face  value,  when  the  pledgee 
should  have  realized  much  more.^  Even  though  the  pledgee  of  bonds 
purchases  the  property  at  foreclosure  sale  and  turns  in  the  bonds  in 
payment,  he  still  holds  the  property  as  collateral  and  not  as  absolute 
owner. ^  Where  a  pledgee's  claim  has  really  been  paid  and  yet  he  re- 
tains the  stock,  and  by  reason  thereof  the  pledgor  is  unable  to  enter  a 
reorganization,  the  pledgor  can  recover  for  the  actual  damages  sustained, 

1  Cleveland  City  Ry.  v.  First  Nat.  '  Brown   v.   Anderson,    104   Ga.   .30 
Bank,  68  Ohio  St.  582  (190.3).  (1898). 

2  Gibson  v.  Richmond,  etc.  R.  R.,  37  *  Field  v.  Sibley,  74  N.  Y.  App.  Div. 
Fed.  Rep.  743   (1889).     Even  though  81  (1902) ;  aff'd,  174  N.  Y.  514. 

a   steel    company   owns    stock   in    an  ^  Griggs  v.  Day,  136  N.  Y.  152,  162 

iron    company    and    pledges    it,    and  (1892).    See  156  N.Y.  App.  Div.  277. 

several    years    thereafter    causes    the  ^  Warburton  v.  Trust  Co.  of  Amer- 

iron  company  to  sell  all  its  property  to  ica,  182  Fed.  Rep.  769  (1910). 

such  steel  company,  the  pledgee  can-  '  Warburton  v.  Trust  Co.  of  Amer- 

not  complain,   even  though   the  steel  ica,  169  Fed.  Rep.  974   (1909) ;  afif'd, 

company  becomes  insolvent,  the  stock  182  Fed.  Rep.  769. 

for  the  entire  period  having  stood  in  ^  Greenhall  v.  Carnegie  Trust  Co., 

the   name  of   the   pledgor.     Cohen   v.  180  Fed.  Rep.  812  (1910). 

Big  Stone,  etc.  Co.,  Ill  Va.  468  (1910). 

1292 


CH.  XXVI.]  PLEDGE    OF   STOCK.  [§  468. 

but  such  value  must  be  shown  by  him ;  otherwise  it  will  be  inferred  that 
it  had  little  or  no  value.^  Even  though  a  pledgee  of  bonds  accepts 
common  stock  in  a  reorganized  company  in  place  of  the  bonds,  yet,  if 
both  the  bonds  and  the  common  stock  are  worthless,  the  pledgor  is  not 
released  from  his  debt,  and  even  if  the  common  stock  had  value  it  would 
be  merely  a  substituted  collateral."  Where  the  maker  of  a  note  secured 
by  bonds  as  collateral  causes  the  pledgee  to  exchange  the  bonds  for 
bonds  in  a  reorganized  company,  it  is  for  the  jury  to  say  whether  that 
amounts  to  an  acknowledgment  of  the  debt  postponing  the  statute  of 
limitations.^  A  pledgor  of  stock  may  enforce  a  claim  against  the  cor- 
poration, even  though  thereby  the  corporation  will  become  insolvent 
and  the  stock  be  rendered  worthless.  Although  the  pledgor  has  made 
an  assignment  for  the  benefit  of  creditors,  yet  his  assignee  cannot  be  en- 
joined by  the  pledgee  from  enforcing  the  claim  against  the  corporation.^ 
The  fact  that  the  pledgee,  a  corporation,  gave  through  its  president 
incorrect  information  to  the  pledgor,  whereby  the  pledgor  did  not  sell 
the  stock  in  pledge  and  liquidate  the  debt,  is  no  defense  to  an  action 
on  the  debt.^  A  person  loaning  money  to  an  individual  and  taking 
bank  stock  as  collateral  security  cannot  hold  the  bank  liable,  in  an  ac- 
tion for  damages  for  deceit,  on  the  ground  that  its  published  statements 
were  false  and  fraudulent  and  that  he  relied  on  these  statements.^ 
Where  stock  has  been  pledged,  and  the  pledgor  makes  a  contract  with 
a  third  person,  by  which  the  latter  agrees  to  pay  the  debt  and  take  the 
stock,  the  pledgor  may  enforce  this  contract  without  tendering  the 
stock. ^  Where  a  bank  states  to  a  pledgee  that  it  holds  certain  negotiable 
bonds  in  pledge  to  secure  the  debt,  and  the  bonds  are  produced,  shown, 
and  handed  back  to  the  bank,  the  latter  cannot  afterwards  claim  that 

1  Griggs  V.  Day,  158  N.  Y.  1  (1899).  party  to  purchase  the  stock  held  in 
This  case  arose  out  of  a  controversy  pledge  may  be  held  liable  in  damages 
between  a  contractor  in  the  construe-  if  such  statements  were  false.  Hind- 
tion  of  a  railroad  and  the  chief  stock-  man  v.  First  Nat.  Bank,  etc.,  98  Fed. 
holder  and  promoter,  who  advanced  Rep.  562  (1899).  Where  a  purchaser 
money  on  the  security  of  stock  and  of  gpods  misrepresents  the  value  of 
corporate  notes.  stock  which  is  to  be  given  as  a  pledge 

2  In  re  Lorillard,  107  Fed.  Rep.  677  for  the  purchase  price  and  refers  the 
(1901).  vendor  to  a  bank,  which  bank  repeats 

3  Becker  y.  Oliver,  111  Fed.  Rep.  672  the  misrepresentations,  the  pledgee 
(1901).  may  sue  the  bank  for  damages,  and 

*  Janney  v.  Merchants',  etc.  Bank,  may  show  that  the  bank  at  that  time 

98  Ala.  515  (1893).  held    stock   in    pledge   and    that    the 

5  Investment  Co.  v.  Eldridge,  175  goods  so  purchased  were  substituted 
Pa.  St.  287  (1896) ;  aff'g,  2  Pa.  Sup.  for  the  stock  of  the  bank  upon  the 
394.  transaction   being   closed.     Am.    Nat. 

6  Merchants'  Nat.  Bank  v.  Arm-  Bank,  etc.  v.  Hammond,  25  Colo.  367 
strong,  65  Fed.  Rep.  932  (1895).     But  (1898). 

see  §§  352-355,  supra.     A  bank  which  ^  Gilbert   i'.   Adams,   99   Iowa,   519 

as  pledgee  causes  by  its  statements  a     (1896). 

1293 


§  468.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


it  held  these  bonds  subject  to  a  prior  pledge  by  the  same  pledgor  to 
another  person.^  Pledgees  of  a  majority  of  the  corporate  stock,  who  by 
voting  their  stock  cause  men  of  their  choice  to  be  elected  directors, 
are  not  liable  for  the  misconduct  of  such  directors,-  Nevertheless 
"  the  bailee  owes  a  direct  duty  to  the  pledgor  to  be  reasonably  careful 
that  no  harm  come,  through  his  custody,  to  the  subject-matter  of  the 
pledge."  ^  Hence,  where  one  sugar  refining  company  loans  money  to 
the  majority  stockholder  of  another  sugar  refining  company  and  votes 
the  stock  and  elects  directors  who  cause  the  latter  company  to  stop 
business,  the  latter  company  may  hold  the  former  and  also  its  own  guilty 
directors,  liable  in  treble  damages,  under  the  anti-trust  act  of  Congress 
of  July  2,  1890.^ 


1  Gibson  v.  Lenhart,  111  Pa.  St.  624 
(1886).  Where  a  corporation  guaran- 
tees certain  bonds,  and  a  person  hold- 
ing stock  of  the  company  indorses  on 
the  guaranty  that  he  holds  stock  to 
secure  the  performance  of  the  guar- 
anty, he  cannot  afterwards  claim  that 
he  has  a  prior  lien  as  pledgee  of  the 
stock.  Mercantile  Trust  Co.  v.  Atlan- 
tic Trust  Co.,  86  Hun,  213  (189.5).  For 
subsequent  phases  of  this  litigation, 
see  Bracken  v.  Atlantic  Trust  Co.,  167 
N.  Y.  510  (1901). 

2  Higgins  V.  Lansingh,  154  111.  301 
(1895).  Where  stock  is  pledged  and 
the  pledgee  is  in  control  of  the  com- 
pany, and  instead  of  declaring  divi- 
dends he  honestly  and  intelligently 
applies  the  profits  to  improvements, 
the  pledgor  cannot  hold  him  liable  for 
not  declaring  dividends,  and  for  not 
thus  decreasing  the  debt  for  which  the 
stock  was  given  in  pledge.  Zeller- 
bach  V.  Allenberg,  99  Cal.  57  (1893). 
A  pledgor  of  stock  cannot,  in  a  suit 
brought  by  his  creditor  to  reach  the 
equity  in  a  pledge,  raise  an  issue  as 
to  the  mismanagement  of  the  corpora- 
tion. McMullen  v.  Ritchie,  57  Fed. 
Rep.  104  (1893).  It  is  no  defense  to 
a  note  secured  by  stock  that  the 
pledgee,  by  means  of  the  stock,  con- 
trolled the  company  and  managed  it 
so  badly  that  the  stock  became  worth- 
less. Dunham  v.  Boyd,  64  Conn.  397 
(1894).  In  the  case  Dudley  v.  Armenia 
Ins.  Co.,  115  N.  Y.  App.  Div.  380 
(1906),  it  was  held  that  a  stockholder, 
who  with  other  stockholders  pledged 
his  stock  to  secure  a  debt  from  the 


corporation,  and  whose  stock  was  sold 
out  for  the  non-payment  of  the  debt, 
cannot  hold  the  pledgee  liable  in  dam- 
ages, even  though  he  charges  that  the 
latter  wrecked  the  corporation  and 
thereby  rendered  the  stock  valueless, 
the  decision  being  based  on  the  theory 
that  the  depreciation  in  the  value  of 
the  stock  was  due  to  a  wrong  perpe- 
trated upon  the  corporation,  for  which 
the  remedy  in  the  first  instance  was 
with  the  corporation. 

3  Ritchie  v.  McMullen,  79  Fed.  Rep. 
522,  533  (1897).  In  this  case  the 
court  held  that  if  a  pledgee,  being  in 
control  of  the  corporation,  refuses  to 
develop  the  property  and  to  accept 
subsidies  which  are  offered,  and  to 
accept  profits  under  a  contract  which 
are  possible,  and  to  sell  the  property 
at  a  large  price,  all  for  the  purpose 
of  depreciating  the  pledged  stock  and 
thus  obtain  the  stock  himself,  the 
pledgor  may  call  the  pledgee  to  account 
for  the  loss  suffered  from  this  con- 
spiracy and  wrong.  The  court  held 
also  that  although  the  damage  was 
directly  to  the  corporation,  yet  that  in- 
directly it  was  a  damage  to  the  pledgor, 
and  that  hence  the  pledgor  could 
sue  in  his  own  behalf  alone,  and  that 
the  measure  of  damage  is  the  differ- 
ence between  the  market  value  at  the 
time  of  suit  and  what  it  would  have 
been  if  the  conspiracy  had  not  been 
set  on  foot.  The  court  held,  however, 
in  the  ease  before  it,  that  the  proofs 
did  not  sustain  the  allegations. 

*  Pennsvlvania,  etc.  Co.  v.  American, 
etc.  Co.,   1G6  Fed.   Rep.  254   (1908). 


1294 


CH.  XXVI.] 


PLEDGE   OF   STOCK. 


[§  468. 


The  pledgor  may  by  an  instrument  in  writing  assign  his  equity  of 
redemption  to  one  of  his  creditors.  Such  assignment  need  not  be  re- 
corded as  a  chattel  mortgage,  and  is  not  fraudulent  even  though  it  be 
kept  secret  from  the  other  creditors  of  the  pledgor.^  A  pledge  of  the 
equity  of  redemption  may  be  made  informally  and  may  be  as  security 
for  bail.-  In  a  suit  between  two  claimants  to  stock  which  has  been 
pledged,  the  pledgee  is  not  a  necessary  party .^  A  pledgor  may  release 
his  equity  to  the  pledgee,  yet  the  courts  view  such  agreements  with  dis- 
trust and  disfavor,  and  if  advantage  was  taken  of  the  pledgor  or  the 
consideration  grossly  inadequate,  the  release  will  be  disregarded  and 
the  pledgor  allowed  to  redeem.^  A  judgment  creditor  of  the  pledgor 
may  file  a  bill  to  reach  the  equity  of  redemption  in  a  pledge  of  stock,'^  or 


Even  though  a  holder  of  a  majority  of 
the  stock  of  a  sugar  refining  company 
which  has  not  commenced  business 
pledges  his  stock  and  agrees  that  the 
refinery  wall  not  be  operated  until  the 
loan  is  paid,  and  the  result  is  that  the 
pledgee,  a  competing  sugar  refining 
company,  prevents  the  operation  of 
the  first-named  company,  nevertheless 
the  receiver  of  the  first-named  company 
cannot  hold  the  latter  company  liable 
for  profits  if  there  were  no  profits. 
Earle  v.  American  Sugar,  etc.  Co., 
74  N.  J.  Eq.  751  (1908).  Even  though 
a  bank  owns  a  majority  of  the  stock 
of  a  company  and  takes  other  stock 
in  pledge  it  may  enforce  its  debt 
against  the  pledgor,  although  the 
directors  by  changing  the  business 
ruin  the  company,  such  change  having 
been  made  prior  to  the  pledge.  First 
Nat.  Bank  v.  Ferguson,  224  Pa.  St. 
397  (1909). 

1  National  H.  R.  Bank  v.  Chaskin, 
28  N.  y.  App.  Div.  311  (1898).  An 
assignment  by  a  pledgor  of  stock  of 
his  interest  in  the  equity  of  redemp- 
tion may  be  assigned  by  the  assignee 
by  merely  -wTiting  his  name  on  the 
back  of  the  same,  the  entire  trans- 
action being  in  connection  with  the 
discounting  of  a  note.  Twelfth  Ward 
Bank  v.  Samuels,  71  N.  Y.  App.  Div. 
168  (1902) ;  aff'd,  176  N.  Y.  593.  A 
pledgor  may  pledge  his  equity  of 
redemption  and  he  may  do  this  by  a 
separate  instrument  without  deliver- 
ing the  certificate  of  stock,  that  being 
in  the  possession  of  the  first  pledgee. 
First  Nat.   Bank,   etc.   v.  Bacon,   113 


N.  Y.  App.  Div.  612  (1906) ;  aflf'd,  189 
N.  Y.  533.  The  purchaser  of  the 
equity  of  redemption  of  stock  which 
has  been  pledged  is  the  owner  thereof 
and  mav  be  taxed  thereon.  Central, 
etc.  Co.\'.  Wright,  124  Ga.  630  (1906). 
The  contract  of  the  pledgor  of  stock  to 
sell  the  stock  to  an  outside  party  is 
legal,  where  the  pledgor  obtains  the 
stock  from  the  pledgee  and  tenders 
it  to  the  vendee.  Hershey  v.  Welch, 
96  Minn.  145  (1905).  A  pledgee  of 
the  equity  of  redemption  need  not 
consent  to  his  rights  being  passed  upon 
by  a  referee  in  bankruptcy  of  the 
pledgor.  Re  Bacon,  196  Fed.  Rep. 
986  (1912).  Where  two  promoters 
pledge  their  stock  to  secure  a  corpo- 
rate loan  and  one  of  them  pays  the 
loan  and  takes  the  stock,  the  other 
promoter  cannot  transfer  his  interest 
except  subject  to  contribution  towards 
the  loan.  Soderberg  v.  McRae,  126 
Pac.  Rep.  538  (Wash.  1912). 

-  Leary,  etc.  v.  United  States,  224 
U.  S.  567  (1912)  ;  rev'g  184  Fed.  Rep. 
433. 

'  Edwards  v.  Mercantile,  etc.  Co., 
124  Fed.  Rep.  381  (1903). 

■*  Collins  V.  Dennj%  etc.  Co.,  41 
Wash.  136  (1905),  a  case  where  $27,800 
worth  of  stock  was  pledged  for  a 
$3,000  debt.  In  this  case  by  the  orig- 
inal agreement  the  pledgee  was  to 
have  the  stock  if  the  debt  was  not 
paid  within  four  months.  See  also 
§  479,  infra. 

^  Ritchie  v.  McMuUen,  79  Fed.  Rep. 
522  (1897).  Where  a  judgment  cred- 
itor of  a  person  files  a  bill  in  equity 


1295 


468. 


PLEDGE   OF   STOCK. 


[cH. 


may  levy  an  attachment  or  execution  upon  it.^  In  a  suit  by  the  pledgee 
to  have  a  Judicial  sale  of  the  stock,  an  assignee  of  the  pledgor's  interest 
is  a  necessary  party,  where  the  pledgee  knows  of  such  assignment,  and 
the  pledge  was  made  merely  by  delivery  of  the  certificate  without  any 
transfer  on  the  back  thereof.^    Where  the  pledgee  is  notified  by  a  person 


to  reach  the  equity  of  that  person  in 
a  pledge  of  stock  which  he  has  made 
to  other  parties,  and  the  pledgees  are 
joined  as  parties  defendant,  the  ac- 
counts and  claims  between  the  pledgor 
and  pledgees  may  be  adjusted  in 
the  same  suit.  Ritchie  v,  McMuUen, 
79  Fed.  Rep.  522  (1897).  The  equity 
of  redemption  of  the  pledgor  may  be 
reached  by  garnishee  process,  and  the 
property  sold  by  a  receiver  to  pay  the 
pledgee,  and  the  balance  to  the  other 
creditor,  where  the  pledgee  consents 
and  his  debt  is  past  due.  Kimbrough 
V.  Orr  Shoe  Co.,  98  Ga.  537  (1896). 
An  attaching  creditor  cannot  complain 
that  the  pledgee,  who  has  prior  rights, 
settled  with  the  pledgor  after  the 
attachment  and  then  sold  the  stock. 
The  creditor  must  offer  to  redeem  or 
have  a  sale  subject  to  the  pledge. 
McClintock  v.  Central  Bank,  etc.,  120 
Mo.  127  (1894).  Where  a  worthless 
equity  of  redemption  in  land  is  turned 
in  for  stock,  and  then  the  stock  is 
pledged  with  the  mortgagee  of  the 
land,  and  then  "scrip"  is  taken  from 
the  corporation  by  the  parties  pledg- 
ing the  stock,  this  scrip  reciting  that 
it  represents  the  equity  of  the  right 
to  the  certificates  of  stock  after  the 
mortgage  is  paid  off,  such  scrip  is 
valid  and  may  be  sold,  it  having  been 
treated  as  valid  for  twenty  years,  even 
though  it  was  issued  without  consid- 
eration. Higgins  V.  Lansingh,  154 
111.  301  (1895).  In  Michigan  garnishee 
process  lies  against  the  pledgee  of 
stock  in  behalf  of  a  creditor  of  the 
pledgor,  and  enables  such  creditor  to 
reach  the  equity  in  the  stock.  Old 
Second  Nat.  Bank  v.  "Williams,  112 
Mich.  564  (1897).  Where  stock  is 
placed  in  escrow,  to  become  the  prop- 
erty of  a  person  in  ease  he  is  obliged 
to  pay  a  certain  obligation,  and  he  is 
so  obliged  to  pay,  the  creditors  of 
the  party  placing  the  stock  in  escrow 
cannot   reach    the   stock   nor   redeem 


it.     Pabst,  etc.  Co.  v.  Montana,  etc. 
Co.,  19  Mont.  294  (1897). 

I  See  §  484,  infra.  The  equity  of 
redemption  which  a  pledgor  has  in 
stocks  which  he  has  pledged  to  a  na- 
tional bank  may  be  reached  by  gar- 
nishment served  on  the  bank  after 
judgment  against  the  debtor.  The 
national  bank  act  does  not  forbid  such 
process.  Commonwealth  v.  Chestnut, 
etc.  Bank,  189  Pa.  St.  606  (1899). 
Garnishee  proceedings  against  a  stock- 
holder's interest  in  stock  which  has 
been  pooled  and  has  also  been  pledged 
do  not  affect  such  pool  or  pledge, 
but  are  made  subject  to  them  if  they 
are  legal.  Hardin  v.  White,  etc.  Co., 
26  Wash.  583  (1901).  Cf.  §  491,  infra. 
The  interest  of  the  pledgor  of  stock 
may  be  levied  upon  under  execution, 
and  thereupon  the  officer  will  sell  the 
pledge  free  from  claims,  and  the  court 
will  direct  the  payment  of  the  pledgee 
and  the  balance  to  the  creditors,  un- 
der the  Georgia  statute.  People's  Nat. 
Bank  v.  Wheedon,  115  Ga.  782  (1902). 
Even  though  the  pledgor  by  a  separate 
instrument  assigns  to  a  third  party 
his  interest  in  the  stock,  and  the  pur- 
chaser files  such  assignment  with  the 
corporation  and  asks  for  a  transfer, 
yet  a  subsequent  attachment  has  pre- 
cedence, under  the  Colorado  statute, 
where  the  debt  of  the  pledgee  was 
paid  prior  to  the  service  of  the  exe- 
cution and  the  purchaser  of  the  equity 
of  redemption  did  not  obtain  or  pre- 
sent the  certificate  of  stock  for  trans- 
fer. Isbell  V.  Graybill,  19  Colo.  App. 
508  (1904). 

-  Brown  v.  Hotel  Assoc,  63  Neb.  181 
(1901).  Where  a  stockholder  has 
made  two  pledges  to  the  same  party, 
and  has  assigned  the  equity  of  redemp- 
tion in  one  of  them,  the  pledgee  may 
foreclose  in  equity  and  make  both 
parties  defendants.  Beyer  v.  Bullock, 
56  Wash.  110  (1909). 


1296 


CH.   XXVI.] 


PLEDGE   OF   STOCK. 


[§  468. 


that  the  latter  is  entitled  to  the  collateral,  subject  to  the  pledge,  and  the 
pledgee  upon  payment  of  the  debt  returns  the  collateral  to  the  pledgor, 
the  pledgee  is  liable  to  such  third  person.^  Where  stock  is  tied  up  by 
attachment  which  is  afterwards  vacated,  and  in  the  meantime  the  stock 
depreciates  in  value,  the  loss  can  be  recovered  from  the  attaching  party 
if  the  stocks  could  and  would  have  been  sold  before  the  depreciation, 
if  they  had  not  been  so  tied  up.  But  if  such  stocks  are  in  pledge,  and 
the  pledgor  does  not  pay  the  loan  while  the  stocks  are  so  tied  up,  no  dam- 
ages can  be  recovered.- 

Where  the  pledgee  allows  the  pledgor  to  take  the  pledge  and  pledge 
it  for  another  loan,  and  then  the  second  pledgee  allows  the  same  thing 
to  be  done  for  a  third  loan,  and  the  third  pledgee  sells  out  the  pledge, 
and  the  second  pledgee  buys,  the  first  pledgee  may  redeem  from  the 
second  by  paying  both  loans.^  A  pledgee  may  deduct  from  the  proceeds 
of  a  sale  reasonable  expenses  in  keeping  and  caring  for  the  pledge,  pay- 
ing taxes  and  liens,  preserving  title,  or  rendering  it  available.*  Costs  in- 
curred by  the  pledgee  in  obtaining  judgment  against  a  guarantor  of  the 


1  Hughes  V.  Settle,  36  S.  W.  Rep. 
577  (Tenn.  1895).  After  the  pledgor 
has  sold  his  interest  in  the  pledge 
and  the  purchaser  has  notified  the 
pledgee,  the  pledgee  cannot  then  pur- 
chase such  interest  from  the  original 
pledgor.  McKee  v.  Bernheim,  130 
N.  Y.  App.  Div.  424  (1909);  aff'd, 
198  N.  Y.  575.  Where  a  pledgee  of 
stock  knows  to  whom  it  belongs  and 
delivers  it  to  another,  the  pledgee  is 
liable  for  conversion.  Southern  Irr. 
Co.  V.  Wharton  Nat.  Bank,  144  S.  W. 
Rep.  701  (Tex.  1912).  While  a  bona 
fide  pledgee  of  a  certificate  of  stock  is 
protected,  yet  an  assignment  of  pledge 
by  the  pledgor  of  the  equity  or  redemp- 
tion to  still  another  party,  who  does 
not  get  the  certificate  of  stock,  does 
not  protect  the  latter  unless  a  custom 
to  that  effect  is  proven.  Baker  v.  Davie, 
211  Mass.  429  (1912).  In  a  suit  in 
equity  by  the  pledgor  to  redeem,  the 
pledgee  cannot  set  up  that  the  pledgor 
has  sold  his  interest  in  the  pledge 
to  another  party,  and  that  another 
suit  is  pending  brought  by  that 
other  party  for  specific  performance, 
and  that  in  such  suit  the  pledgee  is 
a  party  defendant,  no  proof  being 
given  of  such  sale.  Houston,  etc. 
R.  R.  V.  Conner,  29  Tex.  Civ.  App. 
259  (1902). 

2  Fourth  Nat.  Bank,  etc.  v.  Crescent, 


etc.  Co.,  52  S.  W.  Rep.  1021  (Tenn. 
1897). 

3  Manhattan  Trust  Co.  v.  Sioux  City, 
etc.  R.  R.,  65  Fed.  Rep.  559  (1895). 
See  s.  c,  171  U.  S.  474  (1898). 

*  Furness  v.  Union  Nat.  Bank,  147 
111.  570  (1893).  While  the  pledgee  is 
entitled  to  defend  his  title,  yet  in  his 
suit  to  foreclose  the  pledge  he  cannot 
be  allowed  disbursements  made  to 
counsel  in  defending  his  title  in  an- 
other suit  brought  by  the  real  owner 
of  the  stock,  the  pledge  being  in 
fraud  of  such  owner's  rights,  but  the 
pledgee  being  bona  fide.  Work  v. 
Tibbits,  87  Hun,  352  (1895).  A 
pledgee  of  bonds  is  bound  to  exercise 
due  diligence  in  collecting  the  same 
and  is  entitled  to  be  reimbursed  for 
his  expense,  including  attorney's  fees. 
Hanover,  etc.  Bank  v.  Brown,  53  S.  W. 
Rep.  206  (Tenn.  1899).  An  attor- 
ney who  represents  pledgors  of  stock 
in  winding  up  the  affairs  of  the  com- 
pany may  have  a  lien  on  the  fund 
realized  on  such  stock  prior  to  the 
lien  of  the  pledgee.  Shirk  v.  Sheri- 
dan, 10  Kan.  App.  463  (1900).  The 
expenses  of  a  receiver  appointed  at 
the  instance  of  a  pledgee  of  pig  iron 
may  be  prorated  between  the  insol- 
vent company  and  the  pledgee.  Ameri- 
can, etc.  Co.  V.  German,  126  Ala.  194 
(1900). 


(82) 


1297 


§  469.]  PLEDGE    OF   STOCK.  [cH.  XXVI. 

debt  are  a  lien  on  the  pledge.^  The  pledgee  cannot  set  up  the  title  of 
a  third  person  as  against  the  pledgor,  however  tortious  the  possession 
of  the  latter,  unless  the  owner  has  claimed  the  pledge  and  the  pledgee 
has  yielded  to  the  claim.-  A  pledgee  is  not  bound  to  prosecute  suits 
to  protect  the  pledge,  nor  to  sell,  and  a  provision  that  the  pledgee  may 
claim  repayment  of- any  sums  expended  in  the  prosecution  of  claims  is 
not  an  agreement  of  the  pledgee  to  prosecute.^  The  pledgee  need  not 
defend  against  a  replevin  suit  brought  by  a  person  who  claims  to  be 
owner  of  the  stock,  w^iere  the  pledgee's  attorney  advises  him  that 
there  is  no  defense.'*  A  pledge  for  any  "  note  or  claim  against  me  " 
applies  to  a  claim  against  the  pledgor's  firm.^  The  pledgee  cannot 
be  taxed  on  the  stock. ^  Questions  relative  to  the  right  of  pledgees 
to  maintain  suits  the  same  as  stockholders  are  considered  elsewhere.'' 

§  469.  Pledgee  need  not  retain  or  return  to  the  pledgor  the  iden- 
tical certificates  or  shares  of  stock  which  were  pledged,  but  must  have 
equal  quantity  always  on  hand.  —  One  share  of  stock  does  not  differ 
from  another  share  of  the  same  capital  stock.  Each  is  but  an  un- 
divided interest  in  the  corporate  rights,  privileges,  and  property.^  Ac- 
cordingly, it  is  held  that  a  pledgee  of  stock  need  not  retain  in  his  pos- 
session the  identical  shares  of  stock  which  were  pledged  to  him,  but 
that  the  rights  of  the  pledgor  are  fully  preserved  if  similar  stock  is  re- 
tained by  the  pledgee  until  the  termination  of  the  pledge.^    The  pledgee 

1  Sachs  V.  Ashby  &  Co.,  88  L.  T.  certificate,  as  the  term  implies,  but 
Rep.  393  (1903).  certifies   the   ownership   of   the   prop- 

2  Sedgwick  v.  Macy,  24  N.  Y.  App.  erty  and  rights  in  the  corporation  rep- 
Div.  1  (1897),  the  court  refusing  to  resented  by  the  number  of  shares 
follow  the  English  rule  on  this  sub-  named.  A  certificate  of  the  same 
ject.  number    of    shares,    although    printed 

^  Culver  V.  Wilkinson,  14.5  U.  S.  205  upon    different    paper    and   bearing  a 

(1892).     The  pledgee  may  claim  cred-  different  number,  represents  precisely 

its   for   defending   the   pledge   against  the  same  kind  and  value  of  property 

attacks     by     lawsuits,    and     in    some  as  does  another  certificate  for  a  like 

cases  for  adding  to  its  value  by  aid-  number  of  shares  of  stock  in  the  same 

ing  the  subject  of  the  pledge.     Rey-  corporation.     It  is  a  misconception  of 

nolds  V.  Cridge,  131  Pa.  St.  189  (1890).  the  nature  of  the  certificate  to  say  that 

^  Loomis  V.  Reimers,  119  Iowa,  169  a  return  of  a  different  certificate  or  the 

(1903).  right  to  substitute  one  certificate  for 

*  Hallowell  v.  Blackstone  Nat.  Bank,  another  is  a  material  change  in  the 
154  Mass.  3.59  (1891).  A  pledge  of  property  right  held  by  the  broker  for 
stock  to  secure  future  liabilities  does  the  customer."  Richardson  v.  Shaw, 
not  apply  to  past  liabilities.  Frank-  209  U.  S.  365  (1908) ;  aff'g  147  Fed. 
lin  Bank  v.  Harris,  77  Md.  423  (1893).  Rep.  659. 

«  See  §  564,  note,  infra.  ^  Caswell  v.  Putnam,  120  N.  Y.  153 

7  See  §  735,  infra.  (1890) ;     Skiff  v.   Stoddard,   63   Conn. 

*  Quoted  and  approved  in  Smith  v.  198  (1893) ;  Nourse  v.  Prime,  4  Johns. 
Becker,  129  Wis.  396  (1906).  "The  Ch.  490  (1820);  s.  c,  7  Johns.  Ch.  69 
certificate  of  shares  of  stock  is  not  (1823) ;  Horton  v.  Morgan,  19  N.  Y. 
the  property  itself,  it  is  but  the  evi-  170  (1859) ;  Barclay  v.  Culver,  30  Hun, 
dence  of  property  in  the  shares.     The  1  (1883) ;    Noyes  v.  Spaulding,  27  Vt. 

1298 


CH.  XXVI.] 


PLEDGE   OF   STOCK. 


469. 


must  have  on  hand  at  all  times  the  full  amount  of  the  stock  pledged, 
whether  the  debt  secured  is  due  or  not,  since  the  law  will  not  allow  the 
pledgee  to  speculate  or  deal  with  the  stock  of  another  as  though  it  were 
his  own.^    It  is  not  enough  that  he  can  at  once  procure  the  stock  from 


420  (1855) ;  Atjdns  t'.  Gamble,  42  Cal. 
86  (1871) ;  Pi-ice  v.  Grover,  40  Md.  102 
(1874) ;  Gilpin  v.  Howell,  5  Pa.  St.  41 
(1847) ;  Hardenbergh  v.  Bacon,  33 
Cal.  356  (1867) ;  Taylor  v.  Ketchum, 
35  How.  Pr.  289  (1867) ;  Thompson  v. 
Toland,  48  Cal.  99  (1874) ;  Le  Croy  v. 
Eastman,  10  Mod.  499  (1722) ;  Hard- 
ing V.  Field,  1  N.  Y.  App.  Div.  391 
(1896) ;  Douglas  v.  Carpenter,  17 
N.  Y.  App.  Div.  329  (1897) ;  Hubbell 
V.  Drexel,  11  Fed.  Rep.  115  (1882); 
Boylan  v.  Huguet,  8  Nev.  345  (1873). 
Cf.  Langton  v.  Waite,  L.  R.  6  Eq.  165 
(1868).  See  also  §§  457,  467,  supra. 
It  is  sufficient  if  the  pledgee  has  at 
all  times  in  his  possession  ready  for 
delivery  similar  certificates  for  the 
same  number  of  shares.  Bell  v. 
Bank  of  California,  153  Cal.  234 
(1908).  In  the  case  Dykers  v.  Allen, 
7  Hill,  497  (1844),  the  pledgee  at 
one  time  seemed  to  have  had  no 
stock  on  hand.  In  selling  the  pledgor's 
stock  on  notice  for  non-payment 
of  the  debt,  the  pledgee  need  not  sell 
the  identical  stock  pledged.  Berlin 
V.  Eddy,  33  Mo.  426  (1863).  Where 
a  depository  of  stock  to  vote  the  same 
for  five  years  agrees  to  return  the 
stock  at  the  end  of  that  time,  or  an 
equal  amount  of  stock,  together 
with  dividends,  any  future  assess- 
ments on  the  stock  to  be  paid  by  the 
person  making  the  deposit,  and,  if 
not  paid,  then  the  depository,  in  ease 
he  pays  the  assessment,  to  be  entitled 
to  repayment  from  the  dividends, 
with  interest,  and  the  assessments  are 
not  paid  and  the  stock  is  sold,  and  at 
the  end  of  five  years  the  depository 
tenders  back  other  stock  with  assess- 
ments paid,  the  depository  is  entitled 
to  repayment  of  such  assessments. 
Moore  v.  Bank  of  British  Columbia, 
106  Fed.  Rep.  574  (1901),  modified  in 
125  Fed.  Rep.  849.  Where  an  agent 
with  whom  stock  is  deposited  trans- 
ferred in  blank  causes  the  same  to 
be  transferred  to  himself  on  the  books 
of  the  company  and  then  hypothecates 


the  same,  and  afterwards  dies,  the 
real  owner  of  the  stock  may  claim 
other  stock  in  the  same  corporation 
which  such  agent  had  at  the  time  of 
his  death.  The  identity  of  the  certifi- 
cates is  immaterial.  Marshall  v.  Mar- 
shall, 11  Colo.  App.  505  (1898).  In 
Mayo  V.  Knowlton,  134  N.  Y.  250 
(1892),  the  court  said:  "The  stock 
had  no  ear-mark ;  one  share  wa3  the 
same  as  another,  and  could  not  be 
identified  or  distinguished  therefrom." 
Where  a  customer  knows  that  the 
broker  is  insolvent,  and  has  not  kept 
on  hand  the  stock  which  the  customer 
had  deposited  on  margin,  and  the 
broker  purchases  stock  in  order  to 
satisfy  the  demand  of  the  customer, 
the  transaction  is  a  preference,  in 
violation  of  the  statutes  of  Massachu- 
setts. Weston  V.  Jordan,  168  Mass. 
401  (1897).  In  AUen  v.  Dubois,  117 
Mich.  115  (1898),  it  is  held  that  a 
pledgee  is  bound  to  return  to  the 
pledgor  the  identical  shares  which 
are  pledged,  and  is  liable  for  conver- 
sion if  he  has  sold  them,  and  that  it 
is  immaterial  that  he  had  on  hand 
at  all  times  and  tendered  back  an 
equal  number  of  shares.  So  also  in 
the  case  Lamb,  etc.  Co.  v.  Lamb,  119 
Mich.  568  (1899),  where  a  party 
claiming  to  be  the  real  owner  of  stock 
filed  a  biU  to  compel  the  holder  of 
such  stock  to  deliver  up  the  same, 
but  it  appeared  that  the  defendant 
had  already  disposed  of  the  stock 
before  the  commencement  of  the  suit, 
the  court  refused  to  grant  relief,  even 
though  it  further  appeared  that  the 
defendant  had  other  stock  in  the  same 
corporation  equal  in  amount  to  the 
stock  in  issue. 

1  Ex  parte  Dennison,  3  Ves.  Jr.  552 
(1797) ;  Taussig  v.  Hart,  58  N.  Y.  425 
(1874) ;  Thompson  v.  Toland,  48  Cal. 
99  (1874);  Hubbell  v.  Drexel,  11  Fed. 
Rep.  115  (1882).  The  pledgor  may 
waive  this  restriction  by  express 
agreement.  Ogden  v.  Lathrop,  65 
N.  Y.  158  (1875). 


1299 


§§  470,  471.]  PLEDGE   OF   STOCK.  [cH.  XXVI. 

one  to  whom  it  is  loaned/  or  that  he  had  sufficient  on  hand  for  the  plain- 
tiff pledgor,  but  not  enough  for  all  the  pledgors  whom  he  had  at  any 
particular  time.^  The  law  requires  him  to  set  aside  as  much  stock  as 
has  been  pledged  to  him.  A  "  loan  "  of  stock  returnable  on  demand 
transfers  the  title  in  one  sense,  inasmuch  as  the  borrower  may  return 
similar  stock  of  the  same  amount,  in  place  of  returning  the  identical 
stock,  which  was  loaned  to  him.^ 

§  470.  Pledgee's  liability  on  subscription  and  statutory  liability 
on  stock}  —  A  pledgee  who  has  obtained  registry  on  the  corporate 
books  appears  to  third  parties  as  a  full  stockholder.  Accordingly, 
in  case  the  corporation  becomes  insolvent,  the  registered  pledgee  is 
held  liable  on  his  stock,  as  though  he  were  an  absolute  stockholder. 
In  order  to  avoid  this  danger,  the  law  allows  the  pledgee  to  have  the 
pledged  stock  registered  on  the  corporate  books  in  the  name  of  a  nominee 
of  the  pledgee.^  Wliere  such  a  registry  is  obtained,  the  pledgee  has  the 
advantage  of  the  control  of  the  stock,  and  at  the  same  time  escapes  the 
danger  of  liability  as  a  stockholder. 

§  471.  Pledgee  has  no  right  to  sell  or  repledge  the  stock  even  tem- 
porarily, except  upon  notice,  unless  the  debt  is  assigned  with  the 
stock.  —  "  Equity  will  not  tolerate  a  separation  of  the  pledge  from 
the  debt,  and  they  must  stand  together,  and  will  force  upon  a  wrong- 
doer the  character  of  a  trustee,  and  thus  compel  him  to  do  justice." 
Such  is  the  language  of  the  New  York  court  of  appeals.^  The  pledgee 
of  stock  cannot  legally  part  with  the  possession  of  the  stock  by  a  sale 
or  repledge  of  it,  except  as  he  transfers  the  debt  which  the  stock  secures. 
If  he  does  so  he  is  guilty  of  a  conversion,^  and  in  New  York  state  may  be 

1  Allen  V.  Dykers,  3  Hill,  593  violation  of  the  express  contract, 
(1842) ;  aff'd,  Dykers  v.  Allen,  7  Hill,  repledges  or  sells  such  stock  without 
497  (1844) ;  Ex  parte  Dennison,  3  Ves.  authority  from  the  customer,  he  is 
Jr.  552  (1797).  guilty    of    a    conversion,    for    which 

2  Fay  V.  Grav,  124  Mass.  500  (1878).  trover  will  lie.     Chew  v.  Louchheim,  80 

3  Fosdiek  y.  Greene,  27  Ohio  St.  484  Fed.  Rep.  500  (1897).  The  case  Ex 
(1875) ;  Dykers  v.  Allen,  7  Hill,  497  parte  Sargent,  L.  R.  17  Eq.  273  (1874), 
(1844).     See  also  §  445,  supra.  contained  a  dictum  giving  a  contrary 

*  See  §  247,  supra.  rule ;    but  France  v.  Clark,  L.   R.  22 

*Newry,  etc.  Ry.  v.  Moss,  14  Beav.  Ch.  D.  830   (1883),  disapproves  such 

64  (1851).     See  §  466,  supra.  dictum  and  says:    "As  a  general  rule 

6  Bennett  v.  Austin,  81  N.  Y.  308,  the  pawnee  of  chattels  has  no  right 

322  (1880).     Cf.  Easton  v.  Hodges,  18  to  sell  them,  unless  a  time  was  orig- 

Fed.  Rep.  677  (1883).  inally  fixed  for  theu-  redemption,  and 

^  Oregon,  etc.  Co.  v.  Hilmers,  20  Fed.  that    time   has   expired,  or   unless   he 

Rep.  717  (1884) ;  Gass  v.  Hampton,  16  has  made  a  demand  upon  the  pawnor 

Nev.  185  (1881).     See  also  §452,  supra,  for  the  payment  of  what  is  due  him." 

Brokers  holding  a  certificate  of  stock  Fay  v.   Gray,    124  Mass.   500   (1878), 

as    security    for    the    balance    of    the  holds   that   the   pledgee  has   no  right 

purchase  price  due  from  the  customer  to  sell,  lend,  or  repledge  the  stock.     In 

are    pledgees,    and    if    the    broker,    in  the  notes  in  21  Am.  Law  Reg.  (N.  S.) 

1300 


CH.   XXVI.] 


PLEDGE   OF   STOCK. 


[§  471. 


arrested.^  In  Pennsylvania  it  is  a  penal  offense  for  the  pledgee  to  re- 
pledge  the  stock.-  Even  where,  apparently,  the  pledgor  would  not  be 
injured  by  the  pledgee's  separating  the  stock  from  the  debt  and  trans- 
ferring the  stock  pledged  as  collateral  security,  yet  the  law  rigidly  pro- 
tects the  interests  of  the  debtor  and  pledgor,  and  will  not  compel  him 
to  submit  to  the  danger  of  such  transfers  by  the  pledgee.  There  may,  of 
course,  be  an  express  agreement  or  understanding  to  the  contrary.^ 
Where  an  agent  has  wrongfully  pledged  his  principal's  stock,  and  the 
pledgee  then  wrongfully  converts  the  pledge,  the  principal  may  ratify  the 

party,  and  the  pledgor  dies,  the 
pledgee  may  pledge  the  securities  to 
bring  about  the  return  of  such  stock 
and  bonds.  M'Cartney  v.  Earle,  115 
Fed.  Rep.  462  (1902). 

1  Oregon,  etc.  Co.  i'.  Hilmers,  20  Fed. 
Rep.  717  (1884) ;  Barry  v.  Calder,  48 
Hun,  449  (1888) ;  aff'd.  111  N.  Y.  684. 
See  also  §  457,  supra,  and  §  576,  i7ifra. 
A  pledgee  of  bonds  may  maintain  an 
action  for  conversion  thereof  and  may 
cause  the  arrest  of  a  repledgee  who 
has  disposed  of  such  bonds.  Blanck 
I'.  Nelson,  39  N.  Y.  App.  Div.  21 
(1899). 

2  Act  of  May  25,  1878,  modified  as 
to  purchases  by  broker  on  margin  by 
act  of  June  10,  1881  (P.  L.  1881,  107). 
Section  1784  of  the  code  of  Alabama 
forbids  an  assignment  of  a  pledge 
without  an  assignment  of  the  debt  it 
secures.  Dexter  v.  McClellan,  116  Ala. 
37  (1897). 

3  Chouteau  v.  Allen,  70  Mo.  290 
(1879).  A  broker  has  no  right  to 
repledge  stock  held  by  him  for  a  cus- 
tomer to  secure  margins,  and,  even  if 
the  customer  authorizes  him  to  re- 
pledge,  this  authority  sustains  a 
repledge  only  to  the  extent  of  the 
amount  due  from  the  customer,  and 
the  broker  must  be  ready  at  all  times 
to  return  the  stock  to  the  customer 
upon-  the  latter  paying  the  debt.  In 
this  case  it  was  held  also  that  the 
repledgee,  under  the  usual  transfer  in 
blank  on  the  back  of  the  certificate,  is 
not  a  bona  fide  pledgee.  German  Sav. 
Bank  v.  Renshaw,  78  Md.  475  (1894). 
The  right  of  the  pledgee  to  repledge 
may  exist  by  force  of  a  custom  under- 
stood bv  both  parties.  Chamberlain 
V.  Greenleaf,  4  Abb.  N.  Cas.  178 
(1878). 


454-461,  a  contention  is  made  that  the 
pledgee  should  be  allowed  to  repledge, 
but  it  is  admitted  that  the  weight  of 
authority   holds    otherwise.     The  fol- 
lowing   cases    are    cited :     I^Ierchants' 
Nat.    Bank    v.    Trenholm,    12    Heisk. 
(Tenn.)  520  (1873) ;    First  Nat.  Bank 
V.  Brvce,  19  Am.  L.  Reg.  (N.  S.)  503 
(1880*^) ;    Work  v.  Bennett,  70  Pa.  St. 
484  (1872) ;   Wood  v.  Hayes,  81  Mass. 
375   (1860);    Thompson  v.  Patrick,  4 
Watts    (Pa.),    414    (1835);     and    see 
§  469,  supra.     In  Lawrence  v.  Maxwell, 
53  N.   Y.   19   (1863),  the  court  said: 
."Ordinarily,  and  in  the  absence  of  an 
agreement  or  assent  by  the  pledgor, 
the  pledgee  would  have  no  right   to 
use  the  thing  pledged,  and  a  use  of  it 
would  be  illegal.     But,  under  special 
circumstances     depending     somewhat 
upon  the  nature  of  the  pledge,  and  in 
all    cases    with    the    assent     of     the 
pledgor,  express  or  implied,  the  prop- 
erty   pledged    may    be    used    by    the 
pledgee   in   any  way  consistent   with 
the   general    ownership    and  the  ulti- 
mate rights  of  the  pledgor."     Where 
the  pledgee  has  an  option  to  purchase 
the  stock,  but,  instead  of  purchasing, 
he  repledges    it    illegally,  the  pledgor 
may   consider   this   as   an   exercise  of 
the    option.     Upham    r.    Barbour,    65 
Minn.  364  (1896).     Where  the  pledgee 
transfers  the  stock  to  another  person 
as  security   that  a  proposed  contract 
between  the  corporation  and  another 
corporation  will  be  ratified  at  a  stock- 
holders' meeting,  and  such  other  per- 
son  votes   said   stock   at   such   stock- 
holders' meeting,  the  pledgee  is  guilty 
of  conversion  of  the  stock.     Upham  v. 
Barbour,  65  Minn.  364  (1896).     Where 
a  pledge  is  made  to  secure  the  return 
of  certain  stock  and  bonds  to  a  third 


1301 


§471. 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


act  of  his  agent  and  sue  the  pledgee  for  conversion.     The  pledgee  may 
offset  the  amount  actually  due  him.^ 

A  pledgee  may  assign  the  principal  debt  to  a  third  person  and  "  give 
him  the  benefit  of  the  collateral  securities  to  secure  the  payment  of  the 
principal  debt.  So  long  as  nothing  is  done  to  deprive  the  pledgor  of 
the  right  to  redeem  on  payment  of  the  amount  due  on  the  principal 
debt,  the  pledgor  is  not  injured."  -  "  Nothing  is  better  settled  than  the 
right  of  a  transferee  of  a  pledge  to  hold  it  until  the  debt  for  which  it  was 
given  is  paid."^  Where  a  pledgee  repledges  both  the  note  and  the  stock, 
an  agreement  between  the  original  pledgor  and  the  second  pledgee, 
whereby  the  second  pledgee  sells  the  stock  and  takes  in  payment  notes 
of  the  purchaser,  is  illegal  as  regards  the  rights  of  the  first  pledgee.  As 
against  the  second  pledgee  the  first  pledgee  is  entitled  to  be  credited 
with  the  value  of  the  stock  at  the  time  of  the  sale."*  Except  in  New  York 
and  Massachusetts,  a  broker  has  no  right  to  pledge  his  customers'  se- 
curities unless  expressly  authorized  so  to  do.^    A  receipt  given  by  a 


1  Smith  V.  Savin,  141  N.  Y.  315 
(1894). 

2  Chapman  v.  Brooks,  31  N.  Y.  75, 
84  (1865) ;  Duncomb  v.  New  York,  etc. 
R.  R.,  84  N.  Y.  190,  208  (1881).  The 
pledgee  may  assign  his  interest  in  the 
pledge  and  transfer  the  pledge  to  such 
assignee.  Overton,  Liens,  §§  168,  172 ; 
Sehoul.  Bailm.  (2d  ed.),  §  218,  etc. 
Story,  Bailm.,  §  324,  says  the  pawnee 
"may  sell  or  assign  all  his  interest 
in  the  pawn,  or  he  may  convey  the 
same  interest  conditionally,  by  way  of 
pawn  to  another  person,  without  in 
either  ease  destroying  or  invalidating 
his  security."  See  also  Talty  v. 
Freedman's  Sav.  etc.  Co.,  93  U.  S.  321 
(1876) ;  2  Kent,  Com.  579 ;  Jarvis  v. 
Rogers,  13  Mass.  105  (1816),  15  Mass. 
389,  408  ;  Mores  v.  Conham,  Owen,  123 
(1610);  Ratcliffe  v.  Davis,  1  Bulst. 
29  (1611);  Anon.,  2  Salk.  522  (1694). 
In  Lewis  v.  Mott,  36  N.  Y.  394  (1867), 
where,  after  the  debt  was  due  and 
unpaid,  the  pledgee  turned  over  the 
debt  and  security  to  another  without 
a  foreclosure  or  sale  on  notice,  the 
court  held  that  the  latter  could  hold 
the  collateral  stock  until  the  pledgor 
tendered  the  amount  of  the  debt.  The 
latest  English  cases  hold  that,  al- 
though the  repledge  may  be  wrong, 
yet  that  the  pledgor  cannot  reclaim 
the  stock  from  the  repledgee  until  the 
former  pays   the  debt  for  which   the 

i: 


pledge  was  made.  Donald  v.  Suckling, 
L.  R.  1  Q.  B.  585  (1866) ;  Halliday  v. 
Holgate,  L.  R.  3  Exch.  299  (1868). 
Where  a  broker,  holding  stock  in 
pledge  on  a  margin,  repledges  it  with- 
out the  consent  of  his  customer,  it 
has  been  held  that  he  cannot  recover 
the  value  of  the  stock  from  the  cus- 
tomer on  a  tender  of  the  certificate. 
Clarkson  v.  Snider,  5  Can.  L.  T.  587 
(1885).  In  Langton  v.  Waite,  L.  R.  6 
Eq.  165  (1868),  the  court  said  that 
the  law  was  clear  that,  in  the  absence 
of  express  contract  to  the  contrary,  a 
pawnee  cannot  sell  without  the  ex- 
press permission  of  the  owner,  and 
that  if  he  does,  the  owner  can  charge 
him  with  the  excess  of  the  price  over 
the  loan.  The  court,  however,  seemed 
to  think  that  the  pledgee  could  re- 
pledge  the  stock.  In  Gould  v.  Farm- 
ers' L.  &  T.  Co.,  23  Hun,  322  (1880), 
the  court  said  that  the  pledgee  might 
repledge  the  stock  so  far  as  he  had 
an  interest  in  it.  A  pledgor  cannot 
hold  the  pledgee  liable  for  selling  the 
note  after  it  became  due  and  unpaid, 
where  the  collateral  was  transferred 
with  the  note.  Carson  v.  Old  Nat. 
Bank,  37  Wash.  279  (1905). 

3  Philler   v.  Yardley,  62  Fed.  Rep. 
645,  649  (1894). 

'  Pauly  V.  Wilson,  57  Fed.  Rep.  548 
(1893). 

5  See  §§  452,  467,  supra. 
502 


CH.  XXVI.]  PLEDGE    OF   STOCK.  [§  472. 

broker  to  a  customer  reciting  first  that  certain  stocks  had  been  deposited 
as  security,  and,  second,  that  certain  stocks  purchased  on  a  margin, 
might  be  hypothecated,  will  be  strictly  construed,  and  the  first-men- 
tioned stocks  cannot  legally  be  rehypothecated  under  such  receipt; 
hence  the  title  does  not  pass  except  to  a  bona  fide  pledgee  or  purchaser, 
and  if  they  have  passed,  any  surplus  in  such  stocks  will  be  applied  to 
the  first-mentioned  stock.^  Questions  relative  to  the  arrest  of  a  pledgee 
for  converting  the  pledge  by  selling  or  hypothecating  it  without  au- 
thority, and  also  his  criminal  liability  and  the  effect  of  a  discharge  in 
bankruptcy  are  considered  elsewhere  ^  as  is  also  the  question  of  the 
liability  of  a  pledgee  who  turns  in  the  pledge  on  a  reorganization.^ 

§  472.  Purchasers  or  pledgees  of  stock  from  pledgee  with  notice 
are  not  protected.  —  A  person  who  purchases  or  takes  in  pledge  stock 
which  he  knows  it  held  in  pledge  by  the  person  from  whom  he  takes 
it  is  not  a  bona  fide  holder  of  such  stock,  and  is  not  entitled  to  the  rights 
of  such.  At  the  best  he  stands  merely  in  the  place  of  the  pledgee  from 
whom  he  receives  the  stock.  He  must  restore  the  stock  to  the  owner 
in  case  the  pledgee  would  be  obliged  to  restore  it,  had  no  second  sale  or 
pledge  been  made."^  The  second  pledgee  or  vendee,  with  notice  that 
he  was  taking  pledged  stock,  has  no  rights  which  the  first  pledgee  has 
not.  He  is  but  an  equitable  assignee  of  the  latter,  and  can  be  com- 
pelled by  the  owner  to  deliver  the  stock  in  any  case  where  the  first  pledgee 
could  be  so  compelled.^    The  same  rule  applies  whether  the  pledgee 

1  Thomas  v.  Taggart,  209  U.  S.  385  pledgee  taking  with  notice  that  the 
(1908).  pledge    is    in    breach    of    trust    is    not 

2  See  §  452,  supra.  protected.     Kern's  Estate,  176  Pa.  St. 

3  See  §  468,  supra.  373  (1896).     Even  though  it  be  illegal 

4  Quoted  and  approved  in  German  for  an  irrigation  company  to  sub- 
Sav.  Bank  v.  Renshaw,  78  Md.  475  scribe  for  the  stock  of  a  land  com- 
(1894).  pany,  yet  where  it  does  so    subscribe 

=  Any  fact,  such  as  usury  in  the  sec-  and    turns    in   property    in   payment, 

ond    transaction,    which   prevents   the  and  the  stock  is  taken  in  the  name  of 

second  pledgee  or  purchaser  from  be-  its  secretary,  individually  and  not  as 

ing  a  bona  fide  purchaser,  applies  to  a  secretary,   the  company   may    compel 

repledgee  of  stock.     The  repledgee  is  him    to    turn    over    the    stock,    even 

not  protected.     Felt  v.  Heye,  23  How.  though  he  has  pledged  it  for  his  per- 

Pr.   359    (1862) ;     Little   v.   Barker,    1  sonal  debt,  the  pledgee  having  taken 

Hoffm.  Ch.   487    (1840.)     So   also   in  with  knowledge  of  all  the  facts.     Bear 

Pennsylvania,     where     the    repledgee  River,  etc.  Co.  v.  Hanley,  15  Utah,  506 

takes  in  consideration  of  a  pre-exist-  (1897).      In   Hampton,   etc.    R.  R.   v. 

ing  indebtedness.     Ashton's  Appeal,  73  Bank,  48  S.   C.   120   (1897),  where  a 

Pa.    St.    153    (1873).     In  general,    see  raik-oad  had  issued  stock  and  bonds 

also  Duncan  v.  Jaudon,  15  Wall.  165  to  a  finance  company  for  money  to  be 

(1872) ;    Shaw  v.  Spencer,   100  Mass.  paid   in   the   future,   and   the   finance 

382   (1868) ;    Ellis's  Appeal,  8  W.  N.  company  had  not  paid  the  money,  but 

Cas.     (Pa.)    538     (1880) ;     Porter    v.  on  the  contrary  had  pledged  some  of 

Parks,  49  N.  Y.  564  (1872) ;  Chouteau  the  stock  to  a  bank,   the  court  held 

V.    Alien,    70    Mo.    290     (1879).     A  that  the  bank  was  bound  to  take  no- 

1303 


§  472.]  PLEDGE   OF   STOCK.  [cH.  XXVI. 

assigns  both  the  debt  and  the  stock,  or  repledges  the  stock  alone.^ 
Where  a  pledgee  has  been  fraudulently  induced  to  sell  the  stock  to  a 
person,  the  pledgor  may  file  a  bill  in  equity  against  such  person  to  ob- 
tain a  retransfer  of  the  stock  to  himself  and  also  the  dividends  which 
have  been  paid,  and  need  not  join  the  pledgee  as  a  party .^  A  person 
who  receives  stock  with  notice  that  the  holder  is  under  contract  obliga- 
tions to  deliver  it  to  another  may  not  be  protected.^  A  pledgee  who 
knows  at  the  time  he  accepts  the  pledge  that  the  stock  is  already  sub- 
ject to  another  lien,  takes  subject  thereto.'* 

Where  a  bank  takes  in  pledge  from  a  broker  stock  which  the  bank 
knows  belongs  to  a  customer  of  the  broker,  the  bank  cannot  hold  such 
stock  as  against  the  customer,  even  though  the  stock  was  indorsed 
in  blank  on  the  back  of  the  certificates.^  A  pledgee  who  knows  that 
the  pledgor  is  acting  as  agent,  or  that  the  pledgor  holds  the  stock  in 
pledge,  must  take  notice  of  the  powers  of  such  pledgor.^  Wliere  the 
pledgee  sells  the  debt  and  stock  to  another  person,  and  the  latter  sells 
the  stock  without  the  debt,  and  the  purchaser  sells  the  stock  to  still 
another  person,  the  various  sales  being  a  conspiracy,  the  pledgor  may 
sue  the  various  purchasers  for  conversion,  and  need  not  tender  the  debt 
or  make  any  demand  before  commencing  suit."  Where  the  owner  of 
stock  and  bonds  turns  them  over  to  a  trust  company  to  sell  as  it  should 
deem  best  and  return  one-half  of  the  proceeds,  and  the  trust  company 
in  violation  of  the  trust  pledges  them  for  a  past-due  debt,  the  remedy  of 
the  owner  against  the  pledgee  is  not  for  conversion,  but  for  an  account- 

tice  of  a  provision  in  the  charter    to  ^  Westinghouse     v.     German     Nat. 

the  effect  that  no  sale  of  stock  should  Bank,  etc.,  188  Pa.  St.  630  (1898).     In 

relieve    an    original    owner    from    his  New  York  a  broker  must  have  either 

obligations  to  the  company,  and  hence  in  possession  or  control  an  amount  of 

was  not  protected  as  pledgee.  stock  equal  to  that  which  he  is  carry- 

1  Felt  V.  Heye,  23  Hov.-.  Pr.  359  ing  for  a  purchaser  on  a  margin.  If 
(1862).  The  repledgee  cannot  claim  he  repledges  it  without  authority  and 
the  benefit  of  the  debt  not  assigned  to  it  then  passes  into  the  hands  of  one 
him.  Felt  v.  Heye,  23  How.  Pr.  359  who  takes  it  with  notice  of  the  cus- 
(1862).  See  also  Talty  v.  Freedman's,  tomer's  claim,  the  customer  may  re- 
etc.  Co.,  93  U.  S.  321  (1876).  claim    the    stock.     Strickland    v.    Ma- 

2  Smith  V.  Lee,  77  Fed.  Rep.  779  goun,  119  N.  Y.  App.  Div.  113  (1907); 
(1896).  aff'd,  190  N.  Y.  545. 

3  See  §§  766c,  852,  infra,  and  |  317,  « Matteson  v.  Dent,  112  Iowa,  551 
supra.  (1900).     See     also     §  321,     supra.     A 

*  Guaranty  T.  Co.  v.  Atlantic,  etc.  person    taking   stock   in   pledge    from 

R.  R.,   138  Fed.   Rep.  517   (1905).     A  the  cashier  of  stock-brokers  is   bound 

purchaser  of  certificates  of  stock  who  to    inquire    as    to    his    authority    to 

knows  that  the  stock  has  been  pledged  make  the  pledge  for  his  own  benefit, 

is  not  protected  as  against  the  pledgee.  Menardi     v.    Wacker,    32    Nev.     169 

New   Jersey,   etc.    Co.   v.    Bodine,    60  (1909). 

Atl.  Rep.  387  (N.  J.  1905).     See  also  ^  Usher  v.  Van  Vranken,  48  N.  Y. 

§§  317,    350,    supra,    and    706c,    852,  App.  Div.  413  (1900). 
infra. 

1304 


Ch.  XXVI. 


PLEDGE  OF  STOCK. 


[§  473. 


ing.^     The  question  of  what  constitutes  bona  fide  holdership  is  discussed 
elsewhere. - 

§  473.  Bona  fide  repledgees  or  purchasers  of  pledged  stock  are  pro- 
tected—  Pledgor's  remedies — Marshaling  the  assets.  —  Where  a 
pledgee  of  certificates  of  stock  indorsed  in  blank  takes  the  certificates 
and  sells  or  pledges  them  to  another,  who  takes  such  certificates  in  good 
faith  and  for  value,  and  without  notice  that  his  vendor  or  pledgor  held 
them  as  a  pledge,  the  purchaser  or  pledgee  from  the  pledgee  is  as  fully 
protected  in  his  rights  as  though  the  person  with  whom  he  dealt  was  the 
absolute  owner  of  the  stock.^     This  rule  arises,  not  on  the  ground  that 


1  Smith  V.  American  Nat.  Bank,  89 
Fed.  Rep.  832  (1898). 

^  See  §  293,  supra.  A  stockholder 
does  not  transfer  his  stock  by  merely 
putting  his  name  in  the  first  Line  of 
a  transfer  reading  "Know  all  men  by 

these  presents   that    do 

hereby  appoint,"  etc.,  without  signing 
his  name  at  the  end  of  the  transfer, 
as  called  for  by  the  form,  and  hence 
a  purchaser  of  the  certificate  from  a 
pledgee  of  the  same  is  not  protected 
and  a  suit  lies  to  compel  the  purchaser 
to  give  up  the  stock,  and  if  the  cor- 
poration has  been  merged  into  an- 
other corporation,  the  purchaser  must 
account  for  what  he  received  from 
such  other  corporation.  Treadwell  v. 
Clark,  114  N.  Y.  App.  Div.  493  (1906) ; 
aff'd,  190  N.  Y.  51.  In  this  case  when 
aifirmed  on  appeal  it  was  held  that 
where  a  certificate  of  stock  is  stolen 
from  a  pledgee  and  the  transfer  on 
the  back  is  insufficient  in  that  the 
pledgor's  name  was  written  not  at  the 
end  of  the  transfer  but  at  the  begin- 
ning, the  pledgor  may  by  a  bill  in 
equity  redeem  the  stock  from  a  person 
who  purchased  it  from  the  thief.  A 
suit  in  equity  lies  inasmuch  as  an  act 
is  involved  as  to  the  amount  due  and 
the  dividends  received.  The  ten-year 
statute  of  limitations  applies,  there 
being  no  acquiescence  or  unreasonable 
delay.  Treadwell  v.  Clark,  190  N.  Y. 
51  (1907). 

^  The  important  case  McNeil  v. 
Tenth  Nat.  Bank,  46  N.  Y.  325  (1871), 
was  on  the  rights  of  a  bona  fide  re- 
pledgee  of  stock,  and  fully  sustains 
the  general  rule.  See  also  Fatman  v. 
Lobach,  1  Duer,  354  (1852);  Nelson 
V.  Owen,  113  Ala.  372  (1896) ;   Wood's 


Appeal,  92  Pa.  St.  379  (1880);  Gass 
V.  Hampton,  16  Nev.  185  (1881); 
Mount  Holly,  etc.  Co.  v.  Ferree,  17 
N.  J.  Eq.  117  (1864) ;  Otis  v.  Gardner, 
105  111.  436  (1883) ;  Ex  parte  Sargent, 
L.  R.  17  Eq.  273  (1874);  Cherry  v. 
Frost,  7  Lea  (Tenn.),  1  (1881), 'the  court 
saying  that  in  general  a  pledgee  of 
personal  property  cannot  convey  a 
good  title  to  another;  but  "if  the 
owner  intrusts  to  another  not  merely 
the  possession  of  the  property,  but 
also  written  evidence  over  his  own 
signature  of  title  thereto  and  of  un- 
conditional power  of  disposition  over 
it,  the  case  is  vastly  different."  Thus, 
a  pledgee,  without  notice,  of  bonds 
from  a  pledgor,  who  turns  out  to  have 
held  the  bonds  as  securities  for  the 
cancellation  of  a  mortgage,  is  pro- 
tected in  his  pledge.  Saloy  v.  Hibernia 
Nat.  Bank,  39  La.  Ann.  90  (1887). 
"If  the  owner  of  stock  knowingly 
places  in  the  hand  of  another  the  cer- 
tificate therefor,  either  indorsed  in 
blank  or  by  a  separate  instrument  of 
transfer  and  power  of  attorney,  the 
person  to  whom  the  certificate  and 
instrument  are  delivered  can  pass  a 
good  title  by  delivery  or  pledge  regard- 
less of  the  relations  between  him  and 
the  owner.  This  is  not  on  the  ground 
that  the  certificate  becomes  a  negotia- 
ble instrument,  but,  on  the  ground  of 
estoppel,  because  the  owner,  having 
given  another  such  indicia  of  title  as 
clothes  him  \vith  the  appearance  of 
ownership,  is  precluded  from  setting 
up  title  in  himself  as  against  a  holder 
in  good  faith."  Baker  v.  Davie,  211 
Mass.  429  (1912).  A  bona  fide  pledgee 
of  a  certificate  of  stock  from  a  broker 
with  a  blank  transfer  from  the  broker's 


1305 


§  473.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


the  certificate  of  stock  is  negotiable,  but  for  the  reason  that  the  owner 
is  held  to  have  enabled  his  pledgee  to  sell  the  stock  as  the  pledgee's 


customer  is  protected  even  though  the 
customer  had  given  such  transfer  in  a 
previous  transaction  relating  to  the 
same  stock.  Talcott  v.  Standard  Oil 
Co.,  149  N.  Y.  App.  Div.  694  (1912). 
Where  the  owner  of  stock  which  is  in- 
dorsed in  blank  leaves  it  with  his 
broker  for  safe  keeping  and  the  broker 
fraudulently  pledges  it,  the  pledgee, 
being  bona  fide,  is  protected.  Shattuck 
V.  American  Cement  Co.,  205  Pa.  St. 
197  (1903).  Where  the  pledgee  of  stock 
transfers  it  into  his  own  name  on 
the  books  of  the  company  and  takes 
out  new  certificates,  a  bona  fide  pur- 
chaser or  pledgee  from  him  is  pro- 
tected. Westinghouse  v.  German,  etc. 
Bank,  196  Pa.  St.  249  (1900).  A  bank 
taking  stock  in  pledge  from  a  broker  in 
exchange  for  stock  already  held,  is  a 
bona  fide  holder  as  against  the  owner 
of  the  stock  who  intrusted  it  to  the 
broker.  King  v.  Mellon  Nat.  Bank, 
227  Pa.  St.  22  (1910).  Where  the 
wife  authorizes  the  husband  to  have 
stock  transferred  from  her  name  into 
his  name  to  pledge  for  a  certain  pur- 
pose, and  he  pledges  it  for  a  different 
purpose,  the  pledgee  is  protected. 
Lomax  v.  Colorado  Nat.  Bank,  46 
Colo.  229  (1909).  A  bona  fide  pledgee 
of  a  certificate  of  stock  from  an  agent 
having  power  to  pledge,  but  who  had  so 
pledged  the  stock  for  purposes  not 
authorized  by  the  owner,  is  neverthe- 
less protected,  and  even  though  such 
pledgee  sells  the  stock  at  private  sale 
without  notice  he  cannot  be  held  liable 
if  the  stock  was  not  worth  more  than 
the  debt  secured.  Brittan  v.  Oakdale, 
etc.,  124  Cal.  282  (1899).  A  bona  fide 
pledgee  of  fraudulently  issued  ware- 
house receipts  can  enforce  them  only 
to  the  extent  of  the  loan  and  interest. 
Corn,  etc.  Bank  v.  American,  etc.  Co., 
163  N.  Y.  3.32  (1900).  In  Ortigosa  v. 
Brown,  47  L.  J.  (Ch.)  168  (1878),  the 
court,  following  the  English  doctrine 
that  an  unregistered  transferee  of 
certificates  of  railway  stock  has  no 
more  rights  than  his  transferrer, 
refused  to  protect  the  unregistered 
repledgee  of  stock.  A  bona  fide  pur- 
chaser of  pledged  stock  is  protected 


in  his  title.  Krouse  v.  Woodward,  110 
Cal.  638  (1895).  Where  stock  is 
pledged  as  collateral,  and  the  pledgee 
sells  to  a  bona  fide  purchaser  without 
notice,  such  purchaser  is  protected, 
even  though  he  at  the  same  time  pur- 
chases the  note  for  which  the  stock  is 
collateral.  Strickland  v.  Leggett,  21 
N.  Y.  Supp.  356  (1892).  A  bona  fide 
transferee,  absolutely  or  in  pledge 
from  a  broker,  holding  his  customer's 
stock  in  pledge,  is  protected  to  the 
extent  of  the  transfer,  the  transferee 
having  no  notice  of  the  fact  that  the 
stock  was  held  in  pledge  by  the  broker. 
Thompson  v.  Toland,  48  Cal.  99 
(1874);  Zulick  v.  Markham,  6  Daly, 
129  (1875) ;  and  see  many  cases  in 
§  321,  supra.  These  cases  apply 
equally  whether  the  person  transferring 
contrary  to  law  is  an  agent  or  a  pledgee, 
and  equally,  also,  whether  he  sells  or 
only  repledges.  In  a  decision  in 
Maryland  an  important  distinction  is 
drawn  between  the  rights  of  a  bona  fide 
purchaser  and  a  bo7ia  fide  pledgee.  It 
is  held  that  the  usual  form  of  transfer 
on  the  back  of  certificates  of  stock, 
signed  by  the  stockholder,  with  the 
name  of  the  transferee  left  blank,  does 
not  protect  a  bona  fide  pledgee.  The 
pledgee  is  chargeable  with  notice  of 
all  the  facts  and  equities.  Under  this 
decision  it  would  seem  to  be  necessary 
in  Maryland  to  enlarge  the  terms  and 
form  of  the  usual  assignment  and 
power  of  attorney  on  the  back  of  cer- 
tificates of  stock.  German  Sav.  Bank 
V.  Renshaw,  78  Md.  475  (1894),  a  case 
wherein  a  broker  holding  stock  on  a 
margin  repledged  it  at  a  bank.  In 
Maryland  a  pledgee  of  a  certificate  of 
stock  from  a  broker  is  bound  to  take 
notice  of  the  rights  of  the  broker's 
customer,  and  the  customer  may  sue 
the  broker  and  pledgee  jointly  for 
conversion  of  the  stock,  but  the  defend- 
ants may  deduct  any  sums  actually 
due,  and  the  damages  in  trover  are  the 
value  of  the  stock  at  the  time  of  the 
conversion  with  interest  to  the  date 
of  the  verdict.  Merchants'  Nat.  Bank 
V.  Williams,  110  Md.  334  (1909). 
Where  the  pledgee  repledges  stock  to  a 


1306 


CH.  XXVI.]  PLEDGE   OF   STOCK.  l§  473. 

own,  and  that  as  between  the  owner  and  the  bona  fide  purchaser  or 
pledgee  from  the  pledgee  the  owner  must  bear  the  loss.     The  law  of 
estoppel  prevents  his  denying  the  right  of  his  pledgee  to  sell  or  pledge, 
as  against  a  bona  fide  purchaser  or  pledgee  from  the  pledgee.     So, 
also,  this  principle  arises  under  the  well-established  rule  that,  where 
one  of  two  innocent  parties  must  suffer  from  the  fraud  of  a  third,  the 
loss  must  fall  upon  him  who  enabled  the  third  party  to  perpetrate  the 
fraud.     A  person  who  pledges  stock  with  a  bank  may  recover  it  back 
from  a  person  to  whom  the  cashier  of  the  bank  has  sold  the  stock,  the 
cashier  having  stolen  it  from  the  bank.^     Wliere  a  person  signs  a  note 
to  a  bank  for  the  accommodation  of  the  cashier,  but  on  condition  that 
certain  collateral  may  be  deposited,  which  is  done,  and  the  cashier  em- 
bezzles the  collateral,  such  person  is  entitled  to  credit  for  the  value  of 
the  collateral  when  he  is  sued  on  the  note  by  the  receiver  of  the  bank.^ 
In  Nebraska  it  has  been  held  that  a  stockholder  whose  stock  has  been 
wrongfully  pledged  may  enjoin  the  corporation  from  allowing  a  transfer 
by  the  pledgee  who  has  applied  for  the  same,  and  the  pledgor  need  not 
allege  that  the  pledgee  took  with  notice.     It  is  for  the  pledgee  to  inter- 
vene and  prove  that  the  pledge  was  bona  fide?    If  the  pledgee  has  re- 
pledged  the  stock,  the  owner  can  obtain  the  stock  only  by  paying  to  the 
repledgee  the  amount  of  the  latter's  advancement  to  the  first  pledgee.^ 
In  case  of  a  wrongful  repledge  the  pledgor  may  claim  the  proceeds  or  re- 
deem the  stock  from  the  second  pledgee.^     "\Miere  the  second  pledgee 
has  sold  the  stock  for  non-payment  of  his  debt,  the  first  pledgor  may 
claim  the  excess,  the  amount  retained  by  the  repledgee  being  more 
than  the  first  pledgor's  debt.^     The  pledgor  of  stock,  under  these  rules, 

bona  fide  pledgee,  and  the  original  of  the  repledgee.  In  case  of  a  pledge  of 
pledgor  sues  the  first  pledgee  for  eon-  national  bank  stock  indorsed  in  blank, 
version,  the  original  pledgor  cannot  the  pledgee  may  give  good  title  to  a 
then  sue  the  repledgee  on  the  theory  bona  fide  purchaser  or  pledgee  from 
that  the  repledge  was  not  properly  him.  The  original  pledgor  may  re- 
made. Colton  V.  Oakland  Bank,  etc.,  strain  the  transfer,  however,  on  tender- 
137  Cal.  376  (1902).     229  U.  S.  391.  ing   the    amount   due    the  repledgee. 

1  Schumacher  v.  Greene,  etc.  Co.,  Gray  v.  Frankhauser,  58  Greg.  423 
117  Minn.  124  (1912).  See  also  §  358,  (1911).  See,  in  general,  Donald  v. 
supra.  Suckling,   L.   R.   1   Q.  B.  585   (1866) 

2  Skud  V.  Tillinghast.  195  Fed.  Rep.  Moore  v.  Conham,  Owen,  123  (1610) 
1  (1912).  Ratcliff   v.   Davis,   Yelv.    178    (1611) 

3  Reynolds  v.  Touzalin  Imp.  Co.,  62  Jarvis  v.  Rogers,  15  Mass.  389  (1819). 
Neb.  236  (1901).  See  s.  c,  13  Mass.  105. 

*  Wood's   Appeal,    92    Pa.    St.    379  ^  Chamberlain  v.  Greenleaf,  4  Abb. 

(1880) ;    Fatman  v.   Lobach,   1   Duer,  N.  Cas.  178  (1878). 

354  (18.52);    Ex  parte  Sargent,  L.  R.  ^  ^jg  Bonner,  8  Daly,  75  (1878).     See 

17  Eq.  273  (1874) ;   Cherry  v.  Frost,  7  also   Fowle   v.    Ward,    113   Mass.    548 

Lea   (Tenn.),   1   (1881),  holding,  how-  (1873).      Where    a    broker    repledges 

ever,  that  payments  on  the  subserip-  stock  held  by  him  in  pledge  and  then 

tion  by  the  owner  subsequently  to  the  becomes  insolvent,  the  original  pledg- 

repledge  do   not  inure  to  the  benefit  ors    may    claim    a    surplus   remaining 

1307 


§473. 


PLEDGE  OF  STOCK. 


[cH.  xxvr. 


has  practically  no  protection  as  to  his  stock  except  the  honesty  and  re- 
sponsibility of  his  pledgee.  The  bona  fide  purchaser  or  pledgee  from  the 
pledgee  is  equally  protected  whether  the  certificates  of  stock  are  indorsed 
by  the  pledgor  or  vendor,  or  are  indorsed  in  blank  by  some  previous 
holder.^  The  repledgee  or  vendee  is  held  to  be  a  bona  fide  holder, 
however,  only  where  he  would  be  held  so  to  be  in  cases  of  promissory 
notes  and  other  similar  cases.-     The  vendor  of  stock  who  retains  it  as 


after  a  sale  of  the  stock  by  the  re- 
pledgee.  Such  surplus  does  not  be- 
long to  the  estate  of  the  broker.  Even 
though  the  broker  had  also  pledged 
with  such  stock  certain  securities 
which  had  been  deposited  with  him, 
not  in  pledge,  but  to  sell,  the  owner 
of  such  securities  can  share  propor 
tionately  in  such  surplus,  but  has  no 
right  superior  to  the  pledgor's.  Rhine- 
lander  V.  National  City  Bank,  36  N.  Y. 
App.  Div.  11  (1899).  Where  the 
pledgee  repledges  the  stock  to  a  bank 
and  then  goes  into  banki'uptcy,  and 
the  bank  after  seUing  all  the  securities 
held  by  it  as  pledgee  of  the  bank- 
rupt has  a  surplus  equal  to  the  amount 
of  the  stock  so  repledged,  the  original 
pledgor  is  entitled  to  such  excess.  In 
re  Swift,  108  Fed.  Rep.  212  (1901). 
On  appeal  the  court  held  that  where 
the  pledgee  repledges  the  stock  in 
breacii  of  trust,  the  original  pledgor  is 
entitled  to  the  surplus  after  the  re- 
pledgee  has  sold  his  stock  and  paid  his 
debt,  even  though  the  original  pledgee 
is  in  bankruptcy.  Hutchinson  v.  Le 
Roy,  113  Fed.  Rep.  202  (1902). 
Even  though  a  broker  repledges  the 
stocks  of  various  customers  without 
authority  from  them,  the  pledgee  is 
protected  if  he  had  no  knowledge  of 
the  fact  that  the  broker  did  not  own 
the  stocks ;  and  if  the  pledgee,  after 
selling  out  the  stocks  on  notice,  has  a 
balance  remaining  both  of  money  and 
stocks,  the  customers  prorate  as  to  such 
balance,  even  though  the  stocks  of 
some  of  them  were  not  sold  by  the 
pledgee.  This  rule  is  based  on  the 
principle  that  if  they  a,ll  had  united 
in  redeeming  from  the  pledgee  they 
would  have  borne  the  loss  pro  rata. 
Whitlock  V.  Seaboard  Nat.  Bank,  29 
N.  Y.  Misc.  Rep.  84  (1899). 

'  Gass   V.    Hampton,    16   Nev.    185 
(1881). 


2  See  §  293,  supra.     The  word  "trus- 
tee" on  the  face  of  the  certificate  is 
notice,  and  deprives  the  pledgee  of  his 
character  of  being  a  bona  fide  holder. 
See    §  325,    supra.     In    New    York    a 
pledgee  is  not  bona  fide  when  he  takes 
bonds    in    pledge     for     a     precedent 
debt.     Duncombv.N.  Y.,etc.  R.  R.,84 
N.  Y.  190,  204  (1881) ;  Gould  v.  Farm- 
ers' L.  &  T.  Co.,  23  Hun,  322  (1880). 
A  pledge  of  stock  to  secure  an  exten- 
sion of  a  past-due  note  may  make  the 
pledgee  a  bona  fide  holder.     Johnson 
V.  First  National  Bank,  132  N.  Y.  App. 
Div.    524    (1909);    aff'd,    200   N.    Y. 
593.     A  pledgee  of  stock  for  an  antece- 
dent debt  is   not  a   bo7ia  fide  holder. 
Shuster  v.  Jones,  58  S.  W.   Rep.  595 
(Ky.  1900).     A  pledgee  is  not  bona  fiide 
when  the  name  of  another  pledgee  in 
the  certificate  is  erased  and  his  own 
inserted.     Denny  v.  Lyon,  38  Pa.  St. 
98    (1860).     Where   a   party   receives 
from     his     debtor     certain     stock     as 
security  for  the  purchase  of  other  stock 
and  holds  it  for  the  old  debt,  and  sells 
it  after  being  notified  that  it  belongs  to 
another  party,  he  is  liable  to  the  lat- 
ter   partv    for    conversion.     Niles    v. 
Edwards,*^  90  Cal.   10   (1891).     A  reg- 
istered municipal  bond  with  coupons 
attached     is     negotiable,     where     the 
name  of   the  payee  is  left  blank  on 
-the  face  of  the  bond,  even  though  in 
books  kept  for  that  purpose  the  name 
of    the    registered    owner    is    entered. 
Hence   a   purchaser   in   good   faith   of 
such  bond  is  protected,  although  the 
bond  was  stolen.     A  bona  fide  pledgee 
is  likewise  protected.     Manhattan  Sav. 
Inst.  V.  N.  Y.,  etc.  Bank,  170  N.  Y.  58 
(1902).     A  bank  may  be  a  bona  fide 
pledgee  of  stock  from  its  cashier,  even 
though  such  stock  is  in  the  name  of  a 
third  person  and   is   indorsed  by   the 
latter.     Bradv  v.  Mount  Morris  Bank, 
65  N.  Y.  App.  Div.  212  (1901).     Even 


1308 


CH.  XXVI.1 


PLEDGE  OF  STOCK. 


[§  473. 


pledgee  may,  by  agreement  with  the  vendee,  pledge  it  to  secure  a  debt 
of  the  vendee,  and  yet  have  a  lien  on  the  stock  prior  to  a  second  pledge 
from  the  vendee.^  Where  a  railroad  pledges  its  bonds  to  a  contractor  to 
secure  payments  to  be  made  to  him,  and  he  then  pledges  the  bonds  to  a 
person  who  advances  money  to  a  sub-contractor,  and  such  person  wrong- 
fully repledges  the  bonds  to  a  bank  to  secure  those  moneys  and  also 
other  moneys,  the  original  pledgee  may  hold  the  second  pledgee  liable  for 
the  illegal  pledge  to  the  bank.^ 

The  general  rule  of  law  is  that  a  pledgee  holding  various  securities 
may  resort  to  any  one  security  which  he  chooses.  He  is  not  bound  to 
resort  to  those  securities  upon  which  other  creditors  have  no  claim.* 
Under  such  circumstances,  however,  as  give  a  court  of  equity  power  so 
to  do,  especially  where  a  repledgee  has  other  collateral  for  his  debt,  a 
court  of  equity  may  marshal  the  assets  and  compel  resort  to  such  other 
collateral  first.''     Where  the  pledgee  has  repledged  the  stock  illegally 


though  no  transfer  of  the  stock  on 
the  books  of  the  company  is  de- 
manded, a  pledge  of  stock  in  considera- 
tion of  the  extension  of  a  past-due  debt 
may  make  the  pledgee  a  bona  fide 
pledgee.  Just  v.  State  Sav.  Bank,  132 
Mich.  600  (1903). 

1  Shinkle  v.  Vickery,  130  Fed.  Rep. 
424  (1904). 

2  Interurban,  etc.  Co.  v.  Hayes,  191 
Mo.  248  (1905). 

'  Jennings  v.  Loeffler,  184  Pa.  St. 
318  (1808).  Where  stock  is  pledged 
to  secure  several  debts,  some  of  which 
are  secured  in  other  ways,  the  pledgee 
may  apply  the  proceeds  of  the  pledge 
to  those  debts  which  are  not  secured 
by  indorsements.  Fall  River  Nat. 
Bank  v.  Slade,  153  Mass.  415  (1891). 
Where  the  pledgor  gives  the  pledgee 
the  right  to  say  which  debt  or  liability 
the  pledge  should  be  applied  to,  this 
right  cannot  be  controlled  by  the 
court.  Donnally  v.  Hearndon,  41  W. 
Va.  519  (1895).  In  a  suit  to  foreclose 
a  pledge  of  stock  where  the  pledgee 
has  other  securities  also,  the  court 
will  not  compel  the  pledgee  to  sell  the 
other  securities  first.  Work  v.  Ogden, 
N.  Y.  L.  J.,  May  20,  1890.  In  a  suit 
by  the  pledgee  to  have  the  pledge  sold, 
it  is  no  defense  that  he  also  has  real 
estate  security ;  nor  is  it  a  defense 
that  he  has  been  given  control  of  the 
company.  Weiscopt  v.  Newman,  65  S. 
W.  Rep.  808  (Ky.  1901).     In  New  Jer- 


sey it  has  been  held,  however,  that  if 
the  pledgee  has  also  other  security,  an 
unsecured  creditor  of  the  pledgor  may 
compel  the  pledgee  to  resort  to  such 
other  security  first.  Bishop,  etc. 
Assoc.  V.  Kennedy,  12  Atl.  Rep.  141 
(N.  J.  1887). 

*  Gould  V.  Farmers'  L.  &  T.  Co.,  23 
Hun,  322  (1880) ;  Herbert  v.  Me- 
chanics' Bldg.,  etc.  Assoc,  17  N.  J.  Eq. 
497  (1864),  reversing,  on  this  point. 
Mechanics',  etc.  Assoc,  v.  Conover,  14 
N.  J.  Eq.  219  (1862).  Where  a  broker 
illegally  pledges  his  customer's  stock 
for  more  than  the  customer  owes  the 
broker,  the  pledge  being  in  connection 
with  various  other  securities,  and  the 
broker  fails  and  the  pledgee  sells  out 
enough  of  the  securities  to  pay  his 
debt,  the  assets  will  be  dealt  with  the 
same  as  marshaling  the  equity  and  the 
customer  will  be  given  an  interest  in 
the  surplus  securities.  Re  Burge,  etc. 
Co.,  [1912]  1  K.  B.  393.  Where  the 
pledgee  repledges  the  stock  illegally 
with  other  stock,  the  first  pledgor  may 
enjoin  the  second  pledgee  from  selling 
the  stock  until  the  other  stock  of  the 
pledgee  is  sold,  and  an  account  ren- 
dered, and  notice  of  intent  to  sell  the 
remainder  given.  Myers  v.  Merchants' 
Nat.  Bank,  16  N.  Y.  Supp.  58  (1891). 
The  pledgor  himself  cannot  enjoin  a 
sale  by  the  pledgee,  unless  the  pledgee 
is  insolvent.  The  pledgor's  remedy  is 
at  law.     Park  v.  Musgrave,  2  Thomp. 


1309 


§  473.J 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


to  bona  fide  holders,  the  latter,  upon  being  informed  of  the  fact  by  the 
first  pledgor,  are  bound  to  apply  the  proceeds  of  the  other  securities  held 
by  them  before  resorting  to  the  stock  owned  by  him,  the  first  pledgor.^ 
Where,  by  custom,  a  broker   repledges  the   stock   of    his    customer, 

that  if  a  bona  fide  repledgee  is  in- 
formed of  the  conversion  by  the  orig- 
inal pledgee,  the  repledgee  is  then 
bound,  in  case  he  sells  out  the  securi- 
ties, to  turn  over  the  surplus  to  the 
pledgor.  The  court  also  held  that  the 
repledgee,  upon  receiving  notice,  was 
bound  to  resort  to  other  collateral  be- 
fore selling  the  collateral  wrongfully 
repledged  by  the  pledgee  to  the  re- 
pledgee. A  receiver  of  the  pledgee  has 
no  greater  rights  than  the  pledgee 
himself.  Union  Pac.  Ry.  v.  Schiff, 
78  Fed.  Rep.  216  (1897).  Where  a 
broker  repledges  his  customers'  se- 
curities to  a  bank  they  may  claim  the 
surplus  over  and  above  the  bank  debt. 
United  Nat.  Bank  v.  Tappan,  33  R.  I. 
1  (1911).  Where  the  customer  of  a 
broker  borrowed  money  of  him  and 
pledged  certain  securities  and  the 
broker  repledged  them  without  author- 
ity and  became  insolvent  and  the 
repledgee  satisfied  his  debt  out  of 
other  securities,  the  customer  is  en- 
titled to  a  return  of  his  securities.  Re 
Mclntyre  &  Co.,  189  Fed.  Rep.  46 
(1911).  A  broker  is  the  agent,  and  not 
the  creditor,  of  his  customer,  and  if 
he  becomes  bankrupt  his  customer's 
securities  in  the  hands  of  the  broker's 
New  York  correspondent  may  be  iden- 
tified, and  also  the  surplus  proceeds 
from  their  sale,  including  any  margin 
in  the  hands  of  the  New  York  corre- 
spondent. Re  Carothers  &  Co.,  182 
Fed.  Rep.  501  (1910).  Where  a  per- 
son loans  stock  to  a  broker  to  be  used 
in  his  business,  he  may  pledge  it,  and  if 
he  becomes  insolvent  that  stock  must 
contribute  ratably  to  other  stocks 
pledged  for  that  same  debt.  Re 
Mclntyre  &  Co.,  181  Fed.  Rep.  955 
(1910).  An  adjustment  of  equities 
between  owners  of  securities  wrong- 
fully pledged  by  a  broker  was  involved 
in  Re  Ennis,  187  Fed.  Rep.  720  (1911). 
It  is  larceny  for  a  broker  to  pledge  for 
his  own  debts  stock  which  has  been 
deposited  with  him  by  a  customer  to 
secure  the  broker  against  loss  from  the 


&  C.  (N.  Y.)  571  (1874).  Where  a 
broker  pledgee,  with  the  assent  of  the 
pledgor,  has  repledged  the  stock,  the 
second  pledgor,  having  no  notice  of 
who  the  first  pledgor  is,  may  hold  all 
stocks  until  all  the  debts  from  the 
second  pledgor  to  him  are  paid.  A  per- 
son who  gave  stock  to  the  first  broker 
to  sell  is  preferred  to  one  who  pur- 
chased stock  on  a  margin.  Willard  v. 
White,  56  Hun,  581  (1890).  Where 
pledged  stock  is  repledged  and  sold 
out  by  the  repledgee,  together  with 
various  other  stock  held  as  collateral 
by  the  repledgee,  a  court  of  equity 
will  marshal  the  assets.  Smith  v. 
Savin,  9  N.  Y.  Supp.  106  (1890) ;  aff'd, 
69  Hun,  311,  and  141  N.  Y.  315  (1894). 
Where  the  pledgee  sells  the  securities 
and  has  a  surplus,  he  cannot  inter- 
plead between  two  claimants  where  he 
is  sued  by  one  of  them  for  more  than 
he  admits  the  surplus  amounts  to. 
Dodge  V.  Lawson,  N.  Y.  L.  J.,  April  20, 
1892.  A  pledgee  need  not  resort  to 
the  pledge  in  order  to  obtain  payment, 
and  even  if  the  pledgor  becomes  in- 
solvent the  pledgee  may  sell  out  the 
securities.  Chemical  Nat.  Bank  v. 
Armstrong,  59  Fed.  Rep.  372  (1893), 
rev'g  50  Fed.  Rep.  798  (1892).  See 
also  §§  476,  763,  infra,  and  §§  456,  457, 
460,  supra. 

1  The  latter  cannot  object  to  the 
mode  of  selling  the  other  securities. 
Smith  V.  Savin,  141  N.  Y.  315  (1894), 
holding,  moreover,  that  the  first 
pledgor  may  hold  such  second  pledgee 
liable  for  a  sale  without  notice,  there 
being  no  waiver  of  notice.  Where  the 
pledgee  wrongfully  rehypothecates  the 
pledge,  together  with  other  securi- 
ties, the  pledgor  may  pay  the  debt  due 
to  the  repledgee  and  take  all  the  se- 
curities and  sell  them  all  out,  and  may 
also  sue  the  pledgee  for  conversion. 
The  court  will  require  the  pledgor  to 
indorse  upon  the  judgment  for  conver- 
sion a  suitable  credit  for  the  amount 
realized  out  of  such  sale  of  the  seciu-i- 
ties  by  the  pledgor.     The  court  said 


1310 


CH.  XXVI.]  PLEDGE   OF   STOCK.  [§  473. 

together  with  other  stock,  the  customer  cannot  insist  that  the  broker's 
stock  be  first  appHed  to  the  debt.  Where,  however,  the  customer 
had  not  authorized  the  broker  to  repledge  the  stock,  then  the  stock 
owned  by  the  broker  and  pledged  together  with  the  stock  of  the  customer 
will  first  be  applied  to  the  debt.^  If  a  broker  wrongfully  pledges  stock 
deposited  with  him  for  safe-keeping,  together  with  stock  held  by  him  on 
a  margin,  the  owner  of  the  former  stock  is  entitled  to  priority  as  to  the 
equity  of  such  wrongful  pledge  by  the  broker.^  Where  a  customer  de- 
livers stock  to  a  broker  and  the  broker  without  his  consent  transfers 
it  into  his  own  name,  the  customer  may  claim  the  new  certificate  upon 
satisfactorily  identifying  the  stock.^  Where  a  customer  pledges  his 
stock  with  the  broker,  and  the  latter  wrongfully  repledges  it  and  fails, 
and  the  customer  notifies  the  repledgee  of  his  claim  and  demands  notice 
of  any  sale,  the  repledgee  is  liable  if  he  sells  without  notice  to  the  former 
and  turns  the  surplus  over  to  the  assignee  of  the  broker.^ 

Where  a  broker  executes  through  sub-brokers  an  order  to  purchase 
stock  and  collects  the  price  thereof  from  the  customer  and  then  fails, 
and  there  is  a  balance  due  from  the  sub-broker  to  the  broker,  the  cus- 
tomer is  entitled  to  the  full  value  of  the  stock  so  purchased,  the  stock 
itself  having  been  sold  by  the  sub-brokers  on  account  of  the  broker. 
On  the  other  hand,  a  sale  of  such  stock  by  the  sub-broker  does  not  en- 
title a  customer  to  a  preference  over  other  customers  of  the  broker.^ 

transactions  on  the  market  for  the  i  Skiff  v.  Stoddard,  63  Conn.  198 
customer's  account,  and  hence  the  (1893),  holding  also  that  a  customer 
customer  may  recover  the  certificates  who  deposits  stock  with  a  broker  to 
of  stock  from  the  pledgee  of  the  broker  secure  a  marginal  contract  may  re- 
if  the  latter  has  satisfied  the  broker's  deem  the  same  from  the  assignee  of 
debt  out  of  other  assets.  Re  Melntyre  the  broker  for  the  benefit  of  the  cred- 
it Co.,  181  Fed.  Rep.  955  (1910).  itors,  but  the  identity  of  the  stock 
Where  the  pledgee  wrongfully  repledges  must  be  established,  and  that  if  there 
the  securities,  and  the  original  pledgor  is  not  sufficient  stock  to  satisfy  all 
takes  up  the  securities  from  the  re-  claims  on  that  class  of  stock,  the  stock 
pledgee  and  agrees  to  protect  the  re-  is  prorated  among  all  claimants, 
pledgee,  the  original  pledgor  cannot  Where  a  broker  pledges  his  own  stock 
subsequently  repudiate  the  transac-  and  also  illegally  pledges  his  customer's 
tion  and  hold  the  repledgee  liable  for  stock  and  fails,  the  debt  should  be  paid 
the  securities  originally  repledged.  from  his  own  stock  first.  Baker  v. 
Union  Pac.  Ry.  v.  Schiff,  74  Fed.  Rep.  Davie,  211  Mass.  429  (1912).  As  to 
674  (1896).  Where  the  pledgor  sues  rights  upon  the  failure  of  a  broker,  see 
the  pledgee  for  conversion,  in  that  the  also  §  457,  supra. 

pledgee  repledged   the  collateral,  and  ^  Matter  of  Mills,  125  N.  Y.  App. 

the  pledgor  obtains  judgment  for  the  Div.  730  (1908) ;   aff'd,  193  N.  Y.  626. 

difference   between   the   value   of   the  ^  Mould  v.  Importers',  etc.  Bank,  72 

stock  and  the  amount  due  from  the  N.  Y.  App.  Div.  30  (1902). 

pledgor,  and  subsequently  the  pledgee  *  Le  Marchant  v.  Moore,  79  Hun, 

or  his  receiver  recovers  back  some  of  352  (1894) ;  aff'd,  150  N.  Y.  209. 

the    stock   so    repledged,  the   pledgor  ^  Denison  v.  Emery,  153  Fed.  Rep. 

cannot  reclaim  such  stock.     Deitz  v.  427  (1907). 
Field,  10  N.  Y.  App.  Div.  425  (1896). 

1311 


§  473.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


"Where  a  broker  pledges  stock  which  has  been  left  with  him  by  a  customer 
for  safe-keeping  and  pledges  also  on  the  same  loan  certain  stock  which 
he  holds  for  customers,  and  on  which  he  has  a  lien  for  advances,  and 
the  pledgee  sells  out  the  stocks  and  realizes  enough  to  pay  the  debt 
without  resorting  to  the  first-mentioned  stock,  the  owner  of  the  latter 
is  entitled  to  it  without  contributing  towards  the  amount  of  such  loan.^ 
A  customer  who  owns  particular  certificates  of  stock  and  pledges  them 
with  his  broker  may  reclaim  such  certificates  from  the  broker's  assets 
upon  the  insolvency  of  the  latter,  but  he  cannot  claim  any  particular 
stocks  which  the  broker  has  purchased  for  him,  even  though  he  is  able 
to  identify  them  as  being  the  ones  which  were  purchased  for  him,  inas- 
much as  his  equities  are  no  better  than  the  equities  of  other  customers.^ 


1  Tompkins  v.  Morton  T.  Co.,  91 
N.  Y.  App.  Div.  274  (1904) ;  aff'd, 
181  N.  Y.  578. 

2  Sillcocks  V.  Gallaudet,  66  Hun,  522 
(1892).  Where  the  bank  in  which 
stock-brokers  deposit  their  funds  is  a 
bona  fide  holder  of  cash  so  deposited 
and  also  of  securities  deposited  by  the 
brokers  as  security,  and  the  brokers 
fail,  and  the  bank  applies  the  cash  to 
the  brokers'  debts  and  then  sells  the 
securities  to  pay  the  balance,  leaving 
a  surplus,  a  customer  of  the  brokers 
whose  cash  was  deposited  by  the  bro- 
kers in  the  bank  may  reclaim  the 
same,  even  as  against  the  owners  of 
the  securities.  Mutton  v.  Peat,  [1900] 
2  Ch.  79.  The  rule  that  a  customer 
who  pays  money  to  a  broker  to  buy 
stocks  or  gives  him  securities  to  sell 
is  a  special  creditor  does  not  apply 
where  the  customer  bought  and  sold 
stocks  through  the  broker  and  kept 
merely  a  general  account.  King  v. 
Button,  [1900]  2  Q.  B.  504.  The  right 
of  a  stock  exchange,  in  accordance 
with  its  rules,  to  apply  the  assets  on 
the  exchange  of  an  insolvent  member 
to  his  obligations  on  the  exchange  is 
not  affected  by  the  bankruptcy  act  in 
England.  Re  Woodd,  82  L.  T.  Rep. 
504  (1900).  Where  a  broker  purchases 
stock  for  a  customer  through  another 
broker  and  then  fails,  and  the  sub- 
broker  sells  out  all  his  securities  to 
pay  a  debt  and  has  a  surplus,  the 
customer  may  reach  such  surplus  in 
preference  to  other  creditors  of  his 
broker.  In  re  Graff,  117  Fed.  Rep.  343 
(1902).     Where  a  broker  at  the  time 

13 


of  his  failure  has  on  hand  a  larger 
amount  of  a  certain  stock  than  he  ■ 
holds  for  a  customer,  the  customer 
may  claim  that  part  of  such  stock  is 
his  own.  In  re  Graff,  117  Fed.  Rep. 
343  (1902).  A  creditor  of  a  defaulter 
on  the  stock  exchange  who  has  taken 
the  benefit  of  the  private  distribution 
of  stock-exchange  assets,  made  by  the 
official  assignee  of  the  stock  exchange 
under  its  rules,  is  not  precluded 
from  afterwards  taking  ordinary  legal 
proceedings  for  the  recovery  of  his 
debt,  though  he  must  give  credit  for 
what  he  has  received  from  the  offi- 
cial assignee.  Ratcliff  v.  Mendels- 
sohn, [1902]  2  K.  B.  653.  As  to  sub- 
brokers  or  correspondent  brokers,  see 
§  456,  supra. 

Even  though  a  customer  has  paid  a 
broker  in  full  for  stock  which  has  not 
been  delivered,  and  the  broker  becomes 
insolvent,  the  customer  has  no  priority 
over  other  creditors.  Fogg  v.  Tyler, 
83  Atl.  Rep.  664  (Me.  1912).  Where  a 
broker  has  failed,  a  customer  who  has 
deposited  stocks  with  him  cannot 
claim  similar  stock  in  the  hands  of 
the  trustee  in  bankruptcy.  Re  Ennis, 
187  Fed.  Rep.  728  (1911).  A  cus- 
tomer cannot  claim  particular  stock 
in  the  broker's  possession  upon  his 
insolvency  simply  because  that  stock 
is  of  the  same  kind  which  the  cus- 
tomer had  deposited  with  the  broker. 
Re  Mclntyre  &  Co.,  181  Fed.  Rep. 
960  (1910).  A  customer  whose  stock 
is  converted  by  his  broker  and  sold 
cannot  claim  other  stock  of  the  same 
kind  among  the  broker's  assets,  no 
12 


CH.  XXVI.] 


PLEDGE  OF  STOCK. 


[§  473. 


If  a  broker,  by  custom  and  authority  impliedly  given,  repledges  stock 
carried  by  him  on  a  margin,  the  customer  cannot,  upon  the  failure  of 
the  broker,  have  all  the  broker's  stock  of  that  class  first  applied  in  dis- 
charge of  his  claim. ^  Where  stock-brokers  have  pledged  their  customer's 
securities  and  become  bankrupt,  the  bankruptcy  court  may  enjoin  the 
pledgees  from  selling  the  securities  pending  an  investigation  as  to  the 
right  of  the  customer  to  redeem.^  And  where  an  insolvent  bank  illegally 
sells  collateral  which  it  holds  to  secure  a  note,  and  at  all  times  thereafter 
the  bank  has  sufficient  funds  to  replace  the  collateral,  the  maker  of  the 
note  may  claim  the  full  value  of  the  stock  even  as  against  the  receiver.^ 
If  a  pledgor  becomes  insolvent  the  question  often  arises  as  to 
whether  the  pledgee  may  prove  his  entire  claim  against  the  estate, 
or  whether  the  pledgee  must  first  realize  what  he  can  from  the  pledge 
and  then  present  a  claim  for  the  deficiency  only.  The  rule  is  now  well 
established,  however,  that  the  pledgee  may  prove  his  entire  claim  against 
the  insolvent  estate  of  the  pledgor,  and  may  demand  his  proportionate 
part  of  such  estate,  the  same  as  though  he  had  no  collateral  security 
whatsoever.^     A   creditor  holding  collateral   must  first  exhaust  that 


connection  between  the  two  being 
shown.  Re  Brown,  184  Fed.  Rep. 
454  (1911).  Where  a  broker  pledges 
his  customer's  stock  without  authority 
and  fails,  the  customer  may  claim  a 
preference  as  to  surplus  from  the 
pledgee's  sale  of  that  stock  if  he  can 
identify  it.  Re  Brown  &  Co.,  183 
Fed.  Rep.  861  (1910).  If  a  broker  at 
the  time  of  his  bankruptcy  has  cer- 
tain stock  on  hand,  it  belongs  to  a 
customer  entitled  to  stock  of  that 
amount,  even  though  it  is  different 
stock  from  the  stock  that  was  pur- 
chased for  him.  If  there  are  several 
such  stockholders,  they  own  it  in 
common.  Stock  has  no  ear  marks. 
Re  Brown  &  Co.,  171  Fed.  Rep.  254 
(1909). 

1  Skiff  V.  Stoddard,  63  Conn.  198 
(1893). 

2  Re  Carothers  &  Co.,  192  Fed. 
Rep.  691   (1912).      Cf.  §  475,  infra. 

5  Brennan  v.  Tillinghast,  201  Fed. 
Rep.  609  (1913). 

^  People  V.  Remington,  121  N.  Y. 
328  (1890).  A  secured  creditor  of  an 
insolvent  national  bank  may  prove 
and  receive  dividends  upon  the  face 
of  his  claim  as  it  stood  at  the  time  of 
the  declaration  of  insolvency,  without 
crediting  either  his  collaterals  or  col- 


lections made  therefrom  after  such 
declaration,  subject  always  to  the  pro- 
viso that  dividends  must  cease  when, 
from  them  and  from  collaterals  real- 
ized, the  claim  has  been  paid  in  full. 
Merrill  v.  National  Bank,  etc.,  173 
U.  S.  131  (1899).  A  holder  of  collateral 
may  enforce  his  claim  in  the  ordinary 
way  by  judgment  and  execution 
against  the  debtor,  without  any  deduc- 
tion for  his  collateral.  Chemical  Nat. 
Bank  v.  Armstrong,  59  Fed.  Rep.  372 
(1893) ;  Lewis  v.  United  States,  92  U.  S. 
618  (1875).  The  pledgee  is  entitled 
to  participate  in  the  distribution  of 
the  general  assets  without  his  security 
being  taken  into  consideration,  except 
that  he  shall  not  receive  more  than 
what  is  due  him,  and  if  he  holds  mort- 
gage bonds  as  security  his  debt  is 
figured  at  the  amount  actually  due 
him  and  not  on  the  par  value  of  the 
bonds  held  as  security.  Hitner  v. 
Diamond,  etc.  Co.,  176  Fed.  Rep. 
384  (1910).  Mortgage  bondholders 
may  prove  their  bonds  as  general 
creditors  without  surrendering  their 
lien.  Re  Medina,  etc.  Co.,  179  Fed. 
Rep.  929  (1910).  The  pledgee  is 
entitled  to  file  his  claim  and  receive 
his  distributive  share  of  the  assets 
without    reference    to    his    collateral. 


(83) 


1313 


§  473.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


before  holding  the  stockholders  hable  on  their  subscription  Habihty, 
there  being  other  creditors.^ 


Commercial,  etc.  Bank  v.  Jenks  Lum- 
ber Co.,  194  Fed.  Rep.  732  (1911). 
A  deficiency  on  foreclosure  sale  may 
participate  with  unsecured  creditors 
in  the  distribution  of  assets  not  cov- 
ered by  liens.  Homer  v.  Baltimore, 
etc.  Co.,  117  Md.  411  (1912).  A 
mortgagee  is  entitled  to  share  propor- 
tionately in  unmortgaged  corporate 
assets  without  reference  to  his  mort- 
gage security,  except  that  the  total 
amount  received  must  not  exceed  his 
debt.  The  court  may  require  him  to 
realize  on  his  security  so  as  to  ascer- 
tain the  balance  due.  Mark  v. 
American,  etc.  Co.,  84  Atl.  Rep.  887 
(Del.  1912).  A  creditor  of  a  cor- 
poration who  holds  collateral  security 
for  his  debt  cannot  be  compelled  to 
exhaust  such  security  before  resort- 
ing to  the  general  assets  of  the  corpo- 
ration for  payment.  Doe  v.  North- 
western Coal,  etc.  Co.,  78  Fed.  Rep. 
62  (1896).  The  pledgee  may  prove  his 
entire  claim  against  the  insolvent 
pledgor's  estate  without  first  resorting 
to,  surrendering,  or  accounting  for  the 
pledge.  Re  Ives,  11  N.  Y.  Supp.  655 
(1890).  See  also  §763,  infra.  A 
pledgee  is  entitled  to  a  dividend  from 
the  pledgor's  estate  without  resorting 
to  his  pledge  and  without  delivering 
it  up  •  to  the  estate.  Wheeler  v. 
Walton,  etc.  Co.,  72  Fed.  Rep.  966 
(1896).  See  also  §476,  infra.  The 
fact  that  a  creditor's  claim  is  secured 
by  mortgage  or  otherwise  does  not 
affect  his  right  to  prove  for  the  full 
amount  of  the  claim,  nor  does  the  fact 
that  he  has  realized  part  thereof  out 
of  the  collateral  since  the  date  of  the 
receivership ;  but  in  the  latter  case  he 
is  entitled  to  dividends  only  until  the 
balance  of  his  debt  is  satisfied.  New 
York  Security,  etc.  Co.  v.  Lombard 
Inv.  Co.,  73  Fed.  Rep.  537  (1896). 
The  pledgee  may  file  his  claim  in  the 


probate  court  against  the  pledgor's 
estate,  and  may  then  sell  the  pledge, 
and  will  be  entitled  to  participate  in 
the  estate  without  deduction  of  the 
amount  realized  on  the  sale,  unless  he 
would  thereby  receive  more  than  the 
whole  debt.  Furness  v.  Union  Nat. 
Bank,  147  111.  570  (1893).  Where  a 
pledgee  has  realized  on  his  security, 
he  participates  in  the  insolvent  estate 
of  the  pledgor  on  only  the  balance 
remaining  due  to  him.  Philadelphia 
Warehouse  Co.  v.  Anniston  Pipe 
Works,  106  Ala.  357  (1895).  In 
Nebraska,  the  court,  after  reviewing 
the  conflicting  rules  in  the  different 
states,  held  that  where  a  creditor  held 
collateral  he  must  deduct  from  his 
claim  all  that  he  realizes  from  the 
collateral  before  he  can  get  a  divi- 
dend, and  must  also  deliver  up  his 
collateral  to  the  receiver.  State  v. 
Nebraska  Sav.  Bank,  40  Neb.  342 
(1894). 

Where  a  corporation  assumes  a 
mortgage  and  then  becomes  insolvent, 
the  mortgagee  is  entitled  to  a  divi- 
dend from  its  assets  on  the  whole 
mortgage  debt  existing  at  the  time  of 
such  assumption,  even  though  the 
mortgagee  has  foreclosed  and  realized 
a  part  of  the  debt.  Matter  of  Simp- 
son, 36  N.  Y.  App.  Div.  562  (1899); 
aff'd,  158  N.  Y.  720.  Collateral  secu- 
rity furnished  by  the  stockholders  to 
a  corporate  creditor  is  not  to  be 
deducted  before  the  claim  participates 
in  the  assets  of  the  insolvent  cor- 
poration, although  the  rule  is  differ- 
ent in  Maryland  where  the  security 
was  furnished  to  the  corporation 
itself.  Rogers  v.  Citizens',  etc.  Bank, 
93  Md.  613  (1901).  Where  the  stock- 
holder has  died  and  his  estate  is  being 
distributed,  the  portion  going  to  the 
corporation  by  reason  of  its  lien  will 
not   be  decreased   by   the  avmount   of 


1  Welch  V.  Sargent,  127  Cal.  72 
(1899).  Even  though  a  corporate 
creditor  has  realized  a  part  of  his  debt 
under  the  stockholders'  statutory  lia- 
bility, yet  he  may  participate  in  the 


assets  of  the  corporation  as  though  no 
part  of  his  debt  had  been  paid.  Sac- 
ramento Bank  v.  Pacific  Bank,  124 
Cal.  147  (1899). 


1314 


CH.  XXVI.] 


PLEDGE  OF  STOCK. 


[§  474. 


§  474.  Pledges  by  agents,  trustees,  executors,  etc.,  legally  and  in 
breach  of  trust.  —  It  is  within  the  power  of  an  executor  or  administrator 
to  pledge  shares  of  stock  belonging  to  the  estate,  and  the  pledgee  is 
protected  even  though  he  knew  that  the  executor  pledged  it  as  an  ex- 
ecutor.^ The  fact  that  stock  is  specifically  bequeathed  to  the  executors 
as  trustees  does  not  prevent  the  executors  selling  or  pledging  such  stock, 
and  the  pledgee  or  purchaser  is  protected  and  need  not  inquire  into  the 
necessity  of  the  sale  or  pledge.-  Where  stock  is  specifically  bequeathed 
to  an  executor  as  trustee,  and  five  years  thereafter  the  executor  is  dis- 
charged, but  continues  as  trustee,  and  two  years  thereafter  he  fraudu- 
lently pledges  the  stock  as  executor,  the  pledgee  is  not  protected,  since 
the  lapse  of  time  was  sufficient  to  put  him  on  inquiry.^  AYhere  an  exec- 
utor pledges,  for  his  personal  debt,  stock  belonging  to  the  estate,  in 
breach  of  trust,  the  pledgee  is  not  protected,  even  though  the  corporation 
issued  a  new  certificate  to  the  pledgee,  by  mistake,  as  absolute  owner, 
and  he  cannot  hold  the  corporation  liable  for  retaining  the  new  certifi- 
cate, upon  its  being  delivered  for  transfer  to  a  purchaser  with  notice.^ 


dividends,  hi  re  Hovey's  Estate,  198 
Pa.  St.  385  (1901).  Under  the  New 
Hampshire  statutes  the  holder  of  a 
mortgage  as  security  for  a  note  cannot 
prove  the  full  amount  of  the  note  in 
insolvency  proceedings,  but  must  first 
deduct  the  value  of  the  security ;  but 
the  rule  is  otherwise  as  to  an  indorse- 
ment made  by  the  insolvent  party. 
Bank  Com'rs  v.  Security,  etc.  Co.,  70 
N.  H.  536  (1901).  A  creditor  having 
security  is  entitled  to  his  dividends 
from  the  general  estate  in  addition 
to  his  dividends  from  the  collateral. 
Detroit  T.  Co.  v.  State  Bank,  150 
Mich.  530  (1907).  In  distribution 
a  person  holding  collateral  is  entitled 
to  a  part  of  the  general  estate  without 
considering  the  collateral.  Buttler  v. 
Commonwealth,  etc.  Co.,  73  N.  J. 
Eq.  205  (1907).  A  secured  creditor 
in  Mississippi  can  participate  in  the 
general  assets  only  after  he  has  cred- 
ited the  value  of  the  collateral. 
Kretschmar  v.  First  Xat.  Bank,  90 
Miss.  363  (1907).  A  holder  of  the 
note  of  a  bankrupt  company  which 
has  pledged  borrowed  bonds  as  col- 
lateral security  for  the  note  cannot 
claim  to  be  an  unsecured  creditor  of  the 
banki-upt  company.  Re  Watertown, 
etc.  Co.,  169  Fed.  Rep.  252  (1909). 
Under    the    New    Jersey    statutes    a 


creditor  holding  collateral  must 
exhaust  his  collateral  and  then  prove 
his  claim  for  the  balance.  Butler  v. 
Commonwealth,  etc.  Co.,  74  N.  J.  Eq, 
423  (1908). 

'  Goodwin  v.  American  Nat.  Bank, 
48  Conn.  550  (1881);  Wood's  Appeal, 
92  Pa.  St.  379  (1880) ;  Carter  v.  Manu- 
facturers' Nat.  Bank,  71  Me.  448 
(1880) ;  §  329,  supra;  Manhattan  Bank 
V.  Walker,  130  U.  S.  267  (1889).  A 
pledgee  from  an  executor  is  pro- 
tected. Gottberg  v.  U.  S.  Nat.  Bank, 
13  N.  Y.  Supp.  841  (1890).  If  a 
pledge  of  stock  by  an  executor  is 
illegal,  the  pledgee  is  not  protected 
where,  not  trusting  to  the  executor's 
power  as  executor,  he  causes  the  stock 
to  be  transferred  first  to  a  legatee. 
Moore  v.  American  L.  &  T.  Co.,  115 
N.  Y.  65  (1889).  Pledgees  from  the 
trustee  for  antecedent  debts  are  not 
bona  fide  holders  without  notice,  even 
though  the  form  of  a  public  sale  was 
gone  through.  Darling  t'.  Potts,  118 
Mo.  506  (1893). 

2  Schell  v.  Deperven,  198  Pa.  St.  600 
(1901);  Schell  v.  Deperven,  198  Pa. 
St.  591  (1901).     See  also  §329,  supra. 

3  Schell  V.  Deperven,  198  Pa.  St.  591 
(1901).     See  also  §  329,  supra. 

^  Davis  V.  National,  etc.  Bank,  50 
Atl.  Rep.  530  (R.  I.  1901).     Where  an 


1315 


I  474.]  PLEDGE  OF  STOCK.  [cH.  XXVI. 

A  trustee,  on  the  other  hand,  has  no  impHed  power  to  pledge  or  sell  cor- 
porate stock  belonging  to  the  trust. ^  Express  power  to  a  trustee  to  sell 
and  reinvest  does  not  give  him  power  to  pledge.-  An  agent's  pledges 
of  his  principal's  stock,  in  breach  of  his  duty  as  agent,  follow  the  same 
rules  as  where  a  pledgee  repledges  the  stock  given  to  him  in  pledge.  A 
bona  fide  holder  for  value  and  without  notice  is  protected,  while  one 
who  takes  with  notice  is  not  protected.  Where,  however,  the  one  tak- 
ing stock  in  pledge  from  an  agent  knows  that  the  latter  is  acting  as 
agent,  he  is  bound  to  inquire  whether  the  principal  has  authorized  his 
agent  to  pledge  the  stock,  since  a  power  to  pledge  cannot  be  presumed 
from  a  power  to  sell.^  The  express  power  of  an  agent  to  sell  securities 
is  revoked  by  the  death  of  the  principal,  and  if  he  sells  thereafter  he  is 
liable  for  damages  in  conversion.^  Where  an  agent  wrongfully  repledges 
the  stock  belonging  to  his  principal  and  then  assigns  for  the  benefit 
of  creditors,  and  his  assignee  obtains  repossession  of  the  stock  by  real- 
izing on  other  securities  which  were  pledged  with  it,  the  original  owner 
of  the  stock  may  reclaim  it.^  The  right  of  corporations  and  persons  to 
give  and  take  stock  in  pledge  is  considered  elsewhere.^  The  authority 
of  a  guardian  given  by  the  court  to  sell  stock  does  not  authorize  him  to 
pledge  the  stock.'  Power  of  an  agent  to  sell  does  not  give  him  power 
to  pledge  for  his  own  use,  and  where  the  corporation  with  knowledge 
of  the  facts  allows  a  transfer  it  is  liable  to  the  owner.^  The  power  of  a 
corporate  agent  to  sell  bonds  does  not  give  him  power  to  pledge  them 
even  to  secure  corporate  debts.  Holders  not  bona  fide  are  not  protected.' 
A  bona  fide  pledgee  of  stock  indorsed  in  blank  on  the  back  is  protected.^" 
Even  though  brokers  in  sending  stock  to  a  customer  indorse  it  in 
blank  and  intrust  it  to  a  messenger,  and  the  messenger  converts  it  to 
his  use  by  having  other  brokers  sell  it  in  good  faith,  yet  such  latter 
brokers  are  liable  to  the  customer  for  the  value  of  the  stock.^^ 

executor    pledges    stock    for    his   own  ^  See  eh.  XIX,  supra. 

debt,  the  pledgee  knowing  the  fact  so  "  O'Herron  v.  Gray,  168  Mass.  573 

to  be,  the  latter  becomes  trustee,  and  (1897). 

the  statute  of  limitations  does  not  run  «  Read  v.  Cumberland  Tel.  etc.  Co., 

against    redemption    until    after    the  93  Tenn.  482  (1894). 

pledgee    has    notified    the    cestui    que  » Shaw    v.    Saranac,    etc.    Co.,   144 

trust  of  the  estate  that  he  holds  the  X.   Y.  220  (1904).     Where  one  party 

stock    adversely.     Marshall's    Estate,  authorizes  another  party  to  pledge  the 

138  Pa.  St.  285  (1890).     As  to  who  is  former's  stock  for  a  certain  purpose, 

a  bona  fide  holder,  see  §  293,  supra.  and  the  latter  pledges  it  for  a  different 

1  See   §§  323-327,   supra.  purpose,  the  pledgee  is  not  protected 

-  First  Nat.  Bank  v.  Nat.  Broadway  if    he    took    the    stock    with    notice. 

Bank,  156  N.  Y.  459  (1898).  Bowen  v.  Cleary,  35  S.  W.  Rep.  281 

3  See  ch.  XIX,  §  321,  supra.  (Ky.  1896). 

*  Matter  of  Mitchell,  36  N.  Y.  App.  "  Gilbert  v.  Erie  Bldg.  Assoc,  184 

Div.  542  (1899) ;  aff'd,  161  N.  Y.  654.  Pa.  St.  5-54  (1898). 

5  Woodside  v.  Grafflin,  91  Md.  422  ^^  Hall  v.  Wagner,  111  N.  Y.  App. 

(1900).  Div.  70  (1906). 

1316 


CH.  XXVI.] 


PLEDGE  OF  STOCK. 


[§  475. 


Where  the  cashier  of  a  bank  abstracts  bonds  held  in  pledge  by  the 
bank,  and  pledges  them  for  his  own  purposes,  and  his  administrator 
pays  the  debt  in  order  to  redeem  the  bonds,  the  bank  may  claim  the 
bonds  without  repaying  what  the  administrator  has  paid  out.^  A 
bucket-shop  keeper  may  be  required  to  restore  trust  funds  which  one 
of  his  customers  has  used  in  gambling  in  stocks.- 

§  475.  Pledgor's  remedies.  —  The  pledgor  cannot  enjoin  a  sale  of 
the  pledge  by  the  pledgee  or  by  a  repledgee,  unless  the  pledgee  is  in- 
solvent. The  pledgor's  remedy  is  at  law.^  The  fact  that  a  pledgor 
claims  that  the  pledgee  owes  him  more  money  than  he  owes  the  pledgee 
is  not  sufficient  to  sustain  a  bill  in  equity  to  enjoin  the  pledgee  from  sell- 
ing the  stock  in  order  to  pay  the  amount  due.  Some  other  ground  of 
equitable  jurisdiction  must  be  set  forth.^    Where  the  pledgee  of  stock 


^  Rinaker  v.  Dollar,  etc.  T.  Co., 
219  Pa.  St.  523  (1908). 

2  Joslyn  V.  Downing,  etc.  Co.,  150 
Fed.  Rep.  317  (1906).  See  also  §  452, 
supra. 

^  Park  V.  Musgrave,  2  Thomp.  &  C. 
(N.  Y.)  571  (1874).  A  pledgor  cannot 
enjoin  a  pledgee  from  selling  unless 
the  latter  is  insolvent  and  the  property 
has  no  ascertainable  value.  Howley 
V.  Francis  Press,  127  N.  Y.  App.  Div. 
646  (1908).  C/.  note  1,  p.  1322, 
infra.  Even  though  the  pledgee  of 
bonds  has  repledged  the  bonds  ille- 
gally, yet  the  pledgor  cannot  enjoin 
the  repledgee  from  selling  the  bonds 
where  there  is  no  allegation  that  the 
original  pledgee  is  insolvent.  Syra- 
cuse, etc.  Ry.  V.  Salt  Springs,  etc. 
Bank,  28  N.  Y.  Misc.  Rep.  619  (1899). 
A  pledgee  of  rights  to  subscribe  can- 
not be  enjoined  from  selling  the  same 
on  non-payment  of  the  debt,  if  he  is 
solvent.  Ehrich  v.  Grant,  111  N.  Y. 
App.  Div.  196  (1906). 

^Elliott  V.  Sibley,  101  Ala.  344 
(1893),  holding  also  that  in  a  suit 
in  equity  by  a  stockholder  to  enjoin 
a  sale  of  his  stock  by  the  corporation 
for  a  debt  due  the  corporation,  the 
corporation  is  a  necessary  party 
defendant,  and  that  the  complainant 
must  aver  a  readiness  to  pay  what- 
ever may  be  found  due.  Where  the 
pledgor  tenders  the  debt  and  upon 
its  not  being  accepted,  sues  in  trover, 
and  the  pledgee  then  advertises  the 
stock  for  sale,  the  pledgor  may 
maintain    an    injunction    suit   against 


the  sale,  the  injunction  to  be  dis- 
solved if  the  pledgor  does  not  con- 
tinue the  tender.  The  rule  that  a 
tender  releases  the  pledge  does  not 
apply  in  such  an  injunction  suit. 
Glover  v.  Central  Inv.  Co.,  133  Ga. 
62,  (1909).  In  Louisiana  in  a  suit 
by  a  pledgor  to  redeem  he  may  have 
an  injunction  and  the  order  of  the 
court  may  compel  the  pledgee  to 
deliver  the  certificates  to  the  sheriff. 
Ansley  v.  Stuart,  123  La.  330  (1908). 
Where  a  person's  stock  is  pledged  for 
a  debt  of  his  own  and  another  party 
and  the  pledgee  claims  a  lien  for  other 
debts  of  the  party,  the  owner  of  the 
stock  may  maintain  a  bill  in  equity 
to  marshal  the  assets.  Smith  v. 
First  National  Bank,  151  N.  Y.  App. 
Div.  317  (1912).  In  a  suit  in  equity 
by  a  pledgor  to  recover  back  certifi- 
cates of  stock  in  pledge  a  receiver 
will  not  be  appointed  if  the  defendant 
is  responsible,  but  an  injunction 
■will  be  granted  against  the  pledgee's 
disposing  of  the  stock.  Ketcham 
V.  Provost,  147  N.  Y.  App.  Div. 
777  (1911).  Where  stock-brokers  have 
pledged  their  customers'  securities 
and  become  bankrupt,  the  bank- 
ruptcy court  may  enjoin  the  pledgees 
from  selling  the  securities  pending 
an  investigation  as  to  the  right  of  the 
customer  to  redeem.  Re  Carothers 
&  Co.,  192  Fed.  Rep.  691  (1912).  In 
a  pledgor's  suit  to  enjoin  the  pledgee 
from  selling  the  pledge  on  the  ground 
that  the  pledgor  had  purchased  the 
stock  from  the  pledgee  by  fraudulent 


1317 


§  475.] 


PLEDGE    OF   STOCK. 


[CH.  XXVI. 


has  been  guilty  of  a  conversion  of  it,  the  pledgor's  remedy  against  him 
is  generally  by  an  action  at  law  for  damages.  He  need  not  tender  to 
the  pledgee  the  amount  of  the  debt  secured  by  the  pledge,  since  the 
pledgee  may  recoup  to  that  extent  and  thus  decrease  the  damages  of 
the  pledgor.^     So  also  where  a  broker  has  converted  the  customer's 


representations  and  liad  given  a  note 
in  payment  of  the  stock  as  pledged, 
the  suit  being  to  reduce  the  amount 
of  the  note,  clear  proof  of  fraud  is 
necessary.  Brooks  v.  Culver,  168 
Mich.  436  (1912).  A  subscriber  for 
bonds  who  repudiates  for  fraud  and 
holds  the  promoters  liable  cannot 
claim  a  lien  on  the  bonds,  because  that 
would  involve  affirmance.  Donnelly 
V.  Missouri-Lincoln,  etc.  Co.,  144  S.  W. 
Rep.  388  (Mo.  1911).  A  pledgor  of 
bonds  cannot  maintain  a  bill  in 
equity  against  a  pledgee  for  fraudu- 
lently selling  the  bonds  and  buying 
them  himself,  inasmuch  as  the  damages 
can  be  fixed  in  a  suit  at  law.  Dickin- 
son V.  Kempner,  193  Fed.  Rep.  204 
(1912).  A  constitutional  amendment 
changing  the  law  as  to  the  validity 
of  contracts  to  sell  stock  on  margin 
repeals  an  existing  right  of  action  to 
recover  back  money  paid  under  such 
contract,  but  does  not  stop  a  suit  to 
recover  back  a  pledge  made  to  secui-e 
such  an  illegal  contract.  Willcox  v. 
Edwards,  123  Pac.  Rep.  276  (Cal. 
1912).  A  purchaser  of  all  the  stock 
of  a  corporation  which  he  gives  back 
in  pledge  to  secure  part  of  the  pur- 
chase price,  may  enjoin  the  pledgee 
from  selling  on  the  ground  that  that 
corporation  had  practically  been  liqui- 
dated, and  the  pledgee  had  assets 
which  went  to  that  stock.  Francis  v. 
Gilreath  Coal,  etc.  Co.,  60  S.  Rep. 
919  (Ala.  1912).  In  a  sale  by  a  bank 
as  pledgee,  the  bank  cannot  be  enjoined 
on  the  ground  that  the  president  had 
secretly  agreed  that  the  collateral 
would  not  be  resorted  to.  Breyfogle 
V.  Walsh,  71  Fed.  Rep.  898  (1894). 
Where  the  pledgee  illegally  includes 
another  debt  in  his  claims  and  adver- 
tises the  stock  for  sale,  and  a  bill  is 
then  filed  to  enjoin  the  sale  and  to 
redeem,  and  the  pledgee  then  offers 
to  take  the  amount  justly  due,  but 
does  not  give  the  pledgor  reasonable 


time  in  which  to  pay,  and  the  sale  takes 
place,  and  the  pledgee  buys  the  stock 
and  then  sells  a  part  of  it,  the  pledgor 
in  the  bill  so  filed  may  have  damages 
for  the  value  of  all  the  stock  with 
interest,  less  the  amount  justly  due. 
Blood  II.  Erie,  etc.  Loan  Co.,  164  Pa. 
St.  95  (1894).  An  injunction  against 
a  pledgee  disposing  of  stock  owned 
by  a  certain  party,  or  an  attachment 
upon  the  interest  of  that  party,  does 
not  prevent  the  pledgee  selling  the 
stock  if  such  stock  really  belonged  to 
the  wife  of  that  party.  Fourth  Nat. 
Bank,  etc.  v.  Crescent,  etc.  Co.,  52 
S.  W.  Rep.  1021  (Tenn.  1897). 

1  Allen  V.  Dykers,  3  Hill  (N.  Y.), 
593  (1842);  aff''d,  Dykers  v.  Allen,  7 
Hill  (N.  Y.),  497;  New  York,  etc. 
R.  R.  V.  Davies,  38  Hun,  477  (1886) ; 
Work  V.  Bennett,  70  Pa.  St.  484  (1872) ; 
Neiler  v.  Kelley,  69  Pa.  St.  403  (1871) ; 
Langton  v.  Waite,  L.  R.  6  Eq.  165 
(1868) ;  Felt  v.  Heye,  23  How.  Pr.  359 
(1.862) ;  Lewis  v.  Graham,  4  Abb.  Pr. 
106  (1857);  Cortelyou  v.  Lansing,  2 
Caines'  Cas.  200  (1805);  Fisher  v. 
Brown,  104  Mass.  259  (1870).  How- 
ever, a  later  case  in  Massachusetts  — 
Cumnock  v.  Newburj'port  Sav.  Inst., 
142  Mass.  342  (1886)  —  holds  that 
a  tender  of  payment  of  a  debt  is  neces- 
sary to  enable  a  pledgor  to  maintain 
trover  for  a  conversion  of  property 
pledged,  unless  the  lien  created  by  the 
pledge  has  been  otherwise  discharged. 
"After  the  sale  by  the  pledgee,  the 
pledgor  need  not  make  a  tender  of  the 
amount  due  nor  a  demand  of  the 
securities  before  bringing  his  action. 
...  A  formal  tender  of  the  amount 
of  the  notes  would  have  been  a  useless 
ceremony,  such  as  the  law  never 
requires."  Fletcher  v.  Dickinson,  89 
Mass.  23  (1863).  Where  the  customer 
sues  the  broker  for  selling  the  stock 
illegally,  the  broker  may  set  up  the 
amount  due  from  the  customer,  not 
by  way  of  recoupment,   but  by  way 


1318 


CH.  XXVI.] 


PLEDGE   OF   STOCK. 


[§  475. 


stock,  the  customer  need  not  tender  the  balance  of  the  purchase  price 
of  the  stock  nor  make  demand  for  the  security  for  the  stock  before  com- 
mencing suit.^  Where  the  pledgee  sells  the  debt  and  stock  to  another 
person  and  the  latter  sells  the  stock  without  the  debt,  and  the  purchaser 
sells  the  stock  to  still  another  person,  the  various  sales  being  a  conspiracy, 
the  pledgor  may  sue  the  various  purchasers  for  conversion,  and  need  not 
tender  the  debt  or  make  any  demand  before  commencing  suit.^  The 
pledgor's  damages  are  measured  by  the  market  value  of  the  stock, 
together   with   interest   and   subsequent   damages.^     In   a   customer's 


of  a  lien  on  the  stock.  Farrar  v. 
Paine,  173  Mass.  58  (1899).  A  sale 
by  a  pledgee  without  notice  is  a  con- 
version, and  the  pledgor  may  sue  for 
the  value  of  the  stock  without  tender- 
ing the  debt,  but  the  pledgee  may  re- 
coup to  the  extent  of  the  debt.  Feige 
V.  Burt,  118  Mich.  243  (1898).  A 
pledgor's  vendee  may  tender  the 
amount  of  the  debt  and  demand  the 
stock  as  a  condition  of  payment. 
Trover  lies  for  a  refusal  of  pledgee 
to  deliver.  The  pledgee  is  liable  for 
depreciation  of  stock  after  such  ten- 
der. An  attachment  of  stock  against 
the  pledgor,  but  after  sale  by  him,  is 
no  defense  to  the  pledgee.  Tender  is 
sufficient  without  paying  the  money 
into  court.  Loughborough  v.  McNevin, 
74  Cal.  250  (1887).  See  also  Thomp- 
son V.  St.  Nicholas  Nat.  Bank,  113 
N.  Y.  325  (1889) ;  aff'd,  146  U.  S.  240, 
and  §  461,  supra.  The  pledgee  sued 
for  conversion  may  set  off  the  debt  due 
him.  Van  Shaick  v.  Ramsey,  90  Hun, 
550  (1895).  Where  the  pledgee  buys 
the  seciu'ity  at  the  public  sale  and  then 
sells  it,  and  then  sues  the  pledgor  for 
the  deficiency  on  the  first  sale,  the 
pledgor  may  claim  a  set-off  for  the 
full  value  of  the  securities  wrongfully 
resold,  and  need  not  make  a  tender. 
Rush  V.  First  Nat.  Bank,  71  Fed. 
Rep.  102  (1895),  reviewing  the  author- 
ities on  tender  in  such  cases.  A  suit 
against  a  pledgee  for  conversion  of 
stock  with  a  demand  for  judgment 
for  the  difference  between  the  amount 
due  on  the  debt  and  the  value  of  the 
stock,  plus  dividends,  without  asking 
for  a  redemption  of  the  stock  or  trans- 
fer thereof,  is  at  law  and  not  in  equity. 
Brightson  v.  Claflin  Co.,  108  N.  Y. 
App.    Div.    284     (1905).     Where    the 


pledgee  gives  notice  of  intent  to  sell 
but  withdraws  it,  he  must  give  another 
notice  before  selling,  and  if  he  sells 
without  such  further  notice  the 
pledgor  may  sue  for  the  stock  without 
paying  any  money  into  court.  Furber 
V.  National,  etc.  Co.,  118  N.  Y.  App. 
Div.  263  (1907);  aff'd,  193  N.  Y. 
622.  Under  the  California  code,  the 
pledgor,  in  order  to  redeem,  must  ten- 
der the  amount  due,  even  though  the 
pledgee  has  converted  the  stock.  Bell 
V.  Bank  of  California,  153  Cal.  234 
(1908). 

1  Mullen  V.  Quinlan  &  Co.,  195  N.  Y. 
109  (1909). 

2  Usher  v.  Van  Vranken,  48  N.  Y. 
App.  Div.  413  (1900). 

3  See  ch.  XXXV,  infra.  In  Fowle 
V.  Ward,  113  Mass.  548  (1873),  the 
court  said  the  damages  should  be  "a 
sum  of  money  which  would  enable 
him  to  purchase  seventeen  new  shares 
to  replace  those  which  have  been 
taken  from  him,  with  such  additional 
sum  as  would  indemnify  him  for  the 
dividends  which  he  has  lost  since  the 
sale,  and  also  an  eqiiitable  allowance 
for  interest."  Where  the  pledgee 
refuses  to  deliver  up  the  stock  upon  a 
tender  of  the  debt  he  is  liable  in  dam- 
ages for-^the  value  of  the  stock  on 
the  day  of  the  tender  and  demand, 
less  the  amount  tendered.  Franklin 
Bank  v.  Harris,  77  Md.  423  (1893). 
The  pledgor  in  suing  to  recover  back 
the  stock  must  include  a  claim  for 
depreciation  in  its  value  after  he  had 
tendered  the  debt,  if  he  intends  to 
make  such  a  claim,  and  cannot  after 
judgment  start  another  suit  for  such 
depreciation.  Van  Home  v.  Tread- 
well,  130  Pac.  Rep.  5  (Cal.  1913). 


1319 


§475. 


PLEDGE  OF  STOCK. 


CH.  XXVI. 


suit  against  a  broker  for  conversion  of  the  stock,  the  highest  price  of 
the  stock  within  periods  varying  from  a  few  days  to  within  two  months 
of  the  conversion  may  be  shown,  and  the  court  may  determine  as  a 
matter  of  law,  what  is  a  reasonable  time  within  which  such  value  may 
be  shown. ^  The  pledgor  may  be  barred  from  his  action  for  damages 
by  a  waiver  of  the  particular  act  of  conversion  by  the  pledgee.'  He  has 
the  option  of  ratifying  the  transaction  and  claiming  the  proceeds,  or 
he  may  repudiate  the  sale  and  sue  for  conversion,^  and  in  New  York 
state  may  arrest  the  pledgee."  The  remedy  at  law  may  be  on  contract 
or  in  tort.5     An  illegal  sale  of  the  pledge  by  the  pledgee  is  a  conversion, 


1  Mullen  V.  Quinlan  &  Co.,  195 
N.  Y.  109  (1909).  The  question  of 
what  is  a  reasonable  time  within 
which  the  purchaser  might  have  gone 
into  the  market  and  repurchased  his 
stock  which  his  broker  has  converted, 
is  a  question  of  law,  and  nine  days  is 
a  reasonable  time,  but  each  conversion 
by  the  broker  will  be  considered  by 
itself.  Keller  v.  Halsey,  130  N.  Y. 
App.  Div.  598  (1909)  ;  rev'd  on  another 
point  in  202  N.  Y.  588.  A  customer 
whose  stock  has  wrongfully  been  sold 
by  a  broker  need  not  repurchase  it 
at  once  on  discovering  conversion  in 
order  to  measure  the  loss,  but  may 
recover  the  difference  between  the 
price  of  the  sale  and  the  highest  price 
within  three  weeks  of  the  time  of  sale. 
Miller  &  Co.  v.  Lyons,  74  S.  E.  Rep. 
194  (Va.  1912).     See  §  460,  supra. 

2  See  eases  in  note  2,  p.  1324,  irifra. 

3  Atkins  V.  Gamble,  42  Cal.  86,  91 
(1871).  If  there  are  several  pledgors, 
and  the  pledge  is  redeemed,  and  the 
pledgee,  at  the  request  of  one  of  the 
pledgors,  transfers  the  stock  to  third 
parties,  the  pledgee  is  liable  to  the 
other  pledgors  for  the  loss  incurred 
thereby.  Magnus  v.  Queensland  Nat. 
Bank,  L.  R.  36  Ch.  D.  25  (1887); 
aff'd,  L.  R.  37  Ch.  D.  466. 

*  See  §§  452,  471,  supra. 

^  The  form  of  a  complaint  or  dec- 
laration in  an  action  by  a  pledgor 
against  a  pledgee  for  the  conversion 
of  the  stock  held  in  pledge  may  be  in 
tort  or  in  assumpsit,  but  not  in  both. 
Stevens  v.  Hiirlbut  Bank,  31  Conn. 
146  (1862).  It  is  a  conversion  for  the 
pledgee  to  retain  the  stock  after  the 
principal  of  the  debt  is  paid,  nothing 
being    said    about   interest.     KuUman 


V.  Greenebaum,  92  Cal.  403  (1891). 
A  complaint  which,  after  stating  that 
shares  of  stock  had  been  pledged  to 
defendant,  avers  that  "defendant,  in 
consideration  of  the  premises,  then 
and  there  undertook  and  promised  to 
plaintiff"  to  hold  the  stock  only  as 
pledgee,  but  that,  in  violation  of  its 
promise,  defendant  sold  and  converted 
the  stock  to  its  own  use,  without  giv- 
ing plaintiff  notice  of  the  sale,  and 
in  which  plaintiff  seeks  to  recover  as 
damages  the  full  value  of  the  shares 
alleged  to  have  been  converted,  though 
informal,  is  good  as  a  complaint  in 
case.  Sharpe  v.  Birmingham  Nat. 
Bank,  87  Ala.  644  (1888).  This  case 
discussed  also  the  difference  between 
assumpsit  and  case  in  such  an  action. 
In  Butts  V.  Burnett,  6  Abb.  Pr.  (N.  S.) 
302  (1869),  involving  the  arrest  of  a 
broker  who  had  sold  the  pledge  before 
the  note  was  due,  the  court  said : 
"It  is  very  questionable,  I  think, 
whether  a  demand  after  default  in 
payment  of  the  debt  for  which  prop- 
erty is  pledged  as  security  will  render 
a  refusal  to  deliver  the  pledged  prop- 
erty a  tortious  conversion  of  it.  No 
doubt  the  pledgor  can  redeem  upon  a 
tender  of  the  debt,  or  he  may  recover 
the  difference  between  the  value  of  the 
pledge  and  the  debt.  But  to  lay  the 
foundation  for  an  action  for  conver- 
sion, I  am  of  opinion  that  an  offer 
and  demand  must  be  made  on  the 
day,  and  is  not  sufficient  if  made  after 
the  day  on  which  the  debt  has  become 
payable."  As  to  the  complaint  in 
an  action  by  a  pledgor  against  the 
pledgee  for  not  returning  goods 
pledged,  see  2  Chitty,  PI.  69 ;  Stanton 
V.  CoUier,  3  El.  &  Bl.  274  (1854).     An 


1320 


CH.  XXVI.] 


PLEDGE  OF  STOCK. 


[§  475. 


and  a  complaint  for  such  conversion  will  not  be  construed  as  a  complaint 
for  breach  of  contract.^  In  some  cases  the  pledgor  may,  if  he  prefers, 
begin  suit  in  a  court  of  equity,  when  the  pledgee  has  converted  the  stock, 
and  compel  him  either  to  replace  the  stock  or  give  compensation  in 
damages.  The  jurisdiction  of  a  court  of  equity  in  such  a  case  does  not 
always  attach,-  but  sometimes  may  be  sustained  on  the  ground  that 
only  a  court  of  equity  can  compel  a  retransf  er  of  the  stock  or  an  account- 
ing of  the  dividends  declared  while  the  pledge  was  running,  or  an  ac- 


answer  is  not  good  where  it  merely 
denies  the  conversion  and  does  not 
deny  the  possession  by  the  defendant 
of  certain  stocks  belonging  to  the 
plaintiff,  nor  the  tender  of  the  balance 
due,  nor  the  demand  for  such  stocks, 
nor  the  non-delivery  of  the  same. 
Dubois  V.  Sistare,  N.  Y.  L.  J.,  Dec.  9, 
1890.  See  Smith  v.  Savin,  141  N.  Y. 
315  (1894).  Where  the  repledgee  con- 
verts the  stock  the  remedy  for  conver- 
sion is  with  the  first  pledgee,  not  with 
the  first  pledgor.  Thompson  v.  Toland, 
48  Cal.  99  (1874).  Contra,  Smith  v. 
Savin,  69  Hun,  311  (1893).  See  s.  c, 
9  N.  Y.  Supp.  106,  and  141  N.  Y.  315. 
A  pledge  of  stock  to  secure  future 
liabilities  does  not  secure  past  liabili- 
ties. If  the  pledgee  refuses  to  sur- 
render the  stock  on  demand  and  ten- 
der, the  pledgor  may  recover  the 
value  of  the  stock  on  that  day,  less 
the  amount  tendered.  Franklin  Bank 
V.  Harris,  77  Md.  423  (1893).  Where 
the  pledgor  learns  of  the  illegality  of 
the  sale  after  he  has  commenced  suit 
for  the  surplus,  he  will  be  allowed  to 
amend  and  sue  for  conversion.  Smith 
V.  Savin,  141  N.  Y.  315  (1894).     , 

1  Smith  V.  Hall,  67  N.  Y.  48  (1876), 
distinguishing  Austin  v.  Rawdon,  44 
N.  Y.  63  (1870). 

2  Lacombe  v.  Forstall's  Sons,  123 
U.  S.  562  (1887) ;  Genet  v.  Howland,  45 
Barb.  560  (1866).  A  pledgee  cannot 
maintain  a  bill  in  equity  to  redeem 
unless  the  items  are  numerous  or 
technical,  and  the  fact  that  inciden- 
tally a  discovery  is  sought  is  not  suffi- 
cient in  itself.  De  Bevoise  v.  H.  &  W. 
Co.,  67  N.  J.  Eq.  472  (1904).  The 
remedy  of  the  pledgor  is  at  law  after 
a  tender,  not  by  bill  in  equity  to 
redeem.  Doak  v.  Bank  of  the  State,  6 
Ired.  L.   (N.  C.)  309   (1846).     Where 


the   pledgee   has   sold   the   stock,    the 
pledgor  cannot  compel  'him  to  restore 
it  by  a  bill  in  equity,  even  though  he 
alleges  that  the  sale  was  to  a  person 
who  holds  the  stock  as  trustee  for  the 
pledgee.     The  pledgor's  remedy  is  at 
law.     Hinckley  v.  Pfister,  83  Wis.  64 
(1892).     A  bill  in  equity  does  not  lie 
for  damages  due  to  an  illegal  sale  of 
stock  by  a  pledgee.     Henry  v.  Travel- 
ers' Ins.  Co.,  45  Fed.  Rep.  299  (1891). 
A  pledgor  cannot  file  a  bill  in  equity 
to  hold  the  pledgee  liable  for  selling 
the  stock  in  violation  of  the  pledge, 
there    being     no     disputed     accounts. 
Roland  v.   Lancaster,   etc.   Bank,    135 
Pa.  St.  598   (1890);  Angus  v.  Robin- 
son, 62  Vt.  60  (1890).     It    is  well  set- 
tled   that    a   bill    in    equity    will    not 
ordinarily  lie  to  redeem  property  from 
a  pledge.     Kemp  v.  Westbrook,  1  Ves. 
Sr.     278     (1749);     Story,     Eq.     Jur., 
§  1032).     The  reason  is  obvious.     The 
legal  title  to  the  thing  pledged  does 
not  pass  to  the  pledgee,  as  it  does  to 
a  mortgagee  in  possession  in  the  case 
of  a  mortgage.     The  pledgor  retains 
the  legal  title  and  parts  only  with  pos- 
session and  a  special  property.     Jones, 
Pledges,    §  552.     He    has    therefore    a 
legal  right  to  redeem,  and  upon  ten- 
dering the  amount  due  to  the  pledgee 
he    may    bring    replevin    for    the    col- 
lateral   or    an    action    to    recover    its 
value.     It  is  only  when  his  legal  reme- 
dies are  insufficient   that   the  pledgor 
can  come  into  equity.     Jones,  Pledges, 
§  556,  and  cases  cited.     Even  though 
a    stockholder    pledges    his    stock    to 
secure  a  debt  of  the  corporation,  and 
Such  stock  is  sold  out,  yet  he  is  not 
entitled  to  an  equal  amount  of  stock 
from  the  corporation,  but  is  merely  a 
creditor  of  it.     Dempster  v.   Rosehill. 
etc.  Co.,  206  111.  261  (1903). 


1321 


§4; 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


counting  by  third  persons  to  whom  the  pledgee  has  assigned  the  debt 
and  pledge,  or  enjoin  an  illegal  transfer  of  the  stock. ^     A  pledgor  may 

1  Bryson  v.  Rayner,  25  Md.  424 
(1866) ;  Conyngham's  Appeal,  57  Pa. 
St.  474  (1868) ;  Hasbrouck  v.  Vander- 
voort,  4  Sandf.  74  (1850);  Koons  v. 
Jeffersonville  Nat.  Bank,  89  Ind.  178 
(1883) ;  Smith  v.  Anderson,  8  Tex. 
Civ.  App.  188  (1894);  Maynard  v. 
Tilden,  28  Fed.  Rep.  688  (1886).  A 
sale  with  a  right  to  repurchase  may 
amount  to  a  pledge  and  the  party  may 
maintain  a  bill  in  equity  to  recover 
back  the  stock  in  payment,  it  appear- 
ing that  it  has  no  ascertainable  mar- 
ket value  and  has  a  peculiar  value  to 
plaintiff,  greater  than  the  market 
value  at  the  time  of  transfer.  Eich- 
baum  V.  Sample,  213  Pa.  St.  216 
(1906).  Even  though  a  pledgor  signs 
a  WT-itten  agreement  that  on  non- 
payment of  the  debt  the  pledgee  may 
sell  the  stock  at  public  or  private  sale 
with  or  without  notice  to  the  pledgor, 
yet  a  sale  on  an  exchange  at  which 
the  public  cannot  bid  will  be  set 
aside  at  the  instance  of  the  pledgor, 
and  if  the  pledgee  has  resold  the 
stock,  the  pledgor  in  a  suit  in  equity 
instituted  to  redeem  the  pledge  may 
be  given  damages  equal  to  the  differ- 
ence between  the  debt  and  the  market 
value  of  the  stock,  which  may  be  the 
price  at  which  the  pledgee  has  re- 
sold the  same.  The  pledgee  is  not 
entitled  to  have  a  jury  estimate  such 
damage.  Such  a  suit  in  equity  lies 
if,  at  the  time  of  instituting  it,  the 
pledgor  did  not  know  that  the  pledgee 
had  resold  the  stock,  the  stock  being 
in  a  private  corporation,  and  consti- 
tuting a  majority.  No  tender  of  the 
debt  is  necessary  if  the  pledgee  de- 
nies the  right  of  the  pledgor  to  re- 
deem. Hagan  v.  Continental  Nat. 
Bank,  182  Mo.  319  (1904).  A  pledgor 
cannot  maintain  a  bill  in  equity  to 
redeem  where  he  does  not  show  that 
the  remedy  at  law  is  insufficient. 
Somerville  v.  Hellman,  210  Mo.  567 
(1908).  A  guarantor  of  a  note  secured 
by  stock  may  take  up  the  debt  and 
the  pledgor  may  maintain  a  bill  in 
equity  to  redeem.  Hinckley  v.  Col- 
vin,  233  111.  139  (1908).  A  pledgor 
cannot   maintain  a   bill   in   equity   to 

13 


redeem  when  he  knows  that  the 
pledgee  no  longer  has  possession  and 
cannot  return  the  pledge.  Bell  v. 
Bank  of  California,  153  Cal.  234 
(1908).  An  action  to  redeem  may  be 
sustained  in  equity  where  the  trans- 
action is  a  complicated  one.  Higgins 
V.  Lansingh,  154  111.  301  (1895). 
Where  the  pledgee  has  transferred  the 
stock  held  in  pledge,  and  is  insolvent, 
the  pledgor  may  file  a  bill  in  equity, 
and  bring  in  all  parties  interested. 
Nelson  v.  Owen,  113  Ala.  372  (1896). 
Where  the  pledgor  borrows  the  money 
from  a  third  party  to  pay  a  debt,  and 
the  lender  does  pay  the  debt,  but 
takes  the  collateral  without  authority 
and  pledges  it  for  its  own  debt,  the' 
original  pledgor  may  file  a  bill  to  ob- 
tain the  possession  of  the  stock  and 
also  obtain  the  dividends  that  have 
been  paid.  If  the  second  pledgee  claims 
to  be  a  bona  fide  holder  of  the  stock, 
those  facts  must  be  specially  pleaded 
in  defense.  Maxwell  v.  Foster,  64  S.  C. 
1  (1902).  In  a  suit  in  equity  by  the 
pledgor  to  redeem,  the  pledgee  can- 
not set  up  that  the  pledgor  has  sold 
his  interest  in  the  pledge  to  another 
party,  and  that  another  suit  is  pend- 
ing brought  by  that  other  party  for 
specific  performance,  and  that  in  such 
suit  the  pledgee  is  a  party  defendant, 
no  proof  being  given  of  such  sale. 
Houston,  etc.  R.  R.  v.  Conner,  29  Tex. 
Civ.  App.  259  (1902).  Where  the 
pledge  has  been  sold  by  the  pledgee 
and  the  amount  due  is  in  dispute,  the 
pledgor  may  file  a  bill  in  equity 
against  the  pledgee  and  the  purchaser 
with  notice  and  the  corporation  to  re- 
deem it,  and  he  need  not  make  any 
tender  of  the  amount  due,  provided  he 
offers  in  his  complaint  to  pay  any 
amount  found  due.  Treadwell  v. 
Clark,  73  N.  Y.  App.  Div.  473  (1902) ; 
s.  c,  114  N.  Y.  App.  Div.  493;  aff'd, 
190  N.  Y.  51.  Where  a  transaction  is 
adjudged  to  be  a  loan  and  not  a  sale, 
and  the  defendant  is  ordered  to  return 
the  stock,  it  is  error  to  add  an  alterna- 
tive money  judgment  for  the  value  of 
the  stock.  Fanny  Rawlings  Min.  Co. 
V.  Tribe,  29  Colo.  302  (1902).  A 
22 


CH.  XXVI. 


PLEDGE  OF  STOCK. 


[§  475. 


by  suit  in  equity  compel  the  pledgee  to  deliver  up  the  stock  in  pledge, 
and  if  the  pledgee  has  sold  the  pledged  stock,  but  has  similar  stock, 


pledgor  ill  contracting  with  the  pledgee 
to  obtain  a  release  of  the  stock  on  a 
settlement  of  the  debt  for  less  than  the 
full  sum  is  not  bound  to  disclose  the 
fact  that  the  corporation  was  about  to 
be  sold  out  at  a  high  price  which 
would  have  paid  the  whole  debt.  The 
pledgor  may  file  a  bill  in  equity  to  re- 
deem the  stock  on  the  payment  of  the 
sum  agreed  upon.  Chicora,  etc.  Co.  v. 
Dunan,  91  Md.  144  (1900).  A  cross- 
bill in  equity  by  a  pledgee  to  have  the 
debt  determined  and  have  a  sale  made 
was  involved  in  Troendle  v.  Van  Nort- 
wick,  98  Fed.  Rep.  785  (1900).  Where 
a  pledge  of  stock  is  deposited  with  a 
third  party,  according  to  the  contract 
of  pledge,  such  third  party  need  not 
be  joined  in  a  suit  by  the  pledgor 
against  the  pledgee  to  redeem.  Baeek 
V.  Meinken,  33  N.  Y.  Misc.  Rep.  371 
(1900).  A  broker  cannot  interplead 
between  his  customer  and  an  indorser 
of  the  customer's  note,  in  regard  to 
stocks  deposited  with  the  broker  by  the 
customer,  even  though  the  adminis- 
trator of  the  indorser  claims  that  he 
has  an  interest  in  such  stock.  Post  v. 
Emmett,  40  N.  Y.  App.  Div.  477 
(1899).  Where  the  pledgor  files  a 
bill  to  redeem  and  the  pledgee  claims 
that  the  stock  is  sold  and  not  pledged, 
and  the  court  decides  that  the  trans- 
action was  a  pledge  and  decrees  the 
amount  to  be  paid  by  the  pledgor  to 
redeem,  and  the  pledgee  then  appeals 
and  pays  assessments  on  the  stock 
pending  the  appeal,  the  pledgee  may 
recover  back  such  assessments  from 
the  pledgor,  even  though  the  judg- 
ment was  affirmed  on  appeal.  Irvine 
V.  Angus,  93  Fed.  Rep.  629  (1899). 
The  question  of  the  ownership  of 
bonds  as  between  a  pledgor  and 
pledgee  and  subsequent  holders  can- 
not be  contested  in  the  foreclosure  of 
the  mortgage  securing  the  same,  prior 
to  the  decree,  but  on  the  distribution 
of  the  proceeds  of  the  foreclosure  sale 
that  question  can  then  be  litigated. 
Sioux  City,  etc.  Ry.  v.  Manhattan  T. 
Co.,  92  Fed.  Rep.  428  (1899).  The 
pledgor  may  file  a  bill  to  reach  the 
excess  realized  by  the  pledgee  on  a  sale 


of    the    collateral,    and    in    such    suit 
may  enjoin  the  assignee  of  the  pledgee 
from  using  such  excess  to  pay  other 
debts  of  the  pledgee.     Adams  v.  Ball, 
24   N.    Y.    App.    Div.    69    (1897).     A 
pledgor  may  maintain  a  suit  in  equity 
to   redeem    his    stock,    and    the   judg- 
ment may  order  the  pledgee  to  deposit 
the  certificate'  of  stock  in  court.     Col- 
burn    V.    Riley,    11    Colo.    App.    184 
(1898).     The  pledgee  must  return  the 
stock  and  stock  dividends  and  account 
for     money     dividends.     Vaughan     v. 
Wood,  1  M.  &  K.  403  (1833).     A  court 
of   equity    has    power    to    decree    the 
return   of   pledged   stock   and   money 
deposited  as  collateral.     Post  v.  Sim- 
mons,   9    N.    Y.    Supp.    112    (1890); 
Brown  v.  Runals,  14  Wis.  693  (1861). 
A  pledgor  may  file  a  bill  in  equity  to 
have  a  surplus  delivered  up  and  the 
notes    for    which    the    collateral    was 
given   delivered   up   also.     Cahoon   v. 
Bank  of  Utica,  7  N.   Y.  486   (1852), 
rev'g  7  How.  Pr.  134.     In  England  an 
action  to  redeem  a  pledge  of  stock  is 
to    be    tried    without    a    jury,    even 
though  the  defendant  sets  up  a  coun- 
ter   claim     of    false    representations. 
Lynch  v.  Macdonald,  L.  R.  37  Ch.  D. 
227    (1887).     Where    the    pledgee    is 
about  to  sell  the  stock  and  denies  the 
pledge,    the   pledgor   may   enjoin   the 
sale.     Thielens    v.    Dialogue,    19    Atl. 
Rep.  970  (N.  J.  1890).     For  other  cases 
sustaining     the     jurisdiction     on     the 
ground  that  an  injunction  was  proper, 
see  Hower  v.  Weiss,  etc.  Co.,  55  Fed. 
Rep.  356  (1893) ;  Myers  v.  Merchants' 
Nat.  Bank,  16  N.  Y.  Supp.  58  (1891). 
The  pledgor  cannot  enjoin  a  sale  by 
the  pledgee  on  the  ground   that   the 
sale   will   be   at   a   sacrifice.     Park   v. 
Musgrave,  2  Thomp.  &  C.  (N.  Y.)  571 
(1874).     Where  a  purchaser  of  stock 
agrees  to  give  a  long-time  note  with 
the    stock    as    security,     and    subse- 
quently, for  the  accommodation  of  the 
vendor,    a    short-time    note    with    the 
stock    as    security    is    delivered    to    a 
third   person    named   by    the   vendor, 
and  the  vendor  then  obtains  posses- 
sion of  the  stock  and  note,  and,  after 
the  short-time  note  becomes  due,  pro- 


1323 


§  475.] 


PLEDGE  OF  STOCK. 


[cH.  XXVI. 


he  may  be  compelled  to  transfer  the  latter.^  An  unreasonable  delay 
or  laches  on  the  part  of  the  pledgor  will  bar  his  remedy  against  the 
pledgee.^ 


But  delay  in  bringing  suit  to  redeem  pledged  property  does 


poses  to  collect  the  note  and  sell  out 
the  stock,  the  pledgor  may  enjoin  the 
sale  of  the  stock.  In  this  case  the 
stock  was  of  uncertain  value,  and  rep- 
resented a  controlling  interest  in  the 
company,  and  damages  for  its  con- 
version would  not  have  been  an  ade- 
quate remedy.  The  court  held  that  an 
action  for  replevin  was  not  adequate, 
inasmuch  as,  in  order  to  bring  re- 
plevin, the  pledgor  would  have  to  ten- 
der the  debt,  which,  according  to  the 
original  agreement,  was  not  yet  due. 
Hower  v.  Weiss,  etc.  Co.,  55  Fed.  Rep. 
356  (1893).  "If,  for  instance,  the  col- 
laterals consist  of  shares  of  stock 
which  have  been  transferred  into  the 
pledgee's  name  upon  the  books  of  a 
corporation,  an  action  in  equity  will 
lie,  for  the  reason  that  such  an  action 
is  necessary  to  secure  the  retransfer 
of  the  shares.  So  equity  may  be  in- 
voked where  an  accounting  or  a  dis- 
covery is  needed  or  where  the  pledgee 
has  assigned  the  pledge."  Stokes  v. 
Stokes,  N.  Y.  L.  J.,  Nov.  15,  1892,  p. 
375.  See  also  cases  in  note  2,  p.  1324. 
A  purchaser  of  stock  who  makes  a 
partial  payment  and  gives  back  the 
stock  as  collateral  security  cannot 
abandon  the  contract  and  claim  such 
part  of  the  stock  as  the  payment  al- 
ready made  would  pay  for,  on  the 
ground  that  the  seller  has  obtained 
control  of  the  corporation  and  is 
guilty  of  a  breach  of  trust.  The  fact 
that  the  seller  as  pledgee  has  sold  the 
stock  and  bought  it  in  himself  is 
immaterial,  inasmuch  as  such  sale  is 
illegal.  Reid  v.  Caldwell,  110  Ga.  481 
(1900);   s.  c,  114  Ga.  676  (1902). 

1  Krouse  v.  Woodward,  110  Cal.  638 
(1895).  Where  an  agent  with  whom 
stock  is  deposited  transferred  in 
blank  causes  the  same  to  be  trans- 
ferred to  himself  on  the  books  of  the 
company,  and  then  hypothecates  the 
same,  and  afterwards  dies,  the  real 
owner  of  the  stock  may  claim  other 
stock  in  the  same  corporation  which 
such  agent  had  at  the  time  of  his 
death.     The  identity  of  the  certificates 


is  immaterial.  Marshall  v.  Marshall, 
11  Colo.  App.  505  (1898).  See  also 
§  469,  supra.  A  pledgor  cannot  have 
a  sale  by  the  pledgee  on  notice  set 
aside  on  the  ground  that  the  pledgor 
expected  an  extension  of  time  to  pay 
the  debt.  Haines  v.  Barber,  113  N.  Y. 
App.  Div.  696  (1906). 

2  A  delay  by  the  pledgor  for  twenty- 
five  years  in  filing  a  bill  to  redeem  is 
fatal.  Kase  v.  Burnham,  206  Pa.  St. 
330  (1903).  Where  the  corporation  is 
sued  by  a  claimant  of  stock  and  it 
applies  to  the  court  to  be  allowed  to 
interplead  between  such  claimant  and 
a  pledgee  of  the  certificates,  if  the 
court  refuses  such  interpleader  and 
gives  judgment  for  the  first  claimant, 
and  for  twenty  years  the  pledgee 
takes  no  action,  and  in  the  meantime 
the  corporation  issues  new  certificates 
to  the  claimant,  the  pledgee  cannot 
maintain  a  suit  for  the  stock.  Potts- 
ville  Bank  v.  Minersville,  etc.  Co.,  211 
Pa.  St.  566  (1905).  A  delay  of  the 
pledgor  in  demanding  back  the  col- 
lateral, for  ten  years  after  paying  the 
note,  is  a  bar  to  a  recovery.  Brown  v. 
Bronson,  93  N.  Y.  App.  Div.  312 
(1904).  The  right  to  redeem  contin- 
ues unless  the  pledgee  has  demanded 
redemption.  White  River,  etc.  Bank 
V.  Capital,  etc.  Co.,  77  Vt.  123  (1904). 
Laches  in  claiming  stock  is  no  bar, 
unless  there  is  an  estoppel,  and  the 
pledgee  has  altered  his  position  by 
reason  thereof.  Groeltz  v.  Cole,  128 
Iowa,  340  (1905).  Eight  years'  delay 
by  the  pledgor  in  complaining  of  the 
refusal  of  the  pledgee  to  deliver  up 
the  stock  on  tender  of  the  debt,  the 
stock  having  subsequently  declined 
in  value,  was  held  to  be  fatal  in  Mer- 
riam  v.  Childs,  93  Mo.  131  (1887). 
Where  the  pledgor's  executor,  for 
value  received,  sells  the  pledgor's  in- 
terest to  the  pledgee,  long  lapse  of 
time  after  full  knowledge  of  the  facts 
by  all  parties  will  raise  a  presumption 
in  favor  of  the  pledgee's  complete 
ownership.  Lockwood  v.  Brantly,  1 
Silvern.  187  (1886) ;    s.  c,  103  N.  Y. 


1324 


PLEDGE    OF   STOCK. 


[§  475. 


not  constitute  laches,  when  the  debt  is  kept  aUve  until  the  suit  is  be- 
gun.^ The  statute  of  limitations  commences  to  run  as  against  the 
pledgor  from  the  date  when  the  debt  becomes  due.^  At  common  law  the 
statute  of  limitations  both  as  to  a  debt  and  the  pledge  is  twenty  years, 


680.  As  to  the  statute  of  limitations, 
see  Maynard  v.  Tilden,  28  Fed.  Rep. 
688,  703  (1886);  Child  v.  Hugg,  41 
Cal.  519  (1891),  where  long  delay  was 
held  to  be  a  bar ;  also  §  476,  infra.  In 
Greene  v.  Dispeau,  14  R.  I.  575  (1884), 
a  pledge  of  stock  was  treated  as  a 
mortgage,  and  the  right  to  redeem  was 
held  to  be  barred  six  years  after  the 
date  of  the  mortgage.  A  pledgor 
waives  informality  of  the  notice, 
where,  after  the  sale,  he,  as  an  officer 
of  the  corporation,  enters  a  transfer 
of  the  stock  to  the  one  who  purchased 
at  the  sale.  Downer  v.  Whittier,  144 
Mass.  448  (1887).  Four  years'  delay 
in  complaining  is  fatal.  Receiving  the 
benefit  of  the  sale  is  a  waiver  of  objec- 
tions. McDowell  V.  Chicago  Steel 
Works,  124  111.  491  (1888).  Although 
the  pledgee  gives  no  public  notice  of 
the  sale,  and  although  he  purchases 
the  stock  at  the  sale,  yet  the  pledgor 
ratifies  the  sale  by  acquiescing  and 
by  negotiating  to  buy  the  stock.  Hill 
V.  Finigan,  77  Cal.  267  (1888).  The 
statute  of  limitations  is  no  bar  to  an 
action  to  redeem  a  pledge  of  stock, 
unless  the  statute  was  set  running  by 
demand  of  payment  and  notice  of  in- 
tent to  sell.  Gilmer  v.  Morris,  35  Fed. 
Rep.  682  (1888).  See  s.  c,  80  Ala.  78. 
In  the  case  of  a  pledge  of  stock  to 
secure  future  advances,  the  statute  of 
limitations  begins  to  run  against  the 
right  of  the  pledgor  to  redeem  from 
the  time  when  the  pledgee,  by  some 
positive  act,  repudiates  the  pledge  and 
claims  the  property  as  his  own,  or  im- 
properly disposes  of  it.  Gilmer  v. 
Morris,  43  Fed.  Rep.  456  (1890).  If 
the  pledge  is  recognized  by  extension 
to  other  debts,  the  statute  of  limita- 
tions runs  from  the  latter  date.  Gil- 
mer V.  Morris,  46  Fed.  Rep.  333 
(1891).  This  case,  Gilmer  v.  Morris, 
in  80  Ala.  78,  arose  again  in  Billing  v . 
Gilmer,  60  Fed.  Rep.  332  (1894), 
rev'g  Gilmer  v.  Billings,  55  Fed.  Rep. 
775.  The  statute  of  limitations  runs 
against  a  receipt  reciting  a  first  pay- 


ment on  stock  "standing  in  my  name 
but  owned  by  him,  and  he  remaining 
responsible  for  the  balance  of  the  in- 
stallments when  called  in,"  there  be- 
ing no  agreement-  as  to  the  future  dis- 
position of  the  stock  and  of  dividends. 
Cone  V.  Dunham,  59  Conn.  145  (1890). 
A  pledge  is  not  legally  abandoned  al- 
though no  demand  is  made  for  it  dur- 
ing a  long  lapse  of  time.  Reynolds 
V.  Cridge,  131  Pa.  St.  189  (1890). 
As  to  redemption,  laches,  etc.,  see 
Sehouler,  Bailm.  (2d  ed.),  §  2.50.  As 
to  the  rule  in  New  York,  see  Bailey 
V.  Chamberlain,  N.  Y.  D.  Reg.,  July  23, 
1888,  and  Miner  v.  Beekman,  50  N.  Y. 
337  (1872).  The  pledgee  cannot  claim 
that  he  has  held  the  stock,  adversely 
to  the  pledgor,  for  a  time  more  than 
sufficient  to  give  him  title  to  it  under 
the  statute  of  limitations.  He  is  not 
allowed  to  assert  that  he  holds  the 
stock  adversely.  Cross  v.  Eureka 
Lake,  etc.  Co.,  73  Cal.  302  (1887). 
The  ten  years'  statute  of  limitations 
applies  and  does  not  commence  to  run- 
until  the  pledgor  has  demanded  the 
stock,  where  the  amount  due  is  in  dis- 
pute. Treadwell  v.  Clark,  73  N.  Y. 
App.  Div.  473  (1902) ;  s.  c,  114  N.  Y. 
App.  Div.  493,  aff'd,  190  N.  Y.  51. 
Where  a  person  delivering  stock  to 
another  claims  that  it  was  to  secure 
the  latter  for  a  debt  of  the  ^  former 
which  the  latter  had  paid,  but  the 
latter  claims  the  stock  is  his  own, 
and  the  former  delays  three  years 
before  commencing  legal  proceedings 
to  redeem,  he  is  bound  to  explain 
the  cause  of  his  delay.  Blanton  v. 
Chalmers,  1.58  Fed.  Rep.  907   (1908). 

1  Higgins  V.  Lansingh,  154  111.  301 
(1895). 

-  Wheeler  v.  Breslin,  47  N.  Y.  Misc. 
Rep.  507  (1905).  See  §  476,  infra. 
The  statute  of  limitations  applies  to  a 
suit  of  the  pledgor  against  the  pledgee, 
even  though  the  suit  is  in  equity,  and 
involves  also  an  accounting,  conversion 
being  alleged.  Bell  v.  Bank  of  Cali- 
fornia, 153  Cal.  234  (1908). 


1325 


§  475.]  PLEDGE   OF   STOCK.  [cH.  XXVI, 

and  hence  a  pledge  in  Georgia  of  stock  in  an  Alabama  corporation  will 
in  an  Alabama  court  be  presumed  to  be  good  for  twenty  years.^  Where 
the  trustee  of  a  mortgage  illegally  accepts  some  of  the  bonds  as  security 
for  a  loan  to  the  secretary  of  the  mortgagor,  the  statute  of  limitations 
does  not  run  against  the  act  until  the  trust  company  refuses  to  turn  over 
the  bonds  or  until  it  sells  the  bonds  to  some  one  else." 

Where  the  pledgor  has  an  opportunity  to  sell  the  pledged  stock  for 
a  sum  sufficient  to  pay  the  debt  and  requests  the  pledgee  to  deliver 
the  stock  for  that  purpose  and  the  pledgee  refuses  and  sues  on  the  note, 
and  the  stock  becomes  worthless,  the  pledgee  is  liable  for  the  value 
thereof  when  the  request  was  made.^  Under  the  English  bankrupt 
law  if  the  pledgor  has  committed  an  act  of  bankruptcy  by  assigning, 
the  pledgee  is  not  bound  to  deliver  up  the  securities  to  the  pledgor  and 
the  assignee,  even  though  the  full  amount  of  the  debt  is  tendered.'* 
Tender  of  the  debt  when  or  after  it  becomes  due  releases  the  pledge.^ 
The  pledgee  need  not  deliver  up  part  of  the  security  upon  receiving  a 
part  payment  unless  the  pledge  agreement  so  provides.^  Where  the 
pledgor  makes  tender  of  the  amount  which  he  considers  due  and  demands 
the  pledge,  and  the  pledgee  refuses  the  tender  and  does  not  state  that 
the  amount  is  too  small,  the  pledgee  is  guilty  of  a  conversion .''  A  pledgor 
cannot  compel  his  pledgee  to  sell  the  stock  and  apply  the  proceeds  to 
the  debt  by  a  notice  to  make  such  a  sale.^    The  pledgee  is  not  liable  to 

1  Warrior,  etc.  Co.  v.  National  against  the  sale,  the  injunction  to  be 
Bank,  etc.,  53  S.  Rep.  997  (Ala.  1910).  dissolved  if  the  pledgor  does  not  con- 

2  MacDonnell  v.  Buffalo,  etc.  Co.,  tinue  the  tender.  The  rule  that  a  ten- 
193  N.  Y.  92  (1908).  der  releases  the  pledge  does  not  apply 

3  National  Exchange  Bank  v.  Kil-  in  such  an  injunction  suit.  Glover  v. 
patric,  102  S.  W.  Rep.  499  (Mo.  1907).  Central  Inv.  Co.,  133  Ga.  62  (1909). 

*  Ponsford,  etc.   Co.  v.  Union,  etc.  ^  Herman  Goepper  &  Co.  v.  Phoenix, 

Bank,  Lim.,  [1906]  2  Ch.  444.  etc.  Co.,  115  Ky.  708  (1903). 

<•  A  tender  of  the  amount  due  be-  '  Latta    v.    Tutton,    122    Cal.    279 

fore  sale  redeems  pledged   stock  and  (1898).     Where  the  pledgee  does  not 

stops  the  sale.     Winkler  v.  Magdeburg,  return  the  securities,  on  the  debt  be- 

100    Wis.    421    (1898).     An    uncondi-  ing    paid    by   services,    in   accordance 

tional  tender  of  the  amount  due  the  with    an    agreement,    the    pledgee    is 

pledgee   releases    the   pledge   and   en-  guilty     of     conversion.     Scrivner     v. 

titles  the  pledgor  to  the  stock.     Tom  Woodward,  139  Cal.  314  (1903). 

Boy,  etc.  Co.  v.  Green,  11  Colo.  App.  »  Lawrence  v.  Maxwell,  53  N.  Y.  19 

477  (1898);    Hyams  v.  Bamberger,  10  (1873);    Robinson  ?;.  Hurley,  11  Iowa, 

Utah,    3    (1894).     If    the    pledge   has  410   (1860);    O'NeUl  v.  Whigham,  87 

been  converted  and  was  worth  more  Pa.  St.  394  (1878) ;  Rozet  y.  McClellan, 

than  the  debt,  the  pledgor  need  not  48  111.  345  (1868) ;    Smouse  v.  Bail,  1 

tender  the  debt  before  suit.     Lowe  v.  Grant   (Pa.),  397   (1856);    Taggard  v. 

Ozmun,     3     Cal.     App.     387     (1906).  Curtenius,     15     Wend.     155     (18.36); 

Where   the   pledgor   tenders  the  debt  Fisher  v.  Fisher,  98  Mass.  303  (1867) ; 

and  upon  its  not  being  accepted,  sues  Napier  v.  Central,  etc.  Bank,  68  Ga. 

in  trover,  and  the  pledgee  then  adver-  637    (1882),    holding,    however,    that 

tises    the  stock    for    sale,  the   pledgor  where  the  pledgee  does   not  sell,   be- 

may     maintain     an     injunction     suit  cause  he  and  others  were  "bearing'' 

1326 


CH.  XXVI.] 


PLEDGE  OF  STOCK. 


[§  476. 


the  pledgor  for  depreciation  in  the  value  of  the  stock,  there  being  no 
agreement  that  the  pledgee  was  to  sell  it.^  When  the  pledgee  causes 
the  stock  to  be  sold,  the  pledgor  is  entitled  to  the  surplus  proceeds  of 
the  sale  remaining  after  the  debt  and  the  expenses  of  the  sale  have  been 
paid,  and  such  surplus  cannot  be  applied  by  the  pledgee  to  another 
debt,-  except  possibly  by  way  of  set-off.  If  the  officers  of  a  pledgee 
bank  refuse  to  deliver  back  the  pledged  stock  upon  a  tender  of  the  debt, 
they  are  liable  personally  in  damages  to  the  pledgor.^ 

A  pledgor  cannot  defend  against  a  note  on  the  ground  that  the  col- 
lateral security  has  been  converted,  unless  such  defense  is  in  the  way 
of  a  set-off  or  counter-claim  or  it  is  alleged  that  the  stock  has  value  or 
that  the  pledgor  has  sustained  damage.^  The  measure  of  damages  on 
an  illegal  sale  is  considered  elsewhere.^ 

§  476.  Pledgee's  remedies  when  debt  secured  is  not  paid  —  Sale 
and  deficiency.  —  Where  shares  of  stock  are  pledged  as  collateral 
security  for  a  debt,  and  the  debt  is  not  paid,  and  the  pledgee  wishes  to 
apply  the  stock  to  the  payment  of  the  debt,  he  has  the  right  to  pursue 
either  one  of  two  remedies. 

First.  He  may  file  a  bill  in  equity  for  the  foreclosure  and  sale  of 
the  pledge.^    In  a  decree  foreclosing  a  pledge  of  stock  the  question  of 


the  market,  there  may  be  an  element 
of  fraud  which  gives  a  cause  of  action. 
The  pledgor  cannot  by  request  compel 
the  pledgee  to  sell.  Minneapolis,  etc. 
Co.  V.  Beteher,  42  Minn.  210  (1889). 
If  there  is  no  agreement  so  to  do,  the 
pledgee  is  not  bound  to  sell,  although 
requested  to  do  so  by  the  pledgor. 
Furness  v.  Union  Nat.  Bank,  147  111. 
570  (1893).  A  guarantor  of  a  note 
cannot  defend  on  the  ground  that  the 
note  is  secured  by  collateral  which 
should  first  be  sold.  Knickerbocker 
T.  Co.  V.  Coyle,  139  Fed.  Rep.  792 
(1905);  s.  c,  143  Fed.  Rep.  587 
(1906). 

^  Lake  v.  Little  Rock,  etc.  Co.,  77 
Ark.  53  (1905).  The  pledgee  is  not 
liable  for  depreciation  in  the  value  of 
the  pledge  even  after  the  debt  be- 
comes due.  Adoue,  etc.  v.  Hutches,  32 
Tex.  Civ.  App.  559  (1903).  '  See  also 
§  476,  infra. 

2  And  the  pledgor's  assignee  for  the 
benefit  of  creditors  may  claim  it.  The 
pledgee  bank  has  no  banker's  lien  on 
the  surplus  for  other  debts.  Brown  v. 
New  Bedford  Sav.  Inst..  137  Mass.  262 
(1884).  A  pledgee  bank  cannot  refuse 
to  deliver  back  the  stock  to  pledgor 


who  tenders  the  amount  due,  on  the 
ground  that  the  pledgee  owes  it  still 
another  debt.  Melntire  v.  Blakeley, 
12  Atl.  Rep.  325  (Pa.  1888). 

3  Melntire  v.  Blakeley,  12  Atl.  Rep. 
325  (Pa.  1888).  A  pledgee  cannot,  on 
sale  of  the  pledge,  apply  the  excess 
to  another  debt  due  him  from  the 
pledgor,  who  died  before  the  sale  was 
made.  Peters  v.  Nashville  Sav.  Bank, 
86  Tenn.  224  (1887). 

4  Wills  V.  Rowland  &  Co.,  117  N.  Y. 
App.  Div.  122  (1907).  A  pledgor  can- 
not defeat  an  action  by  the  pledgee 
on  the  debt  by  showing  that  the 
pledgee  has  converted  the  pledge.  See 
§§  461,  475,  458,  note,  supra.  In  an 
action  by  the  pledgee  for  the  debt,  the 
pledgor  may  set  up  a  conversion  of 
the  stock  pledged.  Donnell  v.  Wyckoff, 
49  N.  J.  L.  48  (1886). 

5  See  ch.  XXXV,  infra. 

8  Where  a  bond  issued  by  a  state  re- 
cites that  it  is  secured  by  an  equal 
amount  of  stock  in  a  railroad  com- 
pany, the  holder  of  such  bond  may 
file  a  bill  to  foreclose  on  that  amount 
of  stock  and  need  not  join  other  bond- 
holders as  parties  defendant.  South 
Dakota  v.  North  Carolina,  192  U.  S. 


1327 


§476. 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


judgment  for  a  deficiency  may  be  left  open  to  be  determined,  if  there  is 
a  deficiency.^     A  suit  to  foreclose  a  pledge  of  stock  need  not  be  brought 


286  (1904),  holding  also  that  where 
no  certificates  of  stock  have  been  is- 
sued to  the  pledgor,  the  pledgee  may 
foreclose  by  a  suit  in  equity.  Equity 
has  jurisdiction  to  foreclose  a  pledge 
of  stock.  Jones  v.  Dimmick,  59  S.  Rep. 
623  (Ala.  1912).  A  pledgee  may  sue 
on  the  debt  or  file  a  bill  for  foreclosure 
or  sell  the  pledge  without  judicial 
process  on  reasonable  notice  to  the 
pledgor.  White  River,  etc.  Bank 
V.  Capital,  etc.  Co.,  77  Vt.  123  (1904), 
holding  also  that  the  pledgee  may 
maintain  a  bill  to  foreclose  the  pledge 
where  the  corporation  claims  a  lien 
prior  to  the  pledge ;  and  that  a 
pledgor  is  not  a  necessary  party  to 
foreclosure  where  he  expressly  con- 
sents to  the  decree.  That  a  suit  to 
foreclose  lies,  see  also  Page  v.  Bog- 
gess,  41  N.  Y.  Misc.  Rep.  46  (1903). 
Where  a  pledgee  brings  suit  to  obtain 
possession  of  the  pledge,  which  had 
been  wrongfully  diverted,  and  during 
the  suit  the  pledge  becomes  worthless, 
a  supplemental  complaint  may  be 
served  alleging  that  fact  and  demand- 
ing the  value  of  the  pledge  at  the  time 
demand  was  made  therefor.  Central 
T.  Co.  V.  West  India,  etc.  Co.,  109  N.  Y. 
App.  Div.  517  (1905).  Where  the 
pledgee  obtains  a  judgment  directing 
the  sale  of  the  pledge  "upon  the  curb" 
in  New  York,  judgment  being  silent 
as  to  any  notice  of  the  sale,  and  the 
pledgee  then  sells  the  stock  in  small 
lots  and  on  different  dates  and  without 
notice,  the  pledgor  cannot  complain  if 
he  delayed  a  year  before  objecting  to 
such  sale.  Violett  v.  Horbach,  119 
N.  Y.  App.  Div.  373  (1907).  A  suit  in 
equity  to  foreclose  a  pledge  of  stock 
was  sustained  in  Meyerholtz  v.  Paxton, 
7  Cal.  App.  237  (1907).  The  pledge 
may  be  made  to  secure  the  carrying 
out    of   a   contract,    and    a    court    of 


equity  will  foreclose  it  although  the 
damages  are  unliquidated.  Vaupell  v. 
Woodward,  2  Sandf.  Ch.  143  (1844). 
A  person  holding  and  carrying  stock 
for  himself  and  others  may  file  a  bill 
in  equity  to  bring  about  a  sale  and  an 
adjustment  of  the  accounts.  Evans 
V.  Goodwin,  132  Pa.  St.  136  (1890).  A 
suit  to  foreclose  a  pledge  of  stock  may 
be  in  equity,  and  after  judgment  a 
suit  cannot  be  maintained  at  law  on 
the  debt  secured.  Brigel  v.  Creed,  65 
Ohio  St.  40  (1901).  In  a  suit  by  an 
attaching  creditor  to  determine  the 
priority  of  his  rights  over  an  unreg- 
istered pledgee,  the  court  has  no 
power  to  decree  a  sale  of  the  pledge 
and  the  distribution  of  the  assets. 
McClung  V.  Colwell,  107  Tenn.  592 
(1901).  In  a  suit  by  a  corporation  to 
foreclose  a  pledge  of  stock  made  to  it 
to  secure  the  payment  of  a  call  on  the 
stock,  the  pledgor  cannot  set  up  in  de- 
fense that  secret  commissions  had 
been  paid  to  some  of  the  stockholders 
upon  the  purchase  of  property  by  the 
corporation.  Irving,  etc.  Assoc,  v. 
Watson,  41  Oreg.  95  (1902).  A  con- 
tractor cannot  by  a  bill  in  equity  com- 
pel the  company  to  allow  him  to  com- 
plete his  contract,  even  though  the 
company  is  insolvent  and  is  about 
to  make  a  contract  with  other  parties 
and  to  dispose  of  securities  pledged 
to  the  first  contractor.  Strang  v. 
Richmond  R.  R.,  93  Fed.  Rep.  71 
(1899).  In  a  suit  by  a  pledgee  to 
have  a  sale  of  bonds  held  in  pledge, 
a  defendant  may  file  a  cross-bill  set- 
ting forth  that  the  bonds  were  il- 
legally issued  and  that  the  complain- 
ant is  not  a  bona  fide  holder.  Ales- 
sandro  Irr.  Dist.  v.  Savings  &  Trust 
Co.,  88  Fed.  Rep.  928  (1898).  Where 
a  firm  has  pledged  stock  and  after- 
wards passes  into  the  hands  of  a  re- 


1  South  Dakota  v.  North  Carolina, 
192  U.  S.  2SG  (1904).  A  court  of 
equity  in  foreclosing  a  pledge  on  stock 
may  render  a  judgment  for  any  defi- 
ciency. Commercial,  etc.  Bank  v. 
Grant,  73  Neb.  435  (1905).  In  a  suit 


to  foreclose  a  pledge  of  stock,  a  judg- 
ment for  deficiency  cannot  be  asked 
against  a  part  of  the  defendants. 
Plankintoji  v.  Hildebrand,  89  Wis.  209 

(1895). 


1328 


CH.  XXVI.] 


PLEDGE   OF   STOCK. 


[§  476. 


at  the  domicile  of  the  corporation,  but  may  be  brought  at  the  domicile 
of  the  pledgor/  or  wherever  the  certificates  of  stock  are  held  in  pledge. 
Certificates  of  stock  represent  the  stock  itself  sufficiently  to  sustain  a 
suit  commenced  by  substituted  service  for  the  purpose  of  establishing 
and  foreclosing  a  pledgee's  lien,  even  though  the  corporation  is  located 
in  another  state. ^  In  an  action  to  foreclose  a  pledge  of  stock,  persons 
claiming  a  lien  thereon  are  proper  parties  defendant,  and  it  is  sufficient 
to  allege  that  they  claim  some  lien.^    Where  a  pledgee  knows  at  the 


ceiver,  an  action  subsequently  com- 
menced by  the  pledgee  to  foreclose 
his  lien  must  make  the  assignee  a 
party  defendant.  Denny  v.  Cole,  22 
Wash.  372  (1900).  A  suit  lies  for 
judgment  on  a  note,  and  for  a  sale  of 
the  collateral  and  the  application  to 
the  judgment  of  the  amount  realized 
on  such  sale.  Farmers',  etc.  Bank  v. 
Rogers,  1  N.  Y.  Supp.  757  (1888). 
There  is  a  dictum  in  Ritchie  v.  Mc- 
MuUen,  79  Fed.  Rep.  522,  535  (1897), 
to  the  effect  that  where  a  pledgee 
enters  into  a  conspiracy  to  depreciate 
the  pledged  stock  the  pledgee  cannot 
maintain  a  bill  to  foreclose  the  pledge. 
A  court  of  equity  has  no  power  to  en- 
force a  pledge  unless  there  was  a 
trust  or  confidential  relation.  Young 
V.  Mercantile  T.  Co.,  140  Fed.  Rep.  61 
(1905);  aff'd,  145  Fed.  Rep.  39.  A 
mortgage  given  in  pledge  may  be  fore- 
closed by  bill  in  equity.  Anderson  v. 
Olin,  145  111.  168  (1893).  In  a  suit 
between  the  pledgor  and  the  pledgee, 
each  side  demanding  affirmative  relief, 
the  court  may  decree  that  stock  is 
held  as  collateral  and  order  a  sale  to 
satisfy  the  claim.  Zellerbach  v.  Al- 
lenberg,  99  Cal.  57  (1893).  Where  the 
pledge  was  made  without  a  written 
transfer  of  the  certificate  a  suit  in 
equity  is  the  only  remedy.  Robinson 
V.  Hurley,  11  Iowa,  410  (1860);  Mer- 
chants' Nat.  Bank  v.  Hall,  83  N.  Y. 
338  (1881);  Smith  v.  Coale,  34  Leg. 
Int.  58  (1877) ;  Blouin  v.  Hart,  30  La. 
Ann.  714  (1878) ;  Johnson  v.  Dexter,  2 
MacArthur,  530  (1876),  and  §  465, 
supra.  In  England  a  deposit  of  a  eer- 
tifieate  of  stock  is  an  equitable  mort- 
gage and  not  a  pledge,  and  hence 
while  foreclosure  would  not  lie  as  re- 
gards a  pledge,  it  does  lie  as  regards 
sucTi  an  equitable  mortgage.     Harrold 


V.  Plenty,  [1901]  2  Ch.  314.  The 
pledge  may  be  foreclosed  in  equity, 
especially  where  the  pledgor  claims 
that  he  tendered  the  amount  of  the 
debt.  Proebstel  v.  Trout,  60  Oreg.  145 
(1911).  In  Pennsylvania  a  court  of 
equity  has  no  power  to  foreclose  a 
pledge  of  stock,  the  remedy  of  the 
pledgee  by  sale  being  ample.  New 
York  Trust  Co.  v.  Langcliffe  Coal  Co., 
227  Pa.  St.  611  (1910).  In  a  suit  by 
the  pledgee  of  stock  against  the  pledgor 
and  corporate  officers  for  damages  for 
combining  to  stop  the  pledgee  trans- 
ferring the  stock  on  the  books  of  the 
company  on  a  sale  by  the  pledgee,  the 
plaintiff  may  examine  the  defendants 
before  trial  to  show  that  they  com- 
bined to  have  "wash  sales"  on  the 
market  in  order  to  cause  greater 
damage  to  the  pledgee.  Bioren  v. 
Canadian  Mines  Co.,  140  N.  Y.  App. 
Div.  .523  (1910).  A  pledge  of  security 
by  a  bank  to  a  clearing-house  associa- 
tion to  secure  clearing-house  certifi- 
cates was  upheld  in  Booth  v.  Atlanta, 
etc.  Ass'n,  132  Ga.  100  (1909),  and 
the  court  refused  to  put  the  securities 
in  the  hands  of  a  receiver. 

1  State  V.  King  County  Super.  Ct., 
13  Wash.  607  (1896). 

2  Merritt  v.  American  Steel  Barge 
Co.,  79  Fed.  Rep.  228  (1897).  See  also 
§  363,  supra. 

3  Plankinton  v.  Hildebrand,  89  Wis. 
209  (1895).  A  Georgia  pledgee  of 
stock  in  an  Alabama  corporation  may 
after  purchasing  the  stock  at  public 
sale  file  a  bill  in  equity  in  Alabama 
against  the  corporation  to  obtain  a 
transfer  on  the  corporate  books,  and  if 
the  pledgor  is  deceased  and  the  execu- 
tors are  non-residents  he  need  not  join 
them  as  parties  defendant,  but  he  may 
join   the   heirs   to   ascertain   on   what 


(84) 


1329 


§476. 


PLEDGE   OF   STOCK. 


[cH.  -xxvr. 


time  of  the  pledge  that  the  securities  should  have  been  placed  under  a 
mortgage  he  is  liable  to  the  mortgagee,  and  if  the  pledgee  sells  his  secu- 
rity, he  is  liable  to  the  mortgagee  to  the  amount  realized,  even  though 
thereafter  the  securities  became  valueless.^ 

Second.  The  pledgee  may  give  notice  to  the  pledgor  of  an  intent 
to  sell  the  stock,  and  may  so  sell  it  without  any  judicial  proceedings, 
and  apply  the  proceeds  to  the  payment  of  the  debt.-    No  express  power 


ground  they  object  to  the  transfer. 
Warrior,  etc.  Co.  v.  National  Bank, 
etc.,  53  S.  Rep.  997  (Ala.  1910). 

1  Central  T.  Co.  v.  West,  etc.  Co., 
144  N.  Y.  App.  Div.  560  (1911). 

2  Quoted  and  approved  in  American, 
etc.  Co.  V.  Pacific,  etc.  Co.,  34  Wash. 
10  (1904).  Guinzburg  v.  H.  W.  Downs 
Co.,  165  Mass.  467  (1896);  Story, 
Bailm.,  9th  ed.  (1877),  §310,  saying: 
"The  law  as  at  present  established 
leaves  an  election  to  the  pawnee.  He 
may  file  a  bill  in  equity  against  the 
pawnor  for  a  foreclosure  and  sale ;  or 
he  may  proceed  to  sell  ex  mero  motu, 
upon  giving  due  notice  of  his  inten- 
tion to  the  pledgor.  In  the  latter  ease, 
if  the  sale  is  bona  fide  and  reasonably 
made,  it  will  be  equally  obligatory  as 
in  the  first  case."  The  leading  case, 
allowing  this  remedy  of  the  pledgee 
against  the  pledge,  is  Tucker  v.  Wil- 
son, 5  Bro.  Pari.  Cas.  193  (1714), 
rev'g  1  P.  Wms.  261.  "At  common 
law  a  pledgee  of  stocks  and  bonds 
given  to  him  as  collateral  security  for  a 
debt  which  the  pledgor  owes  him,  may 
sell  the  collateral  and  apply  the  pro- 
ceeds, but  only  upon  reasonable  notice 
to  the  debtor."  Brooklyn  Bank  v. 
Barnaby,  197  N.  Y.  210  (1910).  In 
Brown  v.  Ward,  3  Duer,  660  (1854), 
the  court  said  :  ' '  Since  the  time  of  the 
case  of  Hart  v.  Ten  Eyck  [2  Johns.  Ch. 
62  —  1816],  before  Chancellor  Kent, 
the  right  of  the  pledgee  to  sell  after  the 
debt  is  due,  upon  reasonable  notice, 
has  been  unquestioned,  and  a  custom 
has  grown  up,  and  has  been  sanc- 
tioned by  the  coiirts,  of  selling  stocks 
at  the  Merchants'  Exchange."  To 
same  effect,  Diller  v.  Brubaker,  52  Pa. 
St.  498  (1866);  Finney's  Appeal,  59 
Pa.  St.  398  (1868) ;  Easton  v.  German- 
American  Bank,  127  U.  S.  532  (1888) ; 
Mount  Holly,  etc.  Co.  v.  Ferree,  17 
N.  J.  Eq.  117  (1864),  where  the  court 


said:  "A  sale  of  a  pledge  by  the 
pawnee,  where  reasonably  and  bona 
fide  made,  and  after  notice  to  the 
pawnor,  is  equally  obligatory  as  if 
made  by  judicial  process,"  2  Kent's 
Com.  582,  saying  that  the  pledgee 
"may  file  a  bill  in  chancery  and  have 
a  judicial  sale  under  a  regular  decree 
of  foreclosure,  .  .  .  and  he  may  sell 
without  judicial  process,  upon  giving 
reasonable  notice  to  the  debtor  to 
redeem";  Sitgreaves  v.  Farmers',  etc. 
Bank,  49  Pa.  St.  359  (1865) ;  Stearns 
V.  Marsh,  4  Denio,  227  (1847) ;  Mark- 
ham  V.  Jaudon,  41  N.  Y.  235,  241 
(1869);  Drury  v.  Cross,  7  Wall.  299 
(1868).  The  parties  may  provide  for 
any  manner  of  disposing  of  the  pledge 
to  satisfy  the  claim  upon  it  which 
is  not  in  contravention  of  statute, 
against  public  policy,  or  fraudulent. 
In  McNeil  v.  Tenth  Nat.  Bank,  46 
N.  Y.  325,  334  (1871),  it  is  said: 
"The  distmetion  between  a  lien  and  a 
pledge  is  said  to  be  that  a  mere  lien 
cannot  be  enforced  by  sale  by  the  act 
of  the  party,  but  that  a  pledge  is  a 
lien  with  a  power  of  sale  superadded." 
The  pledgee's  power  of  attorney  to 
sell  is  coupled  with  an  interest  and 
is  not  revocable.  Renshaw  v.  Credi- 
tors, 40  La.  Ann.  37  (1888).  A  per- 
son secured  by  a  pledge  of  stock  in 
another's  name  may  sue  the  latter  for 
the  amount  received  by  the  latter  on 
a  sale  of  the  stock.  Maynard  v.  Lum- 
berman's Nat.  Bank,  11  Atl.  Rep.  529 
(Pa.  1887).  Although  the  pledgee  has 
not  advanced  all  that  he  agreed  to, 
yet,  where  he  ceased  advances  after 
the  pledgor's  default  in  paying  the 
part  already  advanced,  the  pledgee 
may  proceed  to  sell  the  pledge  after 
notice.  Midland  Ry.  v.  Loan,  etc.  Co., 
N.  Y.  L.  J.,  May  24,  1890.  The  pledgee 
cannot  be  enjoined  from  selling  the 
pledge  on  notice,  merely  because  by 


1330 


CH.  XXVI. 


PLEDGE  OF  STOCK. 


[§  476. 


to  sell  need  be  contained  in  the  memorandum  of  pledge  in  order  to  au- 
thorize the  latter  remedy.     It  exists  by  force  of  law. 

The  pledgee,  however,  is  not  bound  to  pursue  either  remedy  merely 
because  the  debt  is  due  and  unpaid.^  He  need  not  sell  the  stock  upon 
the  maturity  of  the  note  secured,  nor  is  he  liable  because  the  stock  de- 
chnes  in  value.^  He  may  sue  on  the  debt  without  resorting  to  or  ten- 
dering back  the  stock.^    The  pledgor  cannot  compel  him  to  sell  by  merely 


legal  proceedings  he  has  injured  the 
value  of  the  pledge.  Midland  Ry. 
V.  Loan,  etc.  Co.,  N.  Y.  L.  J.,  May  24, 
1890.  A  pledgee  who  has  brought  an 
action    to    foreclose    his    pledge    may 

f  nevertheless  abandon  the  suit  and  re- 
sort to  his  remedy  of  a  sale  after  no- 
tice. Midland  Ry.  v.  Loan,  etc.  Co., 
N.  Y.  L.  J.,  May  24,  1890.  A  sale  by 
a  pledgee  will  not  be  enjoined  merely 
because  the  corporation  is  in  in- 
solvency proceedings  in  another  state 
and  the  sale  has  been  enjoined  by 
courts  of  that  state.  Union  Cattle  Co. 
V.  International  Trust  Co.,  149  Mass. 
492  (1889).  A  mortgage  of  stock  is 
the  same  as  a  pledge  of  stock  in  that 
the  mortgagee  may  sell  the  stock  upon 
default  and  after  proper  notice.  De- 
verges  V.  Sandeman,  etc.  Co.,  [1902]  1 
Ch.  579.  The  agreement  of  the 
pledgee  not  to  dispose  of  the  pledge 
does  not  prevent  a  sale  after  default. 
Kelley  v.  Root,  74  N.  Y.  App.  Div.  499 
(1902).  Even  though  the  pledgee, 
after  the  note  was  due,  told  the  pledgor 
that  he  wished  payment  within  a 
few  days  and  the  pledgor  said  he 
would  pay  whenever  the  pledgee 
wished,  this  is  not  a  legal  agreement 
to  postpone  the  sale.  Thornton  v. 
Martin,  116  Ga.  115  (1902).  A 
pledgee  cannot  acquire  title  by  notify- 
ing the  pledgor  that  the  stock  will  be 
forfeited  if  the  debt  is  not  paid  within 
a  certain  time.  Groeltz  v.  Cole,  128 
Iowa,  340  (1905).  Where  stock  is 
pledged  to  secure  a  note  and  is  sold 
by  the  pledgee,  the  proceeds  must  be 
applied  to  that  note  and  not  to  any 
other  purpose.  Iowa  Nat.  Bank  v. 
Cooper,  101  N.  W.  Rep.  459  (Iowa, 
1904).  Where  the  pledgee  sells  at  one 
price  and  secretly  receives  a  higher  one, 
the  pledgor  may  hold  him  liable  for  the 
latter.     McKee  v.  Smith,  219  Pa.  St. 

.    490  (1908). 


1  O'Neill  V.  Whigham,  87  Pa.  St.  394 
(1878);  Rozet  v.  McClellan,  48  111. 
345  (1868) ;  Palmer  v.  Hawes,  73  Wis. 
46  (1888). 

2  Simonton  v.  Sibley,  122  U.  S.  220 
(1887);  Palmer  v.  Hawes,  73  Wis. 
46  (1888).  See  also  §  475,  supra. 
Where  one  company  buys  out  another 
and  assumes  the  debts  of  the  latter, 
a  creditor  of  the  latter  company  may 
assign  his  claim  as  collateral  security, 
but  the  pledgee  is  not  bound  to  insti- 
tute suit  to  collect  such  claim,  and 
is  not  liable  for  failure  so  to  do,  even 
though  the  claim  is  finally  lost.  Samp- 
son V.  Fox,  109  Ala.  662  (1896).  The 
pledgee  is  not  liable  for  not  selling 
the  collateral,  even  though  the  col- 
lateral declines  in  value,  especially 
where  the  pledgor  made  no  request 
that  such  sale  be  made.  Henry,  etc. 
Co.  V.  Shaeffer,  173  Mass.  443  (1899). 

^  Taylor  v.  Cheever,  72  Mass.  149 
(1856) ;  Butman  v.  Howell,  144  Mass. 
66  (1887).  A  broker  or  pledgee  need 
not  sell  the  stock  held  as  collateral 
before  bringing  an  action  against  the 
pledgor  for  the  amount  due,  nor  does 
a  broker's  custom  compel  it.  De  Cor- 
dova V.  Barnum,  130  N.  Y.  615  (1892). 
A  pledgee  having  sold  the  stock,  and 
there  still  being  a  balance  due  him 
from  the  pledgor,  may  sue  for  such 
balance,  and  need  not  allege  that  the 
sale  was  on  due  notice  and  demand. 
WaUace  v.  Berdell,  24  Hun,  379 
(1881).  Where  stock  pledged  to  se- 
cure a  note  is  to  be  transferred  as 
payment  in  case  the  note  is  not  paid, 
the  pledgee  may  sue  on  the  note  if  the 
pledgor  has  not  transferred  the  stock. 
FuUerton  v.  Mobley,  15  Atl.  Rep.  856 
(Pa.  1888).  The  pledgee  may  sue  on 
the  debt  before  selling  the  collateral. 
Sinclau-  v.  Weekes,  41  S.  W.  Rep.  107 
(Tex.  1897).  As  to  the  duties  of  the 
pledgee   towards   an   indorser   of   the 


1331 


§476. 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


giving  him  notice  so  to  do.^  Nor  is  the  pledgee  bound  to  sell  on  non- 
payment of  the  debt,  although  the  memorandum  of  pledge  expressly 
authorizes  a  sale,  but  he  may  file  a  bill  in  equity  to  foreclose  instead  of 
pursuing  the  other  remedy.-  A  surety  on  a  note  secured  by  collateral 
is  not  discharged  by  the  failure  of  the  pledgee  to  sell  when  the  note 
becomes  due,  no  such  demand  having  been  made  by  the  surety.^  But 
where  the  pledgee  is  secured  by  two  pledges,  one  from  his  debtor  and 
one  from  an  outsider,  and  he  releases  the  former,  he  thereby  releases 
the  latter."*  In  an  action  at  law  against  a  pledgor  on  a  debt,  the  judg- 
ment need  not  provide  for  a  return  of  the  pledge  upon  payment  of  the 
debt.^  The  pledgee's  remedy  by  attaching  the  stock  and  selling  it  at 
an  execution  sale  is  his  remedy  as  a  creditor  and  not  as  a  pledgee  of  the 
person  indebted  to  him.^    Where  the  pledgee  obtains  judgment  on  a 


note,  see  Payne  v.  Commercial  Bank, 
14  Miss.  24  (1846).  Misrepresenta- 
tions by  a  pledgee  of  stock  as  to  the 
value  of  the  stock,  made  after  its 
pledge,  are  no  defense  for  the  pledgor 
when  sued  on  the  debt.  Palmer  v. 
Hawes,  73  Wis.  46  (1888).  The  maker 
of  a  note  is  liable  personally,  although 
it  recites  that  it  is  secured  by  stock 
as  collateral  "without  recourse." 
Rathburn  v.  Jones,  47  S.  C.  206  (1896). 
A  pledgee  of  an  underwriter's  agree- 
ment may  have  difficulty  in  tender- 
ing performances  to  the  underwriters. 
Litchfield,  etc.  Society  v.  Dibble,  80 
Conn.  128  (1907). 
'  See  §  475,  supra. 

2  Cornick  v.  Richards,  3  Lea  (Tenn.), 
1  (1879) ;  Coffin  v.  Chicago,  etc.  Co., 
4  Hun,  625  (1875). 

3  Cromwell  v.  Rankin,  97  S.  W.  Rep. 
415  (Ky.  1906).  A  pledgee  of  stock 
guaranteed  by  an  outside  party  may 
file  a  bill  to  have  the  same  sold,  and 
the  purchaser  may  enforce  the  guar- 
anty. Rogers  v.  Harvey,  143  Kv.  88 
(1911). 

*  In  re  Sanderson,  150  Fed.  Rep.  236 
(1907). 

6  Robertson  v.  Sully,  2  N.  Y.  App. 
Div.  152  (1896),  reversed  on  another 
point  in  157  N.  Y.  624.  The  pledgee 
may  sue  on  the  debt  and  obtain  a 
judgment  and  need  not  tender  the 
stock  held  in  pledge,  and  the  judg- 
ment need  not  contain  a  provision 
that  the  stock  should  be  surrendered 
on  payment  of  the  judgment.  French 
V.  McCarthy,  125  Cal.  508  (1899).  The 


purchaser  of  a  note  may  enforce  the 
same  without  producing  collateral 
which  is  recited  in  the  note  itself, 
where  it  is  shown  that  such  collateral 
was  to  secure  several  notes  and  had 
been  returned  to  the  payor  in  con- 
nection with  the  other  notes  and  new 
collateral  substituted  therefor.  Has- 
kell V.  Africa,  68  N.  H.  421  (1896). 
Where  the  pledgee  forecloses  and 
attaches  the  certificate  of  stock  to  the 
pleadings,  he  cannot  withdraw  the 
certificate  after  a  decree  has  been 
entered  for  its  sale.  American,  etc. 
Co.  V.  Loeb,  50  Wash.  104  (1908). 
If  the  pledgee  brings  suit  to  collect 
the  debt  he  must  produce  at  the  trial 
the  collateral.  Jenkins  v.  Conklin, 
146  N.  Y.  App.  Div.  301  (1911). 
See  §  335. 

6  Lee  t'.  Citizens'  Nat.  Bank,  2  Cin. 
Super.  Ct.  (Ohio)  298  (1872).  His 
remedies  as  a  pledgee  are  not  released 
or  affected  by  his  pursuit  of  other 
remedies.  See  Sickles  v.  Richardson, 
23  Hun,  559  (1881).  While  a  pledgee 
waives  the  pledge  if  he  levies  an  at- 
tachment on  the  stock,  yet  a  gar- 
nishee process,  general  in  its  intent, 
does  not  have  that  effect.  Hudson  v. 
Bank  of  Pine  Bluff,  75  Ark.  493 
(1905).  Judgment  on  the  debt  does 
not  release  the  stock  pledged.  "Un- 
til the  debt  is  paid,  the  pledgor,  under 
the  terms  of  the  bailment,  has  no 
right  to  have  the  pledge  given  up  to 
him."  Donnell  v.  Wyckoff,  49  N.  J. 
L.  48  (1887).  See  also  Hill  v.  Beebe, 
13  N.  Y.  556,  563,  567   (1856).     See 


1332 


CH.  XXVI.] 


PLEDGE   OF   STOCK. 


[§  476. 


note  which  is  secured  by  the  stock  and  then  causes  the  stock  to  be  sold 
out  by  the  sheriff  under  levy  of  execution,  such  sale,  however,  not  being 
made  in  accordance  with  the  statutes,  this  is  the  same  as  selling  the 
stock  without  notice  and  amounts  to  a  conversion  thereof.^  A  pledgee 
cannot,  by  obtaining  judgment  on  his  claim,  reach  the  pledge  by  a  judg- 
ment creditor's  bill.-  A  pledgee  may  prove  his  entire  claim  against 
the  insolvent  estate  of  the  pledgor,  and  obtain  his  proportionate  part 
thereof.^  Or  the  pledgee  may  sell  out  the  collateral  in  accordance  with 
law  and  then  sue  for  the  deficiency.^  A  pledgee  need  not  institute 
proceedings  against  the  estate  of  the  pledgor  and  is  entitled  to  the  extent 
of  his  debt  to  participate  in  the  distribution  of  the  assets  of  the  corpora- 
tion on  dissolution.''  A  pledgee  may  sell  at  public  sale  on  notice,  even 
though  a  receiver  of  the  pledgor  has  been  appointed.®  Even  though 
bankruptcy  proceedings  are  instituted  against  the  pledgor,  yet  the  bank- 
ruptcy court  has  no  power  to  enjoin  the  pledgee  from  selling  the  pledge 
in  accordance  with  the  terms  of  the  pledge  itself.^     A  pledgee  of  bonds 


next  note.  Where  a  wife's  stock 
stands  in  the  name  of  her  husband, 
and  he  pledges  the  certificate  to  secure 
his  debt,  and  his  judgment  creditor 
levies  on  the  stock  under  an  execu- 
tion subject  to  the  pledge,  and  sells 
it,  and  the  creditor  buys  it  himself 
on  the  sale,  he  may  be  held  liable  by 
the  wife  for  conversion,  and  she  need 
not  first  pay  the  debt  for  which  the 
stock  was  pledged.  First  Nat.  Bank, 
etc.  V.  Thomas,  118  S.  W.  Rep.  221 
(Tex.  1909). 

» Feige  v.  Burt,  118  Mich.  243 
(1898).  Where  the  pledgee  levies  an 
attachment,  service  on  the  non-resi- 
dent pledgor  must  be  made  in  ac- 
cordance with  the  statute.  Owens  v. 
Atlanta,  etc.  Co.,  122  Ga.  521  (1904). 
While  a  pledgee  waives  the  pledge 
if  he  levies  an  attachment  on  the 
stock,  yet  a  garnishee  process,  gen- 
eral in  its  intent,  does  not  have  that 
effect.  Hudson  v.  Bank  of  Pine  Bluff, 
75  Ark.  493  (1905).  Where  the 
pledgee  causes  the  sheriff  to  sell 
the  pledge  on  a  judgment  obtained 
upon  the  debt,  the  pledge  relation- 
ship ceases  to  exist,  even  though  it 
turn  out  that  the  sale  was  illegal 
and  void.  Latta  v.  Tutton,  122  Cal. 
279  (1898).  Where  the  pledgee  brings 
suit  on  the  debt  and  attaches  the  stock 
he  thereby  waives  his  lien,  and  even 
though  the  attachment  is  illegal  and 


void  for  insufficient  service,  yet  his 
rights  as  pledgee  are  not  thereby  re- 
stored. H.  B.  Claflin  Co.  v.  Bretz- 
felder,  69  Ark.  271  (1901).  Even 
though  a  pledgee  brings  suit  on  a  debt 
and  levies  on  the  stock  he  does  not 
thereby  lose  his  rights  as  pledgee. 
Croft  V.  Colfax,  etc.  Co.,  113  Iowa,  455 
(1901).  A  person  holding  stock  in 
pledge  may  waive  his  rights  as 
pledgee  and  attach  the  property  of  his 
debtor.  Parberry  v.  Woodson  Sheep 
Co.,  18  Mont.  317  (1896),  citing  Drake 
on  Attachments,  7th  ed.,  §  35. 

2  Shaw  V.  Monson,  etc.  Co.,  96  Me. 
41  (1901). 

^  See  §  473,  supra. 

*  See  §  473,  supra.  See  also  §  763, 
infra,  as  to  pledges  of  bonds. 

5  Clarke  v.  Fii-st  State  Bank,  150 
S.  W.  Rep.  203  (Tex.  1912). 

6  Fidelity,  etc.  T.  Co.  v.  Roanoke, 
etc.  Co.,  8l'Fed.  Rep.  439  (1896).  See 
also  Moore  ;-.  Potter,  155  N.  Y.  481 
(1898) ;  Dudley  v.  Gould,  6  Hun,  97 
(1875). 

'  /ft  re  Browne,  104  Fed.  Rep.  762 
(1900).  Where  corporate  bonds  not 
secured  by  a  mortgage  are  pledged  by 
the  corporation  to  secure  its  debt,  and 
the  corporation  becomes  insolvent,  the 
bankruptcy  court  will  enjoin  a  sale 
of  the  pledge  because  it  merely  adds 
to  the  debt  without  the  sale  of  any 
real  security.    Such  a  corporate  creditor 


1333 


§  476.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


of  the  corporation  cannot  be  enjoined  from  selling  the  same,  although 
dissolution  proceedings  are  pending.^  The  death  of  the  pledgor  does 
not  entitle  his  administrator  to  take  the  stock  from  the  pledgee,  or  to 
claim  the  dividends  without  payment  of  the  debt.^  Even  though  the 
pledgor  has  died  and  the  pledgee  has  filed  a  claim  against  the  estate 
which  has  been  allowed,  the  pledgee  may  sell  at  public  auction  on  notice.^ 
Where  stock  is  held  as  collateral  to  a  debt,  the  statute  of  limitations  does 
not  run  as  against  the  pledge,  and,  although  the  debt  itself  is  barred,  the 
court  may  order  the  stock  sold  to  satisfy  the  debt."  A  sale  of  the  stock 
by  the  pledgee  on  notice,  on  non-payment  of  the  debt,  does  not  extend 
the  period  of  the  statute  of  limitations  so  that  it  commences  to  run 
from  the  time  of  sale  instead  of  the  time  when  the  debt  became  due.^ 
Complicated  questions  arise  where  stock  is  held  by  one  person  as  se- 
curity for  a  debt  due  to  another  person.     These  questions,  as  well  as 


is  an  unsecured  creditor.  Re  Mat- 
thews, 188  Fed.  Rep.  445  (1911). 
Cf.  §  475,  supra.  Where  stock-brokers 
have  pledged  their  customer's  securi- 
ties and  become  bankrupt,  the  bank- 
ruptcy court  may  enjoin  the  pledgees 
from  selling  the  securities  pending  an 
investigation  as  to  the  right  of  the 
customer  to  redeem.  Re  Carothers  & 
Co.,  192  Fed.  Rep.  691  (1912).  A 
national  bank  taking  its  own  stock 
in  pledge,  even  in  violation  of  the  act  of 
Congress,  more  than  foiir  months  be- 
fore the  pledgor  becomes  bankrupt, 
may  enforce  the  pledge  during  such 
four  months.  First  Nat.  Bank  v. 
Lanz,  202  Fed.  Rep.  117  (1913). 

1  Matter  of  Binghamton  Gen.  El.  Co., 
143  N.Y. 261  (1894).   f'/.  154  S.W.  1116. 

2  Fulton  V.  National  Bank,  26  Tex. 
Civ.  App.  115  (1901).  See  also  §  473, 
supra. 

3  Bell  V.  Mills,  123  Fed.  Rep.  24 
(1903),  holding  also  that  the  statutes 
of  California  relative  to  publication 
of  notice  do  not  require  the  notice  to 
state  that  the  stock  is  pledged  stock. 
The  death  of  a  pledgor  does  not  pre- 
vent the  pledgee  from  selling  the 
pledged  stock  for  non-payment  of 
the  debt.  Warrior,  etc.  Co.  v.  Na- 
tional Bank,  etc.,  53  S.  Rep.  997 
(Ala.  1910). 

<  Zellerbach  v.  Allenberg,  99  Cal.  57 
(1893).  See  also  §  475,  supra.  Al- 
though the  statute  of  limitations  has 
run  against  the  debt  the  pledgor  can- 


not compel  the  pledgee  to  give  up  the 
pledge  unless  the  debt  is  paid.  Gage 
V.  Riverside  Trust  Co.,  86  Fed.  Rep. 
984  (1898).  A  lien  may  be  enforced, 
even  though  the  debt  is  barred  by 
the  statute  of  limitations.  Common- 
wealth V.  Standard,  etc.  Co.,  201  Pa. 
St.  103  (1902).  A  pledgee  may  bring 
suit  to  realize  upon  his  security,  even 
though  the  principal  debt  is  barred  by 
the  statute  of  limitations.  London, 
etc.  Bank  v.  Mitchell,  [1899]  2  Ch.  161. 
The  fact  that  stocks  are  deposited  as 
collateral  security  to  a  note  does  not 
prevent  the  statute  of  limitations  run- 
ning against  the  note.  Re  Hartranft's 
Estate,  153  Pa.  St.  530  (1893).  Al- 
though the  debt  is  barred  by  the  stat- 
ute of  limitations,  the  pledgee  may 
compel  the  corporation  to  transfer  the 
stock  to  him  on  the  books.  Miller  v. 
Houston  City  St.  Ry.,  55  Fed.  Rep. 
366  (1893).  A  pledgee  may  enforce 
payment  of  his  debt  by  sale  of  stock 
held  as  collateral  security  therefor, 
even  though  the  debt  itself  may  be 
barred  by  the  statute  of  limitations. 
Tombler  v.  Palestine  Ice  Co.,  17  Tex. 
Civ.  App..  596  (1897).  The  statute  of 
limitations  does  not  commence  to  run 
against  the  pledgor  until  he  has 
notice  that  the  pledgee  claims  the 
stock  absolutely.  Davis  v.  Hardwick, 
43  Tex.  Civ.  App.  71  (1906). 

6  Brooklyn   Bank  v.   Barnaby,    197 
N.  Y.  210  (1910). 


1334 


CH.  XXVI. 


PLEDGE  OF  STOCK. 


[§  477. 


those  arising  from  a  trustee  of  a  mortgage  holding  stock  under  the  mort- 
gage, are  considered  elsewhere.^  An  illegal  sale  by  the  pledgee  may  be 
a  criminal  offense.- 

§  477.  Notice  of  sale  of  stock  by  pledgee  to  apply  to  debt  secured  — 
Waiver  of  notice.  —  In  case  the  pledgee  pursues  the  remedy  of  sell- 
ing the  stock  without  any  judicial  proceedings,  he  must  give  the  pledgor 
reasonable  notice  of  the  intent  to  sell  and  of  the  time  and  place  of  sale.* 
A  sale  without  a  notice  is  a  conversion  of  the  stock.^  The  pledgee  must 
demand  payment  of  the  debt  secured  by  the  pledge  of  stock,  and  a 
waiver  of  notice  of  sale  is  not  a  waiver  of  a  right  to  have  such  a  demand 
made.^     But  where  the  time  of  payment  is  fixed  by  the  note,  no  demand 


1  See  §  317,  supra. 

2  It  is  grand  larceny  in  the  first 
degree,  under  the  New  York  statute, 
for  a  person  to  take  part  in  a  con- 
spiracy to  induce  a  person  to  take  a 
loan,  giving  stock  as  collateral,  and 
then  for  the  pledgee  to  sell  the  col- 
lateral illegally  as  a  part  of  the  con- 
spiracy. People  V.  Katz,  154  N.  Y. 
App.  biv.  44  (1912). 

3  "To  authorize  the  defendants  to 
see  the  stock  purchased,  they  were 
bound,  first,  to  call  upon  the  plaintiff 
to  make  good  his  margin ;  and,  failing 
in  that  he  was  entitled,  secondly,  to 
notice  of  the  time  and  place  where  the 
stock  would  be  sold;  which  time  and 
place,  thirdlv,  must  be  reasonable." 
Markham  v.  Jaudon,  41  N.  Y.  23.5,  243 
(1869).  See  also  Stratford  v.  Jones, 
97  N.  Y.  586  (1885) ;  Baker  v.  Drake, 
66  N.  Y.  518  (1876);  Conyngham's 
Appeal,  57  Pa.  St.  474  (1868) ;  Stearns 
V.  Marsh,  4  Denio,  227  (1847) ;  Neiler 
V.  Kelley,  69  Pa.  St.  403  (1871) ;  Cush- 
man  v.  Hayes,  46  111.  145  (1867).  A 
joint  owner  is  entitled  to  notice. 
Clark  V.  Sparhawk,  2  W.  N.  Cas.  115 
(1875) ;  s.  c,  5  Fed.  Cas.  928.  Even 
where  the  pledgee  obtains  a  judgment 
directing  the  sale  of  the  pledge  "upon 
the  curb"  in  New  York,  judgment 
being  silent  as  to  any  notice  of  the  sale, 
and  the  pledgee  then  sells  the  stock  in 
small  lots  and  on  different  dates  and 
without  notice,  the  pledgor  cannot 
complain  if  he  delayed  a  year  before 
objecting  to  such  sale.  Violett  v.  Hor- 
Tbach,  119  N.  Y.  App.  Div.  373  (1907). 
Actual  notice  of  failure  of  margin  need 
not  be  given  if  the  customer  gives  his 


address  at  a  hotel  and  he  cannot  be 
found  after  diligent  effort,  especially 
where  there  was  no  pledge  as  in  the 
case  of  cotton  purchased  on  a  margin. 
Smith  1'.  Craig,  151  N.  Y.  App.  Div. 
648  (1912). 

*Fowle  V.  Ward,  113  Mass.  548 
(1873) ;  Hempfling  v.  Burr,  59  Mich. 
294  (1886) ;  Illinois  Nat.  Bank  v. 
Baker,  128  111.  533  (1889);  Feige  v. 
Burt,  118  Mich.  243  (1898). 

5  Lewis  V.  Graham,  4  Abb.  Pr.  106 
(1857) ;  Brass  v.  Worth,  40  Barb.  648 
(1863) ;  Wilson  v.  Little,  2  N.  Y.  443, 
448  (1849),  saying:  "It  is  well  set- 
tled that  where  no  time  is  expressly 
fixed  by  contract  between  the  parties 
for  the  payment  of  a  debt  secured  by 
a  pledge,  the  pawnee  cannot  sell  the 
pledge  without  a  previous  demand  of 
payment,  although  the  debt  is  tech- 
nically due  immediately."  Genet  v. 
Rowland,  45  Barb.  560  (1866).  A 
provision  that  the  note  shall  become 
due  on  demand,  with  the  right  to  the 
pledgee  to  sell  the  pledge  without 
further  notice,  requires  a  demand  be- 
fore sale.  A  demand  at  the  place  of 
payment  is  insufifieient  if  the  payor 
did  not  know  of  the  demand.  Smith 
V.  Shippers',  etc.  Co.,  45  S.  Rep.  533 
(La.  1907),  holding  also  that  the  pur- 
chaser of  a  pledge  at  a  sale  made 
without  proper  demand  or  notice  to 
the  pledgor  is  not  protected,  and  if 
the  note  is  also  assigned  to  him  he  is 
merely  subrogated  in  the  place  of  the 
pledgee.  The  pledgee  must  demand 
payment  before  selling.  Drake  v. 
Pueblo  Nat.  Bank,  44  Colo.  49  (1908). 


1335 


§  477.]  PLEDGE   OF   STOCK.  [cH.  XXVI. 

of  payment  need  be  made  before  sale  of  the  pledge.^  Where  the  in- 
dorser  of  a  note  deposits  collateral  as  security,  the  collateral  may  be 
sold,  although  notice  of  non-payment  of  the  note  is  not  given  to  him.^ 
A  notice  of  intent  to  sell,  however,  is  equivalent  to  a  demand  of  pay- 
ment.^ A  broker's  custom  to  the  effect  that  no  notice  is  necessary  is 
illegal  and  void.^  The  time  and  place  of  the  proposed  sale  must  be 
specified  in  the  notice.^  In  New  York  the  rule  is  clearly  adhered  to 
that  the  relation  between  a  stock-broker  and  his  customer  is  that  of 
pledgor  and  pledgee,  even  though  the  stock-broker  advances  the  whole 
purchase  price  without  requiring  any  margin,  and  hence  a  sale  by  the 
broker  on  a  notice  of  intent  to  sell  without  specifying  the  time  and  place 
is  a  conversion,  there  being  no  waiver  by  the  customer.^  Where  a 
person  agrees  to  pay  a  certain  part  of  any  deficiency  if  the  pledge  when 
sold  is  not  sufficient  to  pay  the  note,  and  the  pledgee  notifies  such  a 
guarantor  of  intent  to  sell  the  pledge,  but  delays  for  two  years,  the  guar- 
antor is  not  liable  as  the  sale  was  not  made  within  a  reasonable  time 
after  the  demand.^  Even  though  the  pledgor  has  died  and  the  pledgee 
has  filed  a  claim  against  the  estate  which  has  been  allowed,  the  pledgee 
may  sell  at  public  auction  on  notice.  The  statutes  of  California  rela- 
tive to  publication  of  notice  do  not  require  the  notice  to  state  that  the 
stock  is  pledged  stock. ^  Where  the  note  for  which  stock  is  pledged  is 
made  and  delivered  and  payable  in  IMassachusetts,  and  the  pledge  was 
also  made  there,  and  the  stock  is  in  a  small  Massachusetts  corporation 
and  is  not  known  elsewhere,  it  is  unreasonable  for  the  pledgee  to  fix 
the  place  of  sale  in  New  York,  even  though  the  pledgee  is  a  New  York 

1  Franklin  Nat.  Bank  v.  Newcombe,  apolis,  etc.  Assoc,  14  Fed.  Rep.  801 

1  N.  Y.  App.  Div.  294  (1896) ;    aff'd,  (1883) ;    modified  on  another  point  in 

157  N.  Y.  699.  121  U.  S.  295.     See  Sehouler,  Bailm., 

2Fiske  V.  Williams,  4  N.  Y.  App.  2d'ed.,    §229.     It   has   been  held   in 

Div.  487  (1896).  Maryland  that  a  notice  of  the  place  is 

3  Nabring  v.  Bank  of  Mobile,  58  Ala.  unnecessary.     Worthington  v.  Tormey, 

204   (1877).     So  also  of  notice  of  in-  34  Md.  182  (1870).     But  such  decision 

tent    to   foreclose.     Goodrich   v.    Wil-  would  be  unsafe,  and  probably  would 

lard,  68  Mass.  203   (1854).     Demand  not  be  followed  elsewhere. 

of   payment   may   be   made   by   long  ^  Content  v.  Banner,  184  N.  Y.  121 

urging  for  payment,  even  though  the  (1906). 

word  "demand"  is  not  used.     Carson  'Chelsea   Sav.   Bank  v.   Slater,   78 

V.  Iowa,  etc.  Co.,  80  Iowa,  638  (1890).  Conn.  137  (1905).     Where  the  pledgee 

The    giving    of    a    note    to    a    broker  gives  notice  of  intent  to  sell  but  with- 

pledgee  does  not  extend  the  time  with-  draws  it,  he  must  give  another  notice 

in  which  the  pledgor  was  to  deposit  before  selling,  and  if  he  sells  without 

further  margin.     Gould   v.   Trask,    10  such  further  notice   the  pledgor  may 

N.  Y.  Supp.  619  (1890).  sue  for  the  stock  without  paying  any 

■»  Markham  v.  Jaudon,  41  N.  Y.  235  money  into  court.     Furber  v.  National, 

(1869).  etc.    Co.,   118    N.   Y.   App.   Div.  263 

s  Conyngham's  Appeal,  57  Pa.  St.  (1907) ;   aff'd,  193  N.  Y.  622. 

474    (1868);     Genet    v.    Howland,    45  »*  Bell   v.   Mills,    123   Fed.   Rep.   24 

Barb.  560  (1866);    Canfield  v.  Minne-  (1903). 

1336 


CH.  XXVI.] 


PLEDGE  OF  STOCK. 


[§  477. 


corporation ;  but  where  the  pledgor,  on  receiving  notice  of  the  proposed 
sale,  does  not  make  any  protest  or  objection  to  the  place  of  sale,  and 
takes  no  action  whatsoever  in  regard  to  it,  the  pledgor  waives  any  ob- 
jection on  this  account.^  The  time  between  the  service  of  the  notice 
and  the  time  when  the  sale  is  to  take  place  must  be  reasonable  in  length, 
so  as  to  give  the  debtor  an  opportunity  to  obtain  money  to  pay  the 
debt.-  Four  days'  notice  is  sufficient,  although  the  sale  is  made  in 
New  York  and  the  pledgor  resides  in  Boston.^  A  notice  by  a  newspaper 
advertisement  is  insuflScient.^  It  is  not  sufficient  notice  to  the  pledgor 
to  send  him  a  printed  copy  of  the  public  notice  of  sale,  the  pledged  stock 
being  included  in  a  large  amount  of  other  stock,  and  there  being  nothing 
to  indicate  an  intent  to  sell  nor  to  indicate  that  the  pledgor  was  inter- 
ested.^ The  notice  must  be  served  personally,  and  it  seems  that  it 
cannot  be  served  on  one  who  has  charge  of  the  pledgor's  office  for  the 
transaction  of  business.^  A  sale  of  bonds  as  collateral  security,  in  viola- 
tion of  the  agreement  as  to  the  notice  to  be  given,  does  not  release  a 
surety  on  the  note  secured  by  the  bonds,  but  discharges  him  only  to  the 
extent  of  the  actual  value  of  the  bonds. '^ 

By  an  express  agreement  the  pledgor  may  waive  his  right  to  notice 
of  the  time  and  place  of  the  sale.^    The  pledgee's  right  by  written  agree- 


1  Guinzburg  v.  H.  W.  Downs  Co.,     until  ten  o'clock  the  next  morning  by 
165  Mass.  467   (1896).     The  place  of    the  pledgor,  and  the  advertisement  of 


sale  of  a  pledge  may  be  in  the  county 
where  the  pledgee  resides,  even  though 
the  debt  is  payable  in  another  county 
in  which  the  pledgor  resides.  Thorn- 
ton V.  Martin,  116  Ga.  115  (1902). 

2  In  Maryland  P.  Ins.  Co.  v.  Dal- 
rymple,  25  Md.  242  (1866),  a  week's 
notice  was  held  sufficient.  Lewis  v. 
Graham,  4  Abb.  Pr.  106  (1857),  hold- 
ing that  thirty-four  days,  where  the 
pledgor  resides  in  Illinois  and  the 
sale  is  to  be  in  New  York,  is  suffi- 
cient ;  Bryan  v.  Baldwin,  7  Lans.  174 
(1872) ;  aff'd,  52  N.  Y.  232,  holding 
that  two  days  was  sufficient ;  Stevens 
V.  Hurlbut  Bank,  31  Conn.  146  (1862), 
holding  that  a  sale  on  the  same  day 
is  unreasonable  and  the  notice  in- 
sufficient. See  other  cases  in  §§  457, 
458,  supra;  Willoughby  v.  Comstock,  3 
Hill,  389  (1842),  where  two  days  was 
held  sufficient ;  Edwards,  Bailm.,  §  285. 
Notice  by  the  pledgee  of  merchandise 
that  he  will  sell  the  same  on  the  fol- 
lowing day  at  half-past  twelve  o'clock 
is  insufficient  where  such  notice  was 
merely    mailed    and    is    not    received 


the  sale  was  on  that  morning  and  on 
the  evening  before.  Such  notice  did 
not  give  the  defendant  an  opportunity 
to  redeem  the  property  or  save  his 
equity.  Jacoby  v.  S.  Jacoby  &  Co., 
103  Fed.  Rep.  473  (1900).  As  to 
place  of  sale,  see  §§  458,  476,  supra. 

^  Guinzburg  t'.  H.  W.  Downs  Co., 
165  Mass.  467  (1896). 

^  Lewis  V.  Graham,  4  Abb.  Pr.  106 
(1857) ;   and  see  §  119,  supra. 

5  MeCutcheon  v.  Dittman,  23  N.  Y. 
App.  Div.  285  (1897),  modified  in  164 
N.  Y.  355. 

e  Bryan  v.  Baldwin,  52  N.  Y.  232 
(1873).  Cf.  Milliken  v.  Dehon,  27 
N.  Y.  364  (1863). 

7  Vose  V.  Florida  R.  R.,  50  N.  Y.  369 
(1872). 

8  Maryland  F.  Ins.  Co.  v.  Dalrymple, 
25  Md.  242  (1866) ;  Genet  v.  Rowland, 
45  Barb.  .560  (1866) ;  and  see  §§  459, 
462,  supra;  Milliken  v.  Dehon,  27 
N.  Y.  364  (1863) ;  Stevens  v.  Hurlbut 
Bank,  31  Conn.  146  (1862) ;  Hyatt  v. 
Argenti,  3  Cal.  151  (1853);  Wheeler 
V.  Newbould,    16   N.   Y.   392    (18.57); 


1337 


§477. 


PLEDGE   OF   STOCK. 


[CH.  XXVI. 


ment  to  sell  at  private  sale  without  notice  is  waived  by  him  if  he  does 
anything  which  reasonably  causes  the  pledgor  to  understand  that  such 

court  held  that  "the  pledgee  could 
not  make  sale  of  the  collateral  until 
after  the  default  in  the  payment  of  the 
note,  without  notice  and  demand  of 
payment  to  the  pledgor."  See  also 
s.  c,  sub  noni.  West  v.  Huiskamp,  63 
Fed.  Rep.  749  (1894).  Where  the 
pledgees  are  given  power  to  sell  "in 
such  manner  as  they,  in  their  discre- 
tion, may  deem  proper,  without 
notice,"  a  sale  without  notice  after 
the  maturity  of  the  loan  is  legal. 
Wilhams  v.  United  States  Trust  Co., 
133  N.  Y.  660  (1892).  The  sale  by  a 
pledgee  under  an  agreement,  whereby 
he  sold  without  notice,  was  upheld  in 
McDougall  V.  Hazleton,  etc.  Co.,  88 
Fed.  Rep.  217  (1898).  The  pledgor 
may,  subsequently  to  the  making  of 
the  pledge,  release  his  right  to  re- 
deem. He  may  agree  that  the  pledgee 
may  sell  the  pledge  at  any  time  at 
private  sale,  and  that  the  proceeds 
shall,  after  repayment  of  the  amount 
loaned,  be  divided  equally  between  the 
pledgor  and  pledgee.  Rutherford  v. 
Massachusetts  Mut.  Ins.  Co.,  45  Fed. 
Rep.  712  (1891).  Under  the  statute 
of  California  notice  of  the  time  and 
place  of  sale  may  be  waived  by  the 
pledgor.  Lowe  v.  Ozmun,  3  Cal.  App. 
387  (1906).  The  fact  that  the  pledgee, 
under  a  waiver  of  notice,  of  demand, 
and  of  public  sale,  sells  the  stock  and 
debt  to  an  enemy  of  the  corporation, 
does  not  invalidate  the  sale.  Carson 
V.  Iowa,  etc.  Co.,  80  Iowa,  638  (1890). 
Although  the  pledgor  agrees  that  the 
pledgee  may  sell  part  of  the  pledgee 
without  notice  upon  default,  this  does 
not  release  the  remainder  of  the 
pledge  from  being  additional  security 
for  the  debt.  Bank  of  Africa  v.  Salis- 
bury, etc.  Co.,  L.  R.  17  App.  Cas.  281 
(1892).  Where  a  corporation  author- 
izes its  agent  to  pledge  its  bonds,  the 
agent  may  make  the  pledge  on  the 
usual  terms  as  to  selling  the  bonds 
in  case  of  default.  Morris,  etc.  v.  East 
Side  Ry.,  104  Fed.  Rep.  409  (1900), 
rev'g  95  Fed.  Rep.  13.  Where  a 
majority  of  the  stockholders  and  also 
the  directors  have  ratified  a  sale  by 
a  pledgee  of  property  of  the  corpora- 


Stenton    v.    Jerome,    54    N.    Y.    480 
(1873) ;   Wicks  v.  Hatch,  62  N.  Y.  535 
(1875) ;    Butts  v.  Burnett,  6  Abb.  Pr. 
(N.   S.)   302   (1869).     The  pledgor  of 
stock  may,  by  the  terms  of  the  agree- 
ment  creating  the   pledge,   waive  his 
right   to   notice   of   sale  for   non-pay- 
ment  of  the   debt.     Jeanes's  Appeal, 
116  Pa.  St.  573  (1887).     Formerly  the 
validity    of    a    waiver    was    doubted. 
Campbell    v.    Parker,    9    Bosw.    322 
(1862) ;    Wilson  v.  Little,  2  N.  Y.  443 
(1849) ;    Gilpin  v.  Howell,  5  Pa.  St.  41 
(1846) ;   Hanks  v.  Drake,  49  Barb.  186 
(1867) ;   overruled  on  another  point  in 
41  N.  Y.  243 ;    Sterling  v.  Jaudon,  48 
Barb.   459   (1867).     Authority   to   the 
pledgee  to  sell  "at  public  or   private 
sale,    at   his   discretion,"    thirty   days 
after    notice,    waives    notice    of  sale. 
McDowell  V.  Chicago  Steel  Works,  124 
lU.  491  (1888).     Notice  may  be  waived. 
Chouteau  v.  Allen,  70  Mo.  290  (1879). 
An  agreement  of  the  pledgor  that  upon 
failure  to  supply  additional  collateral 
in  case  the  pledge  should  decline  in 
value,    the   pledge   might   be   sold,    is 
legal   and   binding.     Dunbar  v.  Com- 
mercial, etc.  Co.,   123  Pac.   Rep.  417 
(Okla.  1912).     Under  an  agreement  by 
which  the  pledgee  may  sell  the  stock 
on  non-payment  of  the  note  or    may 
keep    it    and    return    the    note,    the 
pledgor  may  compel  him  to  return  the 
stock   on   payment   of   the   debt   and 
interest,    even    though    fifteen    years 
have  elapsed,   the  note  never  having 
been  returned.    O'Neil  v.  Jamieson,  236 
Pa.  St.  487  ( 1912) .    Where  two  pledgees 
of  mining  stock,  5,000  shares  each,  who 
are  authorized   by   the   pledge  agree- 
ments to  sell  at  any  time  after  default 
and  to  purchase  for  themselves,  eon- 
spire  to  throw  the  stock  on  the  market 
and  depress  the  price  and  buy  it  in 
cheaply  with  the  result  that  they  buy 
it  in  at  two  thirds  of  its  usual  price, 
the  pledgor  may  hold  them  liable  in 
damages.     Hudgens    v.    Chamberlain, 
161  Cal.  710  (1911).     In  Huiskamp  v. 
West,  47  Fed.   Rep.  236,  249   (1891), 
where  the  pledgee  was  authorized  to 
sell  before  maturity  and  without  notice 
if  the  security  became  insufficient,  the 


1338 


CH.   XXVI.] 


PLEDGE   OF   STOCK. 


[§  478. 


special  agreement  is  waived.^  Such  contracts  are  frequently  entered 
into  with  stock-brokers  by  customers  buying  stock  on  a  margin.  But 
an  express  power  to  the  pledgee  to  sell  the  pledge  on  certain  contingencies 
is  not  a  waiver  of  a  right  to  notice.^  Nor  is  a  mere  memorandum  on  an 
account  stated  from  a  broker  to  a  customer  that  the  broker  reserves 
the  right  to  close  out  transactions  when  margins  are  running  out,  with- 
out further  notice,  a  waiver  by  the  customer  of  his  right  to  notice  and 
demand  for  margin.^  Irregularities  in  the  notice  may  be  waived. 
Thus,  where  a  person,  upon  being  presented  with  his  account,  does 
not  object,  but  promises  to  pay  the  amount,  he  thereby  waives  his  right 
to  object  to  a  sale  as  being  without  notice.^  Even  though  a  pledgee 
sells  the  stock  prior  to  the  date  on  which  he  gave  notice  that  he  would 
sell  it,  yet,  if  the  pledgor,  knowing  the  facts,  directs  the  application  of 
the  proceeds  of  the  sale  and  accepts  a  statement  of  it,  he  cannot  after- 
wards complain.^  The  rights  and  duties  of  a  trustee  holding  stock  as 
security  under  a  mortgage  are  considered  elsewhere.^ 

§  478.  Formalities  of  sale.  —  A  sale  of  stock  on  notice  by  a  pledgee, 
for  the  purpose  of  applying  the  proceeds  to  the  pledgor's  debt,  must 
be  at  public  auction.'^    A  private  sale  is  unauthorized  and  illegal,  even 


tion,  a  minority  stockholder  cannot 
cause  the  sale  to  be  set  aside,  inas- 
much as  the  pledgor  might  have  orig- 
inally consented  to  the  sale.  Macon, 
etc.  R.  R.  V.  Shailer,  141  Fed.  Rep. 
585  (1905).  A  special  agreement  au- 
thorizing the  pledgee  to  sell  is  not 
waived  by  the  fact  that  the  pledgee 
does  not  exercise  that  right  when  the 
note  becomes  due,  but  does  exercise 
it  afterwards.  Louis^dlle,  etc.  Co.  v. 
Thomas,  etc.  Co.,  68  S.  W.  Rep.  2 
(Ky.  1902).  Where  the  pledgor 
waives  demand  and  notice  of  the 
time  and  place  of  sale,  the  pledgee, 
after  the  debt  is  due,  may  sell  with- 
out demand  and  without  notice. 
Thornton  v.  Martin,  116  Ga.  115 
(1902).  For  form  of  note  secured  by 
collateral,  see  vol.  V,  infra. 

1  Toplitz  V.  Bauer,  161  N.  Y.  325 
(1900).  It  may  be  shown  by  parol 
evidence  that  it  was  understood  that 
a  special  provision  as  to  selling  the 
collateral  without  notice  should  be 
stricken  out  of  the  note.  Drake  v. 
Pueblo  Nat.  Bank,  44  Colo.  49  (1908). 
Even  though  a  broker's  contract 
authorizes  him  to  close  any  deal  with- 
out notice  on  the  margin  running  out, 
yet'  if  for  four  years  he  has  not  exer- 


cised that  right  he  waives  it.  Miller 
&  Co.  V.  Lyons,  74  S.  E.  Rep.  194 
(Va.  1912). 

2  Stevens  v.  Hurlbut  Bank,  31  Conn. 
146  (1862) ;  Lewis  v.  Graham,  4  Abb. 
Pr.  106  (1857).  See  also  Wilson  v. 
Little,  2  N.  Y.  443  (1849) ;  Genet  v. 
Rowland,  45  Barb.  560  (1866) ;  Sten- 
ton  V.  Jerome,  54  N.  Y.  480  (1873). 
Cf.  Milliken  v.  Dehon,  27  N.  Y.  364 
(1863).  But  an  e.xpress  power  to  sell 
on  a  specified  day  is  held  to  waive 
right  of  notice.  Bryson  v.  Rayner,  25 
Md.  424  (1866). 

sBosoian  v.  Hubbard,  121  N.  Y. 
App.  Div.  510  (1907) ;  s.  c,  129  N.  Y. 
App.  Div.  637.     See  also  §  459,  supra. 

^Gillett  V.  Whiting,  141  N.  Y.  71 
(1894). 

^  Granger  v.  Fidelity,  etc.  Co.,  198 
Pa.  St.  428  (1901). 

"  See  §  317,  supra. 

"  Convngham's  Appeal,  57  Pa.  St. 
474  (1868);  Rank-in  v.  MeCullough, 
12  Barb.  103  (1851);  Genet  v.  How- 
land,  45  Barb.  560  (1866) ;  Ogden  v. 
Lathrop,  65  N.  Y.  158  (1875) ;  Terry 
V.  Birmingham  Nat.  Bank,  93  Ala. 
599  (1891);  s.  c,  99  Ala.  566.  An 
express  power  to  sell  has  been  held 
to  authorize  a   private  sale.     Bryson 


1339 


§478. 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


though  the  utmost  market  price  is  obtained.^  But  a  special  contract 
by  which  the  pledgor  authorizes  the  pledgee  to  sell  without  notice  and 
at  public  or  private  sale  has  been  upheld.-     Unless  there  is  such  a  special 


V.  Rayner,  25  Md.  424  (1866).  Or  a 
sale  at  a  brokers'  board.  Bryson  v. 
Rayner,  25  Md.  424  (1866).  A  private 
sale  of  collateral  held  by  a  receiver 
cannot  be  made,  even  by  order  of  the 
court.  In  re  Earle,  92  Fed.  Rep.  22 
(1899).  A  sale  must  be  public  and 
on  public  notice,  such  as  is  usual  at 
the  place  of  sale  in  respect  to  auction 
sales  of  similar  property.  Lowe  v. 
Ozmun,  3  Cal.  App.  387  (1906). 


The  court  held  also  that  a  waiver  of 
advertisement  or  notice  waived  any 
notice  to  the  pledgor  and  also  to  the 
public.  See  also  §  477,  supra.  Where 
the  pledgor  becomes  insolvent  and 
assigns  for  the  benefit  of  creditors,  his 
assignee  may  agree  with  the  pledgee 
that  the  stock  be  sold  at  private  sale 
by  the  assignee.  Durfee  v.  Harper,  22 
Mont.  3.54  (1899).  A  contract  by 
which  the  pledgee  may  sell  at  public 


1  Castello  V.  City  Bank  of  Albany,    or  private  sale,   either  with  or  with- 


1  N.  Y.  Leg.  Obs.  25  (1842).  Cf. 
Nabring  v.  Bank  of  Mobile,  58  Ala. 
205  (1877).  The  pledgor's  right  to 
object  is  waived  by  long  delay.  Hay- 
ward  V.  National  Bank,  96  U.  S.  611 
(1877).  In  Willoughby  v.  Comstock, 
3  Hill,  389  (1842),  it  was  held  that 
the  pledgor's  failure   to  object   v/hen 


out  notice,  is  valid  and  a  sale  at  pri- 
vate sale  without  notice  is  good.  Lowe 
V.  Ozmun,  3  Cal.  App.  387  (1906).  A 
private  sale  authorized  by  the  pledge 
agreement  is  legal.  Arbogast  v. 
American,  etc.  Bank,  125  Fed.  Rep. 
518  (1903).  Even  though  a  pledgor 
signs    a    written    agreement    that    on 


he   received    notice   of   intent    to    sell    non-payment  of  the  debt  the  pledgee 


at  a  brokers'  board  was  fatal.  A  bona 
fide  pledgee  of  a  certificate  of  stock 
from  an  agent  having  power  to  pledge, 
but  who  had  so  pledged  the  stock  for 
purposes  not  authorized  by  the  owner. 


may  sell  the  stock  at  public  or  private 
sale  with  or  without  notice  to  the 
pledgor,  yet  a  sale  on  an  exchange 
at  which  -the  public  cannot  bid  will 
be   set   aside   at   the   instance   of   the 


IS  nevertheless  protected,  and  even  pledgor,  and  if  the  pledgee  has  resold 
though  such  pledgee  sells  the  stock  at  the  stock,  the  pledgor  in  a  suit  in 
private  sale  without  notice  he  cannot  be    equity  instituted  to  redeem  the  pledge 


held  liable  if  the  stock  was  not  worth 
more  than  the  debt  secured.  Brittan 
V.  Oakdale,  etc.,  124  Cal.  282  (1899). 
2  Williams  v.  United  States  Trust 
Co.,  133  N.  Y.  660  (1892);  s.  c,  14 
N.  Y.  Supp.  502.  A  private  sale  by  the 
pledgee  in  accordance  with  an  agree- 
ment authorizing  such  sale  was  up- 
held in  Smith  v.  Lee,  84  Fed.  Rep. 
557    (1898),   where  the   price  realized 


may  be  given  damages  equal  to  the 
difference  between  the  debt  and  the 
market  value  of  the  stock,  which  may 
be  the  price  at  which  the  pledgee  has 
resold  the  same.  The  pledgee  is  not 
entitled  to  have  a  jury  estimate  such 
damage.  Such  a  suit  in  equity  lies 
if,  at  the  time  of  instituting  it,  the 
pledgor  did  not  know  that  the  pledgee 
had  resold  the  stock,  the  stock  being 


was,  under  the  circumstances,  a  fair  in  a   private  corporation  and   consti 

price.     In  this  case  a  third  party  had  tuting  a  majority.     No  tender  of  the 

substituted  his  stock  for  the  stock  of  debt  is  necessary  if  the  pledgee  denies 

the    original    pledgor,    and    the    court  the   right   of   the   pledgor   to   redeem, 

held   that   the   substituted   stock  was  Hagan  v.  Continental  Nat.  Bank,  182 

subject   to   the  terms  of  the  original  Mo.   319    (1904).     The   agreement   of 


agreement  of  pledge  as  to  mode  of 
sale.  A  private  sale  in  accordance 
with  the  contract  allowing  said  sale 
was   held    in    Dullnig    v.    Weekes,    40 


pledge  may  legally  provide  that  the 
pledgee  may  sell  the  stock  at  private 
sale  without  notice.  Ardmore  State 
Bank  v.  Mason,  30  Okla.  568  (1911). 


S.  W.  Rep.  178  (Tex.  1897),  not  to  be  A  provision  in  a  pledge  of  an  insurance 
invalid,  where  the  amount  realized  policy  that  the  pledgee  may  sell  it 
was   gi-eater   than   the   market   value,     at  public  or  private  sale  upon  default, 

1340 


CH.  XXVI. I 


PLEDGE   OF   STOCK. 


[§  478. 


contract,  the  pledgee  cannot  have  the  sale  made  at  a  brokers'  board  or 
in  a  stock  exchange,  since  only  the  members  of  the  association  are  al- 
lowed to  bid  for  stocks  sold  therein,  while  the  law  requires  that  the  public 
shall  be  allowed  to  bid  at  a  pledgee's  sale.^  Frequently  a  special  agree- 
ment is  made  between  the  pledgor  and  pledgee,  especially  between  a 
customer  and  his  stock-broker,  whereby  the  pledgee  is  allowed  to  sell 
at  a  brokers'  board.-  Such  an  agreement,  however,  does  not  authorize 
a  private  sale  at  a  brokers'  board .^  The  usual  printed  agreement  which 
a  bank  requires  a  pledgor  to  sign  will  be  construed  in  favor  of  the  pledgor, 
inasmuch  as  the  agreement  is  drawn  by  the  pledgee.  A  provision  that 
the  pledge  shall  apply  to  all  liabilities  of  the  pledgor  to  the  bank  does 
not  include  a  claim  which  the  bank  purchases.^  A  sale  is  valid  though 
the  stock  is  sold  for  only  a  small  part  of  its  value. ^    The  fact  that  there 


or  surrender  it  to  the  company,  may 
be  waived  by  agreement,  declaration, 
or  course  of  conduct  indicating  that 
an  opportunity  would  be  given  to 
redeem.  Toplitz  v.  Bauer,  161  N.  Y. 
325  (1900).  Where  by  contract  the 
pledgee  has  the  right  to  make  a  private 
sale  and  he  does  so  with  the  knowledge 
of  the  pledgor,  the  sale  is  valid.  Rose 
V.  Doe,  4  Cal.  App.  680  (1907). 

1  Brass  v.  Worth,  40  Barb.  648 
(1863);  Rankin  v.  McCullough,  12 
Barb.  103  (1851).  A  sale  in  another 
state  is  legal.  King  v.  Texas,  etc.  Ins. 
Co.,  58  Tex.  669  (1883).  A  sale  on  an 
exchange  where  the  public  are  not 
admitted  to  bid  is  not  a  sufficient  sale. 
Hagan  ;;.  Continental  Nat.  Bank,  182 
Mo.  319  (1904).  A  sale  by  a  pledgee 
broker  on  the  curb  is  legal  if  the  stock 
was  purchased  on  the  curb  for  the 
pledgor  at  his  request.  Moreover,  if  the 
pledgor  objects  to  the  place  of  sale  he 
should  object  promptly  on  receiving  no- 
tice of  intent  to  sell.  Weir  v.  Dwyer, 
62  N.  Y.  Misc.  Rep.  7  (1909). 

2  Wicks  V.  Hatch,  62  N.  Y.  535 
(1875).  See  ch.  XXV,  supra.  A 
pledgee  may  show  a  sale  by  proving 
that  he  sent  it  to  a  broker  who  reported 
the  sale,  and  the  pledgee  credited  the 
pledgor  with  the  proceeds  and  notified 
him  thereof,  to  which  the  pledgor 
assented.  Smith  v.  Becker,  129  Wis. 
396  (1906). 

3  Allen  V.  Dykers,  3  Hill,  593  (1842) ; 
aff'd,  Dykers  v.  Allen,  7  Hill,  497 
(1844).  See  also  Dibert  v.  D'Arey 
154  S.  W.  Rep.  1116  (Mo.  1913). 


^  Gillet  V.  Bank  of  America,  160 
N.  Y.  549  (1899). 

^  See  §  850,  infra.  A  bona  fide  pur- 
chaser at  a  pledgee's  sale  is  protected, 
though  he  purchased  for  less  than  the 
real  value  of  the  stock,  and  though  a 
receiver  had  previously  been  appointed 
of  the  pledgor's  property  and  it  had 
been  transferred  to  the  receiver. 
Dudley  v.  Gould,  6  Hun,  97  (1875). 
Even  though  stock  actually  worth 
$5,000  is  sold  on  public  execution  for 
$9,  yet  the  sale  cannot  be  attacked  col- 
laterally, but  can  be  set  aside  only  in 
a  direct  proceeding  for  that  purpose. 
Howard  v.  Corey,  126  Ala.  283  (1900). 
A  pledgee  is  not  justified  in  selling 
the  pledge  for  just  enough  money  to 
pay  the  debt  where  the  pledge  is 
known  to  have  more  than  double  that 
value,  and  where  the  pledgee,  although 
a  bona  fide  holder,  had  learned  that 
the  pledge  had  been  made  in  breach 
of  trust  by  the  pledgor,  especially 
where  the  pledgee  buys  at  the  sale. 
Foote  V.  Utah,  etc.  Bank,  17  Utah,  283 
(1898).  Where  the  court  has  decreed 
foreclosure  of  a  lien  on  stock,  the 
purchaser  at  such  sale  is  protected 
even  though  he  pays  only  SlOO  and 
the  stock  is  worth  $2,000,  and  even 
though  he  was  the  pledgee  himself, 
and  even  though  no  notice  of  sale  was 
given  to  the  pledgor,  it  not  being 
required  by  the  decree,  and  even 
though  the  return  of  the  sheriff  of 
service  of  original  summons  was  irreg- 
ular, thus  deterring  others  from  bid- 
ding for  the  stock.     First  Nat.  Bank 


1341 


§  478.] 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


is  only  one  bidder  does  not  render  the  sale  invalid.^  The  pledgee  in 
selling  must  "  exercise  reasonable  skill  and  diligence  in  order  to  get  the 
value  of  the  property."  -  Where  stock  is  sold  on  a  mortgage  fore- 
closure, it  should  be  sold  "  by  offering  the  shares  in  small  blocks,  and 
then  as  a  whole,  and  taking  the  bid  which  aggregates  the  larger  sum."  ^ 
In  selling  the  pledge  in  parcels,  a  purchaser  of  the  first  parcel  may  be 
given  the  option  to  take  all,  no  objection  having  been  made  and  no  fraud 
or  unfairness  shown .^  But  a  sale  in  small  blocks  is  not  required  at 
common  law.^  A  broker  in  selling  his  customer's  stock  to  repay  the 
former's  advances  on  default  of  the  customer  to  pay  may  sell  all  the 
stock  and  need  not  confine  himself  to  the  amount  necessary  to  repay 


V.  South  Beaumont,  etc.  Co.,  128  S. 
W.  Rep.  436  (Texas,  1910).  As  to  a 
sacrifice  sale  by  a  trustee  of  a  mortgage, 
see  §  317,  supra. 

^  Guinzburg  v.  H.  W.  Downs  Co., 
165  Mass.  467  (1896). 

2  Guinzburg  v.  H.  W.  Downs  Co., 
165     Mass.     467     (1896).     Where     a 
Boston   pledgee   of   stock   in   a   street 
railway  in  New  Hampshire,  having  a 
market  value  in  New   Hampshire  of 
S50   a   share,    sells   out    the   stock   in 
Boston,  where  it  is  not  known,  and 
buys  it  in  at  $10  a  share,  he  is  liable 
for  the  full  value  of  the  stock,  even 
though  it  afterwards  becomes  worth 
nothing,  and  he  offers  to  give  it  up,  it 
appearing  that  he  might  have  sold  it 
to  outsiders  at  its  face   value.     Jen- 
nings p.  Moore,  189  Mass.  197  (1905). 
See   also    §  479,    infra.     In    the   case 
Hagan    v.     Continental    Nat.     Bank, 
182  Mo.   319    (1904),   the  court  held 
that   a   private   sale   by   the   pledgee, 
under    a    special    contract,    must    be 
made  fairly  and  with  a  view  to  the 
advantage  of  the  pledgor  as  well  as  of 
the  pledgee.     The  sale  was  set  aside 
in    that    case    because    it    was    made 
"for  the  benefit  of  whom  it  may  con- 
cern" instead  of  a  full  statement  of 
the    circumstances    being    made,    and 
also  because  the  pledgee  bought  in  for 
$5,000    the    pledged    stock,    and    the 
pledgee  had  then  resold  it  for  $30,000. 
A  pledgee  who  is  given  power  to  man- 
age the  stock  and   sell  cannot  easily 
be   held    liable   in    damages   for   mis- 
management, even  though  it  turns  out 
that  he  sold  for  much  less  than  the 
stock   was   worth.     Hewitt   v.    Steele, 


118  Mo.  463  (1893).  See  also  Min- 
neapolis Trust  Co.  V.  Menage,  73 
Minn.  441  (1898). 

'  Toler  V.  East  Tennessee,  etc.  Ry., 
67  Fed.  Rep.  168,  181  (1894).  Where 
the  pledgee  obtains  a  judgment  for 
the  sale  of  the  pledge  "upon  the  curb" 
in  New  York,  judgment  being  silent 
as  to  any  notice  of  the  sale,  and  the 
pledgee  then  sells  the  stock  in  small 
lots  and  on  different  dates  and  with- 
out notice,  the  pledgor  cannot  com- 
plain if  he  delayed  a  year  before 
objecting  to  such  sale.  Violett  v.  Hor- 
bach,  119  N.  Y.  App.  Div.  373  (1907). 
*Bush  V.  Adams,  165  Fed.  Rep. 
802  (1908). 

5  Even  though  the  sheriff,  under 
execution,  sells  a  large  block  of  stock 
in  one  lot,  instead  of  dividing  and 
selling  it  in  small  lots,  and  even  though 
such  sale  realizes  $12,000,  whereas  the 
levy  was  for  only  $1,000,  yet  the  pur- 
chaser is  protected  in  his  purchase. 
Connecticut,  etc.  Ry.  v.  Morris,  14  S. 
C.  Rep.  (Can.)  318  (1887) ;  Morris  v. 
Connecticut,  etc.  Ry.,  L.  R.  2  Q.  B. 
303  (1886).  The  court  may  order  a 
receiver  to  sell  shares  of  stock  held  by 
the  receiver  in  one  block  instead  of  in 
parcels  if  the  court  deems  best.  First 
Nat.  Bank  v.  C.  Bunting  Co.,  7  Idaho, 
387  (1900).  Where  the  pledgee  under 
the  usual  special  agreement  sells 
without  fair  notice,  and  sells  the 
various  stocks  in  one  bunch  and  buys 
them  in  at  an  unfair  price,  and  the 
securities  were  not  present  at  the  sale, 
the  court  may  hold  the  sale  illegal. 
Oriental  Bank  v.  Western,  etc.  Co., 
143    S.    W.    Rep.    1176    (Tex.    1912). 


1342 


CH.  XXVI.] 


PLEDGE  OF  STOCK. 


[§  479. 


such  advances,  there  being  but  one  certificate  of  stock  involved.^  Where 
an  Oregon  corporation  pledges  its  bonds  in  Cahfornia  to  secure  notes 
payable  in  California,  the  law  of  California  applies  as  to  the  mode  of 
selling  such  bonds  on  default  of  the  pledgor.-  Even  though  a  pledgee 
by  deceit  gets  the  consent  of  the  pledgor  to  the  sale  of  the  pledge,  this 
is  not  obtaining  goods  through  larceny  by  false  pretense.^  It  is  grand 
larceny  in  the  first  degree,  under  the  New  York  statute,  for  a  person  to 
take  part  in  a  conspiracy  to  induce  a  person  to  take  a  loan,  giving  stock 
as  collateral,  and  then  for  the  pledgee  to  sell  the  collateral  illegally  as  a 
part  of  the  conspiracy.^ 

§  479.  //  the  pledgee  himself  purchases  at  the  sale,  then  the  sale  is 
voidable.  —  It  is  a  well-established  rule  that,  where  a  pledgee  pursues 
the  remedy  of  selling  the  stock  upon  notice,  the  pledgee  himself  is  dis- 
qualified from  purchasing  the  stock. ^    The  rule  is  based  on  the  prin- 


1  Stubbs  V.  Slater,  [1910]  1  Ch.  195. 
A  purchaser  of  stock  at  auction  sale 
may  enforce  the  contract  where  the 
auctioneer  declared  the  property  sold. 
Meyer  v.  Redmond,  141  N.  Y.  App. 
Div.  123  (1910). 

2  Morris,  etc.  v.  East  Side  Ry.,  104 
Fed.  Rep.  409  (1900),  rev'g  95  Fed. 
Rep.  13. 

^  Commonwealth  v.  Althause,  207 
Mass.  32  (1910). 

*  People  V.  Katz,  154  N.  Y.  App. 
Div.  44  (1912). 

^  Easton  v.  German-American  Bank, 
127  U.  S.  532  (1888) ;  Bryan  v.  Bald- 
win, 52  N.  Y.  232  (1873),  the  court 
saying:  "The  plaintiff,  being  pledgee 
of  the  stock,  and  in  that  character 
exposing  it  for  sale,  could  not  become 
the  purchaser  unless  the  defendant 
assented  to  such  purchase ....  This 
sale  to  the  plaintiff  was  not  void,  but 
voidable  at  the  election  of  the  defend- 
ant "  ;  Maryland  F.  Ins.  Co.  v.  Dakym- 
ple,  25  Md.  242  (1866).  Nor  can  he 
buy  where  the  pledge  is  being  sold  on 
a  forfeiture  sale  for  non-payment  of 
calls.  Freeman  v.  Harwood,  49  Me. 
195  (1859).  See  also  Sickles  v.  Rich- 
ardson, 23  Hun,  559  (1881);  where 
the  sale  of  property  pledged  was  on 
an  attachment.  The  pledgor's  silence 
may  constitute  a  ratification  of  the 
pledgee's  purchase.  Carroll  v.  Mul- 
lanphy  Sav.  Bank,  8  Mo.  App.  249 
(1880).  If  the  pledgee  is  a  corpora- 
tion its  president  cannot  purchase  for 


it.  Star  F.  Ins.  Co.  v.  Palmer,  41 
N.  Y.  Super.  Ct.  267  (1876).  Lewis 
V.  Graham,  4  Abb.  Pr.  106  (1857), 
holds  that  a  special  partner  of  the 
pledgee  firm  may  purchase.  And  see 
ch.  XXV,  §  450,  supra.  Cf.  Finney's 
Appeal,  59  Pa.  St.  398  (1868).  Where 
a  pledgee  bank  having  a  right  to  sell 
at  private  sale  and  without  notice  sells 
the  pledge  through  its  president,  who 
buys  the  pledge  himself,  and  the 
president  openly  pays  the  bank  for  it, 
long  delay  on  the  part  of  the  bank  in 
complaining  is  fatal.  Raymond  v. 
Palmer,  41  La.  Ann.  425  (1889). 
Even  though  the  attorney  for  the 
pledgee  buys  a  pledge  at  public  sale 
and  afterwards  resells  it  to  the  pledgee, 
yet  if  there  is  no  proof  that  the  trans- 
action was  a  mere  device  the  sale  is 
valid.  Steelman  v.  Weiskittel,  88  Md. 
519  (1898).  Where  a  bank  holds 
$300,000  of  first-mortgage  bonds  issued 
to  the  bank  by  the  corporation  itself, 
for  a  debt  of  about  $175,000  and 
transfers  the  same  to  another  party, 
who  advertises  and  sells  the  bonds 
under  the  terms  of  the  pledge,  even 
though  the  purchaser  borrows  the 
money  from  the  bank  in  order  to  make 
payment,  the  sale  is  not  therebj^ 
invalidated.  Morris,  etc.  v.  East 
Side  Ry.,  104  Fed.  Rep.  409  (1900), 
rev'g  95  Fed.  Rep.  13.  As  against  a 
surety  on  a  note,  the  acts  of  the  pledgee 
in  foreclosing  the  pledge  and  purchas- 
ing the  same  and  also  attaching  other 


1343 


§479. 


PLEDGE  OF  STOCK. 


[cH.  XXVI. 


ciple  that  the  pledgee  owes  a  duty  to  the  pledgor,  and  will  not  open  the 
door  to  possible  devices  of  the  pledgee  for  purchasing  the  stock  for 
himself  at  a  low  price.^  The  pledgee  cannot  purchase,  either  directly 
or  indirectly,  in  his  own  name  or  in  the  name  of  another.^  The  effect 
of  a  purchase  by  the  pledgee  for  himself  is  that  the  whole  proceeding  of 
the  pledgee  for  subjecting  the  pledge  to  the  payment  of  the  debt  is 
utterly  futile,  and  voidable  at  the  election  of  the  pledgor.  The  pledgor, 
however,  may  elect  to  abide  by  the  sale.^  The  pledgor  cannot  claim 
that  the  pledgee  has  converted  the  stock  by  purchasing  at  the  sale,^ 
but  he  may  disregard  the  notice  and  sale  and  the  whole  proceeding  as 
being  ineffectual  and  voidable.  The  pledge  relationship  continues 
as  though  no  attempt  had  been  made  by  the  pledgee  to  subject  the 
pledge  to  the  payment  of  the  debt.^    Where  the  pledgee  buys  the 


stock  held  in  pledge  and  selling  it  on 
execution,  are  not  valid,  the  pledge 
being  worth  more  than  the  amount  of 
the  notes.  Crosby  v.  Woodbury,  37 
Colo.  1  (1905). 

1  Quoted  and  approved  in  Rosen- 
blatt V.  Weinman,  230  Pa.  St.  536 
(1911). 

2  Minneapolis  Assoc,  v.  Canfield, 
121  U.  S.  295  (1887).  He  cannot  buy 
in  the  name  of  a  dummy.  Rush  v. 
Fkst  Nat.  Bank,  71  Fed.  Rep.  102 
(1895). 

3  Appeal  of  Hibernia  Nat.  Bank,  47 
La.  Ann.  643  (1895).  Even  though 
the  pledgee  himself  purchases  at  the 
pubUc  sale,  yet  if  the  pledgor  does 
not  object  for  five  years,  and  in  the 
meantime  a  receiver  of  the  pledgor 
approves  the  purchase  by  order  of  the 
court,  a  certain  sum  being  paid  to  him 
as  receiver  therefor,  the  delay  is  a 
bar  to  any  objection.  Thomas  v. 
Gilbert,  55  Oreg.  14  (1909). 

*  Bryan  v.  Baldwin,  52  N.  Y.  232 
(1873).  Even  though  the  pledgee 
purchases  at  the  sale,  yet  if  he  con- 
tinues to  hold  the  collateral  the  pledgor 
may  treat  the  sale  as  valid  or  may 
consider  the  pledge  as  continuing  but 
cannot  sue  for  conversion.  Holston 
Nat.  Bank  v.  Wood,  140  S.  W.  Rep. 
31  (Tenn.  1911).  If  the  pledgee  buys 
it  in,  there  is  no  conversion.  The 
pledge  continues.  Terry  v.  Birming- 
ham Nat.  Bank,  93  Ala.  599  (1891); 
s.  c,  99  Ala.  566.  If  the  pledgee  pur- 
chases at  the  sale,  the  pledgor  may 
either  ratify  or  disaffirm  the  sale,  but 


cannot  treat  it  as  a  conversion.  Win- 
chester V.  Joslyn,  31  Colo.  220  (1903). 
Where  the  pledgee  buys  at  a  sale  he 
cannot  be  held  liable  for  conversion 
so  long  as  he  retains  the  property, 
unless  the  pledgor  demands  the  return 
of  the  same  and  offers  to  perform  his 
part  of  the  contract ;  but  where  the 
pledgee  sells  a  part  of  the  property  he 
is  liable  for  conversion  without  any 
demand  or  offer  of  performance  by 
the  pledgor.  GUdden  v.  Mechanics' 
Nat.  Bank,  53  Ohio  St.  588  (1895). 
Where  the  pledgee  purchases  at  the 
sale  the  sale  is  void,  but  does  not 
amount  to  a  conversion  of  the  securi- 
ties. First  Nat.  Bank  v.  Hall,  22 
N.  Y.  App.  Div.  356  (1897). 

5  Bryson  v.  Rayner,  25  Md.  424 
(1866) ;  Middlesex  Bank  v.  Minot,  45 
Mass.  325  (1842);  Hestonville,  etc. 
R.  R.  V.  Shields,  3  Brewst.  (Pa.)  2.57 
(1869).  If  the  pledgee  purchases  at. 
the  sale  the  pledge  continues.  The 
pledgor  does  not  waive  his  rights  by 
settling  in  ignorance  that  the  pledgee 
purchased.  Sharpe  v.  Birmingham 
Nat.  Bank,  87  Ala.  644  (1888).  If  the 
pledgee  buys,  the  pledge  continues 
unless  the  pledgor  confirms  the  sale. 
Hyams  v.  Bamberger,  10  Utah,  3 
(1894).  Where  the  pledgee  buys  in 
the  stock  himself,  it  is  the  same  as 
though  no  sale  had  taken  place,  and 
the  corporation  is  not  liable  for  allow- 
ing a  transfer  of  the  stock  to  such 
pledgee.  First  Nat.  Bank  v.  Mings, 
11  Tex.  Civ.  App.  302  (1895).  Where 
a  pledgee  buys  for  himself,  and  subse- 


1344 


CH.  XXVI.J 


PLEDGE  OF  STOCK. 


[§  479. 


security  at  the  public  sale  and  then  sells  it,  and  then  sues  the  pledgor 
for  the  deficiency  on  the  first  sale,  the  pledgor  may  claim  a  set-off  for 
the  full  value  of  the  securities  wrongfully  resold,  and  need  not  make  a 
tender.^  Under  the  statutes  of  California  the  pledgee  at  a  public  sale 
may  buy  in  the  stock ;  ^  while  in  INIassachusetts  by  statute  a  pledgee 
is  prohibited  from  purchasing  at  his  own  sale.^     Where  a  pledge  is  fore- 


quently  takes  the  stock  into  his  pos- 
session, the  pledge  continues,  and  he 
cannot  sell  a  second  time  without  due 
notice.  Leahy  v.  Lobdell,  etc.  Co.,  80 
Fed.  Rep.  665  (1897).  A  pledgee  of 
bonds  who  buys  them  in  at  his  own 
sale  as  pledgee  still  holds  them  in 
pledge.  Duncomb  v.  N.  Y.,  etc.  R.  R., 
84  N.  Y.  190,  204  (1881).  Even 
though  a  national  bank,  as  pledgee  of 
a  national  bank  stock  which  stands 
on  the  books  of  the  latter  bank  in  the 
name  of  the  pledgor,  sells  the  stock 
on  notice  and  buys  it  in  at  a  nominal 
figure,  yet  if  the  pledgee  does  not  have 
the  stock  transferred  to  himself  on 
the  books  of  the  bank  he  cannot  be 
held  liable  thereon,  the  pledgee  hav- 
ing soon  after  the  sale  waived  its 
rights  as  a  purchaser  at  such  sale. 
Robinson  v.  Southern,  etc.  Bank,  180 
U.  S.  295  (1901).  Where  the  pledgee 
of  stock  sells  it  out  and  buys  it  in 
himself,  and  at  the  annual  election 
votes  the  stock  by  proxy,  even  though 
the  stock  still  stands  on  the  corpora- 
tion books  in  the  name  of  the  pledgor, 
and  the  pledgor  claims  that  the  sale 
is  illegal  and  that  the  directors  elected 
by  the  pledgee's  vote  intend  to  take 
action  detrimental  to  the  corporation, 
such  pledgor  is  entitled  to  an  injunc- 
tion against  such  directors  acting  as 
directors.  Reynolds  v.  Bridenthal,  57 
Neb.  280  (1898).  A  purchaser  of 
stock  who  makes  a  partial  payment  and 
gives  back  the  stock  as  collateral 
security  cannot  abandon  the  contract 
and  claim  such  part  of  the  stock  as 
the  payment  already  made  would 
pay  for,  on  the  ground  that  the  seller 
has  obtained  control  of  the  corpora- 
tion and  is  guilty  of  a  breach  of 
trust.  The  fact  that  the  seller  as 
pledgee  has  sold  the  stock  and  bought 
it  in  himself  is  immaterial,  inasmuch 
as  such  a  sale  is  illegal.  Reid  v.  Cald- 
weU,  110  Ga.  481  (1900) ;  114  Ga.  676. 


Where  the  trustee  of  a  mortgage 
makes  a  loan  to  the  mortgagor  on 
the  bonds  secured  by  the  mortgage 
and  then  sells  out  the  collateral  and 
buys  it  in  himself,  he  can  upon  fore- 
closure enforce  the  bonds  only  to  the 
extent  of  the  amount  loaned  and 
interest.  Knickerbocker  Trust  Co.  v. 
Penacook  Mfg.  Co.,  100  Fed.  Rep.  814 
(1900).  A  Georgia  pledgee  of  stock 
in  an  Alabama  corporation  may  after 
piu'chasing  the  stock  at  public  sale 
file  a  bill  in  equity  in  Alabama  against 
the  corporation  to  obtain  a  transfer 
on  the  corporate  books,  and  if  the 
pledgor  is  deceased  and  the  executors 
are  non-residents  he  need  not  join  them 
as  parties  defendant,  but  he  may  join 
the  heirs  to  ascertain  on  what  ground 
they  object  to  the  transfer.  Warrior, 
etc.  Co.  V.  National  Bank,  etc.,  53 
S.  Rep.  997  (Ala.  1910).  Even  though 
a  pledgee  purchases  at  a  sale,  yet  if 
he  afterwards  sells  the  pledge  the  sale 
is  valid.  Liquidators,  etc.  v.  Hart, 
130  La.  843  (1912). 

1  Rush  V.  First  Nat.  Bank,  71  Fed. 
Rep.  102  (1895),  re\dewing  the  author- 
ities on  tender  in  such  cases.  Where 
the  pledgee  sues  for  the  balance  due 
on  the  note  after  a  sale  of  the  pledge, 
and  the  pledgor  sets  up  a  counter- 
claim that  the  pledgee  had  sold  the 
stock  "for  the  use  of  defendant  and 
converted  to  its  own  use,"  the  pledgor 
thereby  ratifies  the  sale,  and  is  entitled 
only  to  the  purchase  price  of  the 
stock,  and  not  its  actual  value.  Terry 
V.  Birmingham  Nat.  Bank,  99  Ala.  566 
(1893). 

2  McAulay  v.  Moody,  128  Cal.  202 
(1900).  Under  the  California  code 
the  pledgee  may  purchase  at  a  public 
sale  of  the  pledge.  Lowe  v.  Ozmun, 
3  Cal.  App.  387  (1906). 

3  Lord  V.  Hartford,  175  Mass.  320 
(1900).  The  Massachusetts  statute 
as  to  the  rights  of  pledgors  and  pledg- 


(85) 


1345 


479. 


PLEDGE  OF  STOCK. 


[CH.  XXVI. 


closed  by  legal  proceedings  similar  to  those  for  the  foreclosure  of  chattel 
mortgages,  either  party  may  bid  at  the  public  judicial  sale.^  Even 
though  the  pledgee  is  authorized  by  special  contract  with  the  pledgor, 
to  sell  at  public  or  private  sale  without  notice,  yet  he  cannot  buy  for 
himself,  notwithstanding  he  has  sold  the  note  with  the  collateral  to 
another  person  who  makes  the  sale.^ 

The  pledgor  may  authorize  the  pledgee  to  purchase  at  the  sale  and 
retain  the  pledge,^  but  the  pledgee  must  not  take  an  undue  advantage 
of  such  an  opportunity.''    A  contract  by  which  the  pledgee  may  sell 


ees  of  stock  does  not  apply  to  stock 
issued  by  an  unincorporated  real 
estate  trust.  Linnell  v.  Leon,  206 
Mass.  71  (1910).  The  statute  referred 
to  in  the  case  Lord  v.  Hartford,  supra, 
is  Ch.  192,  Sees.  10  and  11  of  Public 
Statutes  of  1882  relative  to  sales  of 
pledges  upon  failure  to  pay  the  debt. 
The  case  Linnell  v.  Leon,  206  Mass. 
71  (1910),  refers  to  the  Massachusetts 
statute  authorizing  the  transfer  of 
stock  to  a  pledgee  as  pledgee. 

1  Pewabic  Min.  Co.  v.  Mason,  145 
U.  S.  349  (1892).  A  pledgee  may  pur- 
chase at  a  judicial  sale.  Anderson  v. 
Messenger,  146  Fed.  Rep.  929  (1906). 
The  pledgee  of  stock  cannot  claim 
title  to  it  on  the  ground  that  the 
pledgor  was  a  receiver  and  purchased 
the  stock  at  a  receiver's  sale.  Groeltz 
V.  Cole,  128  Iowa,  340  (1905).  In  New- 
port, etc.  Bridge  Co.  v.  Douglass,  12 
Bush  (Ky.),  673,  720  (1877),  the 
pledgee  of  bonds  from  the  company 
issuing  them  obtained  a  foreclosure 
of  the  pledge  by  suit,  and  bought  the 
bonds  in,  and  was  then  held  to  be  the 
absolute  owner  of  them. 

2  Greer  v.  Lafayette,  etc.  Bank,  128 
Mo.  559  (1895). 

3  Chouteau  v.  Allen,  70  Mo.  290 
(1879).  See  also  Farmers',  etc.  Co.  v. 
Toledo,  etc.  Co.,  54  Fed.  Rep.  759 
(1893),  where  bonds  were  bought  in. 
A  pledgee  cannot  himself  purchase 
the  stock  at  the  sale,  but  the  pledgor 
may  lawfully  contract  so  as  to  allow 
the  pledgee  to  purchase  at  such  sale, 
or  may  ratify  such  purchase  after  it 
has  been  made.  If  there  is  no  such 
contract  or  ratification,  however,  the 
sale  is  void,  and  the  parties  remain  in 
the  same  position  as  though  no  sale 
had  taken  place.     Appleton  v.  Turn 


bull,  84  Me.  72  (1891).  Under  a  power 
of  sale  authorizing  a  pledgee  to  pur- 
chase, and  waiving  notice  of  sale,  the 
pledgee  may  piu-chase,  and  it  is  imma- 
terial that  the  sale  took  place  at  a. 
time  when  stocks  and  bonds  had 
declined  in  a  panic.  The  pledgee  need 
not  wait  for  a  favorable  condition  of 
the  market.  Franklin  Nat.  Bank  v. 
Newcombe,  1  N.  Y.  App.  Div.  294 
(1896) ;  aff'd,  157  N.  Y.  699.  A  pro- 
vision in  a  contract  of  pledge  that  the 
pledgee  may,  at  a  sale  for  non-pay- 
ment, buy  in  the  stock  for  himself,  is 
legal.  Manning  v.  Schriver,  79  Md. 
41  (1894).  In  Fidelity,  etc.  T.  Co.  v. 
Roanoke,  etc.  Co.,  81  Fed.  Rep.  439 
(1896),  the  court  sustained  a  pur- 
chase by  the  pledgee  himself,  where 
the  agreement  of  pledge  authorized 
him  to  sell  at  public  or  private  sale 
and  without  notice  or  demand  of  pay- 
ment. Where  the  pledgee  sells  bonds 
held  as  collateral  and  buys  them  in, 
he  may  enforce  them  for  their  full  par 
value  instead  of  to  the  extent  of  only 
his  claim.  Atlantic  Trust  Co.  v. 
Woodbridge,  etc.  Co.,  86  Fed.  Rep. 
975  (1897).  A  written  agreement  of 
the  pledgor  that  the  pledgee  might 
sell  the  stock  and  purchase  for  himself 
may  be  modified  by  subsequent  oral 
agreement,  but  failure  for  two  years 
to  object  to  such  a  sale  and  purchase 
ratifies  it.  Manning  v.  Heidelbach, 
153  N.  Y.  App.  Div.  790  (1912). 

^  Even  though  the  agreement  of 
pledge  allows  the  pledgee  to  sell  at 
public  or  private  sale  and  purchase 
for  himself,  and  he  does  purchase  at 
public  sale,  the  sale  is  not  legal  unless 
it  was  fairly  made  and  he  acted  in  good 
faith  to  protect  the  pledgor,  and  a  delay 
of  three  years  in  complaining  is  not 


1346 


XXVI.] 


PLEDGE   OF   STOCK. 


[§  479. 


at  private  sale  means  an  actual  sale  and  not  a  taking  over  of  the  property 
by  the  pledgee  himself.^  Under  a  contract  authorizing  the  pledgee  to 
buy  at  a  sale  of  the  collateral,  he  may  buy  even  at  a  much  less  price 
than  the  market  price,  where  the  sale  was  public  and  the  pledgor  was 
given  full  notice  of  the  same  with  an  opportunity  to  stop  the  sale  by 
advancing  more  collateral,  especially  where  the  notice  of  sale  was  fully 
advertised  in  the  papers  and  the  place  of  sale  was  a  public  exchange 
where  such  sales  were  usually  made.-  Stock  held  in  pledge  to  secure  a 
debt  cannot  be  sold  before  the  debt  is  due,^  unless  there  is  a  special  con- 
tract to  that  effect.     The  pledgor  may  release  his  equity  to  the  pledgee.^ 


fatal.  Perkins  v.  Applegate,  85  S. 
W.  Rep.  723  (Ky.  1905).  Where  a 
Boston  pledgee  of  stock  in  a  street 
railway  in  New  Hampshire,  having 
a  market  value  in  New  Hampshire  of 
$50  a  share,  sells  out  the  stock  in 
Boston,  where  it  is  not  known  and  buys 
it  in  at  $10  a  share,  he  is  liable  for  the 
full  value  of  the  stock,  even  though 
it  afterwards  becomes  worth  nothing, 
and  he  offers  to  give  it  up,  it  appearing 
that  he  might  have  sold  it  to  outsiders 
at  its  face  value.  Jennings  v.  Moore, 
189  Mass.  197  (1905).  See  also  §  478, 
supra.  Where  two  pledgees  of  mining 
stock,  5,000  shares  each,  who  are 
authorized  by  the  pledge  agreements 
to  sell  at  any  time  after  default  and 
to  purchase  for  themselves,  conspire 
to  throw  the  stock  on  the  market  and 
depress  the  price  and  buy  it  in  cheaply 
with  the  result  that  they  buy  it  in  at 
two  thirds  of  its  usual  price,  the  pledgor 
may  hold  them  liable  in  damages. 
Hudgens  v.  Chamberlain,  161  Cal.  710 
(1911).  A  fraudulent  sale  Avith  the 
permission  of  the  pledgor,  who  is 
bankrupt,  may  be  set  aside.  Horton  v. 
Bamford,    79   N.   J.    Eq.   356    (1911). 

1  Lowe  V.  Ozmun,  3  Cal.  App.  387 
(1906). 

2  Farmers',  etc.  Bank  v.  Venner,  192 
Mass.  531  (1906),  holding  also  that 
an  error  in  the  notice  of  sale  describ- 
ing the  bonds  as  six  per  cent,  instead 
of  five  per  cent,  is  immaterial.  A 
pledgee  may  purchase  at  a  public 
sale  regularly  conducted  where  the 
pledge  agreement  allowed  him  to 
purchase,  even  though  the  pledge  is 
sold  at  less  than  its  actual  value. 
Bush  V.  Adams,  165  Fed.  Rep.  802 
(1908). 


5  Illinois  Nat.  Bank  v.  Baker,  128 
111.  533  (1889). 

'  Thomas  v.  CofBn,  62  Fed.  Rep.  665 
(1894);  Small  v.  Saloy,  42  La.  Ann. 
183  (1890).  A  pledgor  may  pledge 
the  securities  pledged,  and  the  sale 
may  be  to  the  pledgee.  The  sale  may 
be  oral  and  will  be  upheld,  the  debt 
being  canceled  thereby.  Brown  v. 
Farmers'  L.  &  T.  Co.,  117  N.  Y.  266 
(1889).  Cf.  Ryle  v.  Ryle,  41  N.  J.  Eq. 
582  (1886).  Where  the  owner  of  stock 
has  pledged  all  of  it  to  different  par- 
ties and  arranges  with  one  of  them 
to  take  up  all  the  stock,  and  the  latter 
does  so,  and  for  several  years  treats  it 
as  his  own,  and  the  lower  court  finds 
that  the  agreement  was  that  the 
pledgee  should  own  it,  the  upper  court 
will  not  disturb  the  decision,  espe- 
cially where  the  pledgor  claims  that  he 
transferred  the  stock  to  avoid  paying 
other  creditors.  Hukill  v.  Yoder,  189 
Pa.  St.  233  (1899).  Where  an  agree- 
ment whereby  stock  is  pledged  to 
secure  a  note  provides  that  the  pledgee 
may  buy  the  stock  at  a  fixed  price  on 
or  before  a  certain  date,  a  transferee 
of  the  note  and  pledge  cannot  exer- 
cise such  option  by  notice  to  the 
original  pledgee.  The  notice  must  be 
to  the  pledgor.  Rumsey  v.  Lentz,  59 
Ohio  St.  189  (1898).  A  written  agree- 
ment between  the  pledgor  and  pledgee 
by  which  the  note  is  canceled,  in  con- 
sideration of  the  stock  being  sold  and 
transferred  absolutely  to  the  pledgee, 
is  legal,  unless  the  agreement  is  an 
unconscionable  one.  Cunningham  v. 
Jones'  Ex'rs,  108  Ky.  728  (1900). 
Even  though  garnishee  process  has 
been  served  upon  the  pledgee  of  stock 
for   a    debt   of   the   pledgor,   yet    the 


1347 


§  479.] 


PLEDGE   OF   STOCK. 


[CH. 


A  court  of  equity  scrutinizes  closely,  however,  a  contract  between 
pledgor  and  pledgee  for  transfer  of  title,  and  will  set  it  aside  if  there  is 
any  ground  for  believing  that  it  is  a  harsh  contract,  brought  about  by 
the  position  of  vantage  occupied  by  the  pledgee.^  Additional  collateral 
does  not  come  under  a  special  provision  authorizing  the  pledgee  to  pur- 
chase at  a  sale  unless  the  writing  is  clearly  to  that  effect.^  Where  a 
trust  deed  authorized  the  trustee  upon  default  to  sell  the  pledged  bonds 
at  public  or  private  sale  and  to  become  purchaser  itself,  the  pledgee 
may  purchase  for  itself,  even  though  it  is  is  also  trustee  in  a  subsequent 
trust  deed.^  Notwithstanding  a  pledge  provides  that  if  the  debt  is 
not  paid  within  a  certain  time  the  stock  shall  belong  to  the  pledgee, 
this  does  not  give  complete  title  to  the  pledgee  upon  non-payment  of 


pledgor  and  pledgee  may  agree  that 
the  stock  shall  belong  to  the  pledgee 
in  cancellation  of  the  debt.  Such 
agreement  is  not  illegal  if  the  debt  was 
the  full  value  of  the  stock  at  the  time ; 
and  even  though  subsequently  the 
pledgee,  upon  selling  the  stock  for 
more  than  the  debt,  pays  the  surplus 
to  the  pledgor,  the  creditor  issuing 
the  garnishee  process  cannot  com- 
plain. Steiner  v.  First,  etc.  Bank, 
127  Ala.  595  (1900).  Receiving  the 
surplus  in  ignorance  of  illegality  is  no 
waiver.  Allen  v.  American,  etc.  Assoc, 
49  Minn.  544  (1892) ;  Sharpe  v.  Birm- 
ingham Nat.  Bank,  87  Ala.  644  (1888). 
A  creditor  of  an  individual  cannot 
set  aside  a  sale  by  the  latter  of  his 
stock  to  a  pledgee  and  indorser  of 
notes,  even  though  such  sale  was  at 
a  figure  much  less  than  the  price  at 
which  said  pledgee  finally  sold  the 
stock  after  putting  in  additional 
money.  Davis  v.  Yoder,  173  Pa.  St. 
138  (1896).  In  Fox  v.  Hartford,  etc. 
R.  R.,  70  Conn.  1  (1897),  the  pledgor 
sold  the  pledge  to  the  pledgee.  '  Where 
an  insolvent  pledgor  sells  the  pledge 
to  the  pledgee  for  the  debt  itself, 
$7,000,  the  transaction  is  legal,  even 
though  a  jury  find  that  the  stock  was 
worth  $1,500  more.  Wachovia  L.  & 
T.  Co.  V.  Forbes,  120  N.  C.  355  (1897). 
1  Ritchie  v.  McMullen,  79  Fed.  Rep. 
522  (1897).  Under  the  New  Hamp- 
shire statutes,  when  a  corporation  is 
wound  up  under  insolvency  proceed- 
ings, all  claims  are  allowed  as  of  the 
same  date,  interest  being  added  for 
those  past  due,  and  a  rebate  of  interest 


made  on  those  not  yet  due.  An 
assignee  in  insolvency  cannot  agree 
that  a  trustee  to  whom  the  corpora- 
tion pledged  mortgages  as  security 
for  debentures  shall  purchase  such 
securities  at  a  price  named.  Bank 
Com'rs  V.  New  Hampshire,  etc.  Co., 
69  N.  H.  621  (1899).  A  pledgor  may 
release  his  equity  to  the  pledgee,  yet 
the  courts  view  such  agreements  with 
distrust  and  disfavor,  and  if  advantage 
was  taken  of  the  pledgor  or  the  con- 
sideration was  grossly  inadequate,  the 
release  will  be  disregarded  and  the 
pledgor  allowed  to  redeem.  Collins  v. 
Denny,  etc.  Co.,  41  Wash.  136  (1905), 
a  case  where  $27,800  worth  of  stock 
was  pledged  for  a  .?3,000  debt.  In 
this  case  by  the  original  agreement 
the  pledgee  was  to  have  the  stock  if 
the  debt  was  not  paid  within  four 
months.  A  release,  by  the  board  of 
directors  of  a  corporation  mortgagor, 
of  the  equity  of  redemption  to  the 
mortgagee,  is  not  binding  on  the  cor- 
poration. Brinkerhoff,  etc.  Co.  v. 
Boyd,  192  Mo.  597  (1905).  A  pledgor 
who  has  transferred  his  equity  to  the 
pledgee  in  cancellation  of  the  debt, 
cannot  have  the  transaction  set  aside 
where  it  is  not  alleged  that  he  could 
have  obtained  more  for  the  stock  or 
was  kept  in  ignorance  of  its  value  or 
did  not  know  its  worth.  Wetherell 
V.  Johnson,  208  111.  247  (1904). 

2  Holston  Nat.  Bank  v.  Wood,  140 
S.  W.  Rep.  31  (Tenn.  1911). 

3  Shepard,  etc.  Co.  v.  Hurd,  128 
N.  Y.  App.  Div.  28  (1908) ;  aff'd,  198 
N.  Y.  624. 


1348 


CH.   XXVI.] 


PLEDGE   OF   STOCK. 


[§  479. 


the  debt,  but  merely  gives  him  an  option.^  Even  though  a  corporation, 
when  it  mortgages  its  mortgage  bonds,  gives  an  option  to  the  mort- 
gagee to  purchase  the  bonds,  such  option  cannot  be  enforced,  because 
a  mortgagee  is  not  allowed  at  the  time  of  making  a  loan  to  contract  for 
the  purchase  of  mortgaged  property.  The  rule  is  different  where  a  day 
or  more  intervenes  between  the  two  contracts.- 


1  Colonial  T.  Co.  v.  McMillan,  188 
Mo.  547  (1905).  The  owner  of  stock 
may  pledge  it  to  secure  his  agreement 
that  he  ■will  form  a  corporation  to 
take  over  certain  property,  and  he 
may  agree  that  the  stock  shall  be 
forfeited  to  the  pledgee  if  the  agree- 
ment is  not  carried  out.  Electric,  etc. 
Co.  V.  Smith,  113  N.  Y.  App.  Div.  615 
(1906).  Under  an  agreement  by  which 
the  pledgee  may  sell  the  stock  on  non- 
payment of  the  note  or  may  keep 
it  and  return  the  note,  the  pledgor 
may  compel  him  to  return  the  stock 
on  payment  of  the  debt  and  interest, 


even  though  fifteen  years  have  elapsed, 
the  note  never  ha\'ing  been  returned. 
O'Neil  V.  Jamieson,  236  Pa.  St.  487 
(1912).     C/.  132  Pac.  Rep.  88. 

-  Samuel  v.  Jarrah,  etc.  Corp.  Ltd., 
[1904]  A.  C.  323.  Where  the  pledgor 
agrees  to  sell  the  stock  to  the  pledgee, 
but  the  corporation  claims  a  hen  and 
refuses  to  transfer  it,  and  for  three 
years  the  pledgee  does  nothing  and 
the  stock  quadruples  in  value,  specific 
performance  will  not  be  granted  at 
the  instance  of  the  pledgee.  Schimpff 
V.  Dime,  etc.  Bank,  208  Pa.  St.  380 
(1904). 


1349 


CHAPTER   XXVII. 


LEVY  OF    ATTACHMENT    AND    EXECUTION    UPON   SHARES    OF 

STOCK. 


§  480.  An  execution  at  common  law 
could  not  reach  shares  of 
stock. 

481.  Nor,  it  seems,  could  a  court  of 

equity  subject  stock  to  the 
payment  of  debts,  except 
when  it  had  been  conveyed 
away  fraudulently. 

482.  By  statutory  provisions  execu- 

tions are  generally  sufficient 
to  reach  the  debtor's  stock  — 
Strict   compliance   necessary. 

483.  Attachment  of  stock  as  allowed 

by  the  statutes  of  the  various 
states. 

484.  Levy  of  attachment  or  execu- 

tion upon  stock  held  in  pledge 
or  by  trustee,  and  of  stock 
which  the  debtor  has  fraud- 
ulently transferred  away. 

485.  Can    stock    or    certificates    of 

stock  be  attached  elsewhere 
than  in  the  state  creating  the 
corporation  ? 

486.  Rights  of  an  unregistered  trans- 

feree of  a  certificate  of  stock 
as  against  an  attachment  or 
execution  levied  on  that  stock. 

487.  In    California,    Delaware,    Dis- 

trict of  Columbia,  Idaho, 
Kansas,  Kentucky,  Louisiana, 
Michigan,  Minnesota,  Missis- 
sippi, Missouri,  Nebraska, 
New  Jersey,  New  York, 
North  Dakota,  Ohio,  Oregon, 
Pennsylvania,  South  Dakota, 
Tennessee,  Texas,  Utah, 
Washington,  and  in  the  fed- 
eral courts  passing  upon  the 
transfer  of  national  bank 
stock,  it  is  held  that  by  the 
common  law  the  unregistered 


transferee  of  a  certificate  of 
stock  is  protected  as  against 
all  subsequent  attachments 
or  executions  levied  on  that 
stock. 
§  488.  In  Illinois,  Maine,  Maryland, 
Massachusetts,  Montana, 
New  Hampshire,  Rhode  Is- 
land, Virginia,  Wisconsin, 
West  Virginia,  and  Wyoming, 
the  statutes  have  prescribed 
that  an  unregistered  pur- 
chaser or  pledgee  of  certifi- 
cates of  stock  shall  be  pro- 
tected against  subsequent 
attachments  or  executions 
levied  upon  that  stock. 

489.  Rights  and  duties  of  the    cor- 

poration in  such  cases. 

490.  In    Alabama,    Arkansas,    Colo- 

rado, Connecticut,  Indiana, 
Iowa,  New  Mexico,  and  Ver- 
mont, the  usual  statutes  re- 
quiring transfers  of  stock  to 
be  registered  on  the  corporate 
books  are  so  construed  as  to 
give  an  attachment  or  execu- 
tion precedence  over  a  prior 
um-egistered  sale  or  pledge  of 
the  certificates  of  stock  — 
Notice  of  transfer  without 
registry  —  In  Arizona,  Flor- 
ida, Georgia,  Hawaii,  Nevada, 
North  Carolina,  Oklahoma, 
and  South  Carolina,  the 
statutes  have  not  yet  been 
clearly  construed. 

491.  Shares  of  stock  cannot  be  sub- 

jected to  the  payment  of  the 
stockholder's  debts  by  the 
process  of  garnishment  unless 
the  statutes  so  provide. 


§  480.  An  execution  at  common  law  could  not  reach  shares  of 
stock.  —  A  share  of  stock  is  in  the  nature  of  a  chose  in  action,  and 
at  common  law  a  chose  in  action  could  not  be  reached  by  or  made 
subject  to  a  levy  of  execution.  Consequently  it  has  been  uniformly 
held  by  the  courts  that  at  common  law  a  levy  of  execution  could  not 

1350 


CH.   XXVII. 


ATTACroiENT   AXD   EXECUTION. 


[§  481. 


be  made  on  shares  of  stock. ^  Unless,  therefore,  the  process  of  execu- 
tion has  been  extended  by  statute  so  as  to  reach  such  property,  the 
stock  of  a  judgment  debtor  cannot  be  made  subject  to  the  payment 
of  his  debts  by  means  of  an  execution.-  An  attachment,  being 
entirely  statutory,  can  be  levied  on  shares  of  stock  only  when  the 
words  of  the  statute  declare  that  an  attachment  may  be  levied  on 
such  property.^ 

§  481.  Nor,  it  seems,  could  a  court  of  equity  subject  stock  to  the 
payment  of  debts,  except  when  it  had  been  conveyed  away  fraudu- 
lently. —  There  is  some  doubt  whether  a  court  of  equity  has  power 
to  subject  a  judgment  debtor's  choses  in  action  to  the  payment  of 
his  debts,  where  the  only  ground  for  the  interference  of  the  court  is 
that,  unless  it  does  interfere,  such  property  cannot  be  reached  by  the 
judgment  creditor.  In  New  York,  previous  to  the  statutes  regulating 
this  subject,  the  jurisdiction  of  a  court  of  equity  therein  was  emphatically 
denied  in  one  case,^  and  with  equal  emphasis  declared  to  exist  in  another 


'  Quoted  and  approved  in  Gundry 
V.  Reakirt,  173  Fed.  Rep.  167  (1909) ; 
Fowler  v.  Dickson,  74  Atl.  Rep.  601 
(Del.  1909) ;  Dean,  etc.  Co.  v.  Howell, 
144  S.  W.  Rep.  135  (Mo.  1912). 

^  Van  Norman  v.  Jackson  Circuit 
Judge,  45  Mich.  204  (1881) ;  Feige  v. 
Burt,  118  Mich.  243  (1898);  Armour, 
etc.  Co.  V.  St.  Louis  Nat'l  B'k,  113 
Mo.  12  (1892);  Nashville  T.  Co.  v. 
Weaver,  102  Tenn.  66  (1899) ;  Daniel 
V.  Gold  Hill,  etc.  Co.,  28  Wash.  411 
(1902) ;  Goss,  etc.  Mfg.  Co.  v.  People, 
4  111.  App.  510  (1879) ;  Blair  v.  Comp- 
ton,  33  Mich.  414  (1876) ;  Slaymaker 
V.  Bank  of  Gettysburg,  10  Pa.  St.  373 
(1849);  Foster  v.  Potter,  37  Mo.  525 
(1866) ;  Howe  v.  Starkweather,  17 
Mass.  240  (1821) ;  Nabring  v.  Bank  of 
Mobile,  58  Ala.  204  (1877);  Denton 
V.  Livingston,  9  Johns.  (N.  Y.)  96 
(1812),  per  Chancellor  Kent;  Nash- 
ville Bank  v.  Ragsdale,  Peck  (Tenn.), 
296  (1823).  Even  where  the  stock  is 
held  to  be  real  estate.  Cooper  v.  Dis- 
mal Swamp  Canal  Co.,  2  Murph. 
(N.C.)  195  (1812).  Cf.  Gue  v.  Tidewater 
Canal  Co.,  24  How.  (U.  S.)  257  (1860). 
In  the  District  of  Columbia,  stock 
in  an  incorporated  company  cannot  be 
subjected  to  the  process  of  attachment 
or  of  execution.  Barnard  v.  Insur- 
ance Co.,  4  Mackey,  63  (1885).  At  an 
early  day,  when  the  nature  of  stock 
was  little  understood,  an  attachment 


was  attempted  on  the  corporate  prop- 
erty for  the  debts  of  a  stockholder. 
It  failed.  Williamson  v.  Smoot,  7 
Mart.  (La.)  31  (1819).  Stock  cannot 
be  taken  on  a  tax  warrant.  Barnes 
V.  Hall,  55  Vt.  420  (1883).  Cf.  McNeal 
V.  Mechanics',  etc.  Assoc,  40  N.  J.  Eq. 
351  (1885);  Smith  v.  Northampton 
Bank,  58  Mass.  1  (1849).  A  tax  col- 
lector cannot  levy  on  and  sell  stock 
under  the  law  relative  to  attachments. 
Kennedy  v.  Mary  Lee,  etc.  Ry.,  93 
Ala.  494  (1891);  and  §566,  infra. 
Execution  against  a  corporation  can- 
not be  levied  on  stock  owned  by  the 
corporation  itself,  such  stock  having 
been  purchased  by  it  under  statutory 
authority  at  a  forfeiture  sale  for  non- 
payment of  calls.  Robinson  v.  Spauld- 
ing,  etc.  Co.,  72  Cal.  32  (1887).  An 
attachment  of  stock  does  not  prevent 
a  sale  of  proper tv  by  the  corporation. 
Gottfried  v.  Jvliller,  104  U.  S.  521 
(1881).  The  question  of  whether  an 
execution  may  be  le\aed  on  a  seat  in  an 
exchange  is  considered  in  ch.  XXIX, 
infra. 

'  Quoted  and  approved  in  Gundry 
V.  Reakirt,  173  Fed.  Rep.  167  (1909)  ; 
PUmpton  V.  Bigelow,  93  N.  Y.  592, 
602  (1883);  Merchants'  Mut.  Ins. 
Co.  V.  Brower,  38  Tex.  230  (1873). 

^  Donovan  v.  Finn,  1  Hopk.  Ch.  59, 
67  (1823).  See  also  2  Dan.  Ch.  Pr., 
p.  1037,  n. 


1351 


§481. 


ATTACHMENT   AND   EXECUTION. 


[CH.  XXVII. 


case.^  The  English  authorities  are  quite  uniform  in  holding  that  a 
court  of  equity  has  no  such  jurisdiction.-  And  in  America,  for  the  most 
part,  a  similar  conclusion  is  arrived  at.^  Where,  however,  the  debtor 
has  conveyed  away  his  stock  for  the  purpose  of  defrauding  his  credi- 
tors, a  court  of  equity  will  aid  the  judgment  creditor,  inasmuch  as  it  has 
jurisdiction  in  matters  involving  fraud. ^ 


1  Storm  V.  WaddeU,  2  Sandf.  Ch. 
495,  511  (1845). 

2  Dundas  v.  Dutens,  1  Ves.  Jr.  196 
(1790) ;  Bank  of  England  v.  Lunn, 
15  Ves.  Jr.  569  (1809);  Grogan  v. 
Cooke,  2  Ball  &  B.  (Ir.  Ch.)  230  (1812) ; 
Nantes  v.  Corrock,  9  Ves.  Jr.  182 
(1803);  McCarthy  v.  Goold,  1  Ball 
&  B.  (Ir.  Ch.)  387  (1810),  applying 
the  same  rule  to  dividends.  In  King 
V.  Dupine,  2  Atk.  603,  n.  (1744),  a 
court  of  equity  subjected  to  the  pay- 
ment of  a  debt  the  debtor's  reversion- 
ary interest  in  an  annuity.  In  Horn 
V.  Horn,  Ambl.  79  (1749),  the  court 
refused  aid,  inasmuch  as  the  debtor 
had  been  imprisoned  under  a  capias 
ad  satisfaciendum. 

3  Williams  v.  Reynolds,  7  Ind.  622 
(1856) ;  Disborough  v.  Outcalt,  1  N.  J. 
Eq.  298,  306  (1831);  McFerran  v. 
Jones,  2  Litt.  (Ky.)  219  (1822); 
Erwin  v.  Oldham,  6  Yerg.  (Tenn.)  185 
(1834).  Contra,  dictum,  Watkins  v. 
Dorsett,  1  Bland's  Ch.  (Md.)  530 
(1828).  In  Brightwell  v.  Mallory,  10 
Yerg.  (Tenn.)  196  (1836),  the  pro- 
ceeding was  statutory. 

*  Taylor  v.  Jones,  2  Atk.  600  (1743), 
holding  that  the  debtor's  transfer  of 
stock  in  trust  was  in  fraud  of  creditors  ; 
Hadden  v.  Spader,  20  Johns.  (N.  Y). 
554  (1822) ;  Scott  v.  Indianapolis 
Wagon  Works,  48  Ind.  75  (1874) ;  Van 
Norman  v.  Jackson  Circuit  Judge,  45 
Mich.  204  (1881);  Lathrop  v.  McBur- 
ney,  71  Ga.  815  (1883) ;  Gillett  v.  Bate, 
86  N.  Y.  87  (1881);  State  Bank  v. 
Gill,  23  Hun,  410  (1881),  and  §484, 
infra;  Skowhegan  Bank  v.  Cutler,  49 
Me.  315  (1860) ;  State  v.  Warren  F.  & 
M.  Co.,  32  N.  J.  L.  439  (1868) ;  Bayard 
V.  Hoffman,  4  Johns.  Ch.  4.50  (1820) ; 
Moore  v.  Metropolitan  Nat.  Bank,  55 
N.  Y.  41  (1873) ;  Colbert  v.  Sutton,  5 
Del.  Ch.  294  (1880).  The  fraudulent 
transferee  must  be  made  a  party 
defendant.     Hyatt  v.  Swivel,  52  N.  Y. 


Super.  Ct.  1  (1885).     But  the  fraudu- 
lent transferee  is  not  liable  unless  he 
has   accepted   the   stock.     Skowhegan 
Bank  v.   Cutler,  49  Me.   315    (1860); 
Cartmell's  Case,  L.  R.  9  Ch.  App.  691 
(1874).     Acceptance  is  a  question  of 
fact.     Pim's  Case,  3   De  G.   &  S.    11 
(1849).     The  transferee  is  not  allowed 
to    claim    that    the    transfer    was    to 
defeat  creditors.     Smith  v.  Forty-nine, 
etc.    Min.    Co.,    14    Cal.    242    (1859). 
The  judgment  creditor  who  institutes 
the  suit  in  equity  has  priority  in  the  dis- 
tribution of  the  proceeds  of  his  .suit. 
See  Freeman  on  Executions  (2d  ed.), 
§  434.     The  pledgor  may  by  an  instru- 
ment in  writing  assign  his  equity  of 
redemption   to    one    of   his    creditors. 
Such  assignment  need  not  be  recorded 
as    a    chattel    mortgage,    and    is    not 
fraudulent,    even   though   it    be    kept 
secret  from  the  other  creditors  of  the 
pledgor.     National    H.     R.    Bank    v. 
Chaskin,    28    N.    Y.    App.    Div.    311 
(1898).     A  pledgee  cannot,  by  obtain- 
ing judgment  on  his  claim,  reach  the 
pledge  by  a  judgment  creditor's  bill. 
Shaw  V.  Monson,  etc.  Co.,  96  Me.  41 
(1901).     The  fact  that  the  transferee 
of  a  certificate  of  stock  does  not  have 
it  transferred  on  the  corporate  books 
is  no  proof  of  fraud  in  the  transfer, 
even     though     the     transferrer     was 
insolvent    when    he    sold    the    stock. 
Culp  V.  Mulvane,  66  Kan.  143  (1903). 
See  also  §  484,  infra.     A  gift  of  stock 
by    a    husband,     who    is    financially 
embarrassed,  to  his  wife,  may  be  set 
aside     by     his     creditors.     Brady     v. 
Irby,    142    S.    W.    Rep.    1124    (Ark. 
1912).     A  stockholder  who  assigns  cer- 
tificates   of    stock    to    his    wife    and 
places  them  in  a  box  in  his  possession 
in  which  he  keeps  her  papers,  is  not 
guilty  of  a  fraud  as  against  his  subse- 
quent creditors,   even  though  he  did 
not    actually    deliver    the    certiflQates 
to  her  and  she  did  not  know  of  the 


1352 


CH.   XXVII.] 


ATTACHMENT   AND   EXECUTION. 


[§  482. 


§  482.  By  statutory  provisions  executions  are  generally  sufficient 
to  reach  the  debtor's  stock  —  Strict  compliance  necessary.  —  Nearly 
all  of  the  states  of  the  Union  have  enacted  statutes  extending  the 
scope  of  executions  so  as  to  subject  to  them  all  choses  in  action,  includ- 
ing shares  of  stock  in  a  corporation.  Frequently  special  provisions 
are  made  applicable  to  stock,  and  prescribing  the  steps  which  are  neces- 
sary to  render  the  levy  of  execution  effectual.  Where  an  execution 
is  levied  in  accordance  with  such  statutes,  its  provisions  must  be  sub- 
stantially complied  with,  and,  if  not  complied  with,  the  sale  is  not  merely 
voidable,  but  is  wholly  unauthorized  and  void.  The  mode  of  sale  is 
particularly  scrutinized  by  the  courts.^     It  is  fatal  to  the  levy  and  sale 


assignment.     In  re  Hedley,   156  Fed. 
Rep.  314  (1907). 

1  Blair  v.  Compton,  33  Mieh.  414 
(1876),  holding  that  where  the  sheriff 
sold  without  knowing  or  stating  how 
many  shares  of  stock  the  debtor 
owned,  and  which  were  being  sold, 
the  sale  was  void.  See  also  People  v. 
Goss,  etc.  Mfg.  Co.,  99  111.  355  (1881), 
reversing  Goss,  etc.  Mfg.  Co.  v.  People, 
4  111.  App.  510  (1879).  The  proced- 
ure in  levy  of  execution  on  stock  as 
laid  down  by  the  charter  of  the  cor- 
poration supersedes  the  procedure  of 
a  previous  general  statute.  Titcomb 
V.  Union  M.  &  F.  Ins.  Co.,  8  Mass.  326 
(1811).  And  a  statute  which  is  sub- 
sequent to  the  charter  supersedes  in 
this  respect  the  latter.  Howe  v.  Stark- 
weather, 17  Mass.  240  (1821).  The 
sheriff  need  not  sell  the  stock  in  par- 
cels, but  may  sell  the  whole  at  once. 
Morris  v.  Connecticut,  etc.  R.  R. 
(Montreal),  L.  R.  2  Q.  B.  303  (1886). 
Even  though  the  sheriff  sells  in  one 
lot  a  large  block  of  stock  under  execu- 
tion instead  of  dividing  and  selling  it 
in  small  lots,  and  even  though  such 
sale  realizes  $12,000,  whereas  the  levy 
was  for  only  $1,000,  yet  the  purchaser 
is  protected  in  his  purchase.  Con- 
necticut, etc.  Ry.  V.  Morris,  14  S.  C. 
Rep.  (Can.)  318  (1887).  In  Georgia 
by  statute  a  sale  of  stock  under  an 
execution  is  by  the  sale  of  one  share  at  a 
time.  Fugazzi  &  Co.  v.  Simpson,  135 
Ga.  774  (1911).  The  court  may  order  a 
receiver  to  sell  shares  of  stock  held  by 
the  receiver  in  one  block  instead  of  in 
parcels  if  the  court  deems  best.  First 
Nat.   Bank   v.   C.   Bunting   &   Co.,   7 


Idaho,  387  (1900).  See  also  §  489, 
infra.  An  execution  sale  of  stock  will 
be  set  aside  where  it  was  made  with  an 
intentional  concealment  of  the  sale 
from  the  stockholder,  the  execution 
debtor.  Voorhis  v.  Terhune,  50  N.  J. 
L.  147  (1888).  If  no  notice  is  given 
to  the  debtor  of  the  levy  on  his  stock,  a 
sale  under  the  attachment  is  not  good. 
Commercial  Nat.  Bank  v.  Farmers', 
etc.  Bank,  82  Iowa,  192  (1891).  A 
levy  and  sale  of  "all  the  shares" 
which  defendant  owns  is  not  good. 
The  number  of  shares  must  be  ascer- 
tained and  stated.  Keating  v.  Stone, 
etc.  Co.,  83  Tex.  467  (1892).  A 
statute  must  be  substantially  complied 
with,  and  a  failure  to  give  notice  to  the 
corporation  as  required  by  the  statute 
is  fatal  to  the  attachment.  Deutsch- 
man  v.  Byrne,  64  Ark.  Ill  (1897). 
Inasmuch  as  shares  of  stock  cannot  be 
levied  upon  at  common  law,  a  levy 
thereon  can  be  made  only  in  strict  com- 
pliance with  the  statute,  and  if  the 
process  is  a  garnishee  process  the  levy 
is  not  good,  and  even  a  sale  under  such 
a  levy  conveys  no  title.  H.  B.  Clafiin 
Co.  V.  Bretzfelder,  69  Ark.  271  (1901). 
The  statute  authorizing  sale  under 
execution  must  be  substantially  com- 
plied with.  Feige  v.  Burt,  118  Mich. 
243  (1898).  The  title  of  a  purchaser 
of  stock  at  execution  sale  is  not 
affected  by  the  failure  of  the  sheriff 
to  show  in  his  return  that  he  levied 
before  selling.  McFall  v.  Buckeye,  etc. 
Assoc,  122  Cal.  468  (1898).  The  pro- 
cedure prescribed  by  statute  for  at- 
taching shares  of  stock  must  be 
strictly  followed.     Leonhard    v.    John 


1353 


§  482.] 


ATTACHMENT   AND   EXECUTION. 


[CH.  xxvir. 


if  the  sheriff  fails  to  give  to  the  corporation  the  notice  that  is  generally 
required  by  statute/  or  if  the  sale  by  the  sheriff  is  not  made  promptly 
as  advertised  in  accordance  with  the  statute.^  The  sale  itself  is  not 
complete  until  the  sheriff  gives  the  proper  instruments  of  title  to  the 
purchaser,  and  until  then  the  corporation  is  not  obliged  to  recognize 
the  latter  as  having  any  rights.^  A  court  of  equity  will  not  compel  a 
corporation  to  allow  a  transfer  of  stock  by  a  purchaser  at  an  execution 
sale,  where  the  price  paid  at  such  sale  is  so  small  as  to  shock  the  con- 
science of  the  court.^  A  person  who  buys  stock  at  an  execution  sale 
thereof  and  takes  the  sheriff's  certificate  therefor  and  presents  the 
same  to  the  corporation  for  transfer,  thereby  becomes  a  stockholder 
to  the  extent  at  least  of  being  liable  for  any  unpaid  part  of  the  sub- 
scription price  of  such  stock.^  Where  the  pledgee  brings  suit  on  the 
debt  and  attaches  the  stock  he  thereby  waives  his  lien,  and  even  though 


Hope,  etc.  Co.,  21  R.  I.  449  (1899). 
A  judgment  creditor  of  a  corporation 
may  cause  its  treasury  stock  to  be 
sold  on  execution.  Coit  v.  Freed,  15 
Utah,  426  (1897).  Stock  is  personal 
property,  and  may  be  seized  under  an 
execution.  Brock  v.  Ruttan,  1  C.  P. 
(Can.)  218  (1851).  The  sheriff  need 
not  indorse  on  his  levy  a  description 
of  the  stocks.  Re  Braden's  Estate, 
165  Pa.  St.  184  (1895).  A  substan- 
tial compliance  with  the  formalities 
prescribed  by  the  statute  is  suf- 
ficient. Scott  V.  Houpt,  73  Ark.  78 
(1904). 

1  Princeton  Bank  v.  Crozer,  22  N.  J. 
L.  383  (1850),  where  no  notice  was 
given,  but  the  stock  was  merely  men- 
tioned in  the  inventory  returned  by 
the  sheriff.  Oral  notice  by  the  sheriff 
to  the  corporation  that  stock  has  been 
attached  is  insufficient.  Moore  v. 
Marshalltown,  etc.  Co.,  81  Iowa,  45 
(1890);  Barthell  v.  Hencke,  99  Wis. 
660  (1898).  Service  of  the  writ  upon 
a  corporation  must  be  upon  the  de 
facto  officers  and  not  the  de  jure  offi- 
cers. Barthell  v.  Hencke,  99  Wis.  660 
(1898).  An  execution  sale  of  stock 
may  be  valid  although  the  notice  of 
levy  may  have  been  irregular.  Croft 
V.  Colfax,  etc.  Co.,  113  Iowa,  4.55 
(1901).  Where  a  statute  authorizing 
attachment  of  stock  provides  that  a 
copy  of  the  process  be  left  with  the 
corporation,  the  attachment  is  not 
good  if  such  copy  is  not  left.     Fowler 


t;.   Dickson,   74    Atl.    Rep.    601    (Del. 
1909). 

2  Titcomb  v.  Union  M.  &  F.  Ins.  Co., 
8  Mass.  326  (1811),  and  Howe  v. 
Starkweather,  17  Mass.  240  (1821), 
where  the  sale  was  made  after  the 
proper  day,  without  a  readvertise- 
ment,  and  consequently  was  held  to 
be  void.  The  court  said:  "The  sale 
of  them  upon  execution  not  being 
justifiable  at  common  law,  the  statute 
must  be  strictly  pursued  to  give  any 
property  to  the  purchaser."  An  exe- 
cution sale  of  stock  at  nine  o'clock  at 
night,  when  few  are  present,  is  void. 
McNaughton  v.  McLean,  73  Mich.  250 
(1889). 

3  Morgan  v.  Thames  Bank,  14  Conn. 
99  (1840). 

^  See  §§  489,  850,  iJifra. 

^  Basting  v.  Northern  Trust  Co.,  61 
Minn.  307  (1895).  And  is  also  liable 
on  the  statutory  Uability  attaching  to 
such  stock.  Oswald  v.  Minneapolis 
Times  Co.,  65  Minn.  249  (1896).  A 
dictum  in  Sturges  v.  Stetson,  1  Biss. 
246  (1858),  s.  c,  23  Fed.  Cas.  311, 
says  that  the  purchaser  at  execution 
sale  is  liable  on  the  unpaid  subscrip- 
tion the  same  as  the  debtor  was. 
Where  a  stockholder  has  never  paid 
for  his  stock  and  it  has  not  been  issued 
to  him,  the  purchaser  at  an  execution 
sale  levied  on  the  stock  cannot  demand 
the  stock  from  the  corporation  without 
paying  for  it.  Jennings  v.  Saunders 
Co.,  62  Fla.  218  (1912). 


1354 


CH.  XXVII.]  ATTACHMENT  AND   EXECUTION.  [§  483. 

the  attachment  is  illegal  and  void  for  insufficient  service,  yet  his  rights 
as  pledgee  are  not  thereby  restored.^  If  the  pledgee  obtains  judgment 
on  a  note  which  is  secured  by  the  stock  and  then  causes  the  stock  to  be 
sold  out  by  the  sheriff  under  levy  of  execution,  such  sale,  however,  not 
being  made  in  accordance  with  the  statutes,  this  is  the  same  as  selling 
the  stock  without  notice  and  amounts  to  a  conversion  thereof.^  If  an 
attachment  is  vacated  and  in  the  meantime  has  depreciated  in  value, 
the  attaching  creditor  may  be  liable  for  the  damages.^  The  six  years' 
statute  of  limitations  bars  a  suit  by  a  former  stockholder  in  a  company 
to  set  aside  an  execution  sale  of  his  stock.^  A  stockholder  whose  stock 
has  been  sold  on  execution  cannot  maintain  a  suit  in  behalf  of  the  cor- 
poration until  he  first  has  the  sale  set  aside,  and  a  bill  is  multifarious 
which  asks  both  remedies.^ 

§  483.  Attachment  of  stock  as  allowed  by  the  statutes  of  the  various 
states.  —  The  states  of  the  Union  have  quite  generally  passed  statutes 
providing  for  the  attachment  of  a  debtor's  property  where  the  debtor 
is  a  non-resident  or  is  guilty  of  a  fraud,  or  where  other  facts  exist  which 
bring  the  case  within  the  attachment  statute.  Inasmuch  as  in  modern 
times  a  large  part  of  the  property  of  individuals  consists  of  shares  of 
stock  in  corporations,  the  attachment  statutes  generally  provide  specially 
for  the  attachment  of  stock,  and  give  specific  directions  in  reference  to 
the  steps  necessary  to  be  taken  in  making  such  attachment.®     In  New 

1  H.  B.  Claflin  Co.  v.  Bretzfelder,  69  which  on  November  1st  attaches  stock 
Ark.  271  (1901).  See  also  §476,  in  New  Mexico  which  was  owned  by 
supra.  an  insolvent  person  in  Vermont,  is  not 

2  Feige  v.  Burt,  118  Mich.  243  entitled  to  the  preference  obtained 
(1898).  thereby,    where    a    creditor's    petition 

3  See  §  484,  infra.  against  the  insolvent  was  filed  in  Ver- 
*  Ferree  v.  United,  etc.  Co.,  227  Pa.     mont  October  28th,  even  though  the 

St.  41  (1910).  bank  sold  its  claim  and   the  attaeh- 

^  Empire    Realty    Co.     v.    Harton,  ment  to  a  third  person.     The  bank  and 

57  S.  Rep.  763  (Ala.  1911).  its  officers  may  be  held  liable  to   the 

«  Where  both  an  attachment  and  an  assignees  in  insolvency  for  the  amount 

execution    on    stock    are    allowed    by  paid  for  the  stock  at  the  sale  in  New 

statute,  the  former  is  said  to  be  the  Mexico,  the  stock  itself  having  been 

preferable  remedy  when  the  corpora-  bought    in    for    the    benefit    of    the 

tion  has  a  lien  on  the  stock  or  there  assignees.     Hazen  v.  Lyndonville  Nat. 

is  a  claimant  to  the  stock.     Weaver  Bank,  70  Vt.  543  (1898).     Stock  may 

V.  Huntingdon,  etc.  Coal  Co.,  50  Pa.  be  sold  under  an  attachment  in  New 

St.  314  (1865) ;    Lex  v.  Potter,  16  Pa.  Mexico.     Hazen  v.   Lyndonville   Nat. 

St.    295    (1851).     An    attachment    of  Bank,  70  Vt.  543  (1898).     Under  the 

stock  covers  the  dividends  also.     Upon  statutes  of  Idaho  stock  may  be  seized 

vacating  the  attachment  damages  may  by  levy  of  attachment  or  execution, 

be  recovered.     Jacobus  i;.  Monongahela  Wells   v.  Price,  6   Idaho,  490    (1899). 

Nat.  Bank,  35  Fed.  Rep.  395  (1888).  Under    the    confiscation    acts    of    the 

Under   the   Vermont    statutes,    which  United  States  of  1861  and  1862,  stock 

prohibit    preferences    acquired    within  owned  by  a  rebel  in  a  Michigan  rail- 

a  specified  time  before  an  adjudication  road  could   be  condemned  by  giving 

of    insolvency,    a    bank    in    Vermont,  notice  of  seizure  to  the  railroad  cor- 

1355 


483.] 


ATTACHMENT   AND   EXECUTION. 


[CH.   XXVII. 


York  an  attachment  of  stock  is  provided  for ;  but  an  execution  without 
a  previous  attachment  is  not  allowed.^  Where  certificates  of  stock 
and  other  property  are  transferred  to  a  trustee  who  issues  transferable 
trustees'  certificates  therefor,  of  the  par  value  of  $5,000  each,  with  vari- 
ous provisions  for  the  sale  of  the  property  and  a  distribution  of  the  pro- 
ceeds, or  for  the  transfer  to  a  corporation  and  a  distribution  of  the 
stock,  the  legal  title  is  thereby  conveyed,  and  hence,  the  holders  of  the 
certificates  having  only  an  equitable  interest  in  the  property,  an  attach- 
ment cannot  be  levied  on  such  trustees'  certificates,  under  the  New  York 
statute,  by  serving  the  process  on  the  trustee,  no  service  having  been 
made  upon  the  holder  of  the  certificates.^  A  pool  of  stock,  however, 
does  not  prevent  a  creditor  of  one  of  the  participants  causing  to  be 
sold  on  execution  his  debtor's  interest  in  the  stock,  such  sale  to  be  sub- 
ject to  the  pooling  contract  if  it  is  lawful.^  It  has  been  held  that  shares 
of  stock  may  be  attached  under  the  general  provisions  of  an  attachment 
law  which  does  not  specify  shares  of  stock  as  being  subject  to  an  attach- 
ment.^   The  formalities  prescribed  by  the  statute  must  be  complied 


poration.  This  amounted  to  an  at- 
tachment or  garnishment.  Miller  v. 
U.  S.,  11  Wall.  268  (1870).  By  a  stat- 
ute in  Rhode  Island  in  suits  in  equity 
a  writ  of  attachment  may  be  levied 
upon  stock  the  same  as  in  suits  at 
law.  Ladd  v.  Franklin,  etc.  Co.,  24 
R.  I.  311  (1902).  The  statute  may 
provide  for  the  sale  of  stock  at  the 
place  where  the  corporation  exists,  in 
case  the  taxes  upon  such  stock  are 
not  paid.  A  purchaser  of  the  out- 
standing certificates  after  the  assess- 
ment has  been  made  takes  subject  to 
the  tax  and  tax  seizure.  Parker  v. 
Sun  Ins.  Co.,  42  La.  Ann.  1172  (1890). 
Under  the  English  statutes,  1  &  2 
Vict.,  c.  110,  §  14,  and  3  and  4  Vict., 
c.  82,  §  1,  stock  in  any  public  company 
standing  in  the  name  of  any  person 
against  whom  judgment  shall  have 
been  obtained,  whether  "in  his  own 
right  or  in  the  name  of  any  person 
in  trust  for  him,"  may  be  charged  by  a 
judge's  order  with  the  payment  of  the 
amount  of  the  judgment.  The  statute 
says:  "The  interest  of  any  judgment 
debtor,  whether  in  possession,  re- 
mainder, or  reversion,  and  whether 
vested  or  contingent,"  may  be  so 
reached.  Cragg  v.  Taylor,  L.  R. 
2  Exeh.  131  (1867) ;  Baker  v.  Tynte, 
2  El.  &  E.  897  (1860).  Stock  may 
be  reached  by  supplementary  proceed- 


ings in  Ohio.  Ball  v.  Towle  Mfg.  Co., 
67  Ohio  St.  306  (1902).  In  Delaware 
in  attaching  stock,  the  return  of  the 
corporation  is  sufficient  if  a  certificate 
is  given.  No  answer  as  garnishee  is 
required.  Mann  v.  Perr,  4  Pen.  (Del.) 
279  (1903). 

1  Code  Civ.  Proc,  §§  647,  649-651. 
See  4  Wait's  Pr.  3Qj.  Stock  may  be 
reached,  however,  by  supplementary 
proceedings.  See,  in  general,  Barnes 
V.  Morgan,  3  Hun,  703  (1875) ;  O'Brien 
V.  Mechanics',  etc.  Ins.  Co.,  56  N.  Y.  52 
(1874) ;  Smoot  v.  Heim,  1  N.  Y.  Civ. 
Pro.  208  (1881)  —  cases  arising  under 
the  attachment  law ;  Simpson  v. 
Jersey  City,  etc.  Co.,  47  N.  Y.  App. 
Div.  17  (1900),  holding  that  the  New 
York  statute  that  the  copy  of  the 
warrant  and  the  notice  should  be 
served  upon  the  president  of  the  cor- 
poration applied  only  to  domestic  cor- 
porations;  aff'd,  165  N.  Y.  193  (1900). 

-  Montgomery  v.  McDermott,  103 
Fed.  Rep.  801  (1900). 

3  Hardin  v.  White,  etc.  Co.,  26  Wash. 
583  (1901). 

^  Chesapeake,  etc.  R.  R.  v.  Paine,  29 
Grat.  (Va.)  502  (1877),  where  stock 
was  held  to  be  included  under  the 
word  "estate,"  and  the  procedure 
prescribed  for  garnishment  was  fol- 
lowed and  upheld.  So  also  Curtis  v. 
Steever,  36  N.  J.  L.  304  (1873),  where 


1356 


CH.XXVII.]  ATTACHMENT   AND   EXECUTION.  [§  484- 

with  fully,  as  in  the  case  of  a  levy  of  execution  upon  stock.^  It  has  been 
held  that  a  state  statute  authorizing  the  levy  of  an  attachment  upon 
stock  does  not  apply  to  stock  in  a  national  bank,  and  that  it  is 
doubtful  whether  a  state  statute  may  legally  authorize  an  attach- 
ment on  national-bank  stock.^  There  are  many  decisions,  however, 
where  such  an  attachment  or  execution  has  been  levied.^  In  England 
by  statute  stock  is  reached  by  a  judgment  creditor  by  a  "  charging 
order "  granted  by  the  court,  but  this  does  not  apply  to  bonds 
owned  by  the  judgment  debtor."*  A  stockholder  whose  stock  has 
been  attached  cannot  sue  the  attaching  creditor  for  malicious  prosecu- 
tion in  attaching  the  stock. ^ 

§  484.  Levy  of  attachment  or  execution  upon  stock  held  in  pledge 
or  hy  trustee,  and  on  stock  which  the  debtor  has  frauduleiitly  trans- 
ferred away.  —  ^Yhether  or  not  an  execution  can  be  levied  on  stock 
which  has  been  fraudulently  transferred  away  by  the  judgment  debtor 
depends  upon  the  wording  of  the  statute  allowing  the  levy  of  execution 
on  stock.  If  it  allows  a  levy  on  all  interests  of  the  debtor,  whether  legal 
or  equitable,  then  the  fraudulent  transfer  may  be  disregarded  and  the 
stock  seized  as  though  still  standing  in  the  name  of  the  judgment  debtor.® 
If,  however,  the  statute  does  not  expressly  provide  for  a  levy  on  an  equi- 
table interest,  the  judgment  creditor's  remedy  is  not  an  execution,  but 
a  suit  in  equity  to  set  aside  the  fraudulent  transfer.^    So  also  an  attach- 

an  attachment  of    stock  was    upheld  ^  Stamford  Bank  v.  Ferris,  17  Conn, 

though    the    statute    merely    allowed  259     (1845),    where    the    attachment 

attachment   of   "rights   and   credits."  failed  because  the  sheriff  did  not  leave 

In  Haley  v.  Reid,  16  Ga.  437  (1854),  a  copy  of  the  writ,  duly  indorsed,  with 

however,  an  attachment  of  stock  was  the     corporation,     even     though     the 

not  allowed  where  the  statute  allowed  cashier  of  the  corporation  was  absent, 

levy  "upon  the  estate  both  real  and  per-  A  transfer  subsequent  to  such  irregu- 

sonal."     See    also    ISIerchants'     Mut.  lar    attachment    is    valid    and    carries 

Ins.  Co.  V.  Brower,  38  Te.x.  230  (1873).  title.     See  also  §  484,  infra. 

It  has  been  held  that  there  can  be  no  ^  Sowles   v.   National   U.   Bank,   82 

attachment  of  stock  under  a  statute  Fed.    Rep.    696    (1897).     An    attach- 

whieh  allows  an  attachment  of  "real  ment  in  accordance  with  a  state  stat- 

and    personal     property."     Foster    v.  ute   may   be   levied   upon   stock  in  a 

Potter,  37  Mo.  525  (1866).     Shares  of  national  bank.     Oldacre  v.  Butler,  116 

stock   are    "personal    property"    sub-  Ala.  652  (1898). 

ject     to     attachment,     although     the  '  See  eases  in  notes  to  §  487,  infra. 

statutes  provide  only  for  levy  of  exe-  *  Sellar  r.  Chas.  Bright  &  Co.,  Ltd., 

cution  upon  them.     Union  Nat.  Bank  [1904]  2  K.  B.  446. 

V.    Byram,    131    111.    92    (1889).     The  ^  Eldred  v.  Ripley,  97  111.  App.  Rep. 

ordinary  attachment  statute  authoriz-  503  (1901). 

ing  the  attachment  of  shares  of  stock  ^  Scott      v.      Indianapolis      Wagon 

is  not  applicable  to  shares  of  stock  in  a  Works,  48  Ind.  75  (1874).     Cf.  State  v. 

club  organized  for  lawful  sporting  pur-  Warren  Foundry,  etc.  Co.,  32  N.  J.  L. 

poses,  and  being  more  in  the  nature  of  a  439  (1868). 

statutory  joint-stock  association  than  '  Van   Norman   v.   Jackson   Circuit 

a  corporation.     Lyon  v.   Denison,   80  Judge,    45    Mich.     204     (1881).     See 

Mich.  371  (1890).  §  481,  supra. 

1357 


§  484.] 


ATTACHMENT   AND   EXECUTION. 


[CH.   XXVII. 


ment  may  be  levied  on  shares  of  stock  when  the  words  of  the  attach- 
ment statute  are  so  broad  as  to  render  subject  to  the  attachment  all 
equitable  interests  of  the  debtor  whose  stock  is  attached.  In  many  of 
the  states  where  the  debtor  has  transferred  his  stock  for  the  purpose 
of  defrauding  his  creditors,  an  attachment  may  be  levied  on  the  stock. ^ 
The  judgment  creditor  may  also  institute  a  suit  in  equity  to  set  aside 
the  fraudulent  transfer  and  subject  the  stock  to  the  payment  of  the 
judgment.^  Under  the  usual  statutes,  an  attachment  or  execution  miay 
be  levied  upon  stock,  where  the  stock  has  been  mortgaged  or  pledged, 
and  the  attaching  creditor  is  seeking  to  reach  merely  the  equity  of  re- 
demption.^    An  injunction  against  a  pledgee  disposing  of  stock  owned 

1  Beckwith  v.  Burrough,  14  R.  I.  366 
(1884) ;  New  London  Nat.  Bank  r. 
Lake  Shore,  etc.  Ry.,  21  Ohio  St.  221 
(1871),  holding  also  that  the  attach- 
ment is  good,  even  though  the  cor- 
poration denies  that  the  defendant 
owns  any  stock  therein ;  Curtis  v. 
Steever,  36  N.  J.  L.  304  (1873),  the 
court  saying  that  the  attachment  is 
good,  since  the  fraudulent  transfer  is 
void ;  and  holding  that  the  transferee 
may  bring  suit  for  trespass,  and  that 
the  attaching  creditor  may  then  set 
up  the  fraud  in  defense ;  Massey  v. 
Yancey,  90  Va.  626  (1894).  Cf.  State 
V.  Warren  Foundry,  etc.  Co.,  32  N.  J. 
L.  439  (1868).  See  also  §  482,  supra. 
Where  the  owner  of  stock  has  made  a 
bogus  sale  of  the  same,  the  purpose 
being  to  transfer  the  property  in 
fraud  of  creditors,  a  judgment  cred- 
itor may  cause  an  execution  to  be 
levied  on  the  stock  and  the  stock  sold. 
M'Donald  v.  First,  etc.  Bank,  116  Fed. 
Rep.  129  (1902).  Where  an  insolvent 
debtor  transfers  all  his  property  to 
trustees  for  the  benefit  of  creditors, 
excepting  certain  shares  of  stock 
which  are  transferred  to  them  in  trust 
in  order  not  to  render  the  trustees 
liable  thereon,  and  ten  years  later  a 
creditor  levies  on  the  equity  in  such 
stock,  causes  its  sale,  and  purchases 
at  a  nominal  figure,  equity  will  not 
compel  the  corporation  to  transfer 
the  stock  to  such  creditor  on  the  cor- 
porate books.  Randolph  v.  Quidnick 
Co.,  135  U.  S.  467  (1890).  Where  a 
Delaware  corporation  has  its  property, 
business,  books  and  assets  in  Kentucky, 
a  citizen  of  Kentucky  having  a  judg- 
ment   against    a    citizen    of    Indiana 


may  attach  the  stock  of  the  latter  in 
such  corporation  where  such  stock  has 
been  fraudulently  transferred  to  the 
corporation  itself,  especially  as  under 
the  laws  of  Kentucky  a  foreign  cor- 
poration doing  business  in  the  state 
is  declared  to  be  a  resident  of  the  state. 
Bowman  v.  Breyfogle,  145  Ky.  443 
(1911). 

2  See  §  481,  supra. 

3  Foster  v.  Potter,  37  Mo.  525 
(1866);  Manns  v.  Brookville  Nat. 
Bank,  73  Ind.  243  (1881) ;  Edwards  v. 
Beugnot,  7  Cal.  162  (1857),  holding 
also  that,  if  the  mortgage  is  recorded 
on  the  corporate  books,  notice  must 
be  served  on  the  mortgagee  also ;  and 
that,  where  one  attachment  was 
served  on  the  corporation  and  another 
on  the  mortgagee,  the  latter  attach- 
ment prevails  and  takes  the  surplus ; 
Norton  v.  Norton,  43  Ohio  St.  509 
(1885),  holding  that  the  court  will 
order  the  stock  to  be  sold,  the  pledgee 
paid,  and  the  balance  held  under  the 
attachment.  See  also  Vantine  i'. 
Morse,  104  Mass.  275  (1870);  New 
England  M.  Ins.  Co.  v.  Chandler,  16 
Mass.  275  (1820).  Cf.  Cooke  v. 
Hallett,  119  Mass.  148  (1875);  Kyle 
V.  Montgomery,  73  Ga.  337  (1884); 
Seeligson  v.  Brown,  61  Tex.  114  (1884), 
and  §  468,  supra.  Nabring  v.  Bank  of 
Mobile,  58  Ala.  204  (1877),  holds  that 
an  execution  cannot  reach  an  equity 
of  redemption.  See  also  §  491,  infra. 
Under  the  South  Carolina  statutes  a 
pledgor's  equity  of  redemption  in 
stock  may  be  attached.  Pelzer,  etc. 
Co.  V.  Pitts,  etc.,  76  S.  C.  349  (1907). 
If  a  purchaser  at  an  execution  sale 
purchases  merely  a  nominal  equity  of 


1358 


CH.  XXVII.]  ATTACHMENT   AND   EXECUTION.  [§  484. 

by  a  certain  party,  or  an  attachment  upon  the  interest  of  that  party, 
does  not  prevent  the  pledgee  selhng  the  stock  if  such  stock  really  be- 
longed to  the  wife  of  that  party. ^  A  claimant  of  stock  who  has  enjoined 
another  party  from  selling  it  is  entitled  to  defend  against  any  subse- 
quent attachment  levied  on  such  stock.-  An  attachment  is  not  the 
best  remedy  for  a  pledgee  who  wishes  to  subject  the  pledge  to  the  pay- 
ment of  the  debt.^  His  better  remedy  is  by  foreclosure  or  a  public  sale 
on  notice  to  the  pledgor.  Dividends  on  the  stock  w^hich  is  attached 
follow  the  stock,  and  are  covered  by  the  attachment.^  An  attachment 
on  stock  standing  on  the  books  in  a  debtor's  name  is  not  good  where  it 
is  shown  that  in  fact  he  held  the  stock  as  trustee  for  another.^  Even 
though  a  partnership  allows  stock  owned  by  it  to  stand  on  the  books  of 
the  company  in  the  name  of  one  of  the  partners,  yet  an  attachment 
against  him  and  levied  on  such  stock  does  not  give  the  attaching  creditor 
priority  over  the  rights  of  the  partnership.^  Where  the  stock  has  been 
transferred  on  the  corporate  books  to  a  pledgee,  and  afterwards  the  debt 
has  been  paid,  the  stock  cannot  be  attached  for  debts  due  from  the 
pledgee.^  There  can  be  no  attachment  of  stock  as  the  property  of  an 
unregistered  holder  through  whom  title  has  passed  to  another.^  Even 
though  a  party  subscribes  for  stock,  but  with  his  consent  the  corpora- 
tion issues  it  directly  to  others  on  their  original  subscriptions,  this  is 
not  a  transfer  from  the  original  subscriber,  and  hence  the  stock  cannot 

redemption  and  pays  a  fair  price  for  the  stock.     So     held     where     stock     was 

same,  the  court  will  order  the  corpo-  owned  by  a  city  in  trust  for  the  citi- 

ration  to  allow  a  transfer  to  him  in  zens.     Hitchcock  v.  Galveston  Wharf 

order   that   he   may   so   redeem.     See  Co.,  50  Fed.  Rep.  263  (1890).     An  exe- 

dictum  in  Randolph  v.  Quidniek  Co.,  cution  levied  on  stock  held  by  a  treas- 

135   U.    S.   457    (1890).     As   to   mar-  urer  standing  in  his  own  name  is  not 

shaling   the   assets,   see    §  473,   supra,  good,  the  judgment  being  against  him 

As  to  the  remedy  of  garnishment  to  personally.       Nashville     T.     Co.      v. 

reach  stock  or  the  equity  of  redemption  Weaver,  102  Tenn.  66  (1899). 
in  pledged  stock,  see  §  491,  infra.  *  New  York,  etc.  Co.  v.  Francis,  96 

1  Fourth  Nat.   Bank,   etc.   v.   Cres-  Fed.  Rep.  266   (1899) ;    modified  101 

cent,   etc.   Co.,   52   S.   W.   Rep.    1021  Fed.  Rep.  16. 
(Tenn.  1897).  '  Beckwith   v.   Burrough,    13   R.   I. 

2Pittock    V.    Buck,    15    Idaho,    47  294(1884). 
(1908).  8  Thus,     where    A,    the    registered 

3  Lee  V.  Citizens'  Nat.  Bank,  2  Cin.  stockholder,    transfers    the    certificate 

Super.    Ct.    (Ohio),    298,   312    (1872).  of  stock  to  B  and   B  transfers  it  to 

See  §§  476,  482,  supra.  C     and    C    obtains    registry    directly 

^  Jacobus  V.  Monongahela,  etc.  Bank,  from  A,  there  can   be  no  attachment 

35  Fed.   Rep.  395   (1888) ;    Moore  v.  of    the    stock    against    B.     Lippitt    v. 

Gennett,  2  Tenn.  Ch.  375  (1875).  American,  etc.  Co.,  15  R.  I.  141  (1885). 

^  Mo^Ty  V.  Hawkins,  57  Conn.  453  An  attachment  against  a  person  who 

(1889).     Execution  or  garnishee   pro-  held  the  certificate  of  stock,  but  was 

cess  cannot   be  levied   on  stock  held  not  a  stockholder  of  record,  was  up- 

by  an  individual  as  trustee  where  the  held  in  Matusevitz   v.   Citizens',   etc. 

debt  is  his  individual  debt.     Nor  can  Co.,  19  Mont.  368  (1897). 
it  be  levied  on  the  dividend  from  such 

1359 


§  484.] 


ATTACHMENT   AND    EXECUTION. 


[CH. 


be  attached  as  his  stock.^  Where  an  execution  is  levied  upon  a  certifi- 
cate of  stock  found  among  the  assets  of  a  deceased  judgment  debtor, 
such  stock  being  in  the  name  of  another  person  and  indorsed  by  the  latter 
in  blank,  the  administrator  may  file  a  bill  to  enjoin  the  execution  until 
the  real  ownership  of  the  stock  can  be  ascertained  in  order  that  the 
question  of  title  may  be  settled  to  prevent  a  sacrifice  of  the  stock.^ 
In  Missouri  an  attachment  may  be  levied  on  stock  standing  in  the  name 
of  another.^  But  in  jNIichigan  an  attachment  cannot  be  levied  on  stock 
standing  in  a  person's  name  as  trustee,  for  a  debt  due  from  the  real 
owner  of  the  stock,  even  though  the  trustee  is  merely  an  agent.  Attach- 
ment reaches  a  legal  interest  only.^  A  wife  who  allows  stock  bought 
with  her  money  to  stand  for  several  years  in  her  'husband's  name,  in 
order  to  give  him  credit,  may  be  estopped  from  asserting  her  ownership 
as  against  his  creditors.^  Where  the  corporation  has  a  lien  on  stock 
for  debts  due  from  the  stockliolder  to  the  corporation,  it  may  enforce 
the  lien  by  an  attachment.^    Where  stock  is  tied  up  by  attachment 


1  Scott  V.  Houpt,  73  Ark.  78  (1904). 

2  Nashville  T.  Co.  v.  Weaver,   102 
Tenn.  66  (1899). 

3  Tufts  V.  Volkening,   122  Mo.  631 
(1894). 

*  Gypsum,  etc.  Co.  v.  Kent  Circuit 
Judge,  97  Mich.  631  (1893).  Under 
the  Michigan  statutes  a  levy  of  exe- 
cution cannot  reach  stock  .  which 
stands  on  the  books  of  the  company 
in  the  name  of  the  pledgee  of  a  judg- 
ment debtor.  Feige  v.  Burt,  118  Mich. 
243  (1898).  In  making  a  return  to 
the  sheriff  of  an  execution  a  corpora- 
tion is  not  bound  to  state  that  stock 
standing  in  the  name  of  another  belongs 
to  the  judgment  debtor,  there  being 
nothing  in  the  corporate  books  to  indi- 
cate that  fact.  PuUen  v.  Headberg, 
127  Pac.  Rep.  954  (Col.  1912).  Where 
the  real  owner  of  stock  turns  it  over 
to  his  agent  or  trustee  to  look  after 
the  stock,  the  stock  itself  being  put 
in  the  name  of  the  agent  or  trustee 
as  absolute  owner,  and  the  stock  is  sub- 
sequently attached  for  a  debt  of  such 
agent  or  trustee  and  sold  thereunder, 
the  real  owner  of  the  stock  may  hold 
the  agent  or  trustee  liable  for  the 
value  of  the  stock.  Long  delay  is  not 
a  bar  so  long  as  the  agent  does  not 
deny  the  agency  or  trusteeship.  Hovey 
V.  Bradbury,  112  Cal.  620  (1896). 
Where  a  judgment  creditor  levies  on 
stock    standing   in    the    name    of    a 


"dummy"  for  the  debtor,  the  corpo- 
ration may  practically  interplead  be- 
tween such  creditor  and  an  alleged 
bona  fide  holder  of  the  stock.  A  court 
of  equity  has  jurisdiction  in  order 
to  decree  a  transfer.  Spencer  v. 
James,  10  Tex.  Civ.  App.  327  (1895). 

5  Hamlen  v.  Bennett,  52  N.  J.  Eq.  70 
(1893).  Even  though  the  wife  allows 
her  stock  to  stand  in  the  name  of  her 
husband,  yet,  if  the  stock  belongs  to 
her  and  she  has  the  certificates,  she 
may  maintain  a  bill  in  equity  to  en- 
join his  judgment  creditors  from  sell- 
ing the  stock  and  to  compel  the  cor- 
poration to  allow  a  transfer  of  the 
stock  to  her,  but  she  must  show  that 
no  fraud  or  injury  resulted  to  her 
husband's  creditors.  Magerstadt  v. 
Schaefer,  213  111.  351  (1904).  Where 
a  wife's  stock  stands  in  the  name  of 
her  husband,  and  he  pledges  the  cer- 
tificate to  secure  his  debt,  and  his 
judgment  creditor  levies  on  the  stock 
under  an  execution  subject  to  the 
pledge,  and  sells  it,  and  the  creditor 
buys  it  himself  on  the  sale,  he  may  be 
held  liable  by  the  wife  for  conver- 
sion, and  she  need  not  first  pay  the 
debt  for  which  the  stock  was  pledged. 
First  Nat.  Bank,  etc.  v.  Thomas,  118 
S.  W.  Rep.  221  (Tex.  1909). 

«  Sabin  v.  Bank  of  Woodstock,  21 
Vt.  353  (1849).     See  also  §  530,  infra. 


1360 


CH.  XXVII.] 


ATTACHMENT  AND    EXECUTION. 


[§  485. 


which  is  afterwards  vacated,  and  in  the  meantime  the  stock  depreciates 
in  vakie,  the  loss  can  be  recovered  from  the  attaching  party  if  the  stocks 
could  and  would  have  been  sold  before  the  depreciation,  if  they  had  not 
been  so  tied  up.  But  if  such  stocks  are  in  pledge,  and  the  pledgor  does 
not  pay  the  loan  while  the  stocks  are  so  tied  up,  no  damages  can  be 
recovered.^  It  is  a  question  whether  a  decrease  in  the  value  of  the  stock, 
while  subject  to  attachment,  renders  the  sureties  on  the  undertaking 
liable  therefor  and  whether  an  attachment  bond  should  be  increased 
merely  because  the  price  of  the  stock  may  go  down.^  Where  a  sale  of 
stock  is  decreed  and  an  appeal  taken  and  a  bond  given  on  appeal,  and 
the  stock  depreciates  during  the  appeal  and  the  decree  is  affirmed,  the 
liability  on  the  bond  is  the  amount  of  depreciation.^ 

§  485.  Can  stock  or  certificates  of  stock  be  attached  elsewhere  than 
in  the  state  creating  the  corporation?  —  Shares  of  stock  in  a  corporation 
are  personal  property,  whose  location  is  in  the  state  where  the  corpo- 
ration is  created.*  It  is  true  that,  for  purposes  of  taxation  and  some 
other  similar  purposes,  stock  follows  the  domicile  of  its  owner,  but, 
considered  as  property  separated  from  its  owner,  stock  is  in  existence 
only  in  the  state  of  the  corporation.^    All  attachment  statutes  provide 


'  Fourth  Nat.  Bank,  etc.  v.  Crescent, 
etc.  Co.,  52  S.  W.  Rep.  1021  (Tenn. 
1897).     See  also  §  330,  supra. 

2  In  Miller  v.  Ferry,  50  Hun,  256 
(1888),  it  was  held  that  the  sureties 
were  not  liable  and  that  the  bond 
should  not  be  increased.  If  an  attach- 
ment on  stock  is  vacated  the  deprecia- 
tion in  its  value  between  the  time 
when  it  was  levied  and  the  time  when 
it  was  vacated  is  collectible  under  the 
undertaking  given  in  the  attachment 
proceeding.  McCarthy  t'.  Boothe,  2 
Cal.  App.  170  (1905).  See  also  §  364, 
supra. 

3  Welch  V.  Welch,  60  S.  W.  Rep.  409 
(Ky.  1901). 

*  Quoted  and  approved  in  Armour, 
etc.  Co.  V.  St.  Louis  Nat.  Bank,  113 
Mo.  12  (1892).  Evans  v.  Monot,  4 
Jones,  Eq.  (N.  C.)  227  (1858).  For 
the  purposes  of  attachment,  stock 
has  its  situs  where  the  corporation  is 
organized,  and  may  be  attached  there. 
Barber  v.  Morgan,  84  Conn.  618  (1911). 
The  fact  that  certificates  of  stock  in 
foreign  corporations  are  in  New  York 
state  does  not  render  them  subject 
to  taxation  in  that  state.  Re  James, 
144  N.  Y.  6  (1894).  The  inheritance 
tax  in  New  York  state  is  not  applica- 


ble to  certificates  of  stock  which  hap- 
pen to  be  in  the  state  at  the  time  of 
the  death  of  the  stockholder,  where 
the  stockholder  is  a  non-resident  and 
the  corporation  itself  is  a  foreign 
corporation.  See  §  572e,  infra.  As  to 
the  validity  of  a  transfer  of  stock 
made  in  one  state,  while  the  corpora- 
tion issuing  the  stock  is  located  in 
another  state,  the  rule  applies  "that 
personal  property  has  no  locality,  and 
that  the  law  of  the  owner's  domicile 
is  to  determine  the  validity  of  the 
transfer  or  alienatipn  thereof,  unless 
there  is  some  positive  or  customary 
law  of  the  country  where  it  is  found 
to  the  contrary."  Black  v.  Zacharie, 
3  How.  483,  514  (1844),  an  attachment 
case.  A  suit  by  the  purchaser  of  a 
certificate  of  stock  to  compel  delivery 
may  be  brought  at  the  place  where  the 
certificate  is,  and  absent  defendants 
may  be  served  by  publication.  Ryan 
V.  Seaboard,  etc.  R.  R.,  83  Fed.  Rep. 
889.(1897).  See  also  §§12,  13,  363, 
supra. 

*  Quoted  and  approved  in  Fahrig  v. 
Milwaukee  &  Chicago  Breweries,  113 
111.  App.  Rep.  525  (1904),  and  Armour, 
etc.  Co.  V.  St.  Louis  Nat'l  B'k,  113 
Mo.  12  (1892). 


(86) 


1361 


§  485.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXVII. 


for  the  attachment  of  a  non-resident  debtor's  property  in  the  state,  and 
generally,  under  such  statutes,  the  stock  owned  by  a  non-resident  in  a 
corporation  created  by  the  state  wherein  the  suit  is  brought  may  be 
attached  and  jurisdiction  be  thereby  acquired  to  the  extent  of  the  value 
of  the  stock  attached.^  But  a  defendant's  shares  of  stock  cannot  be 
reached  by  levy  of  attachment  in  an  action  commenced  outside  of  the 
state  wherein  the  corporation  is  incorporated,  unless  the  certificates 
of  stock  are  wdthin  the  state  where  the  suit  is  commenced,  and  are  reached 
by  the  sheriff.  For  purposes  of  attachment,  stock  is  located  where  the 
corporation  is  incorporated  and  nowhere  else.-  The  shares  owned  by  a 
non-resident  defendant  in  the  stock  of  a  foreign  corporation  cannot  be 
reached  and  levied  upon  by  virtue  of  an  attachment,  although  officers 
of  the  corporation  are  within  the  state  engaged  in  carrying  on  the  cor- 
porate business.^     It  has  even  been  held  that  such  an  attachment  can- 

1  Quoted  and  approved  in  Gundry  pledged  by  a  non-resident  cannot  be 
V.  Reakirt,  173  Fed.  Rep.  167  (1909).  attached  by  serving  a  notice  on  the 
New  London  Nat.  Bank  v.  Lake  pledgee.  Tweedy  v.  Bogart,  56  Conn. 
Shore,  etc.  Ry.,  21  Ohio  St.  221  419  (1888).  Certificates  of  stock  rep- 
(1871);  Chesapeake,  etc.  R.  R.  v.  resent  the  stock  itself  sufficiently  to 
Paine,  29  Gratt.  (Va.)  502  (1877).  An  sustain  a  suit  commenced  by  substi- 
attachment  and  sale  of  stock  made  tuted  service  for  the  purpose  of  estab- 
on  a  debt  not  justly  due  will  be  en-  lishing  a  lien,  even  though  the  cor- 
joined  as  regards  registry  on  the  cor-  poration  is  located  in  another  state, 
porate  books,  and  the  sale  declared  Merritt  v.  American  Steel  Barge  Co., 
void.  Seligman  v.  St.  Louis,  etc.  R.  R., 
22  Fed.  Rep.  39  (1884). 

2  Quoted  and  approved  in  Smith  v. 
Downey,  8  Ind.  App.  179  (1893),  fendant  in  a  New  Jersey  corporation 
where  it  was  held  that  a  citizen  of  where  the  statutes  of  the  Indian  Ter- 
Indiana  could  not  attach  certificates  ritory  provided  for  execution  upon 
of  stock  owned  by  a  non-resident  in  the  stock  of  domestic  corporations 
a  Colorado  corporation,  even  though  only,  and  the  defendant  is  not  a  resi- 
the  certificates  of  stock  were  in   the  dent    of    that    Territory.     Caffery    v. 


79  Fed.  Rep.  228  (1897).  An  execu- 
tion cannot  be  levied  in  the  Indian 
Territory  on  stock  owned  by  the  de- 


state  of  Indiana,  and  within  the  juris- 
diction of  the  court.  Ireland  v.  Globe, 
etc.  Co.,  19  R.  I.  180  (1895) ;  Armour, 
etc.  Co.  V.  St.  Louis  Nat'l  B'k,  113  Mo. 


Choctaw,  etc.  Co.,  95  Mo.  App.  174 
(1902).  A  statute  authorizing  the 
sale  of  stock  on  execution  applies  to 
stock   in  domestic   corporations  only, 


12    (1892) ;     Winslow   v.   Fletcher,   53  unless   it   clearly    provides   otherwise. 

Conn.    390    (1886),    the   court    saying  Hence  an  alleged  sale  under  levy  of 

that  "stock  in  a  corporation,  for  the  execution,    in    British    Columbia,    of 

purposes   of   an   attachment,    has    its  stock  in  a  Washington  corporation  is 
situs   where    the    corporation    is    lo- 
cated."    Under   the   statutes  of  Ten- 


not  good  in  Washington  unless  it  is 
alleged  and  proved  that  such  sale  was 
nessee,    however,    requiring   a   foreign    authorized  by  the  statutes  of  British 


corporation  doing  business  in  that 
state  to  file  its  articles  of  incorpora- 
tion  with   the   secretary   of   state,    it 


Columbia.     Daniel  v.   Gold  Hill,  etc. 
Co.,  28  Wash.  411  (1902). 

3  Quoted  and  approved  in  Gundry 


was  held  that  it  became  a  domestic  v.  Reakirt,  173  Fed.  Rep.  167  (1909), 
corporation  sufficiently  to  authorize  and  New  Jersey,  etc.  Co.  v.  Traders', 
an  attachment  of  stock  in  that  state,  etc.  Bank,  104  Ky.  90  (1898),  where 
Young  V.  South  Tredegar  Iron  Co.,  85  the  court  held  that  garnishee  proeeed- 
Tenn.   189   (1886).     Bonds  which  are    ings  commenced  in  Kentucky  against 

1362 


CH.   XXVII.] 


ATTACHMENT   AND   EXECUTION. 


[§  485. 


not  be  levied,  although  the  foreign  corporation  has  a  branch  registry 
office  in  the  state  where  the  attachment  is  levied,  and  although  the 
certificates  of  stock  are  also  in  such  state. ^  The  supreme  court  of 
Pennsylvania  has  said  that  stock  cannot  be  attached  by  attaching  the 
certificate,  any  more  than  lands  situated  in  another  state  can  be  attached 
by  an  attachment  in  Pennsylvania  levied  on  the  title  deeds  to  such 
land."    And  it  has  been  held  that  even  though  certificates  of  stock  in  a 

non-resident    stockholders    in   a    New    a    domestic    corporation.     Certificates 

of  stock  in  a  corporation  of  another 
state  cannot  be  subjected  to  the  pay- 
ment of  the  stockholders'  debts,  either 
by  attachment  or  a  bill  in  equity. 
Morton  v.  Grafflin,  68  Md.  545  (1888). 
Where  an  Arizona  corporation  has  its 
principal  oflBee  for  corporate  affairs  in 
Missouri  and  does  its  business  there, 
its  stock  may  be  attached  there. 
Dean,  etc.  Co.  v.  Howell,  162  Mo.  App. 
100  (1912).  Where  a  Delaware  cor- 
poration has  its  property,  business, 
books  and  assets  in  Kentucky,  a 
citizen  of  Kentucky  having  a  judg- 
ment against  a  citizen  of  Indiana  may 
attach  the  stock  of  the  latter  in  such 
corporation  where  such  stock  has  been 
fraudulently  transferred  to  the  cor- 
poration itself,  especially  as  under  the 
laws  of  Kentucky  a  foreign  corpora- 
tion doing  business  in  the  state  is 
declared  to  be  a  resident  of  the  state. 
Bowman  v.  Breyfogle,  145  Ky.  443 
(1911). 

1  Christmas  v.  Biddle,  13  Pa.  St.  223 
(1850),  approved  in  Childs  v.  Digby, 
24  Pa.  St.  23  (1854).  In  this  case  the 
attachment  was  levied  in  Pennsyl- 
vania on  certificates  of  stock  in  Penn- 
sylvania, but  belonging  to  a  citizen  of 
Mississippi,  and  the  corporation  was 
created  by  the  laws  of  Mississippi. 
Certificates  of  stock  in  a  corporation 
cannot  be  attached  anywhere  except 
in  the  state  where  the  corporation  is 
incorporated.  Armour,  etc.  Co.  v.  St. 
Louis  Nat.  Bank,  113  Mo.  12  (1892). 

2  Christmas  v.  Biddle,  13  Pa.  St.  223 
(1850).  In  Winslow  v.  Fletcher,  53 
Conn.  390  (1886),  the  court  well  says: 
."While  the  certificates  are  in  them- 
selves valuable  for  some  purposes,  and 
to  some  extent  may  properly  be 
regarded  as  property,  yet  they  are  dis- 
tinct from  the  holder's  interest  in  the 
capital  stock  of  the  corporation,  and 


Jersey  corporation,  the  New  Jersey 
corporation  being  so  garnisheed,  are 
not  good  as  regards  stock  held  by  the 
defendants  in  such  New  Jersey  cor- 
poration. A  suit  in  equity  does  not 
lie  in  the  United  States  court  in 
Nevada,  at  the  instance  of  a  resident 
of  that  state,  to  recover  stock  owned 
by  non-residents  in  an  Arizona  corpora- 
tion where  service  upon  them  is  made 
only  by  publication.  The  stock  is  not 
within  that  district,  within  the  mean- 
ing of  the  federal  statute.  McKane 
V.  Burke,  132  Fed.  Rep.  688  (1904). 
Stock  owned  by  a  citizen  of  New  York 
in  a  railroad  corporation  of  Michigan 
cannot  be  attached  by  process  levied 
in  Ohio.  Such  stock  is  not  located  in 
Ohio,  and  hence  is  not  subject  to 
attachment  or  garnishment  there. 
Ashley  v.  Quintard,  90  Fed.  Rep.  84 
(1898) ;  Plimpton  v.  Bigelow,  93  N.  Y. 
592  (1883),  reversing  29  Hun,  362, 
the  court  saying:  "We  do  not  doubt 
that  shares,  for  the  purpose  of  attach- 
ment proceedings,  may  be  deemed  to  be 
in  the  possession  of  the  corporation 
which  issued  them,  but  only  at  the 
place  where  the  corporation  by  intend- 
ment of  law  always  remains,  to  wit,  in 
the  state  or  country  of  its  creation. 
.  .  .  Manifestly  the  res  cannot  be 
within  the  jurisdiction,  as  a  mere  eon- 
sequence  of  a  legislative  declaration, 
when  the  actual  locality  is  undeniably 
elsewhere."  To  same  effect,  Preston 
V.  Pangburn,  N.  Y.  L.  J.,  March  7, 
1892.  See  also  Moore  v.  Gennett,  2 
Tenn.  Ch.  375  (1875).  Garnishment 
proceedings  will  not  apply.  The  de- 
fendant may  move  to  have  the  attach- 
ment levy  set  aside.  Martin  v.  Mo- 
bile, etc.  R.  R.,  7  Bush  (Ky.),  116 
(1870),  holding  that  a  statute  author- 
izing a  foreign  corporation  to  exer- 
cise certain  powers  does  not  make  it 


1363 


§485. 


ATTACHMENT   AND   EXECUTION. 


[CH.  XXVII. 


West  Virginia  corporation  are  within  the  state  of  Massachusetts,  yet 
a  citizen  of  Massachusetts  cannot  attach  the  same  in  a  suit  in  Massa- 
chusetts against  a  citizen  of  California,  the  owner  of  such  certificates 
of  stock. ^ 

The  New  York  court  of  appeals,  however,  holds  that  where  certificates 
of  stock  issued  by  a  New  Jersey  corporation  are  within  the  state  of 
New  York,  an  attachment  may  be  levied  upon  them  and  the  interest 
of  the  owner  or  pledgor  therein  sold,  such  certificates  being  a  property 
right  within  the  state.^  And  it  must  be  admitted  that  this  decision, 
although  apparently  a  wide  departure  from  the  common  law,  is  a  correct 
decision,  in  view  of  the  fact  that  certificates  of  stock  have  gradually 
grown  to  be  more  than  mere  receipts  or  evidence  of  stock,  and  have 
come  to  be  the  stock  itself,  practically,  in  business  transactions,  especially 
in  America,  and,  like  a  promissory  note,  a  certificate  of  stock  is  property 
in  itself  and  carries  title,  irrespective  of  the  corporate  books  and  of 
transfer  on  the  corporate  books.     The  decisions  on  this  subject  may  per- 


are  not  goods  and  effects  within  the 
meaning  of  the  statute  relating  to  for- 
eign attachment.  They  are  no  more 
subject  to  an  attachment  or  a  trustee 
process  than  a  promissory  note.  The 
debt  is  subject  to  attachment,  but  the 
note  itself,  which  is  simply  evidence 
of  the  debt,  is  not.  So  with  stock. 
That  may  be  attached,  but  the  certifi- 
cates cannot  be."  Negotiable  bonds, 
held  outside  of  the  jurisdiction  of  the 
court,  cannot  be  attached  by  serving 
the  attachment  on  the  corporation 
which  issued  the  bonds.  Von  Hesse 
V.  Mackaye,  5.5  Hun,  365  (1890) ;  aff'd, 
121  N.  Y.  694.  See  also  Tweedy  v. 
Bogart,  56  Conn.  419  (1888).  The 
mere  fact  that  certificates  of  stock 
owned  by  a  citizen  of  New  York  in  a 
New  York  corporation  happened  to  be 
in  Missouri  at  the  time  of  his  death, 
does  not  authorize  the  public  admin- 
istrator in  Missouri  to  administer 
such  stock  as  property  within  the 
state.  Richardson  v.  Busch,  198  Mo. 
174  (1906). 

1  Pinney  v.  Nevills,  86  Fed.  Rep.  97 
(1898).  In  the  case  Wait  ;;.  Kern 
River,  etc.  Co.,  157  Cal.  16  (1909), 
it  was  held  that  a  promoter  who  is 
entitled  to  a  portion  of  certain  unissued 
stock  in  an  Arizona  mining  company, 
which  did  all  its  business  in  California, 
which  company  had  contracted  to  issue 


such  stock  to  another  promoter,  who 
had  not  yet  actually  received  it,  might 
by  a  bill  in  equity  in  California  against 
the  corporation  and  the  other  promoter 
obtain  a  decree  that  the  corporation 
issue  to  him  the  stock  to  which  he  is 
entitled,  even  though  jurisdiction  of 
the  other  promoter  was  obtained  only 
by  publication.  The  court  held  also 
that  the  remedy  at  law  was  insufficient 
when  the  stock  had  no  market  value, 
and  the  property  of  the  company 
consisted  merely  of  mining  claims  of 
unknown   value.     Cf.    §  363,   supra. 

2  Simpson  v.  Jersey  City,  etc.  Co., 
165  N.  Y.  193  (1900),  the  court  dis- 
tinguishing the  case  of  Plimpton  v. 
Bigelow,  93  N.  Y.  592  (1883),  on  the 
ground  that  the  certificates  of  stock 
in  that  case  were  not  within  the  state. 
The  court  said  :  "Certificates  of  stock 
are  treated  by  business  men  as  prop- 
erty for  all  practical  purposes.  They 
are  sold  in  the  market,  and  they  are 
transferred  as  collateral  security  for 
loans,  and  they  are  used  in  various 
ways  as  property.  They  pass  by 
delivery  from  hand  to  hand  and  they 
are  the  subject  of  larceny."  On  a 
writ  of  sequestration  the  sheriff  may 
seize  certificates  of  stock,  and  the 
court  may  aid  him  by  an  order  to  that 
effect.  Ansley  v.  Stuart,  119  La.  1 
(1907).  ' 


1364 


CH.  XXVII.]  ATTACHMENT  AND   EXECUTION.  [§  486. 

haps  be  reconciled  on  the  ground  that  where  the  words  of  the  statute 
are  broad  enough  to  allow  an  attachment  to  be  levied  on  certificates 
of  stock,  such  a  levy  is  effective,  inasmuch  as  certificates  of  stock  now 
represent  value  in  themselves,  in  very  much  the  same  way  as  promissory 
notes.  On  the  other  hand,  where  the  statute  is  not  broad  enough  in 
its  terms  to  include  a  certificate  of  stock,  then  an  attachment  levied 
upon  a  certificate  of  stock  in  a  foreign  corporation  is  ineffective.  Where 
a  non-resident  sends  certificates  of  stock  in  a  foreign  corporation  to  a 
bank  in  the  state  to  be  delivered  on  payment  of  a  certain  sum,  neither 
the  stock  nor  the  money  is  subject  to  attachment  in  a  suit  against  such 
non-resident.^ 

§  486.  Rights  of  an  unregistered  transferee  of  a  certificate  of 
stock  as  against  an  attachment  or  execution  levied  on  that  stock.  — 
The  most  difficult  and  unsettled  question  connected  with  an  attach- 
ment or  execution  levied  on  stock  is  the  question  of  how  far  a  pur- 
chaser of  the  certificate  of  stock  from  the  stockholder  and  debtor  is 
protected  in  his  ownership  where  such  purchaser  does  not  have  his 
transfer  registered  on  the  corporate  books  before  the  attachment  or 
execution  is  levied.  The  question  is  especially  important,  since  it 
affects  the  rights  of  a  bona  fide  purchaser  of  stock  in  the  open  market, 
and  constitutes  one  of  the  greatest  dangers  incurred  in  the  purchase  of 
certificates  of  stock.  It  has  been  held  that  if  a  stockholder  whose  stock 
has  been  already  attached  or  sold  on  execution  sells  his  certificate  of 
stock  after  the  levy  of  such  attachment  or  execution,  the  vendee  or 
transferee  buys  subject  to  such  levy,  even  though  he  had  no  knowledge 
of  it.  The  stock,  in  contemplation  of  law,  has  already  been  seized  by 
the  levy,  and  the  purchaser  is  bound  to  take  notice  of  that  fact.^  The 
only  means  of  avoiding  this  danger  in  the  purchase  of  stock  is  by  an 
inquiry  at  the  office  of  the  corporation  at  the  time  of  making  the  pur- 
chase."' 

A  different  question,  however,  presents  itself  when  the  stockholder 
against  whose  stock  an  attachment  or  execution  is  levied  has  already 
and  before  such  levy  sold  and  transferred  his  certificate  of  stock,  but 
that  transfer  has  not  been  registered  on  the  corporate  books.  Tlie 
courts  of  the  different  states  are  in  irreconcilable  conflict  on  this  ques- 
tion of  whether  the  unregistered  transferee  is  protected  in  his  purchase. 
The  better  rule,  and  the  rule  which  ultimately  will  prevail,  is  that  an 
unrecorded  transfer  of  stock  is  in  this  respect  like  an  unrecorded  deed 

'  Whitcomb   v.   Quinlan  &  Co.,  75  Griffith,  76  Va.  913  (1882) ;    Re  Bra- 

N.  H.  429  (1910).  den's  Estate,  165  Pa.  St.  184  (1895). 

2  Young  V.  South  Tredegar  Iron  Co.,  Cf.  Dudley  v.  Gould,  6  Hun,  97  (1875). 

85  Tenn.  189  (1886) ;   Chesapeake,  etc.  ^  Quoted   and   approved   in   Ball   v. 

R.  R.   V.  Paine,    29    Gratt.    (Va.)   502  Towle    Mfg.    Co.,    67    Ohio    St.    306 

(1877);     Shenandoah  Valley  R.  R.  v.  (1902). 

1365 


§  487.]  ATTACHMENT   AND   EXECUTION.  [cH.  XXVII, 

of  land,  and  gives  good  title  as  against  subsequent  attachment  or  exe- 
cutions, even  though  the  latter  are  levied  in  ignorance  of  the  unrecorded 
transfer  or  deed.^  The  remedy  of  the  purchaser  of  a  certificate  of  stock 
as  against  an  execution  sale  is  not  an  injunction  unless  the  stock  is  of 
peculiar  value  or  use  to  the  purchaser.^  In  England  it  is  the  law  that 
a  court  has  no  power  to  order  the  sale  of  stock  on  execution,  inasmuch  as 
it  can  only  order  a  sale  of  the  interest  of  the  judgment  debtor  and  not 
of  the  entire  title,  in  the  absence  of  proof  that  the  judgment  debtor 
owns  the  entire  title.^ 

§  487.  In  California,  Delaware,  District  of  Columbia,  Idaho, 
Kansas,  Kentucky,  Louisiana,  Michigan,  Minnesota,  Mississippi, 
Missouri,  Nebraska,  New  Jersey,  New  York,  North  Dakota,  Ohio, 
Oregon,  Pennsylvania,  South  Dakota,  Tennessee,  Texas,  Utah, 
Washington,  arid  in  the  federal  courts  passing  upon  the  transfer  of 
national  bank  stock,  it  is  held  that  by  the  common  law  the  unregistered 
transferee  of  a  certificate  of  stock  is  protected  as  against  all  subse- 
quent attachrnents  or  executions  levied  on  that  stock.  —  The  decided 
weight  of  authority  holds  that  he  who  purchases  for  a  valuable  considera- 
tion a  certificate  of  stock  is  protected  in  his  ownership  of  the  stock,  and 
is  not  affected  by  a  subsequent  attachment  or  execution  levied  on  such 
stock  for  the  debts  of  the  registered  stockholder,  even  though  such  pur- 
chaser has  neglected  to  have  his  transfer  registered  on  the  corporate 
books,  thereby  allowing  his  transferrer  to  appear  to  be  the  owner  of 
the  stock  upon  which  the  attachment  or  execution  is  levied.^  Such  is 
the  rule  prevailing  in  the  federal  courts  and  in  the  courts  of  the  above- 
named  states.^    Frequently  this  rule  is  justified  and  explained  on  the 

1  Quoted  and  approved  in  State,  etc.  in  1  Am.  &  Eng.  Corp.  Cas.  (N.  S.), 
Co.  V.  Taylor,  25  S.  D.  577  (1910).  at  the  end  of  the  volume.     See  also  the 

2  Boone  v.  Van  Gorder,  164  Ind.  499  table  prepared  by  Lowell,  Stimson,  & 
(1905).  Lowell  for  the  Boston  Clearing  House 

'  Kolchmann   v.  Meurice,    [1903]   1  Association. 
K.  B.  534.  California :    In  California  it  is  now 

^  Quoted    and    approved    in    Lips-  well  established  that  the  purchaser  of  a 

comb's  Adm'r  v.  Condon,  56  W.  Va.  certificate  of  stock  is  protected  against 

416  (1904).  a  subsequent   sale  or   attachment   or 

^  Quoted  and  approved  in  State,  execution  levied  on  the  transferrer's 
etc.  Co.  V.  Taylor,  25  S.  D.  577  property,  even  though  no  transfer  has 
(1910).  For  a  careful  statement  of  been  made  on  the  books,  the  purchaser 
the  rule  in  each  state  on  this  subject,  at  such  sale  having  notice  of  the  trans- 
see  an  article  in  35  Am.'  Law  Rev.  238  fer.  Re  Campbell's  Estate,  12  Cal. 
(1901).  For  an  able  article  by  I.  H.  App.  707  (1910).  The  statute  is  as 
Hatfield  in  favor  of  the  doctrine  that  follows:  A  "transfer  is  not  valid 
the  attaching  creditor  should  be  pre-  except  as  to  the  parties  thereto,  until 
ferred  to  the  unrecorded  transferee,  see  the  same  is  so  entered  upon  the  books 
30  Am.  Law  Rev.,  p.  223.  See  also  of  the  corporation  as  to  show  the 
the  detailed  review  of  the  cases  on  names  of  the  parties  by  whom  and  to 
this  subject  in  an  article  written  by  whom  transferred,  the  number  of  the 
Chief  Justice  Corliss  of  North  Dakota  certificate,  the  number  or  designation 

1366 


CH.   XXVII. 


ATTACHMENT   AND    EXECUTION. 


[§  487. 


ground  that  registry  and  by-laws  or  charter  provisions  requiring  reg- 
istry of  transfers  on  the  corporate  books  are  not  for  the  purpose  of  notify- 

of  the  shares,  and  the  date  of  trans-  Delaware:     In    Delaware    the   pur- 
fer."     Civil    Code    (1906),    §  324.     A  chaser  of  a  certificate  of  stock  is  pro- 
purchaser  at  execution  sale,  who  knows  teeted    as     against     attachments     for 
the  debtor  has  sold   the  stock,   takes  debts  of  the  transferrer,  even  though 
nothing.     Blakeman    v.    Puget    Sound  he    does    not    have    the    stock    trans- 
Iron  Co.,  72  Cal.  321  (1887).     Under  ferred  on  the  corporate  books,  and  he 
this     statute     an     attachment     takes  may  have  an  injunction  against  such 
precedence  over  an  um-ecorded  prior  attaching    creditor    selling    the    stock 
transfer  of  a  certificate  of  stock.     See  on    execution.     Allen    v.    Stewart,    7 
Weston  V.  Bear  River,  etc.  Co.,  5  Cal.  Del.   Ch.   287   (1895),     In  Trimble  v. 
186    (1855) ;     Farmers',   etc.    Bank   v.  Vandegrift,  7  Houst.  451   (1887),  the 
Wilson,  58  Cal.  600   (1881);    Naglee  court  ordered  stock  to  be  sold  on  an 
V.    Pacific    Wharf    Co.,    20    Cal.    529  execution,    although    the    corporation 
(1862).      The    case   Weston    v.    Bear  stated  at  the  time  of  the  attachment 
River,  etc.  Co.,  6  Cal.  425  (1856),  holds  that  it  had  received  notice  that   the 
that  one  who  purchases  stock  at  an  stock  had  already  been  sold.     It  ap- 
execution  sale,  knowing  that  a  certifi-  peared,   however,   that   the  statement 
cate  of  stock  had  already  been  sold  made  by  the  corporation  did  not  tell 
or  pledged  by   the  execution  debtor,  to  whom  the  sale  had  been  made,  and 
cannot  claim  a  precedence  over  a  sale  did    not    state    that    a    transfer    had 
of    the   certificates.     To    same   effect,  been   made   on   the   corporate   books, 
People  V.  Elmore,  35  Cal.  653  (1868).  and  it  appeared  also  that  the  attach- 
If    the    unregistered    purchaser    buys  ing   creditor   had   no   way   of    testing 
the    judgment    obtained     under     the  his  right   to  priority,   unless  the  sale 
attachment,     the    latter    is     merged,  was  allowed   to  take  place,  and  that 
Strout  V.  Natoma  Water,  etc.  Co.,  9  the  sale  would  not  necessarily  cut  off 
Cal.  78  (1858).     A  sale  of  stock  after  the  right  of  the  holder  of  the  eertifi- 
an    attachment    suit    has    failed,    and  cate  of  stock  to  litigate  the  priority 
before  that  decision  is  reversed,  gives  of     his     title.     In     Wilmington,     etc. 
the  purchaser  good  title.     Loveland  v.  Turnp.  Co.  v.  Bush,  1  Harr.  44  (1832), 
Alvord,  etc.  Co.,  76  Cal.  562  (1888).  the  court  held  that  the  company  could 
A   transaction  whereby   a  debtor  de-  not    defend    against    a    suit    for   divi- 
livers  certificates  of  stock  to  its  eredi-  dends  on  the  ground  that  attachment 
tor  in  pledge,-  and  the  creditor  imme-  had  been  levied  against  the  stock  as 
diately  returns  them  to  the  debtor,  is  the   property   of   a   former   registered 
not  a  valid    pledge,  even   though    the  owner  of  the  stock,  it  appearing  that 
debtor  told  the  corporate  officers  of  the  the  corporation  had  issued  new  certifi- 
pledge,  but  said  he  did  not  want  the  eates  of  stock  without  a  transfer  on 
transaction   to  appear  on   the   books,  the  books  being  made  by  the  former 
and  even  though  the  secretary  makes  owner  of  the  stock.     The  statute  is  as 
a  note  of  the  fact  on  the  stubs  of  the  follows  :   "The  shares  of  stock  in  every 
certificate-of-stock    book.     An    execu-  corporation  shall  be  deemed  personal 
tion  subsequently  levied  upon  the  stock  property  and  transferable  on  the  books 
as   the  property  of   the  debtor   takes  of  the  corporation  in  such  manner  and 
precedence    over    the    alleged    pledge,  under  such  regulations  as  the  by-laws 
McFall    V.  Buckeye,  etc.  Assoc,   122  provide.  .  .  .     Whenever    any    trans- 
Cal.    468    (1898).     In    California    the  fer  of  shares  shall  be  made  for  collat- 
purchaser  at   execution  sale,   without  eral   secixrity,   and   not   absolutely,   it 
notice  of  a  prior  sale  of  the  certificates,  shall  be  so  expressed  in  the  entry  of 
is  entitled  to  the  stock  and  to  have  new  the  transfer."     (L.  1903)  Ch.  394,  §  16. 
certificates  issued  to  him,  even  though  District  of  Columbia:    The  statute 
the  old    certificates    are   outstanding,  is  as  follows:    Stock  "shall  be  trans- 
West  Coast,  etc.  Co.  v.  Wulff,  133  Cal.  ferable   in   such    manner   as   shall   be 
315  (1901).  prescribed  by  the  by-laws  of  the  com- 

/  ^''7uJ..  a.-?a_  1367 


§  487.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXVII. 


ing  the  creditors  of  the  old  registered  stockholder  that  he  no  longer 
owns  the  stock,  nor  for  any  similar  purpose,  but  are  for  the'  purpose  of 


pany."  Code  of  June  9,  1910,  §  614. 
"A  person  in  whose  name  shares  of 
stock  stand  on  the  books  of  a  com- 
pany shall  be  deemed  the  owner  there- 
of as  regards  the  company,  but  if  any 
such  person  shall  in  good  faith  sell, 
pledge,  or  otherwise  dispose  of  any 
of  his  shares  of  stock  to  another  and 
deliver  to  him  the  certificate  for 
such  shares,  with  written  authority 
for  the  transfer  of  the  same  on  the 
books,  the  title  of  the  former  shall 
vest  in  the  latter  so  far  as  may  be 
necessary  to  effect  the  purpose  of  the 
sale,  pledge,  or  other  disposition,  not 
only  as  between  the  parties  them- 
selves, but  also  as  against  the  credi- 
tors of  and  subsequent  purchasers 
from  the  former."     Id.  §  629. 

Idaho:  An  unrecorded  sale  or 
pledge  of  stock  has  preference  over  a 
subsequent  attachment  by  a  creditor 
of  the  vendor  or  pledgor,  and  a  pro- 
vision in  the  statutes  that  a  transfer 
shall  not  be  valid  until  recorded  is  for 
the  benefit  of  the  corporation,  and  not 
for  the  creditors  of  the  transferrer. 
Such  attachment,  however,  is  good  as 
against  the  equity  of  redemption  of 
the  pledgor.  Mapleton  Bank  v. 
Standrod,  8  Idaho,  740  (1902).  The 
Idaho  statute  is  that  a  "transfer  is  not 
valid  except  between  the  parties 
thereto,  until  the  same  is  so  entered 
upon  the  books  of  the  corporation." 
Civil  Code  (1908),  §2747. 

Kansas :  A  pledge  of  a  certificate  of 
stock,  even  though  not  transferred 
on  the  corporate  books,  has  precedence 
over  a  subsequent  attachment.  Citi- 
zens', etc.  Bank  v.  Bank  of  Com- 
merce, 80  Kans.  205  (1909). 

Kentucky:  See  the  emphatic  dic- 
tum in  Thurber  v.  Crump,  86  Ky.  408 
(1887) ;  also  the  decision  in  Ken- 
tucky Nat.  Bk.  V.  Avery,  30  Am.  L. 
Rev.  234  (1896).  The  corporation 
cannot  claim  a  lien  for  a  debt  incurred 
after  it  had  notice  of  a  sale  of  the 
certificates.  Bank  of  America  v. 
McNeil,  10  Bush,  54  (1873).  The 
Kentucky  statute  is  as  follows:  "The 
shares  of  stock  shall  be  transferred  on 
the  books  of  the  corporation  in  such 


manner  as   the   by-laws   thereof   may 
direct."     Ky.  Stat.  (1909)  §  545. 

Louisiana :  Pitot  ;;.  Johnson,  33  La. 
Ann.  1286  (1881);  Smith  v.  Crescent 
City,  etc.  Co.,  30  La.  Ann.  1378 
(1878) ;  Crescent  City,  etc.  Co.  v.  Deb- 
lieux,  40  La.  Ann.  155  (1888).  The 
attaching  creditor  of  one  who  appears 
on  the  books  of  a  corporation  as  reg- 
istered owner  of  shares  of  its  stock 
cannot  hold  the  stock  against  the  true 
equitable  owner,  who  holds  the  certifi- 
cate of  stock  duly  indorsed  by  the 
debtor.  Kern  v.  Day,  45  La.  Ann.  71 
(1893).  Cf.  Bidstrup  v.  Thompson,  45 
Fed.  Rep.  452  (1891),  where  the 
pledge  had  not  been  completed.  See 
also  Friedlander  v.  Slaughter  House 
Co.,  31  La.  Ann.  523  (1879),  holding 
that  a  company  is  not  liable  to  the 
purchaser  of  the  certificate  where 
such  purchaser  did  not  make  any 
claim  or  give  notice  of  his  rights 
until  after  the  execution  sale  and  until 
after  the  court  had  ordered  the  cor- 
poration to  make  a  transfer  to  the 
purchaser  at  the  execution  sale. 
Where  a  creditor  knows  that  stock 
standing  in  the  name  of  his  debtor 
on  the  books  of  a  corporation  has 
already  been  sold  and  transferred  by 
such  debtor  he  cannot  by  attachment 
obtain  a  prior  lien  thereon,  even  in 
Louisiana.  Black  v.  Zacharie,  3  How. 
483  (1844).  The  Louisiana  statute 
is  as  follows  :  "When  a  debtor  wishes 
to  pledge  .  .  .  stocks  ...  he  shall  de- 
liver to  the  creditor  the  .  .  .  stocks  .  .  . 
or  other  written  obligations,  so  pledged, 
and  such  pledge  so  made  shall  without/ 
further  formalities,  be  valid  as  well 
against  third  persons  as  against  the 
pledger  thereof,  if  made  in  good  faith, 
provided  that  where  the  pledge  is  of 
instruments  not  negotiable,  the  debtor 
must  be  notified  thereof."  Civil  Code 
(1909),  §  3158  (as  provided  by  Act 
157,  Laws  of  1900,  p.  240).  In 
1904,  in  order  to  remove  any  doubt 
on  this  subject,  the  Legislature  enacted 
the  following  statute:  "The  delivery 
of  a  stock  certificate  of  a  corporation 
to  a  bona  fide  purchaser  or  pledgee,  for 
value,  together  with  a  written  transfer 


1368 


CH.   XXVII.] 


ATTACHMENT   AND   EXECUTION. 


[§  487. 


protecting  the  corporation  in  paying  dividends  and  allowing  the  stock 
to  be  voted.     Another  and  stronger  reason  is  that  the  law  favors  the 


of  the  same,  or  a  written  power  of 
attorney  to  sell,  assign,  and  transfer 
the  same,  signed  by  the  owner  of  the 
certificate,  shall  be  a  sufficient  delivery 
to  transfer  the  title  as  against  all 
parties ;  but  no  such  transfer  shall 
affect  the  right  of  the  corporation  to 
pay  any  dividend  due  upon  the  stock, 
or  to  treat  the  holder  of  record  as  the 
holder  in  fact,  until  such  transfer  is 
recorded  upon  the  books  of  the  cor- 
poration, or  a  new  certificate  is 
issued  to  the  person  to  whom  it  has 
been  so  transferred."  R.  L.  (1910) 
Wolff,  Vol.  Ill,  p.  99. 

Michigan:  May  v.  Cleland,  117 
Mich.  45  (1898).  Newberry  v.  Detroit, 
etc.  Co.,  17  Mich.  141  (1868).  The 
Michigan  statute  is  as  follows  :  "Shares 
may  be  transferred  by  indorsement 
and  delivery  of  the  certificates  thereof, 
.  .  .  but  such  transfer  shall  not  be 
valid,  except  between  the  parties  there- 
to, until  the  same  shall  have  been  so  en- 
tered on  the  books  of  the  corporation." 
Comp.  Laws  (1897),  p.  2627,  Ch.  230, 
§  8533.  Stock  may  be  attached.  Id. 
pp.  3131,  3132,  §§  10335-10339,  as 
am'd  by  Laws  of  1903,  p.  347,  No.  219. 

Minnesota:  A  sale  and  transfer  of 
corporate  stock,  although  not  entered 
on  the  books  of  the  corporation,  takes 
precedence  of  a  subsequent  attach- 
ment in  behalf  of  a  creditor  of  the 
vendor.  Lund  v.  Wheaton,  etc.  Co., 
50  Minn.  36  (1892).  The  court  so 
held  although  the  statute  prescribed 
that  no  transfer  should  be  valid 
except  as  bejiween  the  parties  until 
such  transfer  was  registered  on  the 
corporate  books.  Under  the  Minne- 
sota practice,  where  a  corporation  is 
sued  for  refusal  to  transfer  stock  which 
is  claimed  on  one  hand  by  a  purchaser 
of  the  certificate  and  on  the  other 
by  a  purchaser  at  an  execution  sale, 
the  claimant  intervenes.  Haslam  v. 
First  Nat.  Bank,  etc.,  79  Minn.  1 
(1900).  The  Minnesota  statute  is  as 
follows:  "The  transfer  of  shares  is 
not  valid,  except  as  between  the  par- 
ties thereto,  until  it  is  regularly 
entered  on  the  books  of  the  company." 
Rev.  Laws  (1905),  §  2804. 


Mississippi:  Goyer,  etc.  Co.  v. 
Wildberger,  71  Miss.  438  (1894); 
Clark  V.  German  Security  Bank,  61 
Miss.  611  (1884),  the  court  holding 
that  the  holder  of  the  certificate  was 
protected,  although  the  statute  pre- 
scribed that  stock  should  be  trans- 
ferable "only"  on  the  books  of  the 
company.  The  Mississippi  statute  is 
as  follows:  "The  stock  in  all  cor- 
porations shall  be  transferable  by  the 
indorsement  and  delivery  of  the  stock 
certificate  and  the  registry  of  such 
transfer  in  the  books  of  the  corpora- 
tion."    Code  of  1906,  §  909. 

Missouri:  McClintock  v.  Central 
Bank,  120  Mo.  127  (1894).  In  this 
case  it  was  he'd  that  an  attaching 
creditor  cannot  complain  that  the 
pledgee,  who  had  prior  rights,  settled 
with  the  pledgor  after  the  attachment 
and  then  sold  the  stock.  The  creditor 
must  offer  to  redeem  or  have  a  sale 
subject  to  the  pledge.  The  pledgee  of 
the  certificates  was  the  corporation 
itself.  In  Merchants'  Nat.  Bank  v. 
Richards,  6  Mo.  App.  454  (1879); 
aff'd,  74  Mo.  77,  application  had  been 
made  to  the  corporation  for  registry 
but  had  been  refused.  The  purchaser 
of  a  certificate  of  stock  in  a  Missouri 
corporation  may  maintain  a  bill  in 
equity  for  injunction  to  prevent  the 
corporation  transferring  such  stock  - 
to  one  who  purchased  the  same  at 
execution  sale  on  a  judgment  obtained 
against  a  registered  holder  of  such 
stock,  it  being  shown  that  such  pur- 
chaser at  execution  sale  took  with 
notice  of  the  prior  sale  of  the  certifi- 
cate. Seligman  v.  St.  Louis,  etc. 
R.  R.,  22  Fed.  Rep.  39  (1884).  Stock 
in  a  foreign  corporation  cannot  be 
attached.  Armour,  etc.  Co.  v.  St. 
Louis  Nat.  Bank,  113  Mo.  12  (1892). 
Cf.  Smith  V.  Pilot  Min.  Co.,  47  Mo. 
App.  409  (1891).  A  suit  in  equity  by 
a  purchaser  of  stock  at  execution  sale 
against  the  corporation  and  the  stock- 
holder of  record  cannot  be  removed 
to  the  United  States  Court  by  the 
stockholder  of  record  where  the  com- 
plainant and  corporation  are  citizens 
of  the  same  state,  inasmuch  as  the  cor- 


1369 


§  487.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXVII. 


transfer  of  stock  certificates,  and  discountenances,  so  far  as  possible, 
all  secret  dangers  incurred  in  their  purchase.     By  protecting  the  pur- 

the  officer  selling  the  stock  under 
attachment  directed  the  corporation 
to  issue  a  certificate  of  stock  to  the 
purchaser  under  the  attachment  sale. 
Reilly  v.  Absecon  Laud  Co.,  75  N.  J. 
Eq.  71  (1908).  A  transfer  of  the  cer- 
tificate has  precedence  over  an  execu- 
tion sale,  and  even  if  the  corporation  has 
issued  a  new  certificate  to  the  purchaser 
at  the  execution  sale  and  the  latter  has 
voted  to  dissolve  the  company,  such  dis- 
solution may  be  enjoined.  Flostroy  v. 
Corby  Coal  Co.,  85  Atl.  Rep.  578 
(N.  J.  1912).  See  also  Broadway 
Bank  v.  McEh-ath,  13  N.  J.  Eq.  24 
(1860) ;  aff'd,  sub  nom.  Hunterdon 
County  Bank  v.  Nassau  Bank,  17  N.  J. 
Eq.  496  (1864) ;  Rogers  v.  New  Jer- 
sey Ins.  Co.,  8  N.  J.  Eq.  167  (1849). 
In  this  last  case  the  purchaser  at  the 
execution  sale  knew  that  the  certifi- 
cates had  been  sold.  Even  though  a 
transfer  may  have  been  fraudulent, 
yet  mandamus  following  an  execu- 
tion sale  is  not  the  proper  way  to  test 
that  question.  State  v.  Warren 
Foundry,  etc.  Co.,  32  N.  J.  L.  439 
(1868).  The  New  Jersey  statute  is 
as  follows:  "The  shares  of  stock  in 
every  corporation  shall  be  personal 
property  and  shall  be  transferable 
on  the  books  of  the  corporation  in 
such  manner  and  under  such  regula- 
tions as  the  by-laws  provide;  and 
whenever  any  transfer  of  shares  shall 
be  made  for  collateral  security,  and 
not  absolutely,  it  shall  be  so  expressed 
in  the  entry  of  the  transfer."  Comp. 
Stat.  (1909-10),  p.  1610. 

New  York:  The  case  of  Smith  v. 
American  Coal  Co.,  7  Lans.  317  (1873), 
fully  discusses  and  sustains  this  rule. 
See  also  De  Comeau  v.  Guild  Farm 
Oil  Co.,  3  Daly,  218  (1870),  where  the 
court  says  that  the  sheriff,  "by  the 
levy  of  such  an  attachment,  could  not 
acquire  anj'  better  or  greater  title  to 
the  stock  than  a  person  would  have 
done  who  had  purchased  this  stock  of 
the  person  in  whose  name  it  stood  on 
the  day  of  the  levy  of  the  attach- 
ment. And  the  principle  is  well  set- 
tled in  this  state  that  such  a  pur- 
chaser would  not  acquire  any  interest 


poration  is  an  indispensable  party  and 
the  main  relief  is  against  it.  St. 
Louis,  etc.  Ry.  Co.  v.  Wilson,  114  U.  S. 
60  (1885).  "An  unrecorded  trans- 
fer is  good  against  an  execution  cred- 
itor of  a  stockholder,  who  had  no 
notice  of  the  transfer  where  the  execu- 
tion was  levied,  but  was  notified 
thereof  before  he  purchased  the 
stock,  at  a  sale  under  the  execution." 
Wilson  V.  St.  Louis,  etc.  Ry.,  108  Mo. 
588  (1891).  The  Missouri  statute  is 
as  follows  :  Stock  ' '  shall  be  transfer- 
able in  the  manner  prescribed  by  the 
by-laws  of  the  company."  Annotated 
Stat.  (1906),  §§  965,  3183. 

Nebraska:  The  purchaser  of  a  cer- 
tificate of  stock  is  protected  against 
siibsequent  attachments  or  executions 
and  may  maintain  a  suit  in  equity  to 
compel  the  corporation  to  issue  the 
stock  and  to  enjoin  the  sheriff  from 
selling  it  under  an  execution.  Everitt 
V.  Farmers',  etc.  Bank,  82  Neb.  191 
(1908).  In  Nebraska  a  person  who 
has  purchased  or  taken  in  pledge  a  cer- 
tificate of  stock  before  garnishee 
process  has  been  levied  thereon,  in 
accordance  with  the  statute,  takes 
precedence.  Farmers',  etc.  Bank  v. 
Mosher,  68  Neb.  713  (1904).  A  trans- 
fer of  the  certificates  takes  precedence 
over  an  attachment  or  garnishee  pro- 
cess. Farmers',  etc.  Bank  v.  Mosher, 
63  Neb.  130  (1901).  The  Nebraska 
statute  is  as  follows:  Stock  "owned 
by  the  judgment  debtor,  or  the  defend- 
ant in  attachment  proceedings,  may 
be  levied  upon  under  executions  or 
writs  of  attachment."  Cobbey's  Anno. 
Stat.  (1909),  §  1536. 

New  Jersey:  A  purchaser  of  stock 
is  protected  against  subsequent  attach- 
ing creditors  of  the  vendor,  even  if  the 
transfer  is  not  recorded,  but  if  the 
purchaser  delays  a  long  time  in 
demanding  transfer  and  in  the  mean- 
time the  stock  has  been  sold  in  attach- 
ment proceedings,  the  court  may 
require  him  to  give  a  bond  to  the  cor- 
poration against  loss  by  reason  of  a 
decree  in  his  favor  that  the  stock  be 
ti'ansferred  to  him,  and  he  is  then 
entitled   to  the  transfer  even  though 


1370 


CH.   XXVII.] 


ATTACHMENT   AXD   EXECUTfON. 


[§  487. 


chaser  against  subsequent  attachments  and  executions,  the  law  removes 
one  of  the  chief  risks  incurred  in  holding  certificates  of  stock  without  a 


whatever  as  against  a  prior  pur- 
chaser for  value."  Where  the  cor- 
poration causes  an  attachment  to  be 
levied  on  the  stock  of  a  stockholder 
of  record  who  has  sold  his  certificates 
to  another  person  and  causes  a  sale  to 
be  made  to  deprive  the  latter  of  his 
stock,  he  may  hold  the  corporation 
liable.  Robinson  v.  New  Berne  Nat. 
Bank,  95  N.  Y.  637  (1884);  Sims  v. 
Bonner,  16  N.  Y.  Supp.  801  (1891). 
See  also,  in  general,  Dunn  v.  Star  F. 
Ins.  Co.,  19  N.  Y.  Week.  Dig.  531 
(1884).  An  assignment  of  the  certifi- 
cates to  a  receiver  in  another  state 
takes  precedence  of  an  attachment 
against  the  stock  at  the  home  of  the 
corporation.  The  court  will  direct  the 
corporation  to  register  the  transfer. 
Weller  v.  Pace  Tobacco  Co.,  5  Ry.  & 
Corp.  L.  J.  5  (N.  Y.  Sup.  Ct.  1888). 
A  New  York  trust  company  that  holds, 
as  a  depositary,  the  certificates  of 
stock  of  four  railroad  corporations 
which  are  about  to  be  consolidated, 
one  of  which  is  incorporated  in  another 
state,  is  not  liable  for  its  omitting  to 
have  such  stock  in  such  corporation 
transferred  into  its  name,  even  though 
thereby  an  attachment  takes  preced- 
ence over  such  deposit.  The  trust 
company  is  not  bound  to  know  the 
law  of  such  other  state.  New  Jersey 
Con.  Co.  V.  Farmers'  L.  &  T.  Co., 
39  N.  Y.  Misc.  Rep.  672  (1903). 
The  statute  in  New  York  is  as  follows  : 
"No  transfer  of  stock  shall  be  valid 
as  against  the  corporation,  its  stock- 
holders and  creditors  for  any  purpose 
except  to  render  the  transferee  liable 
for  the  debts  of  the  corporation  to  the 
extent  provided  for  in  this  chapter, 
until  it  shall  have  been  entered  in  such 
book  as  required  by  this  section,  by  an 
entry  showing  from  and  to  whom  trans- 
ferred." Stock  Corporation  Law  §  32. 
North  Dakota :  The  statute  is  as  fol- 
lows :  A  "transfer  is  not  valid  except 
between  the  parties  thereto,  unless  the 
same  is  so  entered  upon  the  books 
of  the  corporation."  Rev.  Codes 
(1905),  §  4194.  In  a  controversy  be- 
tween a  pledgee  of  corporate  stock 
indorsed   but   not   transferred   on   the 

13 


books  of  the  company  and  a  subse- 
quent judgment  creditor  of  the  pledgor 
who  bought  the  stock  in  at  an  execu- 
tion sale  under  his  judgment,  with 
knowledge  of  the  pledgee,  it  was  held 
that  the  transfer  by  indorsement 
passed  equitable  title  to  the  pledgee, 
and  that  the  judgment  creditor  took 
the  stock  subject  to  the  lien  of  the 
pledgee.  Van  Cise  v.  Merchants'  Nat. 
Bank,  4  N.  Dak.  485  (1887).  In  Re 
Argus  Printing  Co.,  1  N.  Dak.  434, 
444  (1891),  there  is  a  dictum  giving 
prioritv  to  an  attachment.  In  Doty 
V.  Fu-st  Nat.  Bank,  3  N.  Dak.  9  (1892), 
the  court  declined  to  pass  upon  the 
question,  inasmuch  as  national  bank 
stock  was  involved,  and  the  court 
followed  the  decisions  of  the  federal 
courts  on  this  subject. 

Ohio :  The  statute  is  as  follows : 
"Shares  of  stock  in  any  company 
shall  be  personal  property,  and  when 
fully  paid-up  shall  be  subject  to  levy 
and  sale  upon  execution  against  the 
owner."  Page  &  Adams,  Anno.  Code 
(1912),  §  8682.  An  unrecorded  pledge 
has  precedence  over  a  subsequent  at- 
tachment. Norton  v.  Norton,  43  Ohio 
St.  509  (1885).  An  attachment  has 
precedence  over  a  subsequent  sale  of 
the  certificates.  Ball  v.  Towle  Mfg. 
Co.,  67  Ohio  St.  306  (1902). 

Oregon :  The  statute  is  as  foUows  : 
The  corporation  in  case  of  an  execu- 
tion sale  "is  required  to  make  the 
necessary  transfer  to  the  pvirchaser 
upon  the  stock  book ;  ...  all  sales 
of  stock,  whether  voluntary  or  other- 
wise, transfer  to  the  purchaser  all 
rights  of  the  original  holder  or  per- 
son for  whom  the  same  is  purchased." 
Lords  Oregon  Law  (1910),  §§  6695, 
6696.  Where  the  certificates  of  stock 
were  sold  before  an  attachment  was 
levied,  the  purchaser  at  execution  sale 
cannot  by  mandamus  compel  the  cor- 
poration to  issue  a  new  certificate  to 
him.  Durham  v.  Monumental,  etc. 
Co.,  9  Oreg.  41   (1880). 

Penyisylvania:     Eby  v.  Guest,  94  Pa. 

St.    160    (1880) ;   Finney's  Appeal,   59 

Pa.    St.    398    (1868) ;    Commonwealth 

V.   Watmough,   6  Whart.    117    (1840), 

71 


§  487.] 


ATTACHMENT   AND    EXECUTION. 


[CH.  XXVII. 


registry,   and  thereby  increases  the  safety  and  desirabihty  of  such 
investments.^ 


holding  also  that  the  sheriff  need  not 
levy  on  stock  which  he  knows  has 
already  been  sold  to  an  unregistered 
transferee.  When  the  transferrer  noti- 
fies the  corporation  of  the  transfer, 
a  subsequent  attachment  of  the  stock 
as  the  property  of  the  transferrer  is 
not  good,  although  the  transfer  was 
not  recorded  in  the  corporate  book. 
Telford,  etc.  Co.  v.  Gerhab,  13  Atl. 
Rep.  90  (Pa.  1888) ;  U.  S.  v.  Vaughan, 
3  Binn.  394  (1811),  where  the  unreg- 
istered transferees  resided  in  foreign 
lands.  The  statute  in  Pennsylvania 
is  as  follows:  Stock  "may  be  trans- 
ferred on  the  books  of  the  company 
in  person  or  by  attorney  subject  to 
such  regulations  as  the  by-laws  may 
prescribe."  Purdons  Dig.  (1905),  p. 
801,  §  88.  Stock  "shall  be  liable  to 
execution  like  other  goods  or  chattels." 
Id.  p.  1520,  §  20.  "If  any  person  shall 
claim  to  be  the  owner  of  such  stock, 
he  may,  upon  filing  an  affidavit  that 
the  stock  is  really  his  property,  and 
entering  into  a  recognizance,  with  two 
sufficient  sureties,  conditioned  for  the 
payment  of  such  damages  as  the  court 
may  adjudge  to  the  plaintiff,  if  such 
stock  should  really  belong  to  the  de- 
fendant, the  court  shall  admit  him  to 
become  a  party  upon  the  record,  and 
take  defense  in  like  manner  as  if  he 
were  made  garnishee  in  the  writ." 
Id.  p.  1533,  §  47. 

South  Dakota:  A  pledgee  of  a  cer- 
tificate of  stock  is  protected  against 
a  subsequent  attachment  by  a  creditor 
of  the  pledgor,  even  though  the  transfer 
is  not  recorded  on  the  corporate  books. 
State,  etc.  Co.  v.  Taylor,  25  S.  D. 
577  (1910).  The  statute  is  as  follows  : 
Stock  "may  be  transferred  by  indorse- 
ment by  the  signature  of  the  proprietor, 
or  his  attorney  or  legal  representative, 
and  delivery  of  the  certificate ;  but 
such  transfer  is  not  valid  except 
between  the  parties  thereto,  until  the 
same  is  so  entered  upon  the  books  of 
the  corporation."  Civil  Code  (1908), 
§  423.      In    a    controversy   between  a 


pledgee  of  corporate  stock  indorsed 
but  not  transferred  on  the  books  of 
the  company  and  a  subsequent  judg- 
ment creditor  of  the  pledgor  who 
bought  the  stock  in  at  an  execution 
sale  under  his  judgment,  with  knowl- 
edge of  the  pledge,  it  was  held  that 
the  transfer  by  indorsement  passed 
equitable  title  to  the  pledgee,,  and  that 
the  judgment  creditor  took  the  stock 
subject  to  the  lien  of  the  pledgee.  Van 
Cise  V.  Merchants'  Nat.  Bank,  4  Dak. 
485  (1887). 

Tennessee:  A  sale  under  execution 
of  stock  which  has  been  pledged  con- 
veys nothing.  McQuade  v.  Williams, 
101  Tenn.  334  (1898).  Even  though 
a  pledgee  who  holds  the  certificates 
indorsed  in  blank  sends  them  to  the 
pledgor  to  be  exchanged  for  new  certifi- 
cates in  a  consolidated  company,  and 
even  though  the  pledgor  takes  out  such 
new  certificates  in  his  own  name,  yet 
this  is  not  a  waiver  of  the  pledge 
entitling  attaching  creditors  of  the 
pledgor  to  precedence  over  the  pledgee. 
In  a  suit  by  an  attaching  creditor  to 
determine  the  priority  of  his  rights 
over  an  unregistered  pledgee  the 
court  has  no  pov/er  to  decree  a  sale 
of  the  pledge  and  the  distribution  of 
the  assets.  McClung  v.  Colwell,  107 
Tenn.  592  (1901).  See  also  on  the 
main  question,  Cornick  v.  Richards, 
3  Lea,  1  (1879).  Co7itra,  State  Ins. 
Co.  V.  Sax,  2  Tenn.  Ch.  507  (1875). 
A  subscriber's  subscription  may  be 
attached  before  a  certificate  of  stock 
is  issued  and  delivered,  and  such 
attachment  has  precedence  over  a 
mortgage  even  though  the  mortgage  is 
recorded  with  the  register  of  deeds,  no 
notice,  however,  of  such  mortgage 
being  given  to  the  corporation  itself. 
Cates  V.  Baxter,  97  Tenn.  443  (1896). 
An  unrecorded  assignment  of  the  cer- 
tificates takes  precedence  over  an 
attachment  where  the  corporation  had 
notice  of  such  assignment.  State  Ins. 
Co.  V.  Gennett,  2  Tenn.  Ch.  100  (1874). 
The  Tennessee  statute  is  as  follows : 


1  Quoted  and  approved  in  State,  etc.  Co.  v.  Taylor,  25  S.  D.  577  (1910). 

1372 


CH.   XXVII.] 


ATTACHMENT   AND   EXECUTION. 


[§  488. 


§  488.  In  Illinois,  Maine,  Maryland,  Massachusetts,  Montana, 
New  Hampshire,  Rhode  Island,  Virginia,  West  Virginia,  Wisconsin, 

Stock  is  "subject  to  levy  and  sale  as    manner  as  shall  be  prescribed  by  the 


such,  the  company  in  such  case  being 
required  to  make  the  proper  entries 
in  its  stock  or  transfer  book."  Code 
(1896),  p.  538,  §  2066. 

Texas :  Seeligson  v.  Brown,  61  Tex. 
114  (1884).  An  unregistered  pledgee 
has  priority.  Hamilton  v.  San  An- 
tonio, etc.  Co.,  51  S.  W.  Rep.  1104  (Tex. 
1899).  A  pledgee  of  the  certificates 
is  protected  against  a  subsequent 
attachment,  although  the  transfer 
is  not  recorded.  Tombler  v.  Palestine 
Ice  Co.,  17  Tex.  Civ.  App.  596  (1897). 
Garnishee  process  to  reach  stock  owned 


by-laws  of  the  company  ;  but  no  trans- 
fer shall  be  valid  except  between  the 
parties  thereto,  until  the  same  shall 
have  been  entered  upon  the  books  of 
the  company."  Remington  &  Ball- 
ingess  Codes  (1910),  §3693. 

Federal  Courts:  In  regard  to  stock 
in  national  banks,  the  federal  courts 
have  firmly  established  the  rule  that 
the  unregistered  transferee  is  pro- 
tected against  a  subsequent  attach- 
ment or  execution.  Continental  Nat. 
Bank  v.  Eliot  Nat.  Bank,  7  Fed.  Rep. 
369  (1881),  with  a  full  review  of  the 


by  a  judgment  debtor  is  not  good  as  authorities  by  Judge  Lowell;  Hazard 

against  a  prior  purchaser  of  the  cer-  v.  National  Exch.  Bank,  26  Fed.  Rep. 

tificate  of    stock.     South   Texas  Nat.  94  (1886) ;  Scott  v.  Pequonnock  Nat. 

Bank  v.  Texas,  30  Tex.  Civ.  App.  412  Bank,  15  Fed.  Rep.  494  (1883),  where 

(1902).     The     Texas     statute     is     as  thi    rule    was    applied,    although    the 

follows:     "The  stock  of  any  corpora-  national  bank  was  in  Connecticut,  a 

tion  created  under  this  title  shall  be  state  which  strongly  favors  the  oppo- 


deemed  personal  estate ;  and  shall  be 
transferable  only  on  the  books  of  the 
corporation  in  such  manner  as  the 
by-laws  may  prescribe."  Rev.  Civol 
Stat.  (1911),  p.  282,  Art.  1168. 

Utah :  Laws  of  1896,  p.  304,  §  2280, 
8.  14,  was  amended  by  Laws  of  1903, 
p.  79,  to  read  as  follows  :  "  Stock  shall 


site  rule.  The  court  said:  "The 
tendency  of  modern  decisions  is  to 
regard  certificates  of  stock  attached 
to  an  executed  blank  assignment  and 
power  to  transfer  as  approximating  to 
negotiable  securities,  though  neither 
in  form  or  character  negotiable." 
The  statutes  of  the  state  wherein  the 


be  deemed  personal  property,  and  the  national     bank     is      located     cannot 

delivery  of  a  stock  certificate  of  a  cor-  change  or  interfere  with  this  rule  m 

poration,  together  with  a  written  trans-  regard     to     certificates     of     stock     in 

fer  of  the  same,  signed  by  the  owner,  national   banks.     Doty   v.   First   Nat. 

to  a  bona  fide  purchaser  or  pledgee  for  Bank,  3  N.  Dak.  9  (1892),  where  the 

value,  shall  be  deemed  a  sufficient  trans-  court  refused  to  give  precedence  to  an 

fer  of  the  title  as  against  any  creditor  attachment  as  against  a  prior  unreg- 

of  the  transferrer  and  all  other  persons  istered  transfer  of  a  certificate  of  stock 

whomsoever..."   Comp.  Laws  (1907),  in    a    national    bank.     A    pledgee    of 

§  330.     A  judgment  creditor  who  pur-  national  bank  stock  is  entitled  to  pre- 

ehases   stock   at   execution   sale,   with  cedence  over  a  subsequent  attachment 


notice  that  the  certificates  have  been 
pledged,  does  not  obtain  priority. 
Barse,  etc.  Co.  v.  Range,  etc.  Co.,  16 
Utah,  59  (1897). 

Washington:  Port  Townsend  Nat. 
Bank  v.  Port  Townsend,  etc.  Co.,  6 
Wash.  597  (1893),  the  court  so  holding 
although  the  statute  prescribed  that 
the  transfer  should  not  be  good  except 


levied  on  such  stock.  Where  the 
purchaser  at  the  execution  sale  is  the 
corporation  itself,  the  remedy  of  the 
pledgee  is  at  law,  and  he  is  entitled  to 
recover  only  to  the  extent  of  his  debt 
in  case  such  debt  is  less  than  the 
actual  value  of  the  stock.  Second 
Nat.  Bank  v.  First  Nat.  Bank,  8  N. 
Dak.  50  (1898).     An  unrecorded  trans- 


as  between  the  parties  until  the  same  feree  of  national  bank  stock  is  pro- 
was  registered  on  the  corporate  books,  tec  ted  against  an  attachment  for  a 
The  Washington  statute  is  as  follows  :  debt  of  the  transferrer.  Bateman  v. 
Stock  "shall  be  transferable  in  such     Gits,   16  N.  Mex.  441   (1911).     Even 

1373 


§  488.] 


ATTACHMENT   AND   EXECUTION. 


CH.  XXVII. 


and  Wyoyning,  the  statutes  have  prescribed  that  an  unregistered  pur- 
chaser or  pledgee  of  certificates  of  stock  shall  be  protected  as  against 
subsequent  attachments  or  executions   levied  upon  that  stock}  — 


in  Massachusetts,  where  the  courts 
upheld  at  common  law  an  opposite 
rule,  the  state  courts  will  foUoAv  the 
above  rule  when  the  stock  of  a  national 
bank  is  in  question.  Sibley  v.  Quinsig- 
amond  Nat.  Bank,  133  Mass.  515 
(1882).  The  decision  in  State  v. 
Jeffersonville  Nat.  Bank,  89  Ind.  302 
(1883),  is  erroneous  in  various  ways. 
See  Indiana,  §  490,  infra,  p.  1385. 
Williams  v.  Mechanics'  Bank,  5 
Blatchf.  59  (1862) ;  s.  c,  29  Fed.  Cas. 
1376,  is  not  in  accord  with  the  other 
federal  decisions.  Where  an  attach- 
ment is  levied  on  stock  which  has 
already  been  pledged,  the  attachment 
reaches  only  the  equitable  title  of  the 
debtor  pledgor.  Black  v.  Zacharie, 
3  How.  483,  511  (1844).  A  decision  of 
a  state  court  that  a  donatio  causa 
mortis  of  bank  stock  was  effective, 
although  the  donor  merely  delivered 
the  certificates  of  stock  without  trans- 
ferring the  same  on  the  back  thereof, 
does  not  raise  a  federal  question,  even 
though  the  stock  was  national-bank 
stock.  Leyson  v.  Davis,  170  U.  S.  36 
(1898). 

In  England  the  creditor  of  a  regis- 
tered stockholder  cannot  subject  the 
stock  to  his  debt  as  against  the  owner 
of  the  certificates,  who  has  allowed 
the  stock  to  remain  in  the  name  of 
the  debtor  in  order  to  qualify  the  lat- 
ter as  a  director.  Cooper  v.  Griffin, 
[1892]  1  Q.  B.  740. 

In  Canada  the  unregistered  trans- 
feree is  protected.  Morton  v.  Cowan, 
25  Ont.  Rep.  (Can.)  529  (1894).  An 
execution  has  priority  over  an  unre- 
corded transfer.  Brock  v.  Ruttan,  1 
C.  P.  (Can.)  218  (1851).  An  execu- 
tion levied  on  stock  after  a  transfer  has 
been  entered  on  the  stock  ledger  is 
not  good,  even  though  the  transferee 
has  not  yet  accepted  the  stock.  Wood- 
ruff V.  Harris,  11  U.  C.  (Q.  B.)  490 
(1854). 

1  Illinois :  The  case  of  People's 
Bank  v.  Gridley,  91  111.  457  (1879), 
had  previously  held  that  at  common 
law  an  attachment  or  execution  sale 


took  precedence  over  a  prior  unregis- 
tered sale  or  pledge  of  certificates  of 
stock.  The  statute  was  passed  in 
1883  to  change  this  rule.  Rice  v. 
Gilbert,  173  111.  348  (1898).  The 
Illinois  statute  is  as  follows :  The 
share  or  interest  of  a  stockholder  may 
be  sold  on  execution,  "but  in  all  cases, 
where  such  share  or  interest  has  been 
sold  or  pledged  in  good  faith  for  a 
valuable  consideration,  and  the  certifi- 
cate thereof  has  been  delivered  upon 
such  sale  or  pledge,  such  shares  or 
interest  shall  not  be  liable  to  be  taken 
on  execution  against  the  vendor,  or 
pledgor,  except  for  the  excess  of  the 
value  thereof  over  and  above  the  sum 
for  which  the  same  may  have  been 
pledged  and  the  certificate  thereof 
delivered."  Rev.  Stat.  (1909),  p. 
1369,  §  52. 

Maine:  In  this  state  the  statute 
formerly  prescribed  that  no  title 
should  pass  by  sale  of  the  certificates 
except  as  between  the  parties  until 
registry  had  been  had  on  the  corpo- 
rate books.  This  statute  was  held  to 
give  precedence  to  an  attachment  or  ex- 
ecution sale.  Skowhegan  Bank  v.  Cut- 
ler, 49  Me.  315  (1860) ;  Fiske  v.  Carr, 
20  Me.  301  (1841).  The  Maine  statute 
now  is  as  follows:  "The  delivery  of 
a  certificate  of  stock  of  a  corpora- 
tion to  a  bona  fide  purchaser  or  pledgee 
for  value,  together  with  a  written 
transfer  of  the  same  or  a  written  power 
of  attorney  to  sell,  assign  and  transfer 
the  same,  signed  by  the  owner  of  the 
certificate,  shall  be  a  sufficient  delivery 
to  transfer  the  title  against  all  parties.'' 
R.  S.  (1903),  Ch.  47,  §  34,  p.  440. 

Maryland:  In  Maryland,  by  chap- 
ter 287,  Laws  of  1886,  a  pledgee  or 
purchaser  of  certificates  of  stock  is  pro- 
tected without  a  transfer  on  the  books 
of  the  corporation  as  against  subse- 
quent attachments  or  executions.  Mor- 
ton V.  Grafflin,  68  Md.  545  (1888), 
holding  also  that  the  attaching  credi- 
tor cannot  reach  the  equity  by  a  bill 
in  equity  to  obtain  a  receiver  and  to 
compel  the  pledgee  to  resort  to  other 


1374 


CH.   XXVII. 


ATTACHMENT  AND   EXECUTION. 


[§  488. 


The   courts  of  Massachusetts  were  among  the  first  to  lay  down  the 
rule  which  places  an  attachment  or  execution  levy  ahead  of  an  un- 


seenrity  first.  In  a  transaction  aris- 
ing prior  to  the  above  statute,  the 
pledgee  made  no  effort  to  protect  him- 
self, and  gave  no  notice  of  the  pledge 
until  seven  years  after  the  stock  had 
been  sold  out  on  execution.  It  was 
held  that  the  corporation  was  not  lia- 
ble to  him.  Noble  v.  Turner,  69  Md. 
519  (1888).  The  Maryland  statute  is 
as  follows :  "No  execution  or  attach- 
ment issued  or  levied  upon  the  shares 
of  any  defendant  in  the  capital  stock 
of  a  corporation  standing  on  its  books 
in  his  name,  shall  affect  any  other  in- 
terest than  such  as  such  defendant 
actually  had  in  such  shares  at  the  time 
of  the  delivery  to  the  corporation  by 
the  sheriff  or  other  executive  officer  of 
the  notice  required  by  section  68  of 
this  article.  Nor  shall  any  such  execu- 
tion or  attachment  in  any  way  affect 
the  right,  title  or  interest  of  any  bona 
fide  purchaser  or  pledgee  for  value 
without  actual  notice  of  such  execution 
or  attachment,  who  shall  have  received 
the  certificate  of  stock  with  a  written 
transfer  thereof,  endorsed  thereon  (or 
with  a  written  power  of  attorney  to 
sell,  assign  or  transfer  the  same) ,  signed 
by  the  person  named  as  stockholder  in 
such  certificate.  And  such  purchaser 
or  pledgee  shall  have  power  to  name 
any  person  as  attorney  to  transfer  the 
shares  to  him  on  the  books  of  the  cor- 
poration ;  and  upon  and  after  the  pro- 
duction and  delivery  of  the  original 
certificate  to  the  corporation,  he  shall 
be  entitled  to  a  new  certificate  for  said 
shares,  and  the  rights  of  a  lawful 
holder  thereof."  Pub.  Genl.  Laws 
(1903),  §  392,  was  repealed  by  Chap. 
240,  Laws  of  1908,  and  a  new  section 
reading  as  above  was  enacted,  being 
§  46  of  Chap.  240  of  Laws  of  1908. 
This  section  was  codified  and  is  now 
§71  of  Anno.  Code  (1911). 

Massachusetts:  A  pledgee  of  cer- 
tificates of  stock  in  Massachusetts 
is  protected  by  the  statute  in  that 
state,  even  though  the  stock  is  not 
transferred  on  the  corporate  books. 
Athol,  etc.  Bank  v.  Bennett,  203 
Mass.  480  (1909),  involving  a  bill  in 
equity,  by  the  purchaser  at  execution 


sale  of  the  interest  of  the  pledgor  of 
stock,  to  enjoin  the  pledgee  from  sell- 
ing the  certificates.  While  a  bona  fide 
pledgee  of  a  certificate  of  stock  is 
protected,  yet  an  assignment  or  pledge 
by  the  pledgor  of  the  equity  of  redemp- 
tion to  still  another  party,  who  does 
not  get  the  certificate  of  stock,  does 
not  protect  the  latter  unless  a  custom 
to  that  effect  is  proven.  Baker  v. 
Davie,  211  Mass.  429  (1912).  It  has 
been  held  under  the  Massachusetts 
statute  that  where  a  father  delivers 
stock  to  his  son  in  order  to  qualify  the 
latter  as  director,  and  the  son  transfers 
the  certificate  back  to  his  father,  a 
creditor  of  the  son  cannot  attach  the 
stock  as  against  the  father,  although 
the  stock  stands  on  the  corporate 
books  in  the  name  of  the  son.  Andrews 
V.  Worcester,  etc.  R.R.,  159  Mass. 
64  (1893).  Where  a  stockholder  in- 
dorses a  certificate  of  stock  in  blank 
and  delivers  it  to  an  agent  and  the 
agent  pledges  it  for  his  own  purposes, 
the  pledgee,  if  he  took  without  notice 
of  the  breach  of  trust,  is  protected. 
The  court  held  also  that  the  statute 
of  1884  applied  to  such  a  case.  Russell 
V.  American,  etc.  Co.,  180  Mass.  467 
(1902).  The  Massachusetts  statute 
protects  purchasers  of  a  certificate 
of  stock,  even  though  it  is  merely 
indorsed  in  blank.  Clews  v.  Friedman, 
182  Mass.  555  (1903).  By  written 
agreement,  even  in  Massachusetts,  the 
title  may  remain  in  the  purchaser, 
the  broker  being  merely  a  pledgee, 
and  the  statute  of  Massachusetts  pass- 
ing title  by  a  transfer  and  delivery 
of  the  certificate  has  no  application. 
Chase  v.  City  of  Boston,  193  Mass. 
522  (1907).  Even  though  the  form  of 
the  old  statutes  in  Massachusetts 
authorizing  attachments  of  shares  of 
stock  were  "to  be  considered  as  in  the 
nature  of  a  registry  act,  regulating 
the  transfer  of  the  stock  as  to  third 
persons,  and  therefore  preventing  an 
unrecorded  transfer  from  taking  effect 
against  a  creditor  afterwards  attach- 
ing the  shares  without  notice  of  the 
transfer,"  yet  an  unrecorded  transfer 
of  shares  is  valid  as  against  a  subse- 


1375 


§  488.] 


ATTACHMENT   AND   EXECUTION. 


[CH.    XXVII. 


registered  purchaser  of  the  certificate  of  stock.     The  evil  consequences 
of  the  rule,  however,  seem  to  have  become  apparent  to  her  courts,  and 

quent  attachment  by  a  creditor  who 
has  notice  or  knowledge  of  the  trans- 
fer. Bridgewater  Iron  Co.  v.  Liss- 
berger,  116  U.  S.  8  (1885).  The 
Massachusetts  statute  is  as  follows : 
"The  delivery  of  a  certificate  of  stock 
by  the  person  named  as  a  stockholder 
in  such  certificate  or  by  a  person 
intrusted  by  him  with  its  possession 
for  any  purpose  to  a  bona  fide  purchaser 
or  pledgee  for  value,  with  a  written 
transfer  thereof  or  with  a  written 
power  of  attorney  to  sell,  assign  or 
transfer  the  same,  signed  by  the  per- 
son named  as  the  stockholder  in  such 
certificate,  shall  be  a  sufficient  delivery 
to  transfer  title  as  against  all  persons, 
but  no  such  transfer  shall  affect  the 
right  of  the  corporation  to  pay  any 
dividend  due  upon  the  stock,  or  to 
treat  the  holder  of  record  as  the 
holder  in  fact  until  it  has  been  recorded 
on  the  books  of  the  corporation,  or 
until  a  new  certificate  has  been  issued 
to  the  person  to  whom  it  has  been 
so  transferred."  ...  "A  pledgee  of 
stock  transferred  as  collateral  security 
shall  be  entitled  to  a  new  certificate  if 
the  instrument  of  transfer  substan- 
tially describes  the  debt  or  duty  which 
is  intended  to  be  secured  thereby. 
Such  new  certificate  shall  express  on 
its  face  that  it  is  held  as  collateral 
security,  and  the  name  of  the  pledgor 
shall  be  stated  thereon,  who  alone  shall 
be  liable  as  a  stockholder,  and  entitled 
to  vote  thereon."  Laws,  1903,  Ch. 
423,  p.  403,  §  1. 

Montana:  Rev.  Codes  (1907), 
§3855.  "The  delivery  of  a  stock  cer- 
tificate of  a  corporation  to  a  bona  fide 
purchaser  or  pledgee  for  value,  together 
with  a  written  transfer  of  the  same, 
or  a  written  power  of  attorney  to 
sell,  assign,  and  transfer  the  same, 
signed  by  the  owner  of  the  certificate, 
shall  be  a  sufficient  delivery  to  transfer 
the  title  as  against  the  creditors  of 
the  transferrer  and  subsequent  pur- 
chasers ;  but  no  such  transfer  shall 
affect  the  right  of  the  corporation  to 
pay  any  dividend  due  upon  the  stock, 
or  to  treat  the  holder  of  record  as  the 
iolder  in  fact,  until  such  transfer  is 


recorded  upon  the  books  of  the  cor- 
poration, or  a  new  certificate  is  issued 
to  the  person  to  whom  it  has  been  so 
transferred." 

New  Hampshire :  Chapter  16,  Laws, 
1887.  The  case  Pinkerton  v.  Man- 
chester, etc.  R.  R.,  42  N.  H.  424  (1861), 
held  that  an  attachment  took  preced- 
ence over  a  prior  unregistered  trans- 
fer of  stock,  except  that  the  purchaser 
of  the  certificate  of  stock  was  to  have 
a  reasonable  time  to  apply  for  regis- 
try. The  case  Buttrick  v.  Nashua, 
etc.  R.  R.,  62  N.  H.  413  (1882),  held 
that  the  company  itself  might  attach, 
even  though  one  of  its  directors  knew 
of  a  prior  unregistered  sale  of  the  cer- 
tificates of  stock ;  such  director,  how- 
ever, having  taken  no  part  in  levy- 
ing the  attachment.  The  case  Scrip- 
ture V.  Francestown  Soapstone  Co.,  50 
N.  H.  571  (1871),  held  that  the  attach- 
ment was  not  good  as  against  a  prior 
purchaser  of  the  certificate  of  stock 
from  the  president  himself,  inasmuch 
as  the  president's  knowledge  of  the 
sale  was  sufficient  notice  to  the  cor- 
poration itself.  See  also  Stowe  v. 
Meserve,  13  N.  H.  46  (1842).  The 
New  Hampshire  statute  is  as  follows : 
"The  delivery  of  a  stock  certificate  to 
a  bona  fide  purchaser  or  pledgee  for 
value,  together  with  a  written  transfer 
or  a  deed  of  the  same,  or  a  power  of 
attorney  to  sell,  assign,  and  transfer 
the  same,  signed  by  the  owner  of  the 
certificate,  shall  be  a  sufficient  delivery 
to  transfer  the  title  as  against  all 
parties  except  the  corporation ;  but 
no  such  transfer  shall  affect  the  right 
of  the  corporation  to  treat  the  stock- 
holder of  record  'as  the  stockholder  in 
fact,  until  the  old  certificate  is  sur- 
rendered and  a  new  certificate  is 
issued  to  the  person  entitled  thereto." 
Pub.  Stat.  (1901),  Ch.  149,  §  14. 

Rhode  Island:  Genl.  Laws  (1909), 
p.  711,  §  2.  The  statute  is  as  follows : 
Stock  "shall  be  transferable  in  such 
manner  as  shall  be  prescribed  by  the 
by-laws  of  the  corporation."  .  .  . 
"The  delivery  of  a  certificate  of  stock 
of  a  corporation,  transferable  only  on 
the  books  of  the  corporation  on  sur- 


1376 


CH.   XXVII.] 


ATTACHMENT  AND   EXECUTION. 


488. 


it  was  held  that,  although  the  unregistered  purchaser  was  not  protected 
where  the  charter  of  the  corporation  required  registry,^  yet,  where  only 


render  of  the  certificate,  to  a  bona 
fide  purchaser  or  pledgee  for  value, 
together  with  a  written  transfer  of 
the  same  or  a  written  power  of  attor- 
ney to  sell,  assign,  and  transfer  the 
same,  signed  by  the  owner  of  the 
certificate,  shall  be  a  suifieient  delivery 
to  transfer  the  title  against  all  parties ; 
but  no  such  transfer  shall  affect  the 
right  of  the  corporation  to  pay  any 
dividend  due  upon  the  stock,  or  to 
treat  the  holder  of  record  as  the 
holder  in  fact,  until  such  transfer  is 
recorded  or  presented  for  record,  upon 
the  books  of  the  corporation,  or  a  new 
certificate  is  issued  to  the  person  to 
whom  it  has  been  so  transferred." 
Id.,  p.  714,  §  20.  As  to  the  mode 
of  attachment  and  sale  see  Id.,  p. 
1065,  §  4.  Lippitt  v.  American  Wood 
Paper  Co.,  14  R.  I.  301  (1883); 
Quaere  in  Beekwith  v.  Biu-rough,  13 
R.  I.  294  (1881),  as  to  whether  an  un- 
recorded transferee  has  precedence 
over  a  subsequent  attachment.  Where 
the  plaintiff's  cause  of  action  against  a 
non-resident  is  in  equity  and  not  at 
law,  he  cannot  by  garnishment  reach 
certificates  of  stock  in  a  foreign  cor- 
poration, although  such  certificates 
are  in  the  state.  Maertens  v.  Scott, 
33  R.  I.  356  (1911).  The  Rhode 
Island  statute  about  delivery  of  cer- 
tificates of  stock  constituting  transfer 
of  title  does  not  interfere  with  prov- 
ing that  a  transfer  is  a  pledge.  United 
Nat.  Bank  t;.  Tappan,  33  R.  I.  1  (1911). 
Virginia :  The  statute  is  as  follows  : 
*'If  any  person  shall,  for  a  valuable 
consideration,  sell,  pledge,  or  other- 
wise dispose  of  any  of  his  shares  of 
stock  to  another,  and  deliver  to  him 
the  certificate  for  such  shares  with  a 
power  of  attorney  authorizing  the 
transfer  of  the  same  on  the  books 
of  the  corporation,  the  title  of  the 
former  (both  at  law  and  in  equity) 
shall  vest  in  the  latter  so  far  as  may 


be  necessary  to  effect  the  purpose  of 
the  sale,  pledge  or  other  disposition, 
not  only  as  between  the  parties  them- 
selves, but  also  as  against  the  creditors 
of,  and  subsequent  purchasers  from, 
the  former."  Code  (1904),  §  1105  e., 
clause  59. 

West  Virginia:  Section  37,  chapter 
53,  Code  1906.  In  West  Virginia  an 
assignment  of  the  certificates  cuts  off 
subsequent  attachments  obtained  by 
creditors  of  the  transferrer.  Donnally 
V.  Hearndon,  41  W.  Va.  519  (1895). 
Where  no  certificates  of  stock  have 
been  issued  a  stockholder  may  sell  his 
stock  by  a  written  instrument,  and 
such  written  instrument  takes  pre- 
cedence over  a  subsequent  attach- 
ment or  execution.  Lipscomb's  Adm'r 
V.  Condon,  56  W.  Va.  416  (1904).  The 
West  Virginia  statute  is  as  follows : 
"If  any  person,  for  valuable  considera- 
tion, sell,  pledge,  or  otherwise  dispose 
of  any  shares  belonging  to  him  to 
another,  and  deliver  to  him  the  certifi- 
cate for  such  shares  with  a  power  of 
attorney  authorizing  the  transfer  of 
the  same  on  the  books  of  the  corpora- 
tion, the  title  of  the  former  shall  vest 
in  the  latter  so  far  as  may  be  necessary 
to  effect  the  sale,  pledge  or  other 
disposal  of  the  said  shares,  not  only 
as  between  the  parties  themselves, 
but  also  as  against  the  creditors  of, 
and  subsequent  purchaser  from,  the 
former."     Code  (1906),  §  2266. 

Wisconsin :  Annotated  Statutes, 
chapter  85,  section  1751,  thereby 
changing  the  law  as  laid  down  in  Re 
Murphy,  51  Wis.  519  (1881),  the 
statute  being  as  follows  :  "The  deliv- 
ery of  a  stock  certificate  of  a  corpora- 
tion to  a  bona  fide  purchaser  or  pledgee 
for  value,  together  with  a  written 
transfer  of  the  same,  signed  by  tho 
owner  of  the  certificate,  his  attorney 
or  legal  representative,  shall  be  a  suffi- 
cient delivery  to  transfer  the  title  as 


1  Fisher   v.   Essex  Bank,   71   Mass.     Boyd  v.  Rockport,  etc.  Mills,  73  Mass. 
373   (1855) ;  Newell  v.   Williston,   138    406  (1856) ;  Blanchard  v.  Dedham  Gas 
Mass.  240  (1885) ;  Central  Nat.  Bank    Light  Co.,  78  Mass.  213  (1858). 
V.   Williston,    138   Mass.    244    (1885); 

(87)  1377, 


489. 


ATTACHMENT  AND   EXECUTION. 


[CH.  xxvir. 


the  by-laws  or  the  certificate  itself  created  such  a  requirement,  the  un- 
registered purchaser  was  protected  and  took  precedence  over  the  attach- 
ment or  execution.^  The  legislature  of  Massachusetts  seems  to  have  had 
a  still  clearer  perception  of  the  demands  of  trade  and  of  the  interests  of 
those  who  invest  in  certificates  of  stock,  and  in  1884  enacted  a  statute 
which  made  an  attachment  or  execution  levied  on  stock  no  more  effective 
than  in  New  York  state.^  Similar  statutory  changes  have  been  made  in 
the  other  states  mentioned  above.  The  boards  of  commissioners  for 
promoting  uniformity  of  legislation  have  recommended  the  enactment 
of  a  statute  as  follows :  "  The  delivery  of  a  stock  certificate  of  a  cor- 
poration to  a  bona  fide  purchaser  or  pledgee,  for  value,  together  with  a 
written  transfer  of  the  same,  or  a  written  power  of  attorney  to  sell,  as- 
sign, and  transfer  the  same,  signed  by  the  owner  of  the  certificate,  shall 
be  sufficient  delivery  to  transfer  the  title  as  against  all  parties ;  but  no 
such  transfer  shall  affect  the  right  of  the  corporation  to  pay  any  dividend 
due  upon  the  stock,  or  to  treat  the  holder  of  record  as  the  holder  in  fact, 
until  such  transfer  is  recorded  upon  the  books  of  the  corporation,  or  a  new 
certificate  is  issued  to  the  person  to  whom  it  has  been  so  transferred." 

§  489.  Rights  and  duties  of  the  corporation  in  such  cases. —  The 
corporation  has  a  dangerous  duty  to  perform  when  stock  has  been 


against  all  persons."  Annot.  Stat., 
1898,  Ch.  85,  §  1751.  In  Wisconsin  a 
transfer  of  certificates  of  stock  has  pre- 
cedence over  an  attachment.  Schwab 
V.  Smith,  143  Wis.  427  (1910). 

Wyoming:  The  statute  is  as  fol- 
lows: Stock  "shall  be  transferable  in 
such  manner  as  shall  be  prescribed  by 
the  by-laws  of  the  company."  Comp. 
Laws,  1910,  §  3983.  "In  all  cases 
where  the  share  or  shares  of  the  cap- 
ital stock  of  any  corporation  shall 
have  been  pledged  in  good  faith,  or 
hypothecated  as  collateral  security,  to 
any  loan  or  debt,  and  the  certificate 
thereof  shall  have  been  delivered  upon 
such  pledge  or  debt,  such  share  or 
shares  shall  not  be  liable  to  be  taken 
on  execution  against  the  pledgor, 
except  for  the  excess  of  value  thereof 
over  and  above  the  sum  for  which  the 
same  may  have  been  pledged,  and  the 
certificate  thereof  delivered."  Id., 
§  4754.  Levy  of  execution  on  stock 
belonging  to  the  judgment  debtor,  but 
standing  in  the  name  of  another, 
must  be  made  in  strict  accordance  with 
the  statute.  Wyoming,  etc.  Assoc. 
V.  Talbott,  3  Wyo.  244  (1889). 


*  Sargent  v.  Essex,  etc.  Ry.,  26  Mass. 
202  (1829);  Boston,  etc.  Assoc,  v. 
Cory,  129  Mass.  435  (1880),  holding 
that  a  delay  of  four  years  was  not 
fatal  to  the  unregistered  pxxrehaser's 
rights. 

2  "The  delivery  of  a  stock  certifi- 
cate of  a  corporation  to  a  bona  fide 
purchaser  or  pledgee  for  value,  together 
with  a  written  transfer  of  the  same, 
or  a  written  power  of  attorney  to  sell, 
assign,  and  transfer  the  same,  signed 
by  the  owner  of  the  certificate,  shall 
be  a  sufficient  delivery  to  transfer  the 
title  as  against  all  parties,  but  no 
such  transfer  shall  affect  the  right  of 
the  corporation  to  pay  any  dividend 
due  upon  the  stock,  or  to  treat  the 
holder  of  record  as  the  holder  in 
fact,  until  such  transfer  is  recorded 
upon  the  books  of  the  corporation, 
or  a  new  certificate  is  issued  to  the 
person  to  whom  it  has  been  so 
transferred."  See  Laws,  1903,  Ch.  423, 
p.  403,  §  1.  The  enactment  of  a 
similar  statute  is  respectfully  recom- 
mended to  the  states  mentioned  in 
§  490,  infra. 


1378 


CH.  XXVII.]  ATTACHMENT  AND   EXECUTION.  [§  489. 

attached  or  sold  under  levy  of  execution,  and  a  registry  is  requested 
by  the  purchaser  at  such  sale  or  by  a  purchaser  of  the  outstanding 
certificate  of  stock.^  If  the  purchaser  of  the  certificate  demands  registry 
before  registry  has  been  allowed  to  the  purchaser  at  the  execution  sale, 
and  if  the  former  claims  to  have  purchased  the  certificate  before  the 
attachment  or  execution  was  levied,  the  right  of  the  corporation  is 
clear.  It  may  refuse  to  allow  the  registry,  and  when  sued  therefor  may 
interplead  and  compel  the  claimants  to  litigate  the  matter  between 
themselves.-  But  where  the  corporation  does  not  know  whether  the 
outstanding  certificate  is  in  the  hands  of  a  purchaser  or  not,  and  a  regis- 
try is  demanded  by  a  purchaser  at  an  execution  sale,  the  rights  and 
duties  of  the  corporation  are  not  so  clear.  It  has  two  courses  open  to 
it :  it  may  refuse  to  allow  a  registry  until  compelled  to  do  so  by  a  court, 
or  it  may  allow  registry  without  being  so  compelled.  The  former  is  the 
safer  course,  since  the  corporation  will  probably  be  thereby  protected 
from  all  liability  to  a  possible  purchaser  of  the  outstanding  certificate.^ 
The  corporation  should  be  protected  in  its  obedience  to  the  decree  of 
a  court.^  It  is  quite  probable,  also,  that  no  court  in  any  of  the  above- 
named  states  would  require  the  corporation  to  issue  new  certificates 
of  stock  to  a  purchaser  of  stock  at  an  execution  sale,  unless  such  pur- 
chaser give  to  the  corporation  a  bond  of  indemnity,  whereby  an  unknown 
purchaser  of  the  outstanding  certificate  may  be  protected.^     The  other 

1  Quoted  and  approved  in  Lips-  of  the  purchaser  at  the  execution  sale, 
comb's  Adm'r  v.  Condon,  56  W.  Va.  and  was  defeated  in  the  lower  court, 
416  (1904).  and    appealed    without    staying    the 

2  See  §  387,  supra.  The  proper  rem-  decree  below,  the  corporation  is  not 
edy  for  the  purchaser  from  the  judg-  liable  for  obeying  the  decree  of  the 
ment  debtor  to  pursue  under  such  lower  court,  although  the  appeal  is 
circumstances  is  to  enjoin  the  corpora-  successful.  Chapman  v.  New  Orleans, 
tion  and  the  purchaser  at  the  execu-  etc.  Co.,  4  La.  Ann.  153  (1849).  See 
tion  sale  from  registering  the  latter  Robinson  v.  New  Berne  Nat.  Bank,  95 
as  a  stockholder.     Smith  v.  Crescent  N.  Y.  637  (1884). 

City,  etc.  Co.,  30  La.  Ann.  1378  (1878).  "  See  §§  361,  388,  supra.     Cf.  §  330, 

See  also   cases   supra.     If  an  attach-  supra. 

ment  has  been  levied  he  should  enjoin  *  The    supreme    court   of    Ohio,    in 

that.     Cheever   v.   Meyer,   52   Vt.   66  New  London  Nat.  Bank  v.  Lake  Shore, 

(1879).  etc.  Ry.,  21  Ohio  St.  221  (1871),  very 

3  "  Where  a  judicial  tribunal  of  com-  properly  and  very  distinctly  refused 
petent  jurisdiction  of  last  resort,  after  to  compel  a  registry,  although  con- 
a  fair  contest  in  good  faith  by  the  cor-  ceding  that  the  execution  purchaser 
poration,  orders  the  stock  to  be  trans-  is  entitled  to  dividends.  The  court 
ferred  to  the  purchaser  under  such  said:  "Can  it  be  that,  because  the 
seizure  and  sale,  the  corporation  can-  defendant  refused  to  assume  the  peril 
not  be  liable  to  the  holder  of  the  eer-  of  deciding  between  the  contending 
tificate  who  took  no  steps  to  protect  claimants  by  issuing  other  certifi- 
himself."  Friedlander  v.  Slaughter  cates  for  the  same  stock  to  the  plain- 
House  Co.,  31  La.  Ann.  523  (1879).  tiff  upon  demand,  that  it  thereby 
Where,  also,  the  unregistered  trans-  became  a  wTongdoer  and  converted 
feree  contested  in  the  courts  the  right  the   plaintiff's   stock   to   its   own   use, 

1379 


§  489.]  ATTACHMENT   AND   EXECUTION.  [cH.  XXVII. 

course  open  to  the  corporation,  that  of  allowing  a  registry  by  the  pur- 
chaser at  the  execution  sale  without  being  compelled  to  do  so  by  a  court, 
is  pursued  by  the  corporation  at  its  peril.  If  it  afterwards  transpires 
that  the  outstanding  certificate  had  been  purchased  before  the  attach- 
ment or  execution  was  levied,  the  corporation  is  liable  in  damages  to 
such  purchaser  for  allowing  the  registry,^  but  not  unless  such  purchaser 
gave  a  valuable  consideration  for  the  certificate  and  alleges  that  fact 
in  his  pleading.^  Until  such  purchaser  demands  a  registry  from  the 
corporation,  it  may  safely  pay  dividends  to  the  execution  purchaser.^ 
A  purchaser  of  stock  is  protected  against  subsequent  attaching  creditors 
of  the  vendor,  even  if  the  transfer  is  not  recorded,  but  if  the  purchaser 
delays  a  long  time  in  demanding  transfer  and  in  the  meantime  the 
stock  has  been  sold  in  attachment  proceedings,  the  court  may  require 
him  to  give  a  bond  to  the  corporation  against  loss  by  reason  of  a  decree 
in  his  favor  that  the  stock  be  transferred  to  him,  and  he  is  then  entitled 
to  the  transfer  even  though  the  officer  selling  the  stock  under  attach- 
ment directed  the  corporation  to  issue  a  certificate  of  stock  to  the  pur- 
chaser under  the  attachment  sale.^  Mandamus  lies  to  compel  a  cor- 
poration to  transfer  stock  sold  under  levy  of  execution.  It  can  be 
granted  as  a  common-law  remedy  or  as  a  remedy  ancillary  to  the  suit.^ 
This  rule,  however,  would  work  harshly  in  states  where  the  purchaser 
of  the  outstanding  certificate  may  have  some  rights.  Where  such  a 
possibility  *  exists  the  mandamus  should  be  denied.^  A  judgment 
creditor's  execution  lien  on  bank  stock  is  subject  to  the  lien  of  the  cor- 

and  rendered  itself  liable  to  respond  by  a  purchaser  at  an  execution  sale 

in  the  full  value  of  the  stock  to  the  to  cut  off  the  rights  of  a  judgment 

claimant  who  could  establish  his  right  debtor  the  corporation  is  an  indispen- 

in  a  court  of  law?     The  mere  state-  sable  party,  since  it   alone  can  allow 

ment   of   the   proposition  refutes   it."  a   transfer  on  the  books.     St.   Louis, 

As  to  the  mode  of  pleading  that  the  etc.  Ry.  v.  Wilson,  114  U.  S.  60  (1885). 

defendant    company    has    been    com-  See  also  the  case  Hazard  v.  National 

pelled  to  transfer  the  stock  to  a  pur-  Exch.  Bank,  26  Fed.  Rep.  94  (1886), 

chaser  at  an  execution  sale,  see  Wyo-  holding     the     corporation     liable     in 

ming   Fair   Assoc,  v.  Talbott,  3  Wyo.  damages  to  the  purchaser  of  the  out- 

244  (1889).  standing  certificate. 

1  Smith   V.    American   Coal   Co.,    7         ^  Littell  v.  Scranton,  etc.  Co.,  42  Pa. 

Lans.   317    (1873).     An  issue   by   the  St.  500  (1862). 

corporation  of  a  new  certificate  without  ^  gmitii   j,.    American   Coal   Co.,    7 

requiring  the  delivering  up  of  the  old  Lans.  317  (1873). 

one,  is  at  the  risk  of  the  corporation.  *  Reilly   v.   Absecon   Land   Co.,   75 

Campbell  v.  Perth  Amboy,  etc.  Assoc,  N.  J.  Eq.  371  (1908). 
76  N.  J.  Eq.  347  (1909).     If  the  pur-  ^  Hair  v.  Burnell,  106  Fed.  Rep.  280 

chaser  at  the  execution  sale  still  has  the  (1900).     C/.  §  390,  .swpm. 
certificates,   the  purchaser  of  the  old  «  State  v.  First  Nat.  Bank,  89  Ind. 

certificate  may  bring  suit  against  him  302   (1883) ;  Bailey  v.   Strohecker,   38 

and    the    corporation    to    compel    a  Ga.    259    (1868) ;    Durham   v.    Monu- 

retransfer.     Rogers  v.  New  Jersey  Ins.  mental,  etc.   Co.,  9  Oreg.  41    (1880). 
Co.,  8  N.  J.  Eq.  167  (1849).     In  a  suit 

1380 


CH.  XXVII.]  ATTACHMENT  AND   EXECUTION.  [§  490. 

poration  itself  by  statute  on  the  stock  for  debts  due  to  It  from  the  judg- 
ment debtor,  and  a  further  statutory  provision  that  the  enforcement  of 
the  corporation's  Hen  shall  not  affect  attachment  or  execution  liens  goes 
merely  to  the  remedy  and  does  not  affect  the  priority.^  After  a  cor- 
poration has  issued  a  certificate,  by  order  of  a  court,  it  cannot  refuse  to 
recognize  the  holder  as  a  stockholder.- 

Where  the  transferee  of  certificates  of  stock  in  a  bank  presents  them 
to  the  cashier  of  the  bank  for  transfer,  and  the  cashier  and  a  director 
delay  transfer  until  a  debt  of  the  transferrer  to  the  bank  becomes  due 
and  then  in  behalf  of  the  bank  levy  an  attachment  on  the  stock  for  such 
debt,  the  transferee  may  hold  the  bank  and  the  cashier  and  such  direc- 
tor liable  in  trover  for  conversion  of  the  stock,  and  it  is  no  defense  that 
the  transfer  of  the  certificate  was  made  to  defraud  creditors.^  If  the 
statute  prescribes  that  the  corporation  shall  register  as  a  stockholder 
the  purchaser  at  the  execution  sale,  the  writ  of  mandamus  will  lie  to 
compel  the  corporation  to  make  such  registry ;  ^  but  the  relator  must 
allege  that  he  presented  to  the  corporation  the  required  papers,  and  was 
refused  such  registry.^  A  court  of  equity  will  not  compel  a  corporation 
to  allow  a  transfer  of  stock  by  a  purchaser  at  an  execution  sale  where 
the  price  paid  at  such  sale  is  so  small  as  to  shock  the  conscience  of  the 
court.® 

§  490.  In  Alabama,  Arkansas,  Colorado,  Connecticut,  Indiana, 
Iowa,  New  Mexico,  and  Vermont,  the  usual  statutes  requiring  trans- 

1  Springfield,  etc.  Co.  v.  Bank  of  Foundry,  etc.  Co.,  32  N.  J.  L.  439 
Batesville,  68  Ark.  234  (1900).  (1868).     See  also  §  390,  supra. 

2  A  person  holding  a  certificate  of  ^  Lippitt  v.  American  Wood  Paper 
stock  issued  by  order  of  the  court  Co.,  14  R.  I.  301  (1883) ;  s.  c,  15  R.  I. 
after  an  execution  sale,  is  entitled  to  141. 

attend  meetings,  and  his  transferee  «  Mississippi,  etc.  R.  R.  v.  Cromwell, 
who  has  presented  the  stock  for  91  U.  S.  643  (1875) ;  Randolph  v.  Quid- 
transfer,  and  who  also  has  a  proxy  from  nick  Co.,  135  U.  S.  475  (1890).  See 
the  transferrer,  is  entitled  to  attend  also  §  850,  infra.  Inadequacy  of  price 
the  meetings  and  may  recover  damages  is  not  sufficient  cause  for  setting  aside 
for  assault  if  he  is  ejected  from  the  an  execution  sale  of  stock.  Conway 
meeting.  The  company  cannot  defend  v.  John,  14  Colo.  30  (1890).  Where 
on  the  ground  that  the  execution  sale  the  coiirt  orders  stock  to  be  sold  in 
was  invalid,  and  that  the  stock  had  solido  or  in  blocks  to  suit  the  pur- 
been  canceled.  NoUer  v.  Wright,  138  chaser,  and  $200,000  worth  of  stock 
Mich.  416  (1904).  is  sold  in  one  block  for  $1,000,  and  it 

'  Hine   v.    Commercial   Bank,    etc.,  is   shown   that   the   creditor   and   the 

119  Mich.  448  (1899).  debtor  had  united,  in  order  to  deprive 

*  Bailey  v.  Strohecker,  38  Ga.  259  a  transferee  of  his  rights,   the  coiirt 

(1868).     Where  the  attachment  is  on  held  that  the  sale  was  fraudulent  and 

stock    that    the    plaintiff   alleges    was  would  be  set  aside  at  the  instance  of 

transferred  in  fraud  of  creditors,  7nan-  the  unregistered  transferee.     Fahrney 

damns  will  not  lie  to  compel  the  cor-  v.   Kelly,    102  Fed.   Rep.   403    (1900). 

poration  to  allow  a  registry  under  the  See  also  §  482,  supra. 
execution     sale.      State     v.      Warren 

1381 


490. 


ATTACHMENT   AND   EXECUTION. 


[CH.  XXVII. 


jers  of  stock  to  he  registered  on  the  corporate  hooks  are  so  construed 
as  to  give  an  attachment  or  execution  precedence  over  a  prior  unreg- 
istered sale  or  pledge  of  the  certificates  of  stock  ^ —Notice  of  trans- 
fer without  registry  —  In  Arizona,  Florida,  Georgia,  Hawaii,  Nevada, 
North  Carolina,  Oklahoma,  and  South  Carolina,  the  statutes  have  not 
been  clearly  construed.  —  The  courts  of  these  states  all  hold  that,  where 


^Alabama:  By  statute  the  attach- 
ment takes  precedence  over  a  prior 
transfer  of  the  certificates,  where 
such  transfer  is  not  recorded  on  the 
corporate  books  within  fifteen  days. 
Berney  Nat.  Bank  v.  Pinckard,  87  Ala. 
577  (1888) ;  Dittey  v.  First  Nat.  Bank, 
112  Ala.  391  (1896).  Under  this  stat- 
ute the  unregistered  pledgee  is  not 
protected  against  attachments,  and  no- 
tice to  the  corporate  officer  of  the 
attachment  may  be  oral.  Abels  v. 
Planters',  etc.  Co.,  92  Ala.  382  (1890). 
In  Fisher  v.  Jones,  82  Ala.  117  (1886), 
the  court  held  that  the  unregistered 
pledgee  was  protected  where  there 
was  an  entry  made  on  the  stub  of 
the  certificate  book  of  the  stock  being 
held  in  pledge.  Under  this  statute 
the  attaching  creditor  takes  title  in 
preference  to  an  unregistered  trans- 
feree, and  the  same  rule  prevails 
where  the  registered  holder  is  a  mere 
"dummy"  for  another.  White  v. 
Rankin,  90  Ala.  541  (1890).  The 
statute  in  Alabama  prescribes  that, 
unless  a  transfer  is  made  on  the  cor- 
porate books  within  fifteen  days  after 
the  transfer,  it  "shall  be  void  as  to 
bona  fide  creditors  or  subsequent  pur- 
chasers without  notice."  In  a  suit  by 
the  purchaser  at  execution  sale  to  com- 
pel the  corporation  to  transfer  the 
stock  it  need  not  be  alleged  that  the 
purchase  was  made  without  notice  of 
the  claims  of  other  persons.  We- 
tumpka,  etc.  Co.  v.  Kidd,  124  Ala.  242 
(1900).  A  purchaser  of  stock  at  an 
execution  sale  may  file  a  bill  against 
an  alleged  transferee  of  the  stock  and 
the  corporation  to  have  the  conflicting 
rights  adjudicated.  Howard  v.  Corey, 
126  Ala.  283  (1900).  Where  a  woman 
subscribed  for  stock  in  the  name  of 
her  son  and  the  certificate  was  issued 
to  him,  she  is  not  protected  against  an 
attachment  on  the  stock  for  his  debts, 
even    though    he    had     indorsed    fhe 


certificate  in  blank  to  her.  Marbury, 
etc.  Co.  V.  Hunter,  169  Ala.  503  (1910). 
A  judgment  creditor  who  knows  that 
stock  has  been  hypothecated  and  yet 
causes  it  to  be  sold  on  execution  and 
buys  it  in  has  no  precedence  over  the 
pledge.  Selma  Bridge  Co.  v.  Harris, 
132  Ala.  179  (1902).  Where  the  cor- 
poration knows  that  one  of  its  stock- 
holders has  pledged  his  stock,  the  cor- 
poration cannot  claim  a  prior  lien  by 
statute  on  a  debt  subsequently  in- 
curred. Birmingham,  etc.  Co.  v. 
Louisiana,  etc.  Bank,  99  Ala.  379 
(1892).  Even  though  the  purchaser 
at  the  execution  sale  knew  of  an  unreg- 
istered sale  of  the  certificates,  yet  if 
the  judgment  creditor  did  not  know  it, 
the  purchaser  is  protected.  Jones  v. 
Latham,  70  Ala.  164  (1881).  The 
Alabama  statute  is  as  follows  :  "Trans- 
fers of  stock  must  be  made  or  registered 
on  the  book  of  the  corporation,  and 
persons  holding  stock  not  so  trans- 
ferred or  registered,  or  holding  any 
stock  under  hypothecation,  mortgages, 
or  other  lien  must  have  a  transfer, 
hypothecation,  mortgage,  or  other  lien 
made  or  registered  as  aforesaid,  or 
upon  failing  to  do  so  within  fifteen 
days  of  such  transfers,  hypothecations, 
mortgages,  or  other  liens  shall  be 
void  as  to  judgment  creditors  or  sub- 
sequent purchasers  without  notice." 
Code  of  Ala.  1907,  Vol.  2,  §§  3470,  3471. 
Arkansas:  The  statute  is  as  to 
manufacturing  and  other  business  cor- 
porations as  follows:  "Whenever  any 
stockholder  shall  transfer  his  stock  in 
any  such  corporation,  a  certificate  of 
such  transfer  shall  forthwith  be  de- 
posited with  the  county  clerk  afore- 
said, who  shall  note  the  time  of  said 
deposit  and  record  it  at  full  length  in  a 
book  to  be  kept  for  that  purpose ;  and 
no  transfer  of  stock  shall  be  valid  as 
against  any  creditor  of  such  stock- 
holder until  such  certificate  shall  have 


1382 


CH.   XXVII.] 


ATTACHMENT   AND   EXECUTION, 


[§  490. 


a  statute  exists  requiring  a  transfer  of  stock  to  be  registered  on  the  cor- 
porate books  in  order  to  be  effectual,  an  attachment  or  execution  levied 


been  so  deposited."  Dig.  1904,  p. 
352,  §§849,  1338.  Stock  "shall  be 
deemed  personal  property,  and  be 
transferred  only  on  the  books  of  such 
corporation  in  such  form  as  the  direc- 
tors shall  prescribe."  Id.  Sec.  1342. 
Under  the  Arkansas  statute  an  attach- 
ing creditor  has  preference  over  a 
transfer  not  recorded  with  the  county 
clerk  as  required  by  statute,  even 
though  such  creditor  knew  that  the 
certificate  of  stock  has  been  sold. 
Scott  V.  Houpt,  73  Ark.  78  (1904). 
Under  the  Arkansas  statute  it  is 
immaterial  that  the  purchaser  at  the 
execution  sale  had  actual  knowledge 
that  the  debtor  had  transferred  the 
stock,  and  it  is  immaterial  that  the 
attachment  was  due  to  an  arrange- 
ment between  the  corporation,  a  cred- 
itor, and  a  debtor.  Fahrney  v.  Kelly, 
102  Fed.  Rep.  403  (1900).  The  Arkan- 
sas statute  requiring  transfers  of  stock 
to  be  recorded  with  the  county 
clerk  does  not  apply  to  a  pledge  of 
stock.  Batesville,  etc.  Co.  v.  Myer, 
etc.  Co.,  68  Ark.  115  (1900).  A  pledge 
of  stock  need  not  be  recorded  in  the 
county  clerk's  office,  under  the  Arkan- 
sas statute.  Brady  v.  Irby,  142  S.  W. 
Rep.  1124  (Ark.  1912).  The  Arkansas 
statute  requiring  the  registry  of  a 
transfer  of  stock  does  not  apply  to  a 
pledge  of  a  certificate  of  stock.  A 
pledgee  is  not  liable  for  loss  of  the 
pledge  by  reason  of  the  transfer  not 
having  been  made  on  the  corporate 
books.  Loeb  v.  German  Nat.  Bank, 
88  Ark.  108  (1908).  Although  a 
transferee  of  stock  must  see  that  the 
transfer  is  recorded  in  the  county 
clerk's  office  in  order  to  prevent  at- 
tachments for  the  transferrer's  debts, 
yet  failure  to  file  such  transfer  with  the 
county  clerk  does  not  continue  to 
render  the  transferrer  liable  to  cor- 
porate creditors  on  the  insolvency  of 
the  corporation.  Neither  would  he  be 
liable  for  failure  of  the  corporation  to 
transfer  the  stock  on  its  books,  a 
transfer  thereof  having  been  executed 
and  delivered  by  the  transferrer  to  the 
corporate  officials.  Warren  v.  Nix,  97 
Ark.  374  (1911).     In  the  case  Masury 


t'.  Arkansas  Nat.  Bank,  93  Fed.  Rep. 
603  (1899),  the  court  in  a  carefully 
reasoned  opinion  decided  that  the 
Arkansas  statute  requiring  a  transfer 
on  the  corporate  books  as  against 
creditors  of  the  vendor  of  stock  did 
not  apply  to  a  pledge  of  stock,  even 
though  such  pledge  was  made  by 
transferring  and  delivering  the  certifi- 
cate of  stock  without  any  record 
whatsoever  on  the  corporate  books. 
The  court  stated  that  it  was  unneces- 
sary for  it  to  pass  on  the  question  of 
whether  public  notice  of  the  pledge 
given  at  the  execution  sale  had  any 
bearing  upon  the  rights  of  the  pur- 
chaser. The  court  said  :  "It  is  a  well- 
known  fact  that  stock  certificates 
frequently  circulate  in  places  far 
remote  from  the  home  of  the  corpora- 
tion by  which  they  were  issued,  that 
in  all  commercial  centers  they  are 
commonly  transferred  from  hand  to 
hand  like  negotiable  paper,  and  that 
they  are  hypothecated  for  temporary 
loans  by  a  simple  indorsement  and  de- 
livery thereof,  the  latter  being  per- 
haps the  most  common  use  to  which 
such  securities  are  put.  In  the  great 
majority  of  cases,  when  stock  is 
merely  pledged  for  a  loan,  no  record 
of  the  transfer  is  made  on  the  books 
of  the  corporation,  and  in  the  judg- 
ment of  laymen  the  making  of  such 
a  record  seems  to  be  a  needless  for- 
mality. The  trend  of  modern  decisions 
has  been  to  encourage  the  free  circu- 
lation of  stock  certificates  in  the  mode 
last  indicated,  on  the  theory  that  they 
are  a  valuable  aid  to  commercial 
transactions,  and  that  the  public  inter- 
est is  best  subserved  by  removing  all 
restrictions  against  their  circulation, 
and  by  placing  them  as  nearly  as  pos- 
sible on  the  plane  of  commercial 
paper." 

Colorado :  The  statute  is  as  follows  : 
Except  in  railroad  and  telegraph  cor- 
porations and  corporations  having  a 
paid-up  capital  of  over  S20,000,000  and 
a  stock  transfer  agency  in  New  York 
City  "no  transfer  of  stock  shall  be 
valid  for  any  purpose  whatever  .  .  . 
unless    it    shall    have    been    entered 


1383 


§  490. 


ATTACHMENT   AND    EXECUTION. 


CH.  XXVII. 


on  stock  standing  in  the  defendant  debtor's  name  will  cut  off  the  rights 
of  a  previous  purchaser  of  the  certificate  who  has  not  completed  his 

,  .  .  within  60  days  from  the  date  raised  by  the  pleadings.  Newman  v. 
of  such  transfer  by  an  entry  showing 
to  and  from  whom  transferred  ;  or  in 
case  of  the  pledge  of  any  such  stock 
a  memorandum  be  made  upon  the 
books  of  said  company  showing  to 
whom  and  for  what  amount  the  stock 
has  been  pledged."  Ann'd  Stat. 
(1912),  §  1004.  Even  though  the 
pledgor  by  a  separate  instrument 
assigns  to  a  third  party  his  interest 
in  the  stock,  and  the  purchaser  files 
such  assignment  with  the  corporation 
and  asks  for  a  transfer,  yet  a  subse- 
quent attachment  has  precedence, 
under  the  Colorado  statute,  where  the 
debt  of  the  pledgee  was  paid  prior  to 
the  service  of  the  execution  and  the 
purchaser  of  the  equity  of  redemption 
did  not  obtain  or  present  the  certifi- 
cate of  stock  for  transfer.  Isbell  v. 
Graybill,  19  Col.  App.  508  (1904). 
See  Conway  v.  John,  14  Colo.  30  (1890), 
giving  a  preference  to  the  attachment. 
Cf.  Weber  v.  Bullock,  19  Colo.  214 
(1893),  holding  that  the  pledgee  was 
protected  where  he  had  requested 
transfer  and  been  wrongfully  refused 
by  the  corporation.  See  also  Supply 
Ditch  Co.  V.  Elliott,  10  Colo.  327 
(1887).  Where  a  transferee  of  a 
certificate  of  stock  applies  to  the 
corporation  for  transfer  on  the  cor- 
porate books  and  the  corporation  does 
not  make  the  transfer,  because  it  has 
no  book,  the  transferee  is  protected. 
Central,  etc.  v.  Smith,  43  Col.  90 
(1908).  Where  a  statute  requires  a 
transfer  on  the  books  within  sixty 
days,  and  the  transfer  is  not  made 
within  those  sixty  days,  an  attaching 
creditor  of  the  transferrer  takes  title, 
even  though  he  knew  of  the  unreg- 
istered transfer.  First  Nat.  Bank,  etc. 
V.  Hastings,  7  Colo.  App.  129  (1895). 
Where  the  purchaser  of  a  certificate 
of  stock  files  a  bill  in  equity  to  enjoin 
an  attaching  creditor  of  the  trans- 
ferer from  selling  the  stock  on  execu- 
tion, and  joins  the  corporation  as  a 
party  defendant,  and  in  the  suit  the 
court  decides  that  the  stock  was  origi- 
nally legally  issued,  this  decision  is 
binding,     even     though    it    was     not 


Bullock,  23  Colo.  217  (1896).  The 
vendor  of  stock  cannot  recover  it  back, 
even  though  the  transfer  has  not  been 
recorded  within  a  specified  time  as 
required  by  the  statute  of  the  state. 
Shires  v.  Allen,  47  Colo.  440  ( 19 10) .  The 
Colorado  statute  requiring  a  transfer  of 
stock  to  be  recorded  on  the  corporate 
books  within  sixty  days  in  order  to  be 
valid  refers  only  to  matters  between 
the  corporation  and  its  stockholders, 
such  as  the  company's  internal  man- 
agement and  the  protection  of  trans- 
ferees against  the  creditors  of  trans- 
ferrers and  other  persons  claiming  the 
title,  and  that  statute  does  not  prevent 
a  transferee  of  a  certificate  taking  title 
even  though  the  transfer  is  not 
recorded.  O'Neil  v.  Wolcott  Mining 
Co.,  174  Fed.  Rep.  527  (1909).  The 
preceding  case  did  not  involve  a  claim 
by  a  creditor  of  the  transferrer. 

Connecticut:  The  statute  is  as  fol- 
lows: "Shares  of  stock  in  any  cor- 
poration organized  under  the  laws  of 
this  state  or  of  the  United  States,  or 
treasurer's  receipts  for  payment  on 
subscription  to  the  stock  of  any  cor- 
poration organized  under  the  laws  of 
this  state,  may  be  pledged  by  deliver- 
ing the  certificate  of  such  stock  or 
sucli  receipt  to  the  pledgee,  with  a 
power  of  attorney  for  its  transfer; 
but  no  such  pledge  shall  be  effectual 
to  hold  such  stock  against  any  person 
other  than  the  pledgor,  his  executor, 
or  administrator,  unless  there  shall 
be  an  actual  transfer  of  the  same 
upon  the  books  of  the  corporation,  or 
unless  a  copy  of  such  power  of  attor- 
ney shall  be  filed  with  the  corporation. 
.  .  .  The  stock  of  every  corporation, 
except  when  otherwise  provided  in 
the  charter  of  a  specially  chartered 
corporation,  shall  be  personal  prop- 
erty, and,  with  the  treasurer's  receipt 
for  payments  on  stock  subscriptions, 
shall  be  transferable  only  on  its 
books  in  such  form  as  the  by-laws 
shall  prescribe.  Whenever  any  trans- 
fer of  stock  shall  be  made  for  col- 
lateral security,  the  entry  of  the 
transfer  on  the  books  of  the  corpora- 


1384 


CH.   XXVII. 


ATTACHMENT   AND   EXECUTION. 


[§  490. 


transfer  by  registry.     Even  in  these  states,  however,  it  has  been  held 
that,  if  the  person  who  levies  the  attachment  or  purchases  at  the  exe- 

tion  shall  state  that  it  is  made  for  Stock  may  be  levied  upon  and  sold, 
collateral  security."  Public  Laws  1903,  "and  the  sheriff  shall  transfer  the 
p.  150,  Ch.  194,  §§  20,  21.  A  pledge  stock,  subject  to  the  rights  of  the  cor- 
not  perfected,  as  required  by  statute,  poration  or  company.  .  .  .  The 
is  subject  to  a  statutory  lien  of  the  shares  of  stock  subject  to  be  levied 
corporation  itself,  even  though  the  upon  shall  be  bound  by  the  execution 
statute  was  enacted  after  the  pledge  from  the  time  of  the  levy  .  .  .  and 
was  made.  First  National  Bank  v.  such  levy  shall  constitute  a  lien  upon 
Hartford,  etc.  Ins.  Co.,  45  Conn.  22  the  stock  from  the  time  of  such 
(1877).  Where  the  treasurer  of  a  cor-  levy."  Ann'd  Stat.  (1908),  §  765. 
poration  has  notice  that  stock  owned  The  remedy  of  the  purchaser  of  a 
by  one  of  its  stockholders  of  record  certificate  of  stock  as  against  an  execu- 
has  been  pledged  to  a  bank,  this  pre-  tion  sale  is  not  an  injunction  unless  the 
vents  the  corporation  claiming  a  Uen  stock  is  of  peculiar  value  or  use  to 
on  the  stock  for  a  subsequent  debt  the  purchaser.  Boone  v.  Van  Gorder, 
from  the  stockholder  to  the  corpora-  164  Ind.  499  (1905).  A  statute  pre- 
tion,  even  though  the  pledgee  has  not  scribing  that  stock  should  be  trans- 
obtained  or  filed  an  actual  transfer  ferable  on  the  corporate  books  "and 
with  the  corporation.  Hotehkiss,  etc.  not  otherwise  "  was  held  to  give  preced- 
Co.  V.  Union  Nat.  Bank,  68  Fed.  Rep.  ence  to  an  attachment  as  against  un- 
76  (1895).  See  Northrop  v.  Curtis,  5  registered  purchasers  of  certificates  of 
Conn.  246  (1824) ;  Oxford  Turnp.  Co.  stock.  Coleman  v.  Spencer,  5  Blackf. 
V.  Bunnel,  6  Conn.  552  (1827) ;  Rich-  197  (1839).  In  State  v.  Jeffersonville 
mondville  Mfg.  Co.  v.  Prall,  9  Conn.  Nat.  Bank,  89  Ind.  302  (1883),  the 
487  (1833) ;  Button  v.  Connecticut  court  fell  into  the  error  that  there 
Bank,  13  Conn.  493  (1840),  where  the  could  be  no  pledge  of  stock  unless 
recording  of  an  assignment  for  the  there  was  a  transfer  to  the  pledgee  on 
benefit  of  creditors  in  the  probate  the  books  of  the  company.  Such,  of 
office  was  held  insufficient  notice  to  course,  is  not  the  law.  See  §  465, 
the  company  as  against  attachments ;  supra.  Moreover,  the  court  did  not 
Colti).  Ives,  31  Conn.  25  (1862),  holding  consider  the  federal  decisions  on  this 
that,  where  a  transfer  is  wrongfully  subject,  although  national-bank  stock 
refused  by  the  clerk,  a  subsequent  was  involved.  However,  the  court 
attachment  does  not  take  preeed-  held  that  the  pledgee  should  have 
ence.  The  United  States  court  sit-  appeared  and  set  up  his  claim, 
ting  in  Connecticut  held  in  the  case  loiva :  The  statute  is  as  follows : 
of  New  York  Com.  Co.  v.  Francis,  83  "The  transfer  of  shares  is  not  vaHd, 
Fed.  Rep.  769  (1897),  where  stock  except  as  between  the  parties  thereto, 
in  a  Connecticut  corporation  stood  on  until  regularly  entered  upon  the 
the  books  of  the  corporation  in  the  books  of  the  company.  .  .  .  When 
name  of  a  person  who  was  really  but  any  shares  of  stock  shall  be  trans- 
a  nominal  holder  for  a  copartnership,  ferred  to  any  person,  firm  or  corpora- 
that  an  attachment  levied  on  the  tion  as  collateral  security,  such  per- 
stock  as  the  property  of  such  nominal  son,  firm  or  corporation  may  notify  in 
holder  was  not  good  as  against  the  writing  the  secretary  of  the  corpora- 
real  owner.  The  court  distinguished  tion  whose  stock  is  transferred  as 
such  a  ease  from  a  case  where  a  pur-  aforesaid,  and  from  the  time  of  such 
chaser  allowed  the  stock  to  stand  in  notice,  and  until  written  notice  that 
the  name  of  the  vendor.  The  court  said  stock  shall  have  ceased  to  be 
sustained  a  bill  in  equity  on  the  part  held  as  collateral  security,  said  stock 
of  the  real  owner  of  the  stock  to  enjoin  so  transferred  and  noticed  as  afore- 
its  sale  on  execution.  said  shall  be  considered  in  law  as 
Indiana :   The  statute  is  as  follows :  transferred  on  the  books  of  the  cor- 

1385 


§  490.] 


ATTACHMENT   AND   EXECUTION. 


[CH.  XXVII. 


cution  sale  has  notice  that  the  defendant  debtor  had  transferred  his 
certificate  before  the  attachment  or  execution  was  levied,  the  purchaser 

that  the  certificates  of  stock  had  been 
sold  by  his  debtor  and  that  notice 
thereof  had  been  given  to  the  corpora- 
tion. Ottumwa,  etc.  Co.  v.  Stodghill, 
103  Iowa,  437  (1897).  Under  the  Iowa 
statute  a  transfer  of  stock  is  not 
effective  as  against  creditors,  even 
though  a  request  has  been  made  to 
the  corporation  to  transfer  the  stock, 
if  such  transfer  has  not  been  made, 
and  even  though  the  corporation 
attached  to  the  stub  of  the  certificate 
an  acknowledgment  of  the  assignment 
of  the  certificate,  and  even  though  the 
attaching  creditor  knew  of  such  re- 
quest. Where  the  Iowa  corporation 
keeps  its  stock  books  in  Boston,  a 
transfer  on  such  books  in  Boston  is 
not  effective  as  against  subsequent 
attachments  on  the  stock  in  Iowa,  un- 
less a  book  is  kept  in  Iowa  showing 
all  transfers  as  required  by  the  stat- 
utes of  Iowa.  Perkins  v.  Lyons,  111 
Iowa,  192  (1900).  Where  the  pur- 
chaser of  stock  at  execution  sale  ap- 
plies for  a  mandamus  to  compel  the 
corporation  to  transfer  the  stock  to 
him,  and  the  owner  of  the  stock  inter- 
venes and  claims  that  the  debt  on 
which  the  stock  was  sold  had  been 
paid,  and  asks  for  a  delivery  of  the 
certificates  to  the  owner,  the  case  may 
be  tried  in  equity.  Croft  v.  Colfax,  etc. 
Co.,  113  Iowa,  455  (1901),  holding  also 
that  even  though  a  pledgee  brings  suit 
on  a  debt  and  levies  on  the  stock  he 
does  not  thereby  lose  his  rights  as 
pledgee.     Compare    §  476,    supra. 

New  Mexico:  The  statute  is  as  fol- 
lows: "Stock  shall  be  transferable  on 
the  books  of  the  corporation  is  such 
manner  and  under  such  regulations 
as  the  by-laws  provide ;  and  whenever 
any  transfer  of  shares  shall  be  made 
for  collateral  security,  and  not  abso- 
lutely, it  shall  be  so  expressed  in  the 
entry  of  the  transfer."  Laws,  1905,  p. 
150,  Ch.  79,  §  21.  The  statute  in  this 
state  is  substantially  the  same  as  in 
California,  and  the  same  decision  is 
made  by  the  courts.  See  Lyndonville 
Nat.  Bank  v.  Folsom,  7  N.  M.  611 
(1894). 

Vermont :  The  statute  is  as  follows  : 


poration  which  issued  said  stock, 
without  any  actual  transfer  on  the 
books  of  such  corporation  of  such 
stock.  In  such  cases  it  shall  be  the 
duty  of  the  secretary  or  cashier  of  the 
corporation  or  of  the  person  or  firm  to 
which  such  stock  shall  have  been  trans- 
ferred as  collateral  security  at  once, 
upon  its  ceasing  to  be  so  held,  to  inform 
the  secretary  of  the  corporation  is- 
suing such  stock  of  such  fact.  The 
secretary  of  the  corporation  whose 
stock  is  transferred  as  collateral  shall 
keep  a  record  showing  such  notice 
of  transfer  as  collateral,  and  notice  of 
discharge  as  collateral,  subject  to 
public  inspection.  No  holder  of  stock 
as  collateral  security  shall  be  liable 
for  assessment  on  the  same."  Code 
(1897),  §  1626.  Mere  entry  by  the 
corporation  that  the  stock  has  been 
pledged  is  sufficient  to  protect  the 
pledgee.  Moore  v.  Marshalltown,  etc. 
Co.,  81  Iowa,  45  (1890).  Mandamus 
lies  against  the  corporation  in  behalf 
of  the  purchaser  at  execution  sale,  and 
by  the  Iowa  decisions  such  purchaser  is 
protected,  even  though  he  knew  at  the 
time  of  the  sale  that  the  certificates  had 
been  sold  by  the  judgment  debtor  to  a 
third  person.  Hair  v.  Burnell,  106 
Fed.  Rep.  280  (1900).  The  court  holds 
that  this  statute  gives  an  attachment 
priority  over  a  prior  unregistered  sale 
or  pledge  of  the  certificates  of  stock. 
Fort  Madison  Lumber  Co.  v.  Batavian 
Bank,  71  Iowa,  270  (1887).  This  case 
came  up  again  in  1899,  when  it  appears 
that  after  the  decision  of  the  lower 
court  in  favor  of  the  pledgee,  and  before 
reversal  by  the  upper  court,  the  lower 
court  ordered  a  sale  and  the  pledgee 
bought  in  the  stock,  and  afterwards 
the  stock  became  worthless.  The 
court  now  holds  (77  Iowa,  393)  that 
the  pledgee  need  restore  only  the 
stock,  although  worthless.  In  Com- 
mercial Nat.  Bank  v.  Farmers',  etc. 
Bank,  82  Iowa,  192  (1891),  the  attach- 
ing creditor  took  no  title  because  a 
statutory  notice  as  to  attachments  was 
not  given.  In  Iowa  the  attaching 
creditor  has  priority  even  though  he 
knew  at  the  time  of  his  attachment 


1386 


CH.   XXVII.] 


ATTACHMENT   AND   EXECUTION. 


490. 


of  the  outstanding  certificate  is  entitled  to  the  stock.^  If  the  attaching 
creditor  has  notice  before  the  attachment  is  levied,  the  purchaser  ma}^ 
obtain  a  permanent  injunction  against  the  attachment.^  Moreover, 
if  the  purchaser  at  the  execution  sale  has  notice,  he  may  be  prevented 
from  obtaining  registry  and  claiming  the  stock.^ 


"Stock  ma  J'  be  transferred  as  pro%ided 
by  its  by-laws."  Pub.  Stat.  (1906), 
§  4264.  A  pledge  of  certificates  of 
stock  takes  precedence  over  subse- 
quent attachments,  if  notice  of  such 
pledge  is  given  to  the  corporation 
and  a  memorandum  made  on  the 
stock  ledger,  /cf.,  §  4266.  In  Vermont, 
where  a  pledge  of  stock  may  be  made 
only  by  transfer  on  the  books  or  notice 
to  the  corporation,  a  pledge  without 
such  transfer  or  notification  or  any 
assignment  in  writing  is  not  good  as 
against  a  trustee  in  bankruptcy. 
French  v.  White,  78  Vt.  89  (1905). 
The  decisions  in  this  state  are  to  the 
effect  that  the  attaching  creditor  takes 
precedence  over  an  unregistered  pur- 
chaser or  pledgee  of  the  certificates  of 
stock.  Sabin  v.  Bank  of  Woodstock, 
21  Vt.  353,  362  (1849);  Warren  v. 
Brandon  Mfg.  Co.  (1874),  cited  in  52 
Vt.  75 ;  Cheever  v.  Meyer,  52  Vt.  66 
(1879),  the  court  holding,  however, 
that  the  attachment  in  this  case  did 
not  take  precedence,  inasmuch  as  the 
party  knew  about  the  prior  sale  of  the 
certificates  of  stock. 

For  a  rather  emphatic  invective 
against  the  decisions  of  California, 
Indiana,  Colorado,  and  other  states 
allowing  attachments  in  those  states 
to  have  priority  against  a  prior  trans- 
fer of  stock,  see  12  Ry.  &  Corp.  L.  J. 
145. 

'  The  purchaser  of  a  certificate  of 
stock  in  a  Missouri  corporation  may 
maintain  a  bill  in  equitj^  for  injunc- 
tion to  prevent  the  corporation  trans- 
ferring such  stock  to  one  who  purchased 
the  same  at  execution  sale  on  a  judg- 
ment obtained  against  the  registered 
holder  of  such  stock,  it  being  shown 
that  such  purchaser  at  execution  sale 
took  with  notice  of  the  prior  sale  of  the 
certificate.  Seligman  v.  St.  Louis, 
etc.   R.   R.,  22  Fed.   Rep.  39   (1884). 

2  Cheever  v.  Meyer,  52  Vt.  66 
(1879) ;  Scripture  v.  Francestown 
Soapstone  Co.,  5(i^N.  H.  571  (1871) ; 


Black  V.  Zaeharie,  3  How.  483  (1845). 
A  purchaser  at  an  execution  sale 
takes  no  title  as  against  a  prior  pur- 
chaser of  the  certificate  where  the 
former  knew  of  the  latter's  purchase 
when  the  execution  sale  took  place. 
Wilson  V.  St.  Louis,  etc.  Ry.,  108  Mo. 
588  (1891).  If  the  purchaser  at  the 
execution  sale  buys  with  knowledge 
that  the  judgment  debtor  does  not 
own  the  stock  at  the  time  of  the  sale, 
he  takes  no  title  to  the  stock.  Blake- 
man  V.  Puget  Sound  Iron  Co.,  72  Cal. 
321  (1887).  Where  the  judgment 
creditor  at  the  time  of  levying  the 
execution  knows  that  the  certificates 
of  stock  have  been  transferred  as 
security  for  a  debt  its  purchase  of  the 
stock  at  the  sale  does  not  give  title 
prior  to  the  right  of  a  pledgee.  Selma, 
etc.  Co.  V.  Harris,  132  Ala.  179  (1902). 
'People  V.  Elmore,  35  Cal.  653 
(1868);  Weston  v.  Bear  River,  etc. 
Co.,  6  Cal.  425  (1856) ;  s.  c,  5  Cal. 
186 ;  Van  Cise  v.  Merchants'  Nat. 
Bank,  4  Dak.  485  (1887);  Farmers' 
Nat.  Gold  Bank  v.  Wilson,  58  Cal.  600 
(1881),  holding  also  that  the  execu- 
tion sale  will  not  be  enjoined,  since 
the  claimant  may  attend  and  give 
notice  of  his  claim ;  Newberry  v.  De- 
troit, etc.  Mfg.  Co.,  17  Mich.  141,  158 
(1868),  per  Cooley,  J.  The  purchaser 
of  a  certificate  of  stock  in  a  Missouri 
corporation  may  maintain  a  bill  in 
equity  for  injunction  to  prevent  the 
corporation  transferring  such  stock  to 
one  who  purchased  the  same  at  exe- 
cution sale  on  a  judgment  obtained 
against  the  registered  holder  of  such 
stock,  it  being  shown  that  such  pur- 
chaser at  execution  sale  took  with 
notice  of  the  prior  sale  of  the  cer- 
tificate. Seligman  v.  St.  Louis,  etc. 
R.  R.,  22  Fed.  Rep.  39  (1884).  Where 
the  corporation  bought  for  itself  at 
the  execution  sale  and  had  notice,  it 
is  liable  in  tort  to  the  unregistered 
purchaser  of  the  old  certificates. 
Bridgewater    Iron    Co.    v.    Lissberger, 


1387 


490. 


ATTACHMENT   AND   EXECUTION. 


[CH.  XXVII. 


Actual  notice  of  an  unrecorded  pledge  of  the  certificate  is  sufficient, 
even  though  the  statute  requires  a  transfer  on  the  books  or  the  filing 
of  a  power  of  attorney.  The  company  has  actual  notice  if  its  treasurer 
learns  of  it  at  a  bank.^ 

Where  the  unregistered  transferee  of  the  certificate  of  stock  has 
notified  the  corporation  thereof  and  demanded  registry,  which  is  not 
granted,  any  attachment  or  execution  levied  subsequently  to  the  im- 
proper refusal  by  the  corporation  to  register  does  not  take  precedence 
over  such  purchaser.^  If  the  corporation  improperly  refuses  to  al- 
low the  transferee  of  stock  to  register  his  transfer,  and  the  stock  is 
afterwards  attached  by  a  creditor  of  the  stockliolder,  the  transferee 
may,  if  he  chooses,  hold  the  corporation  liable  in  damages  for  its  refusal 
to  allow  the  registry.^  Where  the  transferee  of  the  certificate  has 
repeatedly  demanded  a  transfer  of  the  company,  but  been  refused,  a 
subsequent  attachment  by  a  creditor  of  the  transferrer  does  not  take 
precedence,  even  though  the  statutes  require  a  registry  within  sixty 
days.*  It  is  proper  and  legal  for  a  corporation  to  add  to  the  name  ap- 
pearing on  the  stock  certificate  the  words  "  as  pledgee  "  or  "  as  collateral 
security,"   or  similar  words. ^    Where   the   unregistered   purchaser  is 


116  U.  S.  8  (1885).  Jones  v.  Latham, 
70  Ala.  164  (1881),  holds  that,  if  the 
execution  is  levied  without  notice  of 
an  unrecorded  transfer,  a  subsequent 
notice  before  the  sale  to  the  purchaser 
at  the  sale  is  ineffectual,  and  does  not 
affect  the  latter.  Where  the  creditor 
of  the  vendor  knows  of  the  pledge  of 
the  certificates  at  the  time  he  sells 
the  stock  on  execution,  he,  the  cred- 
itor, is  not  protected  in  such  sale. 
George,  etc.  Co.  v.  Range,  etc.  Co., 
16  Utah,  59  (1897).  Where  a  statute 
requires  a  transfer  on  the  books  within 
sixty  days,  and  the  transfer  is  not 
made  within  those  sixty  days,  an 
attaching  creditor  of  the  transferrer 
takes  title,  even  though  he  knew  of 
the  unregistered  transfer.  First  Nat. 
Bank,  etc.  v.  Hastings,  7  Colo.  App. 
129  (1895). 

'  Hotchkiss,  etc.  Co.  v.  Union  Nat. 
Bank,  68  Fed.  Rep.  76  (1895). 

2  Merchants'  Nat.  Bank  v.  Richards, 
6  Mo.  App.  454  (1879) ;  aff'd,  74  Mo. 
77 ;  Colt  V.  Ives,  31  Conn.  25  (1862) ; 
State  Ins.  Co.  v.  Gennett,  2  Tenn.  Ch. 
100  (1874) ;  Plymouth  Bank  v.  Bank 
of  Norfolk,  27  Mass.  4.54  (1830) ;  Sar- 
gent V.  Franklin  Ins.  Co.,  25  Mass.  90 
(1829).     Contra,  Fiske  v.  Carr,  20  Me. 


301  (1841).  See  also  §§  258,  382,  383, 
supra;  and  §  532,  infra.  But  not 
if  the  transferee  merely  sends  a  letter 
to  the  corporation  requesting  a  trans- 
fer, without  sending  the  evidences  of 
his  title  and  the  old  certificate.  Newell 
V.  Williston,  138  Mass.  240  (1885). 
The  corporation  is  liable  in  damages 
if  it  levies  the  attachment  under  such 
circumstances.  Sargent  v.  Franklin 
Ins.  Co.,  25  Mass.  90  (1829).  Where 
registry  is  allowed  it  cuts  off  a  sub- 
sequent attachment,  even  though  the 
transferee  has  not  formally  accepted 
the  stock  as  required  by  statute. 
Woodruff  V.  Harris,  11  U.  C.  (Q.  B.) 
490  (18.54).  A  memorandum  on  the 
stock  book  that  the  stock  has  been 
transferred  as  collateral  security  is 
suflScient  to  give  the  transfer  preced- 
ence over  an  attachment.  Moore  v. 
Marshalltown,  etc.  Co.,  81  Iowa,  45 
(1890). 

3  Robinson  v.  National  Bank  of  New 
Berne,  95  N.  Y.  637  (1884).  See  also 
Plymouth  Bank  v.  Bank  of  Norfolk, 
27  Mass.  454  (1830). 

^  Weber  v.  Bullock,  19  Colo.  214 
(1893). 

5  See  §§  247,  466,  supra. 


1388 


CH.  XXVII.] 


ATTACHMENT   AND   EXECUTION. 


490. 


cut  off  by  an  attachment,  he  cannot  compel  a  purchaser  from  him  to 
pay  for  the  stock  which  is  made  vakieless  by  the  attachment.^ 

it  may  be  added,  in  regard  to  this  whole  subject,  that  the  decisions 
and  statutes  of  the  various  states  show  clearly  that  public  policy  and 
the  legitimate  demands  of  trade  have  gradually  caused  the  courts  and 
legislatures  of  the  various  states  to  establish  the  rule  that  a  sale  or  pledge 
of  certificates  of  stock  has  precedence  over  a  subsequent  attachment 
levied  on  that  stock  for  the  debt  of  the  vendor  or  pledgor,  and  that  the 
failure  of  the  pledgee  or  purchaser  of  the  certificate  to  obtain  a  registry 
on  the  corporate  books  is  not  fatal  to  his  interest  in  the  stock.^  In 
the  great  commercial  centers,  where  certificates  of  stock  pass  from  hand 
to  hand  and  are  pledged  to  banks  and  financial  institutions  daily  to 
secure  great  sums  of  money,  the  necessity  of  such  a  rule  is  imperative  ;  ^ 
and  the  fact  that  so  many  states  have,  by  legislative  enactment,  adopted 
the  New  York  rule,  while  no  state  has  changed  from  the  New  York 
rule  to  the  New  England  rule,  demonstrates  in  itself  the  justice  and 
advisability  of  the  rule  which  prevails  in  New  York  state.  The  statutes 
in  Arizona,  Florida,  Georgia,  Hawaii,  Kansas,  Montana,  Nevada,  North 
Carolina,  Oklahoma,  and  South  Carolina,  bearing  on  this  subject,  are 
given  in  the  notes  below  in  alphabetical  order  ."* 

1  Rock  V.  Nichols,  85  Mass.  342  of  equity  to  transfer  the  stock  to  the 
(1862).  purchaser  of  the  pool  certificate,  even 

2  Quoted  and  approved  in  Nat.  Bank,  though  the  stock  has  advanced  in 
etc.  V.  Western  Pac.  Ry.,  157  Cal.  573  value  and  two  years  have  intervened. 
(1910).  Brissell  v.  Knapp,  155  Fed.  Rep.  809 

3  Quoted  and  approved  in  Mapleton  (1907).  Under  the  Arizona  statutes 
Bank  i>.  Standrod,  8  Idaho,  740  (1902).  an   execution   or   sale  has   precedence 

*  Arizona:  The  statute  is  as  follows :  over  a  prior  unrecorded  transfer  of  the 
"Transfer  of  the  stock  shall  not  be  certificate  of  stock.  Dean,  etc.  Co.  v. 
valid  except  as  between  the  parties  Howell,  162  Mo.  App.  100  (1912). 
hereto,  until  the  same  are  regularly  Florida :  The  statute  is  as  follows : 
entered  upon  the  books  of  the  com-  "Stock  shall  be  transferable  in  the 
pany."  R.  S.  (1901),  §  773.  Even  manner  prescribed  by  the  by-laws." 
though  by  the  statutes  of  a  state  Gen.  Stat.  (1906),  §  2656.  State  v. 
(Arizona)  a  transfer  of  the  stock  is  Suwanee  Co.,  21  Fla.  1  (1884),  holds 
not  good  until  recorded  except  as  be-  that  a  pro\'ision  in  a  special  charter 
tween  the  parties,  yet  where  various  that  a  "transfer  shall  not  be  binding 
stockholders  have  pooled  then-  stock  unless  entered  on  the  books  of  the 
by  turning  in  their  certificates  of  company"  is  for  the  protection  of  the 
stock  to  one  person  to  hold,  and  one  company  and  does  not  affect  a  trans- 
of  the  parties  so  pooling  has  sold  his  fer  as  between  holder  and  assignee. 
pool  certificate,  and  the  manager  of  the  Georgia :  The  statute  is  as  follows  : 
pool  knowing  that  fact  refuses  to  per-  "Except  as  against  the  claims  of  the 
mit  the  stock  itself  to  be  correspond-  corporation,  a  transfer  of  stock  does 
ingly  transferred  on  the  books  of  the  not  require  a  transfer  on  the  books 
company,  and  later  fraudulently  ob-  of  the  company."  Code  (1911), 
tains  a  judgment  against  the  party  §  2219,  Sec.  6036  (5431  Code  of  1895) 
who  originally  entered  the  pool,  and  reads  :  " .  .  .  Transfers  of  stock  after 
sells  out  his  stock  under  such  judg-  levy  of  an  attachment,  or  after  judg- 
ment, he  may  be  compelled  by  a  court  ment>    and    with   notice    to    the    eor- 

1389 


§491.] 


ATTACHMENT   AND   EXECUTION. 


[CH.   XXVII. 


§  491.  Shares  of  stock  cannot  be  subjected  to  the  payment  of  the 
stockholder's  debts  by  the  process  of  garnishment  unless  the  statutes 
so  provide.  —  The  process  of  garnishment  is  proper  only  where  a 
debt  is  due  from  a  third  person  to  the  defendant  debtor.  It  is  not  a 
proper  remedy  for  reaching  shares  of  stock  owned  by  the  debtor.^ 
The  corporation  owes  the  stockliolder  no  debt,  and  by  no  fiction  of 


poration  of  the  levy  or  judgment 
are  absolutely  void.  ..."  Bailey  v. 
Strohecker,  38  Ga.  259  (1868),  holds 
that  mandamus  lies  at  the  instance  of 
the  purchaser  at  execution  sale  to  com- 
pel the  corporation  to  issue  to  him  a 
new  certificate.  No  conflicting  claim 
seems  to  have  arisen  in  that  case.  A 
lien  created  by  by-law  has  precedence 
over  a  judgment  against  the  stock- 
holder, especially  where  notice  of  the 
lien  was  given  at  the  execution  sale. 
Owens  I'.  Atlanta,  etc.  Co.,  122  Ga. 
521  (1905). 

Hawaii :  The  statute  is  as  follows  : 
"Transfer  of  the  shares  may  be  made 
by  indorsement  and  delivery  of  the 
certificate.  .  .  .  No  such  transfer 
shall  be  valid,  except  between  the 
parties  thereto,  until  .  .  .  the  trans- 
fer shall  have  been  recorded  on  the 
books  of  the  corporation."  Rev.  Laws 
(1905),  §  2549.  See  Marx  v.  Parmelee, 
13  Hawaii,  438  (1901). 

Kansas :  The  statute  is  as  follows  : 
"Stock  shall  be  transferable  only  on 
the  books  of  the  corporation,  in  such 
manner  as  the  by-laws  may  pre- 
scribe."    Gen.  Stat.  (1909),  §  1743. 

Nevada :  The  statute  is  as  follows : 
"Shares  may  be  transferred  by  in- 
dorsement and  delivery  of  the  certifi- 
cate thereof,  such  indorsement  being 
by  the  signature  of  the  proprietor,  or 
his  or  her  attorney,  or  legal  repre- 
sentative ;  but  such  transfer  shall  not 
be  valid  except  between  the  parties 
thereto,  until  the  same  shall  have  been 
so  entered  upon  the  books  of  the  coi-- 


poration."     Rev.  Stat.  (1912),  §  1131. 

North  Carolina:  The  statute  is  as 
follows:  "The  shares  of  stock  in 
every  corporation  shall  be  personal 
property,  and  shall  be  transferable  on 
the  books  of  the  corporation  in  such 
manner  and  under  such  regulations  as 
the  by-laws  provide ;  and  whenever 
any  transfer  of  shares  shall  be  made 
for  collateral  security,  and  not  abso- 
lutely, it  shall  be  so  expressed  in  the 
entry  of  the  transfer."  Revisal  of 
1908,  §  1168.  An  execution  levy  shall 
be  valid  "upon  all  shares  of  stock 
in  such  company  held  by  the  de- 
fendant in  execution,  which  have  not 
at  the  time  of  the  receipt  of  such 
notice  by  said  clerk,  cashier,  or  other 
officer,  who  has  custody  of  the  books 
of  registry  of  the  stocks  thereof,  been 
actually  transferred  by  the  defend- 
ant ;  and  thereafter  any  transfer  or 
sale  of  such  shares  by  the  defendant 
in  execution  shall  be  void  as  against 
the  plaintiff  in  said  execution,  or  any 
purchaser  of  such  stock  at  any  sale 
thereunder."  Id.,  §  1217.  In  More- 
head  V.  Western  N.  C.  R.  R.,  96  N.  C. 
362  (1887),  there  is  a  dictum  to  the 
effect  that  the  attachment  has  pre- 
cedence. There  was  no  proof  that  the 
sale  of  the  certificate  was  prior  to  the 
attachment,  and  moreover  the  court 
said  that  the  purchaser  of  the  certifi- 
cate might  thereafter  litigate  his 
rights  in  another  suit,  inasmuch  as  he 
was  not  a  party  to  the  suit  at  bar. 

Oklahoma:  The  statute  is  as  fol- 
lows:   "Shares  may  be  transferred  by 


1  Pease  v.  Chicago,  etc.  Co.,  235 
111.  391  (1908).  Fowler  v.  Dickson, 
74  Atl.  Rep.  601  (Del.  1909).  Plan- 
ters', etc.  Bank  v.  Leavens,  4  Ala. 
(N.  S.)  753  (1843) ;  Foster  v.  Potter, 
37  Mo.  525  (1866) ;  Ross  v.  Ross,  25 
Ga.  297  (1858),  where  the  court  said: 
t'ls  stock  in  this  railroad  such  a  debt 


(indebtedness)  of  the  railroad  to  the 
stockholder  that  a  garnishing  creditor 
of  the  stockholder  can  enter  up  judg- 
ment for  it  against  the  railroad.  It  is 
not ;  it  is  a  debt  which  the  railroad 
dares  not  pay,  even  to  the  stockholder 
himself.  The  road  may  pay  him 
dividends  on  it,  but  that  is  all." 


1390 


CH.  XXVII.]  ATTACHMENT    AND   EXECUTION.  [§  491. 

law  can  it  be  held  to  be  a  debtor  of  the  defendant  debtor.^  Conse- 
quently, where  the  sherifi  levies  an  attachment,  not  according  to  pro- 
cedure governing  attachments,  but  according  to  the  procedure  of 
garnishment,  the  whole  proceeding  is  void,  and  a  subsequent  transfer 
of  the  stock  by  the  defendant  debtor  is  valid.-  Stock  held  as  col- 
lateral is  property  subject  to  garnishment  under  the  statutes  of  Texas. ^ 
In  Michigan  garnishee  process  lies  against  the  pledgee  of  stock  in  behalf 
of  a  creditor  of  the  pledgor,  and  enables  the  latter  to  reach  the  equity 
in  the  stock."*  Garnishee  process  lies  to  reach  a  stockliolder's  interest, 
under  the  statutes  of  Nebraska,  especially  where  the  real  interest  of 
a  registered  stockholder  is  different  from  his  apparent  interest.^  In 
Pennsylvania  the  equity  of  redemption  which  a  pledgor  has  in  stocks 
which  he  has  pledged  to  a  national  bank  may  be  reached  by  garnish- 
ment served  on  the  bank  after  judgment  against  the  debtor.  The  na- 
tional bank  act  does  not  forbid  such  process.^  While  a  pledgee  waives 
the  pledge  if  he  levies  an  attachment  on  the  stock,  yet  a  garnishee  pro- 
cess, general  in  its  intent,  does  not  have  that  effect.^  Even  though 
garnishee  process  has  been  served  upon  the  pledgee  of  stock  for  a  debt 
of  the  pledgor,  yet  the  pledgor  and  pledgee  may  agree  that  the  stock 
shall  belong  to  the  pledgee  in  cancellation  of  the  debt.  Such  agree- 
ment is  not  illegal  if  the  debt  was  the  full  value  of  the  stock  at  the 
time ;  and  even  though  subsequently  the  pledgee,  upon  selling  the  stock 

indorsement  by  the  signature  of  the  ^  Quoted  and  approved  in  Gundry 

proprietor,    or   his    attorney    or   legal  v.  Reakirt,  173  Fed.  Rep.   167  (1909). 

representative,    and    delivery    of    the  ^  Mooar   v.   Walker,   46   Iowa,    164 

certificate ;    but   such   transfer   is  not  (1877).     Cf.  Chesapeake,  etc.  R.  R.  v. 

valid  except  between  the  parties  there-  Paine,    29    Gratt.    (Va.)    502    (1877). 

to,  until  the  same  is  so  entered  upon  Garnishee  process  must  conform  to  the 

the  books  of  the  corporation."     Rev.  statute   relative   to   attachments,  and 

Laws  (1909),  §  1284.  if  served  on   the  holders  of  the  cer- 

South  Carolina:    The  statute  is  as  tificates  instead  of  on  the  corporation 

follows:    "No  transfers  of  stock  shall  it  is  ineffectual.     Younkin  v.   Collier, 

be  valid  except  as  between  the    par-  47  Fed.  Rep.  571  (1891). 

ties  thereto  until  the  same  shall  have  '  Smith  v.  Traders'  Nat.  Bank,  74 

been  regularly  entered  upon  the  books  Tex.   457    (1889) ;     Harrell   v.   Mexico 

of   the   corporation."     Code    1902,   p.  Cattle  Co.,  73  Tex.  612  (1889). 

728,    §  1894.     Stock    in    corporations  ^  Old  Second  Nat.  Bank  v.  Williams, 

other  than  banks  and  banking  insti-  112  Mich.  564  (1897).     An  execution 

tutions    "shall    be    deemed    personal  or  garnishee  process  cannot  be  levied 

estate,   except  in   the  ease  of    manu-  on  a  certificate  of  stock  in  the  hands  of 

facturing    companies,    the     stock     in  a  pledgee  of  the  debtor.     Presnall    v. 

which    shall    be    deemed    realty,    as  Stockyards  Nat.  Bank,  151  S.  W.  Rep. 

stated   in    §  1861,    and    the    mode    of  873  (Tex.  1912). 

issuing  the  evidence  of  stock,  and  the  *  Farmers',  etc.  Bank  v.  Mosher,  63 

manner,     terms     and     conditions     of  Neb.  130  (1901). 

assigning     and     transferring     shares,  ^  Commonwealth  v.   Chestnut,   etc. 

shaU  be  prescribed  by  the  by-laws   of  Bank,  189  Pa.  St.  606  (1899). 

each  corporation."     Laws,  1905,  p.  843,  'Hudson  v.  Bank  of  Pine  Bluff,  75 

Ch.  418  (D).  Ark.  493  (1905). 

1391 


§  491.] 


ATTACHMENT   AND   EXECUTION. 


CH.  XXVII. 


for  more  than  the  debt,  pays  the  surplus  to  the  pledgor,  the  creditor  issu- 
ing the  garnishee  process  cannot  complain.^  Garnishee  proceedings 
against  a  stockholder's  interest  in  stock  which  has  been  pooled  and  has 
also  been  pledged  does  not  affect  such  pool  or  pledge,  but  is  made  sub- 
ject to  them  if  they  are  legal.^  Certificates  of  stock  held  by  one  party 
and  belonging  to  another  cannot  be  reached  by  garnishee  process  in 
behalf  of  a  creditor  of  the  owner  of  the  stock.  The  certificate  is  merely 
"  like  a  title  deed  or  a  bill  of  sale,  which  is  not  the  property  itself,  but 
simply  the  evidence  of  title  to  property."  ^  \Vhere  the  plaintiff's  cause 
of  action  against  a  non-resident  is  in  equity  and  not  at  law,  he  cannot 
by  garnishment  reach  certificates  of  stock  in  a  foreign  corporation,  al- 
though such  certificates  are  in  the  state.*  Garnishee  process  may  reach 
dividends  declared  while  the  proceedings  are  pending.^  Garnishee 
process  by  a  creditor  of  the  corporation  itself,  to  collect  unpaid  sub- 
scriptions, is  considered  elsewhere.® 


1  Steiner  v.  First,  etc.  Bank,  127  Ala. 
595  (1900). 

2  Hardin  v.  White,  etc.  Co.,  26  Wash. 
583  (1901). 

3  Packard,  etc.  Co.  v.  Laev,  100  Wis. 
644  (1898). 

*Maertens  v.  Scott,  33  R.  I.  356 
(1911). 

*  Farmers',  etc.  Bank  v.  Mosher, 
68    Neb.     713     (1904).     Where     the 


pledgee  is  garnisheed  and  the  com- 
pany goes  into  liquidation,  the  gar- 
nishee process  covers  the  dividend  on 
the  stock  less  his  claim.  Cooley  v. 
Janes,  71  Kan.  297  (1905). 

^  See  §  201,  supra.  Under  the  Ala- 
bama statute  relative  to  garnishment 
on  subscriptions,  no  call  by  the 
directors  is  necessary.  Enslen  v. 
Nathan,  136  Ala.  412  (1903). 


1392 


CHAPTER  XXVIII. 

CONSTITUTIONALITY  OF  AMENDMENTS  TO  CHARTERS  —  RIGHT 
OF  A  STOCKHOLDER  TO  OBJECT. 


§  492.  A  corporate  charter  is  a  con- 
tract between  three  parties  — 
the  state,  the  corporation, 
and  the  stockholders. 

493.  The  charter  as  a  contract  be- 

tween the  corporation  and 
the  stockholders  —  Amend- 
ment of  charter  by  majority 
of  stockholders  as  allowed  by 
statute  existing  at  time  of 
incorporation. 

494.  Charter  as  a  contract  between 

the  state  and  the  corporation. 

495.  496.  Charter  as  a  contract  be- 

tween the  state  and  the  stock- 
holders. 
497.  Charter    amendments    imposed 
upon      the      stockholders  — 
Police  power. 


§  498.  Charter  amendments  offered  to 
the  stockholders. 

499.  Auxiliary  and  incidental  amend- 

ments are  constitutional, 
though  some  of  the  stock- 
holders dissent. 

500.  Material  amendments  offered  to 

the  stockholders  can  be  ac- 
cepted only  by  a  unanimous 
vote. 

501.  Amendments     under     the     re- 

served power  of  the  state  to 
alter  or  amend  the  charter. 

502.  Dissenting    stockholder's    rem- 

edy against  an  illegal  amend- 
ment. 

503.  Assent   and  acquiescence  as   a 

bar  to  the  stockholder's  rem- 
edy. 


§  492.  A  corporate  charter  is  a  contract  between  three  parties  — 
the  state,  the  corporation,  and  the  stockholders.  —  The  charter  of  a 
corporation  having  a  capital  stock  is  a  contract  between  three  par- 
ties, and  forms  the  basis  of  three  distinct  contracts.^  The  charter 
is  a  contract  between  the  state  and  the  corporation ;  second,  it  is  a 
contract  between  the  corporation  and  the  stockholders ;  third,  it  is 
a  contract  between  the  stockliolders  and  the  state.- 

§  493.  The  charter  as  a  contract  between  the  corporation  and  the 
stockholders  —  Amendment  of  charter  by  majority  of  stockholders 
as  allowed  by  statute  existing  at  time  of  incorporation.  —  That  the 


'  Quoted  and  approved  in  Avondale 
Land  Co.  v.  Shook,  170  Ala.  379 
(1911).  See  State  Bank  v.  Knoop,  16 
How.  369  (1853) ;  Port  Edwards,  etc. 
Ry.  V.  Arpin,  80  Wis.  214  (1891); 
Northern  R.  R.  v.  Miller,  10  Barb.  260 
(1851) ;  Cooley,  Const.  Lim.  (5th  ed.), 
p.  337,  where  the  learned  author  says : 
"Those  charters  of  incorporation,  how- 
ever, which  are  granted,  not  as  a  part 
of  the  machinery  of  the  government, 
but  for  the  private  benefit  or  pur- 
poses of  the  corporators,  stand  upon 
a  different  footing,  and  are  held  to  be 
contracts  between  the  legislature  and 


the  corporators,  having  for  their  con- 
sideration the  liabilities  and  duties 
which  the  corporators  assume  by 
accepting  them ;  and  the  grant  of 
the  franchise  can  no  more  be  resumed 
by  the  legislature,  or  its  benefits 
diminished  or  impaired  without  the 
consent  of  the  grantees,  than  any 
other  grant  of  property  or  valuable 
thing,  unless  the  right  to  do  so  is 
reserved  in  the  charter  itself." 

2  Quoted  and  approved  in  Garey  v. 
St.  Joe  Mining  Company,  32  Utah, 
497  (1907). 


(88) 


1393 


§  493.]  AMENDMENTS   TO    CHARTERS.  [cH.  XXVIII. 

charter  is  a  contract  between  the  corporation  and  the  stockholders  has 
within  the  last  fifty  years  been  firmly  established,  and  is  now  unques- 
tioned law.  The  cases  of  Natusch  v.  Irving  ^  in  England,  and  Livingston 
V.  Lynch  -  in  this  country,  followed  by  a  long  line  of  supporting  decisions, 
distinctly  hold  that  the  charter  is  a  contract  prescribing  to  the  corpora- 
tion that  it  shall  not  attempt  to  materially  change,  extend,  alter,  or 
abandon  the  particular  business  which  that  charter  authorizes  the  cor- 
poration to  do.  Any  attempt  of  the  corporation  to  make  such  a  change, 
extension,  alteration,  or  abandonment  of  that  business  is  called  an  ultra 
vires  act.  It  is  an  act  which  a  single  stockholder  may  prevent  by 
injunction  or  set  aside  by  a  suit  in  equity.  This  subject,  however,  is 
fully  treated  in  another  part  of  this  work.^  Where  the  statutes  in  exist- 
ence at  the  time  of  incorporation  provide  for  the  extension  of  corporate 
charters  a  stockholder  cannot  prevent  the  corporation  from  extending 
its  existence  in  accordance  wnth  such  statutes.'*  Under  a  statute  au- 
thorizing the  stockholders  by  an  amended  certificate  to  change  the 
objects  of  the  corporation,  the  certificate  may  be  amended  so  as  to  give 
a  corporation  power  to  purchase  stock  in  other  corporations.^  Under 
the  English  statute  the  court  decides  as  between  opposing  shareholders 
as  to  whether  the  charter  should  be  amended  restricting  or  extending  its 
objects,  but  the  court  decides  merely  whether  the  change  is  fair  and 
equitable  and  not  whether  the  proposed  change  is  wise.^  A  holder  of 
preferred  stock  may  prevent  a  reduction  of  the  preferred  dividend  by  an 
amendment  of  the  certificate  of  incorporation,  even  though  the  statutes 
of  the  state  at  the  time  of  the  organization  of  the  company  authorize 
the  certificate  of  corporation  to  be  amended  by  a  certain  vote.  Such 
reduction  may  be  enjoined.'^    The  reserved  right  to  alter,  amend  or 

1  This  ease,  decided  by  Lord  Eldon  An  amendment  to  the    certificate    of 

in  1824,  is  reported  in  Gow  on  Part-  incorporation  may   be  made  under  a 

nership,  398 ;   also  2  Cooper's  Ch.  358.  statute  by  a  majority  vote  where  the 

24  Johns.  Ch.  573   (1820);    Clear-  statute  does   not   expressly  require  a 

water  v.  Meredith,  1  Wall.  25  (1863) ;  unanimous    vote.     Re    Sharood    Shoe 

Harding  v.  Amerjcan,  etc.  Co.,  182  111.  Corporation,  192  Fed.  Rep.  945  (1912). 

551    (1899).     A  charter  is  a  contract  See  also  130  Pac.  Rep.  879. 
between  the  corporation  and  the  stock-  «  Re  Jewish,  etc.  Trust,  Ltd.,  [1908] 

holders.     Mannington  v.  Hocking  Ry.,  2  Ch.  287  (1908).     Under  the  English 

183  Fed.  Rep.  133  (1910).  statute  a  charter  with  the  consent  of 

3  See  ch.  XL,  infra.  the     court     may     be     fundamentally 

4  Smith  V.  Eastwood,  etc.  Co.,  58  altered,  and  the  company  may  be  given 
N.  J.  Eq.  331  (1899).  the  power  to  sell  its  property.      /2e  New 

5  Meredith  v.  New  .Jersey,  etc.  Co.,  Westminster,  etc.  Co.,  Ltd.,  105  L.  T. 
59  N.  J.  Eq.  257  (1899) ;  aff'd,  60  N.  J.  Rep.  946  (1911),  or  to  lease  aU  the 
Eq.  445  (1899).  A  statute  requiring  a  property.  Re  Anglo-American  Tel. 
certain  vote  of  the  stock  to  amend  the  Co.,  Ltd.,  105  L.  T.  Rep.  947  (1911). 
charter  refers  to  the  stock  outstanding  '  Pronik  v.  Spirits,  etc.  Co.,  58  N.  J. 
and  not  to  the  authorized  capital  stock.  Eq.  97  (1899).  A  majority  of  the 
Footey.  Greilick,  166  Mich.  636  (1911).  stockholders   cannot  under   a   statute 

1394 


CH.  XXVIII.] 


AMENDMENTS  TO   CIL\RTERS. 


l§  494. 


repeal  charters  is  effective  whether  it  appear  in  the  charter  or  in 
the  general  laws  or  in  the  constitution  of  the  state.^  Where  a 
statute  provides  that  any  corporation  accepting  its  benefits  thereby 
waives  its  exemption  from  the  power  of  the  legislature  to  amend  its 
charter,  the  acceptance  of  the  benefits  of  such  a  statute  thereby 
works  that  change  without  any  formal  action  on  the  part  of  the 
board  of  directors  or  stockholders.- 

§  494.  Charter  as  a  contract  between  the  state  and  the  corpora- 
tion. —  As  between  the  state  and  the  corporation  the  corporate  char- 
ter is  a  contract,  protected  by  that  provision  of  the  United  States  con- 
stitution which  prohibits  a  state  from  passing  any  law  which  will  im- 
pair the  obligation  of  the  contract.^  Hence  it  is  beyond  the  power  of 
the  state  to  repeal  or  materially  annul  such  a  corporate  charter,  unless 
the  power  of  amendment  and  repeal  has  been  expressly  reserved  by  the 
state,  or  unless  all  the  parties  to  the  contract  consent  to  the  change. 
All  the  franchises,  privileges,  and  express  and  implied  powers  necessary 
and  essential  to  carrying  out  the  corporate  purposes  are  protected  by 
this  contract.^  This  branch  of  the  law  is  important  to  stockholders  in 
cases  where  the  corporation  neglects  or  refuses  to  protect  itself  against 
legislative  amendments  or  repeals  violating  the  charter  contract  be- 


amend  the  charter  so  as  to  impose  an 
additional  liability  upon  all  the  stock- 
holders under  the  Wisconsin  statutes. 
Central  Wisconsin  T.  Co.  v.  Barter, 
194  Fed.  Rep.  835  (1912). 

1  Polk  V.  Mutual  Reserve  Fund,  207 
U.  S.  310  (1907).  See  also  §  501, 
infra. 

2  Louisville  &  N.  R.  R.  v.  State,  154 
Ala.  156  (1907).  Under  the  reserved 
right  to  change  corporate  powers  the 
legislature  may  authorize  the  consolida- 
tion of  corporations,  especially  where 
any  corporation  that  amends  its  charter 
is  to  be  bound  by  such  statute  authoriz- 
ing consolidation,  and  such  amendment 
has  been  made.  Winfree  v.  Riverside, 
etc.  Co.,  75  S.  E.  Rep.  309  (Va.  1912). 

'  This  rule  of  law,  first  enunciated 
in  the  case  Dartmouth  College  v. 
Woodward,  4  Wheat.  518  (1819),  by 
Marshall,  C.  J.,  has  become  thoroughly 
established.  As  early  as  1806  a  court 
said:  "We  are  also  satisfied  that  the 
rights  legally  vested  in  this  or  in  any 
corporation  cannot  be  controlled  or 
destroyed  by  any  subsequent  statute, 
unless  a  power  for  that  purpose  be 
reserved  to  the  legislature  in  the  act 


of  incorporation."  Wales  v.  Stetson, 
2  Mass.  143  (1806).  The  charter 
granted  by  the  British  crown  in  1697 
to  the  Trinity  Church  corporation  is  a 
contract  which  cannot  be  disturbed 
by  subsequent  legislation.  Biirke  v. 
Rector,  etc.  Trinity  Church,  63  N.  Y. 
Misc.  Rep.  43  (1909).  In  England  the 
unwritten  constitution  is  not  superior 
to  the  powers  of  parliament,  and  con- 
sequently the  rule  is  different.  In 
that  country,  as  is  said  by  Lord  Coke, 
"the  power  and  jurisdiction  of  par- 
liament is  so  transcendental  and 
absolute  that  it  cannot  be  controlled 
or  confined,  either  for  causes  or  pur- 
poses, within  any  bounds."  Stevens 
V.  Rutland,  etc.  R.  R.,  29  Vt.  545 
(1851) ;  Thorpe  v.  Rutland,  etc.  R.  R., 
27  Vt.  140  (1857) ;  Dartmouth  College 
V.  Woodward,  4  Wheat.  518,  643 
(1819).  Consequently,  the  English 
authorities  are  of  little  use  in  this 
chapter. 

*  State  Bank  v.  Knoop,  16  How.  369 
(1853) ;  Thorpe  v.  Rutland,  etc.  R.  R., 
27  Vt.  140  (1857),  per  Redfield,  C.  J. 
The  latter  case  discusses  the  nature 
of  the  privilege  thus  protected. 


1395 


§  494.]  AMENDMENTS   TO   CHARTERS.  [cH.  XXVIII. 

tween  the  corporation  and  the  state.  In  such  cases  the  stockholder 
may  enjoin  or  remedy  the  wrong  by  bringing  an  action  in  place  of  and 
on  behalf  of  the  corporation,  making  it  a  party  defendant,  together  with 
the  parties  who,  under  the  authority  of  the  state,  have  violated  the 
contract.^  A  stockholder's  action  to  prevent  the  payment  of  a  tax 
levied  upon  the  corporation  in  violation  of  a  statutory  exemption  from 
taxation  is  an  action  of  this  character.-  Corporate  charters,  however, 
are  subject  to  constitutional  provisions  enacted  subsequently  to  the 
granting  of  the  charters,  unless  there  is  a  clear  contract  to  the  contrary.* 
Although  a  special  charter  gives  the  right  to  a  railroad  corporation  to 
consolidate  with  other  roads,  yet  a  subsequent  general  statute  may 
take  away  this  power  except  so  far  as  the  same  has  been  already  exer- 
cised.^ Even  though  a  water-works  company  has  been  incorporated, 
yet  if  before  it  obtains  any  valid  franchise  or  vested  right  to  furnish  water 
to  consumers,  the  state  passes  a  statute  requiring  consumers  to  pur- 
chase water  from  the  city  plant,  such  a  statute  is  valid. ^  The  public 
service  commission  law  of  New  York,  applicable  to  franchises  thereto- 
fore granted  but  not  already  exercised,  is  constitutional.^  A  general 
act  prohibiting  a  municipality  from  granting  a  ferry  right  within  a 
half  mile  of  an  existing  ferry  does  not  constitute  a  contract  with  any  par- 
ticular ferry,  but,  on  the  contrary,  may  be  repealed.^  A  city  ordinance 
passed  under  the  authorization  of  a  statute  is  a  law,  within  the  mean- 
ing of  the  constitution  of  the  United  States  prohibiting  any  law  that 

1  Greenwood  v.  Union  Freight  R.  R.,  a  clear  exposition  of  the  law  on  this 
105  U.  S.  13  (1881).  See  also  §§  900,  subject,  and  on  the  various  and  far- 
901,  infra,  on  this  subject.  The  char-  reaching  applications  and  restrictions 
acter  of  such  an  action,  also  the  par-  of  the  Dartmouth  College  case.  In 
ties,  pleadings,  and  rules  of  relief,  are  this  case  the  court  spoke  of  the  Dart- 
explained  in  Part  IV,  infra.  mouth  College  case  as  follows  (p.  660) : 

2  Dodge  V.  Woolsey,  18  How.  331  "The  doctrine  of  this  case  has  been 
(1855) ;  State  Bank  v.  Knoop,  16  How.  subjected  to  more  or  less  criticism  by 
369  (1853).  See  also  Wilmington  R.  R.  the  courts  and  the  profession,  but  has 
V.  Reid,  13  Wall.  264  (1871);  Dela-  been  reaffirmed  and  applied  so  often 
ware  R.  R.  Tax,  18  Wall.  206  (1873).  as  to  have  become  firmly  established 
See  also  §  562,  infra.  as    a    canon    of    American    jurispru- 

3  Pennsylvania  R.  R.  v.  Miller,  132  dence."  The  statute  authorizing  a 
U.  S.  75  (1889).  Where  by  an  amend-  corporation  to  amend  its  articles  with- 
ment  an  insurance  charter  is  changed  out  changing  substantially  its  pur- 
into  a  banking  charter,  an  exemption  poses  does  not  authorize  a  gas  and 
from  taxation  may  be  lost  thereby  by  power  company  to  change  itself  into  a 
reason  of  a  constitutional  provision  street  railway  company.  State  v.  Tay- 
enacted  after  the  original  charter  was  lor,  55  Ohio  St.  61  (1896). 

granted    but    before    the    amendment  ^  City  of  Rochester  v.  Rochester,  etc. 

was  granted.     Memphis  City  Bank  v.  Co.,  189  N.  Y.  323  (1907). 
Tennessee,  161  U.  S.  186  (1896).  «  People  v.  Willcox,  207  N.   Y.   86 

^Pearsall   v.    Great   Northern   Ry.,  (1912). 
161    U.    S.    646    (1896).     Mr.   Justice  ^  Williams  v.  Wingo,  177  U.  S.  601, 

Brown's  opinion  in  this  c^se  contains  (1900). 

1396 


CH.   XXVIII.] 


AMENDMENTS   TO    CHARTERS. 


[§§  495,  496. 


impairs  the  validity  of  the  contract.^  Wliere  an  exclusive  grant  for  a 
bridge  by  the  legislature  is  extended,  the  extension  is  not  a  contract, 
being  without  consideration.-  An  amendment  exempting  a  corpora- 
tion from  taxation  may  be  repealed,  there  being  no  consideration  for 
the  contract.^  After  a  foreclosure  sale  the  legislature  cannot  pass  a 
law  compelling  the  purchaser  to  pay  certain  of  the  old  debts,  even  though 
the  purchaser  is  a  railroad  corporation  which  was  organized  under  a 
special  charter  for  the  purpose  of  making  such  purchase."*  A  statute 
cannot  turn  over  the  property  of  an  educational  institution  to  another 
educational  institution.^ 

§§  49.5,  496.  Charter  as  a  contract  between  the  state  and  the  stock- 
holders. —  As  between  the  state  and  the  stockholders,  also,  the  cor- 
porate charter  is  a  contract  protected  by  the  United  States  constitution.^ 
In  consequence  thereof  the  state  cannot  materially  amend  the  charter, 
except  by  the  unanimous  consent  of  the  stockholders,  unless  the  power 


1  Grand  Trunk,  etc.  Ry.  v.  Bend, 
227  U.  S.  544  (1913).  Pike's  Peak, 
etc.  Co.  V.  Colorado  Springs,  105  Fed. 
Rep.  1  (1900). 

2  Robinson  v.  Lamb,  126  N.  C.  492 
(1900). 

'  Manistee,  etc.  Co.  v.  Commissioner 
of  Raikoads,  118  Mich.  349  (1898). 
An  amendment  which  grants  to  a 
street  railway  company  an  exclusive 
right  to  certain  streets  may  be  amended 
or  repealed,  even  though  it  was  granted 
at  the  session  of  the  legislature  which 
granted  the  original  charter.  Phila- 
delphia, etc.  Ry.'s  Appeal,  102  Pa.  St. 
123  (1883).  See  also  Johnson  v.  Crow, 
87  Pa.  St.  184  (1878) ;  Norwich  Gas, 
etc.  Co.  V.  Norwich,  etc.  Co.,  25  Conn. 
19  (1856). 

*  Woodward  v.  Central,  etc.  Ry.,  180 
Mass.  599  (1902). 

5  Ohio  V.  Neflf,  52  Ohio  St.  375 
(1895).     See  also  §  500,  infra. 

^  "A  charter  of  incorporation 
granted  by  a  state  creates  a  contract 
between  the  state  and  the  corporators 
which  the  state  cannot  violate."  This 
has  been  held  so  often  by  this  court 
that  it  is  a  "work  of  supererogation" 
to  repeat  it.  Wilmington  R.  R.  v. 
Reid,  13  Wall.  264  (1871).  It  "has 
been  the  settled  law  of  this  court  since 
the  decision  in  the  Dartmouth  College 
case."  Delaware  R.  R.  Tax,  18  Wall. 
206  (1873).  To  the  same  effect,  see 
Zabriskie  v.  Hackensack,   etc.    R.  R., 


18  N.  J.  Eq.  178  (1867) ;  Lothrop  v. 
Stedman,  42  Conn.  583  (1875); 
Stevens  v.  Rutland,  etc.  R.  R.,  29  Vt. 
545  (1851).  "An  act  granting  cor- 
porate privileges  to  a  body  of  men  is, 
when  accepted,  a  contract  between  the 
state  and  the  corporators.  ...  It 
is  sustained  by  everything  that  we  are 
bound  to  regard  as  authority,"  —  by 
the  courts,  by  the  opinion  of  the  legal 
profession,  and  by  the  acquiescence  of 
the  people.  Erie,  etc.  R.  R.  v.  Casey, 
26  Pa.  St.  287  (1856),  per  Jeremiah 
Black,  J.  See  also  Sinking  Fund 
Cases,  99  U.  S.  700  (1878).  "That  an 
act  of  incorporation  is  a  contract  be- 
tween the  state  and  the  stockholders 
is  held  for  settled  law  by  the  federal 
courts  and  by  every  state  court  in  the 
Union.  All  the  cases  on  the  subject 
are  saturated  with  this  doctrine.  It 
is  sustained  not  by  a  current  but  by 
a  torrent  of  authorities.  No  judge 
who  has  a  decent  respect  for  the  prin- 
ciple of  stare  decisis  —  that  great  prin- 
ciple which  is  the  sheet-anchor  of  our 
jurisprudence  —  can  deny  that  it  is 
immovably  established."  "If  any- 
thing is  settled  it  is  this  rule  of  con- 
struction that  a  corporation  takes 
nothing  by  its  charter  except  what  it  is 
plainly,  expressly,  and  unequivocally 
granted."  Per  Black,  J.,  Bank  of 
Pennsylvania  v.  Commonwealth,  19 
Pa.  St.  144  (1852). 


1397 


§  497.]  AMENDMENTS   TO    CHARTERS.  [cH.  XXVIII. 

of  amendment  is  expressly  reserved  by  the  state  at  the  time  of  granting 
the  charter.  It  is  this  contract  which  constitutes  the  subject  of  the 
present  chapter. 

§  497.  Charter  amendments  imposed  upon  the  stockholders  — 
Police  power.  —  The  right  of  the  legislature  to  amend  a  charter  against 
the  will  of  the  stockholders  has  been  the  subject  of  much  litigation. 
Such  amendments  are  clearly  divisible  into  two  kinds.  The  first  are 
those  which,  by  their  terms,  are  absolute  and  compulsory,  and  become 
a  part  of  the  charter  irrespective  of  the  action  or  willingness  of  the 
stockholders  to  accept  them.  Such  amendments,  excepting  those 
which  are  made  as  police  regulations,^  are  unconstitutional  and  void,^ 
unless  made  under  a  reserved  power  to  amend.^  Of  such  a  kind  are 
amendments  repealing  an  exemption  of  stockliolders  from  taxation.'* 
The  legislature  cannot  compel  a  turnpike  company  to  build  a  bridge 
beyond  the  turnpike  as  a  condition  of  continuing  to  exercise  its  franchise.^ 
Where  a  foreign  railroad  company  has  extended  its  lines  into  a  state 
under  a  statute,  the  legislature  of  the  latter  state  cannot  afterwards 
require  it  to  become  a  domestic  corporation.  Such  a  statute  impairs 
the  obligation  of  the  contract.^  Stockholders  sued  under  the  Minnesota 
statute  cannot  question  the  amount  of  the  assessment  which  has  been 
levied  by  the  court.  A  statute  to  that  effect  is  not  unconstitutional.^ 
An  amendment  to  a  banking  act  whereby  a  lien  is  given  to  banks  on 
stock  of  its  stockholders  for  debts  due  the  bank  from  them  does  not 
apply  to  stock  already  issued.^  A  state  may  enact  a  statute  giving 
stockholders  the  right  to  examine  the  corporate  books  of  accounting, 
etc.,  and  requiring  such  books  to  be  kept  in  the  state.     Such  a  statute 

1  See  §  900,  infra,  and  cases  in  this  Co.  v.  Ballard,  2  Mete.  (Ky.)  165 
section.  (1859). 

2  Such  as  an  amendment  changing         ^  ggg  §  501^  infra. 

the    route    and    terminus.     Ames    v.  <  Thus,    a    statute   authorizing    the 

Lake    Superior,    etc.   R.  R.,  21  Minn,  taxation  of  stock  which  by   the  cor- 

241  (1875).     A  corporate  charter  right  porate  charter  is  exempt  is  unconsti- 

to  take  a  certain  rate  of  interest  is  a  tutional.     Gordon  v.  Appeal  Tax  Court, 

contract  and  is  protected  against  sub-  3    How.    133    (1845) ;     Farrington    v. 

sequent  legislation.     Hazen   v.   Union  Tennessee,  95  U.  S.  679   (1877).     An 

Bank,    1    Sneed    (Tenn.),    115    (1853).  exemption  from   taxation   which   is   a 

See  also  dictum  in  Philadelphia,  etc.  gift    may    be    repealed.     Philadelphia 

Ry.'s  Appeal,  102  Pa.  St.  123   (1883),  v.  Pennsylvania  Hospital,  134  Pa.  St. 

that    an     amendment     to    a    charter  171  (1890).     See  §  568,  infra. 
which    enlarges    it    without    imposing  ^  g^^te  v.  Lebanon,  etc.  Co.,  61  S.  W. 

any  new  or  additional  burden  upon  it  Rep.  1096  (Tenn.  1900). 
is  a  mere  license  and  may  be  revoked,  ^  Commonwealth    v.     Mobile,     etc. 

citing  Johnson  v.  Crow,  87  Pa.  St.  184  R.  R.,  64  S.  W.  Rep.  451  (Ky.  1901). 
(1878) ;   Christ  Church  v.  Philadelphia  '  Straw,  etc.  Co.  v.  Kilbourne,  etc. 

County,  24  How.  300  (1860).     The  leg-  Co..  80  Minn.  125  (1900). 
islature    may    subsequently    authorize  *  Southern,  etc.  Co.  v.  Fidelity,  etc. 

the  sale  of  the  corporate  franchises,  Co.,  105  Ga.  487  (1898). 
etc.,    to    pay    debts.     Louisville,    etc. 

1398 


CH.  XXVIII.]  AMENDMENTS   TO   CHARTERS.  [§  497. 

is  constitutional.^  A  statute  may  exclude  votes  at  a  stockholders' 
meeting  by  a  person  holding  the  stock  as  trustee,  unless  such  person 
owns  the  stock  or  the  character  of  the  trusteeship  is  disclosed  on  the 
certificate-of-stock  or  transfer  books.- 

The  New  Jersey  statute  prohibiting  suits  at  law  to  enforce  the  statu- 
tory liability  of  stockholders  in  foreign  corporations,  and  prescribing 
that  the  remedy  shall  be  in  equity  only,  is  unconstitutional  so  far  as 
liabilities  existing  at  the  time  of  the  passage  of  the  statute  are  concerned.^ 
Where,  by  statute,  a  statutory  liability  may  be  enforced  by  any  creditor 
in  a  separate  action  at  law  against  any  stockholder,  the  statute  cannot 
be  changed  so  that  the  remedy  is  a  suit  in  behalf  of  all  creditors  against 
all  the  stockholders,  so  far  as  existing  creditors  are  concerned.*  The 
legislature  may  authorize  the  statutory  liability  of  stockholders  to  be 
enforced  by  a  receiver,  even  in  corporations  which  have  passed  into  a 
receiver's  hands  prior  to  the  enactment  of  the  statute.^  But  where, 
by  statute,  every  creditor  has  the  right  to  bring  suit  to  enforce  the  stock- 
holders' liability,  a  statute  taking  away  this  right  and  giving  it  to  a  re- 
ceiver is  unconstitutional.^  So,  also,  a  statute  passed  subsequently 
to  the  granting  of  a  charter,  and  increasing  the  liability  of  a  stockholder 
on  his  stock  for  the  debts  already  incurred,  is  unconstitutional  and 
void  unless  the  legislature  has  reserved  the  right  to  alter  or  amend  the 
charter."     Under  such  a  reservation  the  statute  is  legal  and  binding, 

1  Venner  v.  Chicago,  etc.    Ry.,  246  solve  and  appoint  a  liquidator.     State 

111.  170  (1910).  V.    People's,    etc.    Co.,    126    La.    548 

-  Coolbaugh  v.  Herman,  221  Pa.  St.  (1910). 
496  (1908).  6  Woodworth  v.  Bowles,  61  Kan.  569 

3  Western,  etc.  Bank  v.  Reckless,  96  (1900).     See  §  218,  supra. 
Fed.  Rep.  70  (1899).  ^  It  certainly  is  as  regards  corporate 

''  Myers   v.    Knickerbocker   T.    Co.,  debts     already    incurred.       Common- 

139  Fed.  Rep.  Ill  (1905),  involving  a  wealth  v.  Cochituate  Bank,  85   Mass. 

Mar>-land  statute,   the  court  refusing  42  (1861) ;    Wheeler  v.  Frontier  Bank, 

to  follow  Miners',  etc.  Bank  I'.  Snyder,  23    Me.    308    (1843).     And    has    been 

100  Md.   57    (1904).     The  legislature  held  to  be  so  as  regards  future  cor- 

may  make  a  suit  in  equity  the  sole  porate  debts.     Ireland  v.  Palestine,  etc. 

remedy   to   enforce    the    stockholders'  Co.,  19  Ohio  St.  369   (1869).     Contra, 

subscription  liability.     Bettendorf,  etc.  Stanley  v.  Stanley,  26  Me.  191  (1846) ; 

Co.  V.  Field,  114  Md.  487  (1911).  Coffin   v.    Rich,   45   Me.    507    (1858); 

^  Persons  v.  Gardner,  42  N.  Y.  App.  Shufeldt  v.  Carver,  8  lU.  App.  545 
Div.  490  (1899).  A  statute  allowing  (1881);  Fogg  v.  SidweU,  8  111.  App. 
a  receiver  to  collect  the  statutory  lia-  551  (1881);  Child  v.  Coffin,  17  Mass. 
bility  of  stockholders  is  constitutional,  64  (1820),  dictum;  Gray  v.  Coffin,  63 
even  as  to  existing  corporations.  Mass.  192,  200  (1852) ;  Hathorn  v. 
Henley  v.  Myers,  215  U.  S.  373  (1910).  Calef,  53  Me.  471  (1866).  See  Weiden- 
A  statutory  provision  that  on  the  for-  ger  v.  Spruance,  101  111.  278  (1881). 
feiture  of  a  charter  of  a  corporation,  And  it  is  said  that  a  stockholder  may 
a  liquidator  appointed  by  the  governor  restrain  by  a  proper  proceeding  the 
shall  wind  up  its  affairs,  takes  preced-  acceptance  by  the  corporation  of  an 
ence  over  a  provision  in  a  special  unconditional  amendment  to  the  char- 
charter  that  the  stockholders  may  dis-  ter    by    which    the    liability    of    the 

1399 


§497. 


AMENDMENTS   TO    CHARTERS. 


CH.  XXVIII. 


although  there  are  limits  even  to  this  reserved  power,  as  will  be  shown 
hereafter.^  A  statute  may  provide  that  stockholders  shall  not  be  re- 
lieved from  a  statutory  liability  by  a  sale  of  their  stock  until  such  sale 
shall  have  been  recorded  with  the  secretary  of  state  by  an  officer  of 
the  company.^  Under  the  reserved  power  the  legislature  may  consoli- 
date several  beneficial  and  scientific  corporations,  especially  where 
the  corporation  objecting  practically  controls  the  others.  The  statute 
to  that  effect  need  not  be  submitted  to  the  stockholders  for  acceptance, 
but  is  mandatory.^  A  statute  which  authorizes  an  additional  assess- 
ment upon  existing  paid-up  stock  is  unconstitutional.^  A  statutory 
liability  may  be  applied  to  existing  corporations  if  they  continue  to  do 
business.^  A  statute  authorizing  corporations  to  sell  all  their  property 
on  a  certain  vote  of  the  stockholders  applies  to  corporations  existing 

any  alteration  or  amendment  of  a 
charter  which  will  not  defeat  or  sub- 
stantially impair  the  object  of  the 
grant,  or  any  rights  vested  under  it, 
and  which  the  legislature  may  deem 
necessary  to  promote  the  original 
purpose  contemplated  by  its  charter 
or  articles  of  association,  or  to  protect 
the  rights  of  the  public."  Under  its 
reserved  power  to  amend,  the  legis- 
lature may  change  the  mode  of  elect- 
ing the  trustees  of  a  non-stock 
corporation  and  may  authorize  a  con- 
solidation with  another  corporation. 
McKee  v.  Chautauqua  Assembly,  124 
Fed.  Rep.  808  (1903) ;  aff'd,  130  Fed. 
Rep.  536.  In  California  a  municipal 
corporation  known  as  an  agricultural 
district  association,  owning  property 
controlled  by  the  public,  cannot  by 
statute  be  authorized  to  turn  itself 
into  a  stock  corporation,  inasmuch  as 
the  constitution  of  the  state  forbids  the 
legislature  making  any  gift  to  any 
corporation.  Sixth  Dist.,  etc.  Ass'n 
V.  Wright,  154  Cal.  119  (1908). 

^  Enterprise,  etc.  Co.  v.  Moffitt,  58 
Neb.  642  (1899). 

^  Gamewell,  etc.  Co.  v.  Fire,  etc.  Co., 
116  Ky.  759  (1903).  A  statute  requir- 
ing corporations  to  file  certificates 
stating  the  amount  of  capital  stock 
paid  in  applies  not  ordy  to  subsequent 
corporations,  but  also  to  pre-existing 
corporations,  as  regards  payments 
made  after  the  statute  was  enacted. 
Bay  State  Gas  Co.  v.  State,  4  Pen. 
(Del.)  497  (1904). 


stockholders  is  increased.  Owen  v. 
Purdy,  12  Ohio  St.  73  (1861);  Fry  v. 
Lexington,  etc.  R.  R.,  2  Mete.  (Ky.) 
314  (1859).  Cf.  Bailey  v.  HoUister, 
26  N.  Y.  112  (1862);  Thompson  v. 
Guion,  5  Jones,  Eq.  (N.  C.)  113 
(1859) ;  Mowrey  v.  Indianapolis,  etc. 
R.  R.,  4  Biss.  78  (1866) ;  s.  c,  17  Fed. 
Cas.  930 ;  Lauman  v.  Lebanon  Valley 
R.  R.,  30  Pa.  St.  42  (1858) ;  Hamilton, 
etc.  Ins.  Co.  v.  Hobart,  68  Mass.  543 
(1854) ;  Gardner  v.  Hamilton  Mut. 
Ins.  Co.,  33  N.  Y.  421  (1865).  Where 
the  incident  of  individual  liability 
was  repealed  by  an  amendment  to  the 
state  (Missouri)  constitution  after 
the  debt  accrued,  but  before  the  in- 
crease of  stock  was  issued,  the  holders 
of  the  new  stock  were  held  not  liable 
under  the  former  constitution.  Ochil- 
tree V.  Railroad  Co.,  21  Wall.  249 
(1874).  A  statute  imposing  a  double 
liability  on  stockholders  in  banks  will 
be  construed  as  applying  only  to  debts 
thereafter  incurred.  Smathers  v. 
Western,  etc.  Bank,  135  N.  C.  410 
(1904).  A  statute  rendering  directors 
liable  may  apply  to  rent  becoming  due 
thereafter  on  a  lease  made  before  the 
passage  of  such  statute.  Steiffel  v. 
Tolhurst,  67  N.  Y.  App.  Div.  521 
(1902). 

1  See  §  501,  infra. 

2  Henley  v.  Myers,  215  U.  S.  373 
(1910). 

^  McKee  v.  Chautauqua  Assembly, 
130  Fed.  Rep.  536  (1904),  the  court 
saying:  "That  the  reserved  power 
authorizes    the    legislature    to    make 


1400 


CH.   XXVIII.] 


AMENDMENTS   TO    CHARTERS. 


[§  497. 


at  the  time  of  the  enactment  of  the  statute,  the  legislatm-e  having  the 
reserved  right  to  alter,  amend  or  repeal  charters.^ 

A  statute  releasing  stockholders  from  paying  one  half  of  the  par 
value  of  the  stock  and  declaring  the  stock  paid-up,  although  but  fifty 
per  cent,  had  been  paid  thereon,  is  unconstitutional  as  regards  creditors 
existing  at  the  time  such  statute  was  enacted.-  A  statute  imposing 
additional  liability  upon  the  stockholders  cannot  be  repealed  so  as 
to  affect  those  who  were  corporate  creditors  previously  to  the  repeal.^ 
But,  whenever  the  statute  imposing  the  liability  is  penal  in  its  nature, 
a  repeal  of  it,  even  so  as  to  affect  existing  debts,  is  constitutional  at  any 
time  before  the  corporate  creditor  obtains  judgment  on  his  claim."^ 

An  important  exception  to  the  general  rules  stated  above  exists  in 
regard  to  amendments  under  the  police  power  of  the  state.  The  state 
may  amend  the  charter  of  a  railroad  corporation  by  reducing  its  traffic 
charges,  requiring  it  to  build  fences,  and  in  various  other  ways  for  the 
protection  of  the  public.^     An  amendment  to  a  charter  forbidding  any 


1  Germer  v.  Triple-State,  etc.  Co.,  60 
W.  Va.  143  (1906).  A  statute  requir- 
ing stock  ledgers  to  be  kept  open  for 
the  examination  of  stockholders  ap- 
plies to  pre-existing  as  well  as  sub- 
sequently organized  corporations. 
Bay  State  Gas  Co.  v.  State,  4  Pen. 
(Del.)  238  (1904). 

2  Williams  v.  Watters,  97  Md.  113 
(1903). 

3  Hawthorne  v.  Calef,  2  Wall.  10 
(1864) ;  Conant  v.  Van  Shaick,  24 
Barb.  87  (18.57) ;  Norris  v.  Wrenschall, 
34  Md.  492  (1871);  Provident  Sav. 
Inst.  V.  Jackson  Place,  etc.  Co.,  52  Mo. 
5.52  (1873) ;  St.  Louis,  etc.  Co.  v.  Har- 
bine,  2  Mo.  App.  134  (1876) ;  Central, 
etc.  Assoc.  V.  Alabama,  etc.  Ins.  Co., 
70  Ala.  120  (1881) ;  Woodruff  v.  Trap- 
naU,  10  How.  190  (1850) ;  McDonnell 
V.  Alabama,  etc.  Ins.  Co.,  85  Ala.  401 
(1888).  See  also  Story  v.  Furman,  25 
N.  Y.  214  (1862) ;  Rochester  v.  Barnes, 
26  Barb.  657  (1858);  Sinking  Fund 
Cases,  99  U.  S.  700  (1878).  Cf.  Jer- 
man  v.  Benton,  79  Mo.  148  (1883); 
Woodhouse  v.  Commonwealth  Ins.  Co., 
54  Pa.  St.  307  (1867) ;  Ite  State  Ins. 
Co.,  14  Fed.  Rep.  28  (1882) ;  Palfrey 
V.  Paulding,  7  La.  Ann.  363  (1852); 
Re  Telegraph  Constr.  Co.,  L.  R.  10 
Eq.  384  (1870) ;  Cooper  v.  Frederick, 
9  Ala.  (N.  S.)  738  (1846) ;  Re  Credit 
Foncier,  L.  R.  11  Eq.  356  (1871); 
Coffin  V.  Rich,  45  Me.  507  (1858).     A 


repeal  of  a  statute  imposing  a  statu- 
tory liability  does  not  affect  a  liability 
already  existing.  Ramsden  v.  Knowles, 
151  Fed.  Rep.  718  (1906).  A  statute 
repealing  a  personal  liability  of  stock- 
holders is  unconstitutional  as  to  ex- 
isting creditors  to  the  extent  only  of 
such  liability,  and  not  as  to  increased 
capital  stock  after  the  repeal.  '  Barton, 
etc.  Bank  v.  Atkins,  72  Vt.  33  (1899). 
Registered  transferees  are  liable  the 
same  as  their  transferrers,  even  though 
before  the  transfer  the  statutory 
liability  was  decreased  by  statute. 
The  liability  to  old  creditors  follows 
the  stock.  National  Com.  Bank  v. 
McDonnell,  92  Ala.  387  (1890).  A 
statute  giving  the  corporation  a  sum- 
mary remedy  against  a  stockholder 
for  non-payment  of  calls  may  be 
repealed.  Ex  -parte  Northeast,  etc.  R. 
R., 37  Ala. 679  (1861).  203  Fed.  Rep. 82. 

*  Breitung  v.  Lindauer,  37  Mich. 
217  (1877) ;  Union  Iron  Co.  v.  Pierce, 
4  Biss.  327  (1869);  s.  c,  24  Fed. 
Cas.  583 ;  Gregory  v.  German  Bank, 
3  Colo.  332  (1877);  Cooley,  Const. 
Lim.  (.5th  ed.),  pp.  444,  474.  See 
§  223,  supra. 

5  See  §§  900,  902,  infra.  The  court 
in  Pearsall  v.  Great  Northern  Ry.,  161 
U.  S.  646,  666  (1896),  in  speaking  of 
the  police  power,  said  :  "So  important 
is  this  power,  and  so  necessary  to  the 
public  safety  and  health,  that  it  can- 


1401 


§  497.]  AMENDMENTS   TO    CHARTERS.  [cH.  XXVIir. 

consolidation  with  a  competing  line  is  a  legitimate  exercise  of  the  police 
power  of  the  state,  and  it  is  immaterial  whether  the  power  to  amend 
was  reserved  or  not.^  A  compulsory  labor  law  applicable  to  corpora- 
tions, firms  and  individuals,  if  a  deprivation  of  property  without  due 
process  of  law,  cannot  be  justified  as  an  amendment  to  a  charter  under 
a  reserved  right  of  the  legislature.-  Even  though  foreign  insurance 
companies  have  been  authorized  to  do  business  in  the  state,  yet  such 
permit  may  be  revoked  by  a  statute  providing  that  any  company  pay- 
ing its  officers  more  than  $50,000  salary  shall  not  do  business  in  the 
state.^  Under  its  reserved  right  to  amend  or  repeal  the  legislature  may 
provide  that  state  banks  shall  contribute  towards  a  guaranty  fund  for 
all  deposits  in  the  state  banks.^  A  provision  in  a  charter  of  a  railroad 
company  that  it  shall  not  be  liable  for  the  death  of  its  employees,  even 
if  caused  by  its  own  negligence,  may  be  repealed  by  the  legislature  under 
its  police  power.^  A  city  may  prohibit  an  omnibus  line  from  putting 
advertisements  on  the  outside  of  its  buses. ^  The  legislature  may  limit 
the  number  of  hours  which  railroad  employees  engaged  in  interstate 
commerce  shall  work.'^  An  act  of  congress,  making  it  a  criminal  offense 
for  a  carrier  engaged  in  interstate  commerce  to  discharge  an  employee 
because  he  belongs  to  a  union,  is  unconstitutional  as  an  arbitrary  and 
unjustifiable  interference  with  liberty  of  contract.^  Private  banking 
without  a  license  of  the  comptroller  of  the  state  may  be  forbidden.^ 
A  statute  may  require  three  brakemen  on  all  trains  having  more  than 
twenty-five  cars.^''  The  legislature  may  validate  contracts  made  in 
the  state  by  foreign  corporations  in  violation  of  the  statute."  The 
legislature  may  prohibit  the  keeping  of  offices  for  dealing  in  stocks  for 
future  delivery  unless  recorded  and  a  tax  paid  thereon.^"'    Since  the 

not  be  bargained  away  by  the  legis-         '  State  v.   Vandiver,   222  Mo.   206 

lature;    and   hence  it  has   been  held  (1909). 

that     charters     for     purposes     incon-         *  Noble  State  Bank  v.  Haskell,  219 

sistent    with    a    due    regard    for    the  U.  S.  104  (1911). 

public  health  or  public  morals  may  be  ^  Texas,   etc.    R.  R.   v.  Miller,    221 

abrogated  in  the  interests  of  a  more  U.  S.  408  (1911).     See  228  U.  S.  559. 

enlightened  public  opinion."     The  de-  ^  Fifth  Ave.  Coach  Co.  v.  New  York, 

('ision  of  the  Virginia  Courts  forfeit-  221  U.  S.  467  (1911). 

ing  the  charter  of  a  club  because  it  ^  Baltimore,  etc.  R.  R.  v.  Int.  Com. 

violated  the  liquor  laws  is  valid,  even  Comm.,  221  U.  S.  612  (1911). 

though   the   liquor   laws   were    passed  ^  Adair  v.  United  States,  208  U.  S. 

after  the  charter  had  been  granted  to  161  (1908). 

the  club.     CosmopoUtan  Club  v.  Vir-  »  Engel  v.  O'Malley,  219  U.  S.  128 

ginia,  208  U.  S.  378  (1907).  (1911). 

1  Louisville,  etc.  R.  R.  v.  Kentucky,  i"  Chicago,  etc.  Ry.  v.  Arkansas,  219 
161  U.  S.  677  (1896).     To  same  effect,  U.  S.  453  (1911). 

Pearsall   v.  Great  Northern    Ry.,   161  "  West    Side    R.  R.    v.    Pittsburgh 

U.  S.  646  (1896).  Cons.  Co.,  219  U.  S.  92  (1911). 

2  Ives  r.  So.  Buffalo  Ry.,  201  N.  Y.  i^  Brodnax  v.   Missouri,   219   U.   S. 
271,  290,  319  (1911).  285  (1911). 

1402 


CH.   XXVIII.] 


AMENDMENTS  TO   CHARTERS. 


[§  497. 


act  of  congress  requiring  railroads  to  collect  the  same  compensation 
from  one  party  as  from  another,  a  contract,  by  which  a  through  pass  is 
given  by  a  railroad  in  payment  for  injuries  received,  ceases,  even  though 
it. was  made  before  the  act  of  congress  was  enacted.^  A  state  has  no 
right  to  prescribe  the  compensation  of  a  surety  company  giving  bonds.^ 
A  state  may  prescribe  that  a  telephone  operator  in  a  block  signal  tower 
on  a  railroad  shall  not  be  on  duty  more  than  eight  hours  in  a  day  except 
in  extraordinary  emergencies.^  A  state  may  prohibit  corporations 
when  sued  by  their  servants  for  negligence  from  setting  up  the  defense 
that  the  negligence  was  that  of  a  co-emplo}'ee.^  The  legislature  may 
increase  the  fee  to  be  paid  to  the  state  on  increased  capital  stock  where 
subsequent  increases  are  made.^  It  is  constitutional  for  the  legislature  to 
require  coal-mining  companies  to  weigh  coal  before  it  is  screened,  espe- 
cially where  the  legislature  has  reserved  the  power  to  amend  charters.® 
The  action  of  a  state  railroad  commission  in  ordering  a  railroad  in  the 
state  to  make  a  reasonable  connection  with  another  railroad  by  running 
an  additional  train,  is  not  a  denial  of  due  process  of  law  or  a  deprivation 
of  the  equal  protection  of  the  law,  or  a  taking  of  property  without  com- 


'  Louisville,  etc.  R.  R.  v.  Mottlev, 
219  U.  S.  467  (1911).  A  statute  that 
railroads  should  not  give  free  passes 
or  tickets  does  not  invalidate  provis- 
ions in  a  pre-existing  railroad  lease 
that  the  lessee  would  transport  the 
stockholders  of  the  lessor  to  and  from 
their  annual  meeting  without  charge. 
Emerson  v.  Boston,  etc.  R.  R.,  75  N.  H. 
427  (1910).  A  contract  of  a  rail- 
road made  prior  to  the  Interstate  Com- 
merce Act  by  which  a  railroad  agrees 
to  issue  a  pass  in  consideration  of  a 
grant  of  land  for  the  railroad  right  of 
way  is  not  invalidated  by  the  Inter- 
state Commerce  Act.  Curry  v.  Kan- 
sas, etc.  Ry.,  58  Kan.  6  (1897).  A 
railroad  cannot  give  railroad  service 
in  settlement  of  a  claim  for  damages 
for  loss  of  property  in  transit,  but 
may  deduct  the  freight  on  such  part 
of  the  property  as  is  lost  in  transit, 
and  it  may  be  for  the  jury  to  decide 
whether  this  was  a  mere  subterfuge. 
Atchison,  etc.  Ry.  v.  United  States, 
170  Fed.  Rep.  250  (1909),  rev'g 
163  Fed.  Rep.  111.  The  contract  of  a 
person  that  he  shall  receive  a  salary  and 
an  annual  pass  from  a  raih'oad  for 
preventing  depredations  on  the  rail- 
road property  is  not  rendered  illegal 
by  a  subsequent  constitutional  prohi- 


bition against  free  passes,  such  a  pass 
not  being  a  free  pass.  Dempsey  v. 
New  York  Central,  etc.  R.  R.,  146 
N.  Y.  290  (1895).  Under  the  Colo- 
rado statute  against  discriminations  a 
railroad  cannot  give  a  coal  company  a 
rate  of  sLxty  cents  a  ton  for  five  years 
while  charging  other  mine  owners  $1 
a  ton,  even  though  the  reduction  is  in 
settlement  of  an  unliquidated  claim  for 
negligently  setting  a  mine  on  fire. 
Union  Pacific  Ry.  t'.  Goodridge,  149 
U.  S.  680  (1893).  The  Nebraska 
"Anti-Pass  Law"  applies  to  a  pass 
given  by  a  railroad  to  a  physician  for 
his  professional  services  in  addition 
to  a  fixed  sum  per  month.  State  v. 
Martyn,  82  Neb.  225  (1908). 

2  American  Surety  Co.  v.  Shellen- 
berger,  183  Fed.  Rep.  636  (1910). 

3  People  V.  Erie  R.  R.,  198  N.  Y. 
369  (1910). 

*  Ozan,  etc.  Co.  v.  Biddie,  87  Ark. 
587  (1908). 

*  Mazaika  v.  Kxauczunas,  223  Pa. 
St.  138  (1911). 

^  A  majority  of  the  court,  however, 
adopted  the  \'iew  that  under  the 
reserved  right  to  amend  charters  the 
legislature  must  do  so  on  terms  that 
are  just  to  the  stockholders.  Wood- 
son V.  State,  69  Ark.  521  (1900). 


1403 


§§  498,  499.]  AMENDMENTS   TO    CHARTERS.  [cH.  XXVIII. 

pensation.^  A  statute,  however,  requiring  corporations  to  pay  their 
employees  once  a  month,  and  giving  the  latter  a  lien  prior  to  all  liens 
excepting  recorded  mortgages,  is  unconstitutional  as  being  a  grant  of 
special  privileges  and  as  denying  the  corporation  the  equal  protection 
of  the  laws,  and  as  depriving  them  of  their  property  without  due  process 
of  law,  and  such  a  statute  interferes  with  the  freedom  to  make  con- 
tracts.- The  supreme  court  of  the  United  States  will  not  reverse  a  de- 
cision of  the  supreme  court  of  Idaho  that  its  constitution  allows  its  legis- 
lature to  compel  a  water  company  to  submit  to  arbitration  the  question 
of  its  rates.^  A  corporation,  whether  foreign  or  domestic,  is  a  "  person  " 
whose  property  cannot  be  taken  without  due  process  of  law.* 

§  498.  Charter  amendments  offered  to  the  stockholders.  —  The  sec- 
ond class  of  amendments  to  a  charter  —  the  amendments  which  occur 
most  frequently  and  give  rise  to  many  difficulties  —  are  those  which 
allow  the  corporate  directors  or  a  majority  of  the  stockholders  in  cor- 
porate meeting  assembled  to  engage  in  a  new  or  different  or  more  ex- 
tensive or  more  contracted  business  than  that  authorized  by  the  original 
and  unamended  charter.  This  is  the  subject  of  the  remainder  of  this 
chapter.  An  amendment  that  has  not  been  acted  upon  may  be  re- 
pealed.^ 

§  499.  Auxiliary  and  incidental  amendments  are  constitutional, 
though  some  of  the  stockholders  dissent.  —  An  amendment  made  to 
a  corporate  charter  is  either  a  material  and  fundamental  change  from 
the  original  plan,  or  it  is  an  auxiliary  and  incidental  change,  consistent 
with  the  carrying  out  of  the  original  plan.^    The  latter  class  of  amend- 

1  Atlantic,  etc.  R.  R.  v.  North  Caro-  '  Murray  v.  PocateUo,  226  U.  S. 
lina,  etc.,  206  U.  S.  1  (1907).                      318  (1912). 

2  Johnson  v.  Goodyear,  etc.  Co.,  127  *  See  §  696,  infra. 

Cal.  4  (1899).  To  same  effect,  State  ^  City  of  Pomona  v.  Sunset  Tel.  & 
V.  Haun,  61  Kan.  146  (1899),  rev'g  Tel.  Co.,  224  U.  S.  330  (1912). 
s.  c,  7  Kan.  App.  509.  A  statute  re-  ^  The  general  principle  of  law  gov- 
quiring  corporations  to  pay  their  em-  erning  this  branch  of  the  subject  is 
ployees  at  least  once  a  month  is  in  well  expressed  in  Woodfork  v.  Union 
violation  of  the  United  States  Con-  Bank,  3  Coldw.  (Tenn.)  488  (1866). 
stitution.  Toledo,  etc.  R.  R.  v.  Long,  "  The  contract  or  charter,  after  accept- 
169  Ind.  316  (1907).  A  state  may  re-  ance,  is  inviolable  between  the  state 
quire  corporations  to  pay  their  em-  and  the  corporation,  as  it  is  also  be- 
ployees  semi-monthly  and  any  contract  tween  the  corporation  and  stockhold- 
to  the  contrary  is  void,  but  on  request  ers.  Neither  the  one  nor  the  other 
from  the  employee  the  corporation  can  disregard  its  obligations  or  alter 
may  pay  at  longer  intervals.  Arkan-  its  essential  franchises  without  the 
sas,  etc.  Co.  v.  State,  94  Ark.  27(1910).  unanimous  concurrence  of  the  stock- 
Under  its  reserved  power  the  legisla-  holders.  ...  If  the  alterations  pro- 
ture  may  compel  railroads  to  pay  their  posed  in  the  charter  of  a  private 
employees  in  cash  semi-monthly.  New  corporation  by  legislative  enactment 
York  Central,  etc.  R.  R.  v.  Williams,  are  merely  auxiliary  and  not  funda- 
199  N.  Y.  108  (1910) .  See  also  mental,  they  may  be  accepted  by  a 
§  900,  infra.  majority  of  the  corporators ;  and  when 

1404 


CH.  XXVIII.] 


AMENDMENTS   TO    CHARTERS. 


499. 


ments  are  constitutional  and  valid.  The  acceptance  of  an  auxiliary 
amendment,  however,  should  be  by  the  stockholders  in  meeting  assem- 
bled instead  of  by  the  board  of  directors.^  But  acceptance  may  arise 
from  user ;  ^  and  hence  it  generally  happens  that  an  incidental  or 
auxiliary  amendment  to  a  charter  is  deemed  to  have  been  accepted  by 
user  and  a  vote  of  acceptance  by  the  directors  or  by  user  alone.^  An 
amendment  may  be  said  to  be  auxiliary  and  incidental  when  it  merely 
grants  new  powers  or  authorizes  new  methods  and  new  plans  for  the 
purpose  of  carrying  out  the  original  plan  and  effecting  the  real  object 
of  that  plan.^  The  individual  motives  and  interests  of  a  stockliolder 
are  disregarded.  Whatever  is  for  the  benefit  of  the  corporation  is 
conclusively  presumed  to  be  for  the  benefit  of  each  stockholder.  A 
change  not  fundamental  to  the  corporation  is  not  fundamental  to  any 


so  assented  to  they  are  binding  on 
the  whole ;  but  it  is  otherwise  .  .  . 
when  the  alterations  are  fundamental, 
radical,  and  vital.  The  acceptance 
must  then  be  unanimous." 

>  Marlborough  Mfg.  Co.  v.  Smith,  2 
Conn.  579  (1818) ;  Brown  v.  Fair- 
mount,  etc.  Co.,  10  Phila.  32  (1873) ; 
Hope  Ins.  Co.  v.  Beckman,  47  Mo.  93 
(1870).  Where  a  charter  may  be 
amended  with  the  written  consent  of 
the  corporation,  a  single  stockholder 
owning  a  minority  of  the  stock  can- 
not object  to  a  change  made  by  the 
directors.  Venner  v.  Chicago  City 
Ry.,  236  111.  349  (1908).  In  England 
it  is  held  that  a  majority  of  the  share- 
holders in  meeting  assembled  may 
control  even  the  discretion  of  the 
directors,  except  as  restrained  by  the 
charter,  and  hence  the  court  refused 
to  stay  a  suit  instituted  by  one  of  the 
directors  in  the  name  of  the  company 
where  it  appeared  that  a  majority  of 
the  shareholders  favored  such  suit. 
Marshall's,  etc.  Co.  v.  Manning,  etc. 
Co.,  [1909]  1  Ch.  267.  Where,  how- 
ever, the  act  is  in  violation  of  the 
charter  it  is  not  legal.  Salmon  v. 
Quin  and  Axtens,  Ltd.,  100  L.  T.  Rep. 
161  (1908) ;  aff'd,  100  L.  T.  Rep.  820, 
the  court  intimating  that  the  by-laws 
originally  adopted,  in  accordance  with 
the  English  statute,  really  constitute 
a  contract  between  the  shareholders 
and  the  company  and  also  between 
each  individual  shareholder  and  every 
other  shareholder.  The  court  ap- 
proved, however,  the  decision  in  Auto- 


matic, etc.  Co.  V.  Cunninghame,  [1906] 
2  Ch.  34,  holding  that  "even  a  reso- 
lution of  a  numerical  majority  at  a 
general  meeting  of  the  company  can- 
not impose  its  will  upon  the  directors 
when  the  articles  have  confided  to 
them  the  control  of  the  company's 
affairs.  The  directors  are  not  ser- 
vants to  obey  directions  given  by  the 
shareholders  as  individuals ;  they  are 
not  agents  appointed  by  and  bound  to 
serve  the  shareholders  as  their  prin- 
cipals. They  are  persons  who  may  by 
the  regulations  be  intrusted  with  the 
control  of  the  business,  and  if  so  in- 
trusted they  can  be  dispossessed  from 
that  control  only  by  the  statutory 
majority,  which  can  alter  the  articles. 
Directors  are  not,  I  think,  bound  to 
comply  with  the  directions  even  of  all 
the  corporators  acting  as  individuals." 

2  See  §  503,  infra,  and  §  2a,  supra. 

3  Illinois,  etc.  R.  R.  v.  Zimmer,  20 
111.  658  (1858).  See  also  Blatchford 
V.  Ross,  54  Barb.  42  (1869) ;  Re  Excel- 
sior F.  Ins.  Co.,  16  Abb.  Pr.  8,  14 
(1862).  A  corporation  existing  before 
an  amendment  to  the  state  constitu- 
tion may  by  its  acts  render  itself  sub- 
ject to  such  constitution  and  laws 
subsequently  enacted.  South,  etc.  R. 
Co.  V.  Gray,  160  Ala.  497  (1909). 
In  Venner  v.  Atchison,  etc.  R.  R., 
28  Fed.  Rep.  581  (1886),  it  was  held 
that  the  directors  are  the  proper 
persons  to  accept  an  amendment 
under  the  circumstances  of  that  case. 

*  Quoted  and  approved  in  Perkins 
V.  Coffin,  84  Conn.  275  (1911). 


1405 


§  499.] 


AMENDMENTS    TO    CHARTERS. 


[CH. 


stockholder.^  A  statute  may  authorize  an  existing  mutual  insurance 
corporation  to  change  its  organization  so  as  to  become  a  premium  in- 
surance corporation.-  Under  its  reserved  power  to  amend  or  repeal 
a  charter,  the  legislature  may  authorize  the  corporation  on  a  two-thirds 
vote  of  its  stockholders  to  issue  preferred  stock.^  The  legislature  may 
authorize  a  railroad  corporation  to  consolidate  with  other  companies, 
on  a  vote  of  a  majority  of  its  stock,  provision  being  made  for  assessing 
and  paying  the  value  of  dissenting  stock.  It  is  immaterial  that  the 
state  had  not  reserved  the  power  to  amend  the  charter."^ 


1  Delaware  R.  R.  v.  Tharp,  1  Houst. 
(Del.)  149  (1855);  Irvin  v.  Turnpike 
Co.,  2  Pen.  &  W.  (Pa.)  466  (1831); 
Illinois  River  R.  R.  v.  Zimmer,  20  111. 
654  (1858) ;  Sprague  v.  Illinois,  etc. 
R.  R.,  19  111.  174  (1857) ;  Banet  v. 
Alton,  etc.  R.  R.,  13  111.  504  (1851). 
Cf.  Hester  v.  Memphis,  etc.  R.  R., 
32  Miss.  378  (1856) ;  Witter  v.  Missis- 
sippi, etc.  R.  R.,  20  Ark.  463  (1859) ; 
Fulton  County  v.  Mississippi,  etc. 
R.  R.,  21  111.  338  (1859).  The 
cases  of  Zabriskie  v.  Hackensaek,  etc. 
R.  R.,  18  N.  J.  Eq.  178  (1867) ;  Day- 
ton, etc.  R.  R.  V.  Hatch,  1  Disney 
(Ohio),  84  (1855),  and  Central  R.  R. 
V.  Collins,  40  Ga.  617  (1869),  repudiate 
the  distinction  between  the  material 
and  immaterial  changes.  All  changes 
are  held  to  be  equally  material. 

2  Wright  V.  Minnesota,  etc.  Co.,  193 
U.  S.  657  (1904). 

^  Hinckley  v.  Schwarzschild,  etc. 
Co.,  107  N.  Y.  App.  Div.  470  (1905). 
Even  though  the  statute  under  which 
a  corporation  is  organized  authorizes 
the  issue  of  preferred  stock  only  on 
unanimous  consent,  yet  such  statute 
may  be  amended  after  the  corporation 
has  been  formed  authorizing  such 
issue  on  a  two-thirds  vote  of  the 
stockholders.  Hinckley  v.  Schwarz- 
schild, etc.  Co.,  45  N.  Y.  Misc.  Rep.  176 
(1904).  Everhart  v.  West  Chester, 
etc.  R.  R.,  28  Pa.  St.  339  (1857)  ; 
Rutland,  etc.  R.  R.  v.  Thrall,  35  Vt. 
536  (1863) ;  Curry  v.  Scott,  54  Pa.  St. 
270  (1867).  As  against  the  dissent  of 
a  single  stockholder  a  corporation 
cannot  issue  preferred  stock  to  take 
up  the  old  outstanding  stock,  even 
though  a  new  statute  authorized  such 
proceeding,  it  appearing  that  the  new 
statute    had    not    been    unanimously 


accepted  by  the  stockholders.  Einstein 
V.  Raritan,  etc.  Mills,  74  N.  J.  Eq.  624 
(1908). 

^  Spencer  v.  Seaboard,  etc.  Co.,  137 
N.  C.  107  (1904).  A  minority  stock- 
holder in  a  street  railway  cannot 
cause  to  be  set  aside  a  sale  of  its 
property  to  another  company  for  stock 
of  the  latter,  where  such  sale  is  author- 
ized by  statute,  even  though  the 
statute  was  passed  subsequently  to 
the  incorporation  of  the  street  rail- 
way, and  even  though  the  purchasing 
company  had  issued  bonds  and  stocks 
to  the  amount  of  $90,000,000  in  pay- 
ment for  street  railways,  the  capital 
stock  and  bonded  indebtedness  of 
which  was  only  $33,255,000,  and  even 
though  in  making  the  sale  the  ma- 
jority stockholders  voted  that  the 
stock  was  worth  $170  a  share,  and 
that  that  price  should  be  paid  to 
minority  stockholders,  and  the  vendee 
company  thereupon  agreed  to  pay  the 
same.  The  remedy  of  the  dissenting 
stockholder,  if  any,  is  at  law  for  the 
market  value  of  the  stock  or  a  pro- 
portionate share  of  the  proceeds. 
Tanner  v.  Lindell  Ry.,  180  Mo.  1 
(1904).  Under  its  reserved  power, 
the  legislature  may  authorize  a  con- 
solidation of  railroads,  especially 
where  they  are  in  a  failing  condition. 
A  majority  of  the  stockholders  may 
accept  such  an  amendment.  Hinds 
County  V.  Natchez,  etc.  R.  R.,  85  Miss. 
599  (1905).  A  corporation  may  amend 
its  certificate  of  incorporation  by  in- 
serting power  to  consolidate  as 
granted  by  a  statute  passed  after  the 
original  certificate  of  incorporation 
had  been  filed.  A  stockholder  who 
became  such  after  the  charter  has 
been  amended,  authorizing  a  consoli- 


1406 


CH.  XXVIII.] 


AMENDMENTS   TO   CIL^VRTERS. 


[§  499. 


Whether  an  amendment  materially  changes  the  corporate  plans 
or  not  is  a  question  of  law  for  the  court.^  Accordingly,  each  case  is 
to  be  decided  according  to  the  peculiar  circumstances  of  that  case,^ 
and  no  general  rules  can  be  laid  down  which  will  apply  to  all  cases. 
j\Iany  illustrations  are  given  in  the  notes  below. ^ 

dation,   cannot  complain.     Colgate  v.  (1880) ;    Danbury,   etc.  R.  R.  v.  Wil- 

United  States,  etc.  Co.,  73  N.  J.  Eq.  son,  22  Conn.  435  (1853) ;    eonsolida- 

72  (1907) ;   s.  c,  72  Atl.  Rep.  126.  tions  that  take  the  place  of  part  of 

1  Perkins   v.    Coffin,    84   Conn.    275  the  line  as  laid  out,   Sprague  v.   lUi- 

(1911);   Winter  v.  Muscogee  R.  R.,  11  nois  River  R.  R.,   19  III.   174  (1857); 

Ga.  438  (1852) ;   Witter  v.  Mississippi,  Hanna  v.  Cincinnati,  etc.  R.  R.,  20  Ind. 

etc.  R.  R.,  20  Ark.  463  (1859) ;   Mem-  30  (1863) ;   change  of  corporate  name, 

phis  Branch  R.  R.  v.  Sullivan,  57  Ga.  Bueksport,  etc.  R.  R.  v.  Buck,  68  Me 

240  (1876).     Cf.  Southern,  etc.  R.  R.  81  (1878);  Clark  v.  Monongahela  Nav 


V.  Stevens,  87  Pa.  St.  190  (1878). 

-  Each  case  must  be  left  for  deter- 
mination on  its  own  peculiar  facts. 
Perkins  v.  Coffin,  84  Conn.  275  (1911). 


Co.,  10  Watts  (Pa.),  364  (1840); 
Thomas,  etc.  Co.  v.  Thomas,  165  Fed. 
Rep.  29  (1908);  changing  the  ter- 
minus. Pacific    R.  R.   V.   Renshaw,    18 


3  A  corporation  to  improve  river  Mo.  210  (1852) ;  Ross  v.  Chicago, 
navigation  and  hold  and  purchase  etc.  R.  R.,  77  111.  127,  134  (1875) ; 
manufactories,  may  have  its  charter  reduction  of  capital  stock  and  short- 
amended  so  as  to  enable  it  to  produce  ening  of  the  road,  Troy,  etc.  R.  R.  v. 
water  power  for  light,  heat  and  power  Kerr,  17  Barb.  581  (1854) ;  Joslyu 
purposes,  and  to  sell  the  same,  such  v.  Pacific  Mail  S.  S.  Co.,  12  Abb.  Pr. 
amendment  being  incidental  and  auxil-  (N.  S.)  329  (1872).  Cf.  Oldtown, 
iary,  and  a  dissenting  stockholder  etc.  R.  R.  v.  Veazie,  39  Me.  571(1855) ; 
cannot  enjoin  it.  Perkins  v.  Coffin,  increasing  the  number  of  directors, 
84  Conn.  275  (1911).  Certain  changes  Mower  v.  Staples,  32  Minn.  284  (1884) ; 
in  the  route  of  a  railroad  have  been  or  enlarging  the  capital  stock  and 
held  to  be  immaterial,  Wilson  v.  Wills  extending  the  road,  such  changes  not 
Valley  R.  R.,  33  Ga.  466  (1863);  appearing  on  the  record  to  be  detri- 
Johnson  v.  Pensacola,  etc.  R.  R.,  9  mental,  Peoria,  etc.  R.  R.  v.  Elting,  17 
Fla.  299  (1860) ;  Peoria,  etc.  R.  R.  111.  429  (1856) ;  Rice  v.  Rock  Island, 
V.  Elting,  17  111.  429  (1856) ;  Banet  etc.  R.  R.,  21  111.  93  (1859) ;  and  minor 
V.  Alton,  etc.  R.  R.,  13  111.  504  (1851) ;  changes  in  general,  Union  Agric,  etc. 
Chattanooga,  etc.  R.  R.  v.  Warthen,  Assoc,  v.  Mill,  31  Iowa,  95  (1870) ; 
98  Ga.  599  (1896) ;  building  branch  also  extensive  changes,  Illinois  River 
lines,  Peoria,  etc.  R.  R.  v.  Preston,  R.  R.  v.  Zimmer,  20  111.  654  (1858) ; 
35  Iowa,  115  (1872);  Greenville,  such  as  extending  the  road.  Cross  v. 
etc.  R.  R.  vJ  Coleman,  5  Rich.  L.  Peach  Bottom  Ry.,  90  Pa.  St.  392 
(S.  C.)  118  (1851);  issuing  more  com-  (1879);  or  purchasing  another  rail- 
mon  stock,  Covington  v.  Covington,  road,  Venner  v.  Atchison,  etc.  R.  R.,  28 
etc.  Bridge  Co.,  10  Bush  (Ky.),  69  Fed.  Rep.  581  (1886).  An  amend- 
(1873) ;  Buffalo,  etc.  R.  R.  v.  Dudley,  ment  increasing  the  capital  stock  and 
14  N.  Y.  336  (18.56).  Cf.  Hughes  v.  authorizing  a  branch  road  does  not 
Antietam  Mfg.  Co.,  34  Md.  316  (1870) ;  re'sase  subscribers.  Schenectady,  etc. 
extending  the  time  for  completing  the  Co.  v.  Thatcher,  11  N.  Y.  102  (1854). 
road.  Agricultural  Branch  R.  R.  v.  See  also  Gray  v.  Coffin,  63  Mass.  192 
Winchester,  95  Mass.  29  (1866) ;  (1852) ;  Child  v.  Coffin,  17  Mass.  64 
Poughkeepsie,  etc.  Co.  v.  Griffin,  24  (1820) ;  Longley  v.  Little,  26  Me.  162 
N.  Y.  150  (1861);  Bailey  y.  Hollister,  (1846);  Payson  v.  Withers,  5  Biss. 
26  N.  Y.  112  (1862),  power  to  amend  269  (1873);  s.  c,  19  Fed.  Cas.  29; 
being  reserved;  Taggart  v.  Western  Joy  v.  Jackson,  etc.  Co.,  11  Mich.  155 
Md.  R.  R.,  24  Md.  563  (1866) ;  Union  (1863) ;  Lincoln,  etc.  Bank  v.  Rich- 
Hotel   Co.   V.   Hersee,   79   N.   Y.   454  ardson,  1  Me.  79  (1820);    GreenviUe, 

1407 


§500.] 


AMENDMENTS   TO    CHARTERS. 


[CH.  xxviir. 


§  500.  Material  amendments  offered  to  the  stockholders  can  be 
accepted  only  by  a  unanimous  vote.  —  On  the  other  hand,  a  material 
and  fundamental  change  in  the  charter  by  an  amendment  to  that 
charter  is  an  unconstitutional  violation  of  the  contract  rights  of  any 
stockholder  who  does  not  assent  to  such  an  amendment.^  Consider- 
able difficulty  is  experienced  in  determining  what  is  a  material  and 
fundamental  change.  Each  case  is  decided  upon  its  own  facts,  and 
consequently  the  best  light  as  to  the  spirit  of  what  constitutes  a  material 
change  is  obtained  by  a  study  of  the  facts  of  cases  which  have  been 
decided.^ 


etc.  R.  R.  V.  Johnson,  8  Baxt.  (Tenn.)  nary,  78  Md.  193  (1893).  An  amend- 
332  (1874) ;  Fall  River  Iron  Works  ment  to  the  charter  may  prescribe 
V.  Old  Colony  R.  R.,  87  Mass.  221  that  unnecessary  corporate  real  estate 
(1862).  An  increase  of  the  capital  shall  be  divided  among  or  partitioned 
stock  as  allowed  by  the  charter  does  between  the  stockholders.  Merchant 
not  release  subscribers.  Port  Ed-  v.  Western  Land  Assoc,  56  Minn.  327 
wards,  etc.  Ry.  v.  Arpin,  80  Wis.  214  (1894).  The  legislature  may  author- 
(1891).  An  amendment  may  author-  ize  a  water- works  company  to  sell  its 
ize  the  directors  to  change  the  loca-  property  to  a  municipality.  Peabody 
tion  of  toll  gates.  Bardstown,  etc.  Co.  v.  Westerly  Water-works,  20  R.  I.  176 
V.  Rodman,  13  S.  W.  Rep.  917  (Ky.  (1897).  Where  a  statute  provides 
1890).  In  Atchison,  etc.  R.  R.  v.  that  the  charter  may  be  amended  in 
Fletcher,  35  Kan.  236  (1886),  an  certain  respects  upon  the  directors  or 
amendment  authorizing  a  corporation  a  majority  of  them  making  and  sign- 
to  buy  the  stock  of  another  railroad  ing  a  certificate,  such  making  and 
corporation  and  to  guarantee  its  signing  need  not  be  at  a  meeting  of 
bonds  was  held  to  be  valid.  An  the  directors.  No  meeting  is  required, 
amendment  authorizing  a  dam  com-  Burden  v.  Burden,  159  N.  Y.  287 
pany  to  raise  the  height  of  its  dam  (1899).  Under  a  statute  authorizing 
is  not  a  fundamental  change.  Gray  the  stockholders  by  an  amended  cer- 
V.  Monongahela  Nav.  Co.,  2  Watts  &  tificate  to  change  the  object  of  the  cor- 
S.  156  (Pa.  1841).  So  also  of  an  poration,  the  certificate  may  be 
amendment  shortening  notices  of  calls  amended  so  as  to  give  a  corporation 
from  ninety  to  twenty  days.  Illinois  power  to  purchase  stock  in  other  cor- 
River  R.  R.  v.  Beers,  27  111.  185  porations.  Meredith  v.  New  Jersey, 
(1862) ;  and  an  amendment  making  etc.  Co.,  59  N.  J.  Eq.  257  (1899) ;  aff'd, 
subscriptions  payable  five  per  cent.  60  N.  J.  Eq.  445  (1899).  A  member 
monthly  instead  of  twenty-five  per  of  an  incorporated  mutual  life  insur- 
cent.  annually.  Burlington,  etc.  R.  R.  ance  association  cannot  prevent  the 
V.  White,  5  Iowa,  409  (18.57).  The  association  accepting  an  amendment 
legislature  may  amend  the  charter  to  its  charter  changing  the  location 
in  regard  to  the  times  when  sub-  of  its  principal  place  of  business, 
seriptions  become  payable.  West  v.  Park  v.  Modern,  etc.  of  America,  181 
Topeka    Sav.     Bank,     66     Kan.     524  111.  214  (1899). 

(1903).     After    six    years    a    corpora-         ^  Quoted  and  approved  in  Larabee  v. 

tion   cannot   repudiate    the   action   of  DoUey,  175  Fed.  Rep.  365,  391  (1909) ; 

its   officers   in   amending   its   charter,  aff'd,  219  U.  S.  121. 
Licking,    etc.     v.    Commonwealth,    89  -  Under    the   circumstances    of    the 

S.    W.    Rep.    682    (Ky.    1905).     The  cases    it    has    been    held    a    material 

legislature     may     authorize     a     sem-  change  to  shorten  and  vary  the  route, 

inary  for  girls  to  lease  a  part  of  the  Winter  v.  Muscogee  R.  R.,  11  Ga.  438 

premises     to     school     commissioners.  (1852) ;    to  vary  the  route,  Middlesex 

Webster  v.  Cambridge  Female  Semi-  Turnp.   Corp.   v.  Locke,  8  Mass.  268 

1408 


CH.   XXVIII.] 


AMENDMENTS   TO    CHARTERS. 


[§  501. 


§  501.  Amendments  under  the  reserved  power  of  the  state  to  alter, 
amend,  or  repeal  the  charter.  —  The  extent  of  the  power  of  the  leg- 


(1811);  Middlesex  Turnp.  Corp.  v. 
Swan,  10  Mass.  384  (1813) ;  Hester  v. 
Memphis,  etc.  R.  R.,  32  Miss.  378 
(1856) ;  Witter  v.  Mississippi,  etc.  R.  R., 
20  Ark.  463  (1859);  Champion  v. 
Memphis,  etc.  R.  R.,  35  Miss.  692 
(1858) ;  Simpson  v.  Denison,  10  Hare, 
54  (1852) ;  changing  a  terminus,  Man- 
heim,  etc.  Co.  v.  Arndt,  31  Pa.  St.  317 
(1858) ;  Marietta,  etc.  R.  R.  v.  Elliott, 
10  Ohio  St.  57  (1859);  Middlesex 
Turnp.  Corp.  v.  Locke,  8  Mass.  268 
(1811);  Middlesex  Turnp.  Corp.  v. 
Swan,  10  Mass.  384  (1813) ;  Thomp- 
son V.  Guion,  5  Jones,  Eq.  (N.  C.)  113 
(1859) ;  permitting  a  railroad  to  go 
into  water  transportation  business, 
Hartford,  etc.  R.  R.  v.  Croswell,  5  Hill, 
383  (1843),  a  leading  case;  Marietta, 
etc.  R.  R.  V.  Elliott,  10  Ohio  St.  57 
(1859) ;  shortening  the  line,  First 
Nat.  Bank  v.  Charlotte,  85  N.  C.  433 
(1881) ;  allowing  business  to  be  com- 
menced before  the  full  capital  stock 
is  subscribed,  Memphis  Branch  R.  R. 
V.  Sullivan,  57  Ga.  240  (1876) ;  divid- 
ing the  line  and  forming  two  or  more 
corporations,  Indiana,  etc.  Turnp.  Co. 
V.  Phillips,  2  Pen.  &  W.  (Pa.)  184 
(1830) ;  Fulton  County  v.  Mississippi, 
etc.  R.  R.,  21  111.  338  (1859);  Car- 
lisle V.  Terre  Haute,  etc.  R.  R.,  6  Ind. 
316  (1855) ;  transferring  a  railroad  sub- 
scription from  one  railroad  to  another, 
Pittsburg,  etc.  R.  R.  v.  Gazzam,  32 
Pa.  St.  340  (18.58) ;  making  the  charter 
perpetual  and  increasing  power  to 
hold  property.  Union  Locks  &  Canals 
V.  Towne,  1  N.  H.  44  (1817) ;  allowing 
a  life  insurance  company  to  insure 
against  fire  and  marine  loss,  Ashton 
V.  Burbank,  2  Dill.  435  (1873) ;  s.  c, 
2  Fed.  Cas.  26;  extending  the  line, 
Stevens  v.  Rutland,  etc.  R.  R.,  29 
Vt.  545  (1851).  See  also  Noesen  v. 
Port  Washington,  37  Wis.  168  (1875), 
where  there  was  an  amendment  au- 
thorizing the  purchase  of  a  railroad 
running  at  right  angles  to  the  old,  but 
a  lease  was  upheld ;  increasing  the 
par  value  of  the  stock,  Mahan  v.  Wood, 
44  Cal.  462  (1872);  consolidating  the 
corporation  with  another  corporation, 
Illinois,  etc.  R.  R.  v.  Cook,  29  111.  237 


(1862);  McCray  v.  Junction  R.  R., 
9  Ind.  358  (1857);  Shelbyville,  etc. 
Turnp.  Co.  v.  Barnes,  42  Ind.  498 
(1873);  Booe  t-.  Junction  R.  R.,  10 
Ind.  93  (1857);  New  Orleans,  etc. 
R.  R.  V.  Harris,  27  Miss.  517  (1854) ; 
Clearwater  v.  Meredith,  1  Wall.  25 
(1863);  Knoxville  v.  Knoxville,  etc. 
R.  R.,  22  Fed.  Rep.  758  (1884) ;  Kean 
V.  Johnson,  9  N.  J.  Eq.  401  (1853); 
Black  V.  Delaware,  etc.  Canal  Co.,  24 
N.  J.  Eq.  4.55  (1873).  Cf.  Lauman  v. 
Lebanon  Valley  R.  R.,  30  Pa.  St.  42 
(1858),  criticised  in  Mowrey  v.  Indian- 
apolis, etc.  R.  R.,  4  Biss.  78  (1866); 
s.  c,  17  Fed.  Cas.  930;  Fry  v.  Lex- 
ington, etc.  R.  R.,  2  Mete.  (Ky.) 
314  (1859).  Until,  however,  the  cor- 
poration accepts  such  amendment  the 
stockholders  cannot  complain.  Dela- 
ware, etc.  R.  R.  V.  Irick,  23  N.  J.  L. 

321  (1852).  Amendments  which  have 
not  been  acted  upon  do  not  release  the 
subscriber.  Taylor  v.  Supervisors,  86 
Va.  506  (1889).  See,  in  general, 
Pearce  v.  Madison,  etc.  R.  R.,  21  How. 
441  (1858) ;  Tuttle  v.  Michigan  Air 
Line  R.  R.,  35  Mich.  247  (1877) ;  New 
Jersey  Mid.  Ry.  v.  Strait,  35  N.  J.  L. 

322  (1872).  In  all  these  eases  neither 
a  mandatory  statute,  nor  a  vote  of  the 
directors,  nor  a  majority  of  the  stock- 
holders can  compel  a  dissenting  stock- 
holder to  accept  the  change.  It  would 
be  unconstitutional.  The  stockholder 
may  say  :  "I  have  agreed  to  become  in- 
terested in  a  railroad  company,  and 
have  contracted  in  view  of  the  profits 
to  be  expected,  and  the  perils  and 
losses  incident  to  that  description  of 
business ;  but  I  have  not  agreed  that 
those  to  be  intrusted  with  the  capital 
I  contribute  shall  have  power  to  use 
it  in  a  business  of  a  different  charac- 
ter, and  attended  with  hazards  of  a 
different  description."  Marietta,  etc. 
R.  R.  V.  Elliott,  10  Ohio  St.  57  (1859). 
As  against  the  dissent  of  a  single 
stockholder  a  corporation  cannot  issue 
preferred  stock  to  take  up  the  old 
outstanding  stock,  even  though  a  new 
statute  authorized  such  proceeding,  it 
appearing  that  the  new  statute  had 
not  been  unanimously  accepted  by  the 


(89) 


1409 


§501. 


AMENDMENTS   TO   CHARTERS. 


[CH.  XXVIII. 


islature  to  amend  a  charter,  where  it  has  reserved  that  power,  is  not 
yet  fully  settled,  and  is  full  of  difficulties.     There  is  a  strong  tendency 


stockholders.  Einstein  v.  Raritan,  etc. 
Mills,  74  N.  J.  Eq.  624  (1908).  An 
increase  of  capital  stock,  the  increase  to 
be  preferred  stock,  was  held  to  be 
fundamental  in  Atlanta  Steel  Co.  v. 
Mynahan,  138  Ga.  668  (1912).  Even 
though  the  legislature,  after  a  turn- 
pike corporation  is  organized,  au- 
thorizes it  to  issue  stock  in  payment 
for  another  turnpike,  yet  a  dissent- 
ing stockholder  may  prevent  the  pur- 
chase by  showing  that  it  decreases 
the  value  of  his  stock.  Shaw  v.  Camp- 
bell, etc.  Co.,  15  S.  W.  Rep.  24.5  (Ky. 
1891).  Where  the  statutes  under 
which  the  company  is  organized  al- 
low the  objects  of  the  company  to  be 
changed  on  a  vote  of  the  stockholders, 
a  dissenting  stockholder  is  not  re- 
leased from  his  subscription  by  such 
change.  Mercantile  Statement  Co.  v. 
Kneal,  51  Minn.  263  (1892).  Acts  rel- 
ative to  a  corporation  may  be  so  rad- 
ical as  to  constitute  a  new  charter 
instead  of  amendments  to  the  old  one. 
Snook  V.  Georgia  Imp.  Co.,  83  Ga.  61 
(1889).  Where  a  municipality  has 
subscribed  for  stock  and  issued  its 
bonds  indorsed  by  a  railroad  company 
to  raise  the  money  to  pay  the  sub- 
scription, the  legislature  cannot  au- 
thorize the  company  to  apply  its  as- 
sets to  the  payment  of  such  bonds.  A 
stockholder  may  enjoin  it.  HiU  v. 
Glasgow  R.  R.,  41  Fed.  Rep.  610 
(1888).  The  legislature  cannot,  in 
the  amendment  itself,  authorize  the 
majority  to  bind  the  minority  therein. 
New  Orleans,  etc.  R.  R.  v.  Harris,  27 
Miss.  517  (1854).  Where  a  charter 
authorizes  a  lease,  if  assented  to  by 
the  stockholders,  an  amendment  au- 
thorizing such  a  lease  by  the  directors 
would  be  unconstitutional,  unless  ac- 
cepted by  the  stockholders.  Re 
Opinion  of  the  Judges,  120  N.  C.  623 
(1897).  Where  a  state  is  a  stock- 
holder, and  by  statute  is  entitled  to  a 
certain  vote  at  elections,  a  subsequent 
statute  cannot  give  to  the  state  a 
larger  vote.  Tucker  v.  Russell,  82 
Fed.  Rep.  263  (1897).  An  amend- 
ment cannot  deprive  the  members  of  a 
corporation  of  the  privilege  of  elect- 


ing its  directors.  The  legislature  can- 
not arbitrarily  name  and  appoint  trus- 
tees of  an  educational  corporation,  the 
charter  providing  that  vacancies  shall 
be  filled  by  the  remaining  trustees. 
Sheriff  v.  Lowndes,  16  Md.  357  (1860). 
It  cannot  give  to  the  city  of  Louisville 
the  power  to  elect  the  trustees  of  the 
University  of  Louisville,  an  educa- 
tional corporation.  Louisville  v.  Uni- 
versity of  Louisville,  15  B.  Mon. 
(Ky.)  642  (1855).  It  cannot  turn 
over  the  property  of  an  educational 
institution  to  another  educational 
institution.  Ohio  v.  Neff,  .52  Ohio  St. 
375  (1895).  It  cannot  vest  the  gov- 
ernment of  an  incorporated  academy 
in  a  new  board  of  trustees.  Norris 
V.  Abingdon  Academy,  7  Gill  &  J. 
(Md.)  7  (1834).  Cf.  §  609a,  infra. 
For  a  valuable  argument  against  the 
power  of  a  majority  of  the  stock- 
holders to  accept  an  amendment  of 
the  charter  so  as  to  give  the  company 
the  power  to  lease  its  railroad,  see 
8  Harvard  L.  Rev.  396.  In  Loewen- 
thal  V.  Rubber,  etc.  Co-,  52  N.  J.  Eq, 
440  (1894),  the  court  held  that  the 
original  by-laws  constituted  a  con- 
tract between  the  stockholders,  and 
that  a  by-law  providing  for  cumula- 
tive voting  could  not  be  repealed.  On 
the  right  of  a  dissenting  stockholder 
in  general,  see  also  Printing  House  v. 
Trustees,  104  U.  S.  711  (1881);  Hoey 
V.  Henderson,  32  La.  Ann.  1069 
(1880);  Re  St.  Mary's  Church,  7 
Serg.  &  R.  (Pa.)  517  (1822).  A  ma- 
jority of  the  stockholders  of  a  rail- 
road company  have  no  power  to  amend 
the  charter  so  as  to  accept  the  general 
railroad  act  of  the  state,  which  general 
act  will  give  the  company  the  right  to 
indefinitely  extend  its  railroad,  build 
branch  lines,  lease  its  property,  build 
and  operate  steamboats,  or  consoli- 
date with  any  other  railroad  company. 
Such  a  wholesale  amendment  is  illegal 
as  against  the  dissent  of  a  stockholder, 
even  though  a  portion  of  such  general 
act  might  have  been  accepted  as  being 
not  a  fundamental  but  merely  an 
auxiliary  amendment.  Alexander  v. 
Atlanta,  etc.  R,  R.  Co.,  108  Ga.  151 


1410 


CU.   XXVIII. 


AMENDMENTS   TO    CHARTERS. 


[§  501. 


in  the  decisions,  and  a  tendency  which  is  deserving  of  the  highest  com- 
mendation, to  Hmit  the  power  of  the  legislature  to  amend  a  charter 
under  this  reserved  power.  It  should  be  restricted  to  those  amend- 
ments only  in  which  the  state  has  a  public  interest.  Any  attempt  to 
use  this  power  of  amendment  for  the  purpose  of  authorizing  a  majority 
of  the  stockholders  to  force  upon  the  minority  a  material  change  in  the 


(1899).  Where  an  insurance  fund  has 
been  collected  by  an  exchange,  in 
accordance  with  its  charter,  a  by-law 
subsequently  passed  distributing  the 
fund  among  the  members  is  illegal  as 
against  the  .objection  of  any  member 
who  contributed  to  the  fund.  Parish  v. 
New  York,  etc.  Exchange,  169  N.  Y.  34 
(1901).  A  holder  of  preferred  stock 
may  prevent  a  reduction  of  the  pre- 
ferred di\adend  by  an  amendment  of 
the  certificate  of  incorporation,  even 
though  the  statutes  of  the  state  at 
the  time  of  organization  of  the  com- 
pany authorized  the  certificate  of 
incorporation .  to  be  amended  by  a 
certain  vote.  Such  reduction  may 
be  enjoined.  Pronik  v.  Spirits,  etc. 
Co.,  58  N.  J.  Eq.  97  (1899).  An 
amendment  authorizing  a  corpora- 
tion to  increase  its  capital  stock  is  a 
fundamental,  and  hence  is  a  special, 
act  in  violation  of  a  constitutional 
prohibition  against  special  acts.  Mar- 
ion T.  Co.  V.  Bennett,  169  Ind.  346 
(1907).  The  board  of  directors  of  a 
railroad  company  have  no  power  to 
accept  amendments  to  the  charter 
involving  the  building  of  many  miles 
of  branch  railroad  and  a  radical  change 
of  the  location  of  the  road  and  the 
abandonment  of  the  existing  line  and 
depots,  especially  where  the  old  char- 
ter provided  that  no  branch  over  two 
miles  long  should  be  constructed  until 
the  stockholders  had  voted  in  favor  of 
it,  and  ratification  of  their  acts  by  a 
stockholders'  meeting  does  not  cure 
the  defect.  Commonwealth  i'.  Rich- 
mond, etc.  R.  R.,  Ill  Va.  611  (1911). 
A  subscriber  may  enjoin  an  amendment 
which  violates  his  conditional  sub- 
scription as  to  where  the  business 
shall  be  carried  on.  Bobzin  v.  Gould, 
etc.  Co.,  140  Iowa,  744  (1908).  As 
against  the  dissent  of  a  stockholder 
two  New  Jersey  leather  companies 
cannot  consolidate  unless  the  statute 


expressly  authorizes  such  consolida- 
tion. Hence  where  the  main  pur- 
pose of  one  company,  in  which  the 
complainant  is  a  stockholder,  is  to 
manufacture  and  sell  leather,  with 
other  incidental  purposes,  and  the  other 
company  has  very  much  broader 
powers,  even  though  in  the  same  line  of 
business,  a  statute  authorizing  consoli- 
dation of  companies  having  the  same 
or  similar  business,  does  not  apply, 
especially  so  where  the  consolidation 
agreement  provides  that  the  consoli- 
dated company  shall  have  all  the 
extensive  powers  of  the  second-named 
corporation.  Colgate  v.  United  States 
Leather  Co.,  75  N.  J.  Eq.  229  (1909). 
A  statutory  provision  that  a  corpora- 
tion may  insert  in  its  charter  any 
special  provision  if  it  desires  it,  does 
not  authorize  the  corporation  to  amend 
its  charter  so  as  to  impose  a  personal 
liability  on  the  stockholders.  Harris 
V.  Northern,  etc.  Co.,  185  Fed.  Rep. 
192  (1911);  aff'd,  194  Fed.  Rep.  835; 
sub  nom.  Central,  etc.  Co.  v.  Barter. 
A  nisi  prius  court  in  Colorado  has  held 
that  a  statute  allowing  corporations  to 
extend  their  term  of  existence  by  a 
majority  vote  of  the  stockholders  is  not 
binding  on  a  dissenting  stockholder  in  a 
corporation  existing  at  the  time  of  the 
enactment  of  the  statute,  and  that 
such  dissenting  stockholder  may  in- 
sist upon  being  paid  the  value  of  his 
stock  to  be  ascertained  by  a  proper 
appraisement ;  otherwise  that  the 
company  be  liquidated  in  due  form. 
Pratt  V.  South  Pueblo,  etc.  Ass'n,  1 
Col.  Dec.  Supp.  171  (1901).  Under 
the  New  York  statute  the  certificate 
of  incorporation  may  contain  a  provis- 
ion that  the  number  of  directors  shall 
not  be  changed  except  by  unanimous 
vote  of  the  stockholders.  Ripin  v. 
United  States,  etc.  Co.,  71  N.  Y.  Misc. 
Rep.  510  (1911) ;  aff'd,  145  N.  Y.  App. 
Div.  916  and  205  N.  Y.  442. 


1411 


§  501.] 


AMENDMENTS   TO    CHARTERS. 


[cH.  xxvitr. 


enterprise  is  contrary  to  law  and  the  spirit  of  justice.^  Under  such  re- 
served power  the  legislature  has  only  that  right  to  amend  the  charter 
which  it  would  have  had  in  case  the  Dartmouth  College  case  had  decided 
that  the  federal  constitution  did  not  apply  to  corporate  charters.^  In 
fact  the  historical  origin  of  this  reservation  of  the  right  to  amend  was 
due  to  the  effort  of  the  various  states  of  the  Union  to  escape  from  the 
decision  in  the  Dartmouth  College  case.^  By  this  reserved  right  the 
restraint  of  the  federal  constitution  is  done  away  with.  But  the  power 
.to  make  a  new  contract  for  the  stockholders  is  not  thereby  given  to  the 
legislature.  The  legislature  may  repeal  the  charter,  but  cannot  force 
any  stockholder  into  a  contract  against  his  will.^ 

The  power  to  make  amendments,  and  to  repeal  and  alter  charters, 
has  been  reserved  in  most  of  the  states  of  the  Union.^     It  is  clearly 


1  Quoted  and  approved  in  Avondale 
Land  Co.  v.  Shook,  170  Ala.  379  (1911). 

2  Quoted  and  approved  in  Garey  v. 
St.  Joe  Mining  Co.,  32  Utah,  497  (1907). 
Sinking  Fund  Cases,  99  U.  S.  700, 
720  (1878) ;  MiUer  v.  State,  15  Wall. 
478,  495  (1872)  ;  San  Mateo  County  v. 
Southern  Pacific  R.  R.,  13  Fed.  Rep. 
722  (1882);  Detroit  v.  Detroit,  etc. 
Co.,  43  Mich.  140  (1880).  The  re- 
served right  to  amend  or  repeal  a 
charter  "leaves  the  state  where  any 
sovereignty  would  be  if  unrestrained 
by  express  constitutional  limitations, 
and  with  the  powers  which  it  would 
then  possess.  It  might  therefore  do 
what  it  would  be  admissible  for  any 
constitutional  government  to  do  when 
not  thus  restrained,  but  it  could  not 
do  what  would  be  inconsistent  with 
constitutional  principles.  And  it  can- 
not be  necessary  at  this  day  to  enter 
upon  a  discussion  in  denial  of  the 
right  of  the  government  to  take  from 
either  individuals  or  corporations  any 
property  which  they  may  rightfully 
have  acquired."  Smith  v.  Lake  Shore, 
etc.  Co.,  114  Mich.  460  (1897);  re- 
versed on  another  point  in  173  U.  S. 
684  (1899). 

^  Quoted  and  approved  in  Avondale 
Land  Co.  v.  Shook,  170  Ala.  379  (1911). 
See  Spring  Valley  Water-works  r. 
Schottler,  110  U.  S.  347,  352  (1884). 
The  Dartmouth  College  decision  was 
rendered  in  1819.  The  Revised  Stat- 
utes of  New  York,  passed  in  1827, 
provided  that  corporate  charters  there- 
after   granted    should    be    subject    to 


alteration,  suspension,  and  repeal.  The 
Court  of  Appeals  of  New  York  in 
1909,  in  passing  on  this  reservation, 
said  (p.  221)  the  provision  in  the 
Revised  Statutes  "was  the  result  of 
public  alarm  and  protest  caused  by  the 
decision  of  the  supreme .  court  of  the 
United  States  in  the  celebrated  Dart- 
mouth College  case,  decided  in  1819. 
...  As  soon  as  it  was  realized  that 
the  principle  of  the  decision  applied 
to  the  charters  of  all  corporations  and 
placed  them  forever  beyond  the  power 
of  legislation,  the  situation  caused 
great  anxiety  throughout  the  nation. 
It  was  felt  that  danger  threatened  the 
public  welfare  when  a  thing  created  by 
law  was  placed  beyond  the  control  of 
law.  The  determination  became  gen- 
eral that  if  existing  charters  were 
stronger  than  the  state,  no  future 
charter  should  be,  and  action  followed 
accordingly  along  the  line  suggested 
by  Mr.  Justice  Story  in  his  concurring 
opinion  in  the  Dartmouth  College  case, 
that  if  a  state  wished  to  alter  charters 
it  must  reserve  the  right  to  do  so. 
In  this  state  as  in  others  the  feeling 
was  almost  universal  that  there  never 
should  be  another  corporation  with 
powers  beyond  the  control  of  the 
legislature."  Lord  v.  Equitable,  etc. 
Soc,  194  N.  Y.  212,  221  (1909). 

*  Quoted  and  approved  in  Garey  v. 
St.  Joe  ^lining  Co.,  91  Pac.  Rep.  369 
(Utah,  1907). 

5  See  the  notes  below.  The  follow- 
ing special  references  are  made  to 
some  of  the  constitutional  provisions 


1412 


CH.   XXVIII.] 


AMENDMENTS   TO    CHARTERS. 


[§  501. 


established  that  the  legislature  cannot,  under  this  reserved  power, 
amend  the  charter  so  as  to  change  the  whole  character  of  the  enterprise 
and  compel  the  corporation  to  proceed  under  the  amended  charter.^ 
The  restrictions  of  the  state  constitution  still  exist,  and  individuals 
cannot  be  forced  by  the  state  into  new  contracts.-    Moreover,  the  amend- 


on  this  subject :  Constitution  of  Ala- 
bama, XIII,  1  ;  Arkansas,  V,  48 ;  Cal- 
ifornia, IV,  31 ;  1879,  XII,  1 ;  Colo- 
rado, 1876,  XV,  3;  Delaware,  II,  17; 
Iowa,  VIII,  12;  Kansas,  XII,  1; 
Maine,  Laws  of  1831 ;  Maryland,  III, 
48,  par.  2;  Massachusetts,  St.  1830, 
eh.  81 ;  R.  S.,  ch.  44,  §  23 ;  Gen.  St., 
eh.  68,  §41;  Michigan,  XV,  1,  8; 
Missouri,  VIII,  14;  Nebraska,  1875, 
XI ;  Nevada,  VIII,  1 ;  New  Jersey, 
Amend.  IV,  7,  par.  11,  cl.  11;  New 
York,  VIII,  1  R.  S.,  pt.  1,  ch.  XVIII, 
title  3,  §  8 ;  North  Carolina,  VIII,  1 ; 
Ohio,  XVIII,  2;  Oregon,  XI,  2; 
Pennsylvania,  XVI,  10;  South  Caro- 
lina, XII,  1 ;  Tennessee,  XI,  8  ;  Texas, 
1875,  XII,  5,  7 ;  Wisconsin,  XI,  §  1 ; 
Re  New  York  Elevated  R.  R.,  70  N.  Y. 
327  (1877) ;  Johnson  v.  Hudson  River 
R.  R.,  49  N.  Y.  455  (1872) ;  Bank  of 
Chenango  v.  Brown,  26  N.  Y.  467 
(1863);  Ashuelot  R.  R.  v.  Elliot,  58 
N.  H.  451,  454  (1878). 

1  In  Pennsylvania  it  is  held  that  the 
reserved  power,  when  used  so  as  to 
make  an  amendment  compulsory  on 
the  corporation,  "is  in  the  nature  of  a 
police  power,  designed  for  the  protec- 
tion of  the  public  welfare."  Cross  v. 
Peach  Bottom  Ry.,  90  Pa.  St.  392 
(1879).  Under  its  reserved  power  to 
amend,  the  state  may  give  a  remedy 
against  a  mill-dam  corporation  for  in- 
jury by  flood.  Monongahela  Nav.  Co. 
V.  Coon,  6  Pa.  St.  379  (1847),  holding 
also  that,  by  accepting  an  amendment 
which  is  granted  on  condition  that 
the  reserved  power  to  amend  shall 
apply  to  the  corporation,  it  is  subject 
to  such  power ;  Kenosha,  etc.  R.  R.  v. 
Marsh,  17  Wis.  13  (1863) ;  Troy,  etc. 
R.  R.  V.  Kerr,  17  Barb.  581  (1854). 
In  Knoxville  v.  Knoxville,  etc.  R.  R., 
22  Fed.  Rep.  758  (1884),  the  court 
said:  "It  was  not  competent  for  the 
legislature  to  do  more  in  this  respect 
than  to  waive  the  public  rights.  It 
could  not  divest  or  impair  the  rights 


of  the  shareholders  as  between  them- 
selves, as  guaranteed  by  the  company's 
charter,  without  their  consent.  It  was 
upon  the  faith  of  the  stipulations  con- 
tained in  said  charter  that  the  share- 
holders subscribed  to  the  capital  stock, 
and  thereby  made  themselves  members 
of  the  corporation."  In  Orr  v.  Bracken 
County,  81  Ky.  593  (1884),  an  amend- 
ment under  the  reserved  power,  chang- 
ing the  method  of  voting,  was  decided 
to  be  of  no  effect  until  the  stockholders 
accepted  it.  The  court  said:  "The 
right  to  amend  the  charter  may  be  ex- 
pressly reserved,  but  that  right  does 
not  confer  the  power  of  taking  from 
the  corporators  the  control  of  the 
corporate  property."  See  also  §  609a, 
infra,  as  to  amendments  affecting  the 
right  to  vote.  Query,  whether  a  man- 
datory consolidation  would  be  legal. 
Mowrey  v.  Indianapolis,  etc.  R.  R.,  4 
Biss.  78  (1866);  s.  c,  17  Fed.  Cas. 
930.  When  legal  a  mandatory  change 
does  not  require  acceptance  by  the 
stockholders.  Zabriskie  v.  Hacken- 
sack,  etc.  R.  R.,  18  N.  J.  Eq.  178  (1867). 
But  when  the  mandatory  amendment 
goes  beyond  the  legal  limits,  it  must  be 
accepted  by  the  corporation  as  though 
it  were  made  optional  with  the  cor- 
poration. Kenosha,  etc.  R.  R.  v. 
Marsh,  17  Wis.  13  (1863),  the  court 
saying  that  the  power  of  amendment 
was  never  reserved  with  reference  to 
any  question  between  the  corporation 
and  its  stock  subscribers,  but  solely 
with  reference  to  questions  between 
the  corporation  and  the  state,  where 
the  latter  desired  to  make  compulsory 
amendments  against  the  will  of  the 
former.  The  corporation  cannot  be 
compelled  to  proceed.  All  the  state 
"can  do  is  to  grant  it  the  power,  and 
then  it  is  for  the  corporation  to  accept 
it  or  not,  as  it  pleases."  See  also  §  497, 
supra. 

2  Cooley,  Const.  Lim.   (5th  ed.),  p. 
454.     As  to  repeals  of  charters  under 


1413 


§501. 


AMENDMENTS   TO    CHARTERS. 


[CH. 


XXVIII. 


ment  must  not  be  foreign  to  the  purposes  and  objects  of  the  original 
charter.  The  power  of  amendment  has  its  Hmits.  "  It  can  repeal  or 
suspend  the  charter ;  it  can  alter  or  modify  it ;  it  can  take  away  the 
charter ;  but  it  cannot  impose  a  new  one  and  oblige  the  stockholders 
to  accept  it.  .  .  .  The  powder  to  alter  and  modify  does  not  give  power 
to  make  any  substantial  additions  to  the  work."  ^  The  best  view  taken 
of  this  reserved  power  of  the  state  is  that  under  it  a  fundamental  amend- 
ment to  the  charter  does  not  authorize  a  majority  of  the  stockholders 
to  accept  the  amendment  and  proceed,  but  that  unanimous  consent  of 
the  stockholders  is  necessary.^ 

Under  this  reserved  power,  however,  the  legislature,  it  is  held,  may 
impose  a  statutory  liability  upon  stockholders  after  they  have  been 
incorporated  and  have  gone  into  business  under  a  charter  which  does 


this  reserved  power,  see  eh.  XXXVIII, 

infra. 

1  Zabriskie  v.  Haekensaek,  etc.  R.  R., 
18  N.  J.  Eq.  178  (1867).  "The 
power  of  alteration  and  amendment 
is  not  without  limit.  The  alterations 
must  be  reasonable ;  they  must  be 
made  in  good  faith,  and  be  consist- 
ent with  the  scope  and  object  of  the 
act  of  incorporation.  Sheer  oppres- 
sion and  wrong  cannot  be  inflicted 
under  the  guise  of  amendment  or 
alteration."  Shields  v.  Ohio,  95  U.  S. 
319  (1877);  Spring  Valley  Water- 
works V.  San  Francisco,  61  Cal.  3 
(1881).  The  amendment  must  "not 
defeat  or  substantially  impair  the  ob- 
ject of  the  grant,  or  any  rights  vested 
under  it."  Close  v.  Glenwood  Ceme- 
tery, 107  U.  S.  466  (1882).  See  also 
Miller  v.  State,  15  Wall.  478  (1872); 
Worcester  v.  Norwich,  etc.  R.  R.,  109 
Mass.  103  (1871).  The  motives  of  the 
legislators  cannot  be  inquired  into. 
Northern  R.  R.  v.  Miller,  10  Barb.  260 
(1851) ;  Re  N.  Y.  Elevated  R.  R.,  70 
N.  Y.  327,  351  (1877).  See  Astor  v. 
Arcade  Ry.,  113  N.  Y.  93,  111  (1889). 

2  Quoted  and  approved  in  Garey  v. 
St.  Joe  Mining  Co.,  32  Utah,  497 
(1907).  Mills  V.  Central  R.  R.,  41 
N.  J.  Eq.  1,  4  (1886),  where  a  statute 
subsequent  to  the  charter  authorized 
the  consolidation  of  railroad  com- 
panies. The  court  said:  "The  legis- 
lature did  not  intend  to  affect  the 
rights  of  stockholders  inter  sese,  and 
the  act  does  not  do  so,  either  expressly 


or  by  implication.  .  .  .  After  share- 
holders had  entered  into  a  contract 
among  themselves,  under  legislative 
sanction,  and  expended  their  money  in 
the  execution  of  the  plan  mutually 
agreed  upon,  the  plan  could  not,  even 
by  vh'tue  of  legislative  enactment,  be 
radically  changed  by  the  majority 
alone,  and  dissentient  stockholders 
be  compelled  to  engage  in  a  new  and 
totally  different  undertaking,  because 
such  action  would  impair  the  obliga- 
tion of  the  dissenting  stockholders' 
contract  with  their  associates  and  the 
state."  The  court  said  also,  that, 
under  its  reserved  power  to  amend  a 
charter,  the  state  cannot  give  "a 
power  to  one  part  of  the  corporators 
as  against  the  other  which  they  did 
not  have  before."  The  case  Cross 
V.  Peach  Bottom  Ry.,  90  Pa.  St.  392 
(1879),  holds  that  "the  legislative 
reservation  is  in  the  nature  of  a  police 
power  designed  for  the  protection  of 
the  public  welfare ;  and  where  such 
protection  becomes  necessary,  the  law- 
making power  may  act  without  con- 
sulting either  the  interests  or  will  of 
the  company  ;  and  in  such  case  it  may 
well  be  that  not  only  the  company  but 
its  stockholders  must  submit.  .  .  . 
The  reservation  .  .  .  was  only  in- 
tended to  enable  the  legislature  to 
act  without  the  consent  and  against 
the  will  of  the  corporation."  On  this 
subject  see  also  §  497,  supra,  and  the 
notes  thereto. 


1414 


CH.  XXVIII.] 


AMENDMENTS   TO    CHARTERS. 


[§  501. 


not  impose  such  liability.  The  exercise  of  this  power  by  the  legislature, 
in  such  a  case,  is  held  to  be  only  a  repeal  of  part  of  the  corporate  fran- 
chises.i  So,  also,  it  is  said  that  under  this  reserved  power  the  legisla- 
ture may  impose  a  statutory  liability  for  the  future  debts  and  obliga- 
tions of  the  corporation.^  Even  though  the  legislature  has  reserved 
the  right  to  amend  a  charter,  yet  it  cannot  authorize  the  corporation 
to  assess  stock  which  was  issued  as  being  full-paid  and  non-assessable. 
A  minority  stockholder  may  enjoin  the  sale  of  the  stock  for  non-payment 
of  such  an  assessment.^ 

The  constitutionality  of  various  amendments  to  charters  in  which 
the  legislature  reserved  the  right  to  amend  or  repeal  is  considered 
in  the  notes  below.* 


'  Quoted  and  approved  in  Williams 
V.  Nail,  108  Ky.  21  (1900),  a  case 
where  the  court  held  that  the  minority 
stockholders  were  not  entitled  to  a 
dissolution  of  the  corporation  by  rea- 
son of  a  statute  imposing  a  statutory 
liability  upon  the  stockholders.  Per- 
kins V.  Coffin,  84  Conn.  275  (1911). 
MeGowan  v.  McDonald,  111  Cal.  57 
(1896) ;  Bissell  v.  Heath,  98  Mich.  472 
(1894) ;  South  Bay,  etc.  Co.  v.  Gray, 
30  Me.  547  (1849) ;  Sleeper  v.  Good- 
win, 67  Wis.  577  (1887).  Cf.  Close  v. 
Glenwood  Cemetery,  107  U.  S.  466 
(1882).  See  §§242,  280,  497,  supra. 
Amendment  under  reserved  right  can- 
not affect  rights  of  previous  creditors 
against  the  corporation.  Bank  of  Old 
Dominion  v.  McVeigh,  20  Gratt.  457 
(1871). 

-  Sherman  v.  Smith,  1  Black,  587 
(1861),  aff'g  Re  Oliver  Lee's  Bank,  21 
N.  Y.  9  (1860) ;  U.  S.  Trust  Co.  v.  U. 
S.  F.  Ins.  Co.,  18  N.  Y.  199  (1858). 
Cf.  Bailey  v.  HoUister,  26  N.  Y.  112 
(1862) ;  Sinking  Fund  Cases,  99  U.  S. 
700  (1878) ;  Oldtown,  etc.  R.  R.  v. 
Veazie,  39  Me.  571  (1855) ;  Green  v. 
Biddle,  8  Wheat.  1,  84  (1823);  Gard- 
ner V.  Hope  Ins.  Co.,  9  R.  I.  194  (1869). 
Such  increased  liability  may  be 
imposed  by  a  new  constitution  of  the 
state.  Re  Reciprocity  Bank,  22 
N.  Y.  9  (1860) ;  U.  S.  Trust  Co.  v.  U. 
S.  F.  Ins.  Co.,  18  N.  Y.  199  (1858) ; 
Re  Oliver  Lee's  Bank,  21  N.  Y.  9 
(1860) ;  aff'd,  sub  nom.  Sherman  v. 
Smith,  1  Black,  587  (1861).  In  Con- 
solidated Assoc.  V.  Lord,  35  La.  Ann. 
425     (1883),     the     coixrt     refused     to 


uphold  an  amendment  which  imposed 
further  liability  on  the  stockholder. 
The  statutory  liability  in  California 
does  not  apply  to  stockholders  in  cor- 
porations existing  at  the  time  the 
statute  was  enacted.  United  States 
V.  Stanford,  69  Fed.  Rep.  25  (1895); 
aff'd,  161  U.  S.  412  (1896).  A  legis- 
lature may  by  statute  create  a  statu- 
tory liability  of  stockholders  for  exist- 
ing debts  of  the  corporation,  although 
the  original  charter  did  not  contain 
such  liability.  ISIaxwell  v.  Northern 
Trust  Co.,  70  Minn.  334  (1897). 
Under  the  reserved  right  of  the  legisla- 
ture to  alter  or  repeal  charters,  the 
legislature  may  impose  an  additional 
liability  on  stockholders  in  a  bank. 
Barnes  v.  Arnold,  45  N.  Y.  App.  Div. 
314  (1899) ;  aff'd,  169  N.  Y.  611.  See 
also  §  497,  supra. 

3  Garey  v.  St.  Joe  ^Mining  Company, 
32  Utah,  497  (1907).  Under  its 
reserved  right  the  legislature  may  pro- 
vide that  any  corporation  on  a  two- 
thirds  vote  of  its  stockholders  may 
assess  paid-up  stock.  Somerville  v. 
St.  Louis,  etc.  Co.,  127  Pac.  Rep.  464 
(Mont.  1912). 

*  Under  the  reserved  right  to 
amend,  alter,  or  repeal  charters,  the 
rights  of  stockholders  among  them- 
selves cannot  be  impaired,  except  as 
required  by  public  interest.  While  it 
is  true  that  the  charter  constitutes  a 
contract  between  the  stockholders,  yet 
under  this  reserved  power  the  legisla- 
ture may  authorize  existing  corpora- 
tions to  piu-chase  and  retire  preferred 
stock  and  issue  in  lieu  thereof  mort- 


1415 


§501. 


AMENDMENTS   TO    CHARTERS. 


CH.  XXVIII. 


The  supreme  court  of  the  United  States  has  said  that  "  a  power  re- 
served to  the  legislature  to  alter,  amend,  or  repeal  a  charter  authorizes 
gage    bonds,    such    amendment   being     (1859).     Under  its  reserved  right  the 


construed  to  be  in  behalf  of  the  pub- 
lic interest.  Berger  v.  United  States 
Steel  Corp.,  63  N.  J.  Eq.  809  (1902). 
Under  the  reserved  right  to  amend 
charters,  the  legislature  may  author- 
ize a  corporation  to  reduce  its  capital 
stock  and  issue  bonds  in  exchange  for 
such  part  of  the  capital  stock  as  is 
retired,  especially  where  the  original 
charter  authorized  the  corporation  to 
decrease  its  capital  stock  by  purchasing 
its  own  stock.  Venner  Co.  v.  United 
States,  etc.  Corp.,  116  Fed.  Rep.  1012 
(1902).  Even  under  the  right  to 
amend  or  repeal  charters  a  statute 
changing  the  amount  which  a  member 
of  a  building  association  is  entitled  to 
upon  withdrawal  is  unconstitutional. 
Intiso  V.  State,  etc.  Assoc,  68  N.  J.  L. 
588  (1902).  An  exclusive  grant  by 
the  legislature  to  a  water-works  com- 
pany to  supply  the  city  with  water 
may  be  repealed  under  the  constitu- 
tion of  Alabama  which  prohibits  the 
legislature  from  "making  any  irrevoc- 
able grants  of  special  privileges  or 
immunities,"  and  another  provision 
of  the  constitution  that  a  repeal  or 
amendment  may  be  made,  provided 
"no  injustice  shall  be  done  to  the 
incorporators,"  does  not  prevent  such 
amendment.  Bienville,  etc.  Co.  v. 
Mobile,  186  U.  S.  212  (1902).  The 
case  Sinking-P^'und  Com'rs  v.  Green, 
etc.  Co.,  79  Ky.  73  (1880),  holding  that 
the  right  to  take  tolls  cannot  be  abol- 
ished where  the  company  has  main- 
tained and  kept  in  repair  the  rivers, 
relying  on  the  right  to  take  toll,  is 
referred  to  in  Louisville  Water  Co. 
V.  Clark,  143  U.  S.  1  (1892).  Con- 
cerning this  subject,  see  §  902,  infra. 
In  Ohio,  etc.  Ry.  v.  People,  123  111. 
467  (1888),  the  court  referred  to  but 
did  not  decide  the  question  whether 
a  state  could  withdraw  its  consent  to 
a  consolidation  after  the  consolidation 
had  been  made.  The  legislature  can- 
not, under  its  reserved  power,  compel 
a  dam  company  to  erect  new  fish- 
ways  after  it  has  compelled  them  to 
pay  damages  to  fish  owners.  Com- 
monwealth V.  Essex  Co.,  79  Mass.  239 


legislature  may  amend  the  charter  of 
a  college  which  has  private  stock- 
holders, but  to  which  the  state  con- 
tributes funds,  so  that  instead  of  the 
state  having  four  directors  out  of 
eleven,  the  state  shall  have  seven  out 
of  twelve.  Jackson  v.  Walsh,  75 
Md.  304  (1892) ;  but  see  Sage  v.  Dil- 
lard,  15  B.  Mon.  (Ky.)  340,  357  (1854) 
State  V.  Adams,  44  Mo.  570  (1869) 
Allen  V.  McKean,  1  Sumn.  276  (1833) 
s.  c,  1  Fed.  Cas.  489.  Under  its 
reserved  power  to  amend,  the  legisla- 
ture may  change  the  mode  of  electing 
the  trustees  of  a  non-stock  corporation 
and  may  authorize  a  consolidation 
with  another  corporation.  McKee  v. 
Chautauqua  Assembly,  124  Fed.  Rep. 
808  (1903).  Under  the  reserved  power 
the  legislature  may  consolidate  several 
beneficial  and  scientific  corporations, 
especially  where  the  corporation  object- 
ing practically  controls  the  others. 
The  statute  to  that  effect  need  not  be 
submitted  to  the  stockholders  for 
acceptance,  but  is  mandatory.  McKee 
V.  Chautauqua  Assembly,  130  Fed. 
Rep.  536  (1904) ;  aff'd,  130  Fed.  Rep. 
536,  the  court  saying:  "That  the 
reserved  power  authorizes  the  legisla- 
ture to  make  any  alteration  or  amend- 
ment of  a  charter  which  will  not  defeat 
or  substantially  impair  the  object  of 
the  grant,  or  any  rights  vested  under  it, 
and  which  the  legislatiu-e  may  deem 
necessary  to  promote  the  original  pur- 
pose contemplated  by  its  charter  or 
articles  of  association,  or  to  protect 
the  rights  of  the  public."  While 
under  the  reserved  power  the  legisla- 
ture may  authorize  the  board  of  direc- 
tors of  an  insurance  company  to  allow 
policyholders  to  elect  a  majority  of 
the  board,  yet  in  the  instance  before 
the  court  it  was  held  that  the  various 
acts  of  the  legislature  on  that  subject 
did  not  apply  to  the  Equitable  Life 
Assurance  Society.  Lord  v.  Equitable, 
etc.  Soc,  109  N.  Y.  App.  Div.  252 
(1905) ;  s.  c,  194  N.  Y.  212.  Under 
its  reserved  right  to  amend  or  repeal 
a  charter,  the  legislature  may  authorize 
a  change  in  the  location  of  a  college. 


1416 


CH.  XXVIII. 


AMENDMENTS   TO   CHARTERS. 


[§  501. 


it  to  make  any  alteration  or  amendment  of  a  charter  granted  subject 
to  it  which  will  not  defeat  or  substantially  impair  the  object  of  the 


even  though  the  citizens  of  the  place 
where  it  was  first  located  donated 
largely  to  its  funds.  Brj^an  v.  Board 
of  Education,  151  U.  S.  639  (1894). 

Where  a  gas  company  has  an  exclu- 
sive right  to  supply  gas  to  a  city,  sub- 
ject to  the  right  of  the  legislature  to 
alter  or  revoke  the  same,  the  legisla- 
ture may  authorize  the  city  to  con- 
struct its  own  gas  works.  A  munici- 
pal ordinance  is  not  such  ti  contract 
as  is  protected  by  the  constitution  of 
the  United  States  in  regard  to  impair- 
ing the  validity  of  contracts.  It 
is  a  contract  that  is  protected  in  the 
same  way  as  contracts  of  individuals. 
Hamilton,  etc.  Co.  v.  Hamilton  City, 
146  U.  S.  258  (1892).  As  to  the  latter 
point,  see  contra,  City  Ry.  v.  Citizens' 
Street  R.  R.,  166  U.  S.  557  (1897). 
Where  an  amendment  exempts  the 
company  from  ta.xation  and  provides 
that  it  shall  furnish  the  city  with 
water  free  of  cost,  a  repeal  of  the 
exemption  repeals  the  obligation  as  to 
water.  Louisville  Water  Co.  v.  Clark, 
143  U.  S.  1  (1892).  An  exemption 
from  taxation  may  be  repealed  under 
the  reserved  right  to  amend,  etc.  Com- 
missioners, etc.  Co.  V.  Bancroft,  203 
U.  S.  112  (1906);  Pearsall  v.  Great 
Northern  Ry.,  161  U.  S.  646,  663 
(1896) ;  Wagner  Free  Institute  v. 
Philadelphia,  132  Pa.  St.  612  (1890). 
As  to  such  repeals  see  §  5726,  infra. 
A  state  may  levy  a  tax  on  stock  in  a 
domestic  corporation  whether  owned 
by  residents  or  non-residents  and  may 
compel  the  corporation  itself  to  pay 
such  tax,  giving  the  corporation  a 
right  to  recover  against  the  stock- 
holders and  a  lien  on  the  stock.  Notice 
of  such  a  tax  to  the  corporation  in 
accordance  with  the  statute  may  be 
sufficient.  Such  a  tax  may  be  levied 
under  the  reserved  right  to  amend 
the  charter.  Corry  v.  Baltimore,  196 
U.  S.  466  (1905).  Under  the  reserve 
power  to  amend  or  repeal  a  charter 
the  legislature  may  compel  the  corpo- 
ration to  pay  wages  weekly  to  its 
employees.  State  v.  Brown,  etc.  Mfg. 
Co.,  18  R.  I.  16  (1892).  Under  the 
reserved   right  to  amend   the  charter 


the  legislature  may  amend  so  as  to 
confine  the  road  to  a  particular  route, 
and  outstanding  contracts  of  the  com- 
pany do  not  prevent  such  an  amend- 
ment. Macon,  etc.  R.  R.  v.  Gibson, 
85  Ga.  1  (1890).  Under  its  reserved 
power  to  amend,  the  legislature  may 
require  several  railroads  to  acquire, 
build  to,  and  use  a  union  depot. 
Worcester  v.  Norwich,  etc.  R.  R.,  109 
Mass.  103  (1871).  Even  though  a 
provision  in  a  special  railroad  charter 
provides  that  rates  shall  be  fixed  by 
its  board  of  directors,  yet,  under  a 
reserved  right  to  amend,  the  legisla- 
ture may  authorize  a  state  commis- 
sion to  regulate  rates.  Matthews 
V.  Board  of  Corporation  Com'rs,  etc., 
97  Fed.  Rep.  400  (1899).  The  legis- 
lature cannot  reduce  the  rates  on  a 
railroad  where  the  original  charter 
fixed  the  rates,  and  even  a  reserved 
right  to  amend  the  charter  upon  com- 
pensation being  made  does  not  sus- 
tain such  reduction  of  rates,  no  com- 
pensation being  provided  for.  Pingree 
i;.  Michigan,  etc.  Co.,  118  Mich.  314 
(1898).  In  regard  to  the  question  of 
the  constitutionality  of  a  radical 
amendment  to  a  charter  under  the 
reserved  right  to  amend,  see  Shields 
V.  Ohio,  95  U.  S.  319  (1877) ;  Sinking 
Fund  Cases,  99  U.  S.  700  (1878); 
Pennsylvania  College  Cases,  13  Wall. 
190  (1871);  Miller  v.  State,  15  Wall. 
478  (1872) ;  Spring  Valley  Waterworks 
V.  Schottler,  110  U.  S.  347  (1884); 
Close  V.  Glenwood  Cemetery,  107 
U.  S.  466  (1882).  Authorizing  one 
railroad  to  subscribe  for  stock  in 
another  railroad  has  been  held  legal. 
White  V.  Syracuse,  etc.  R.  R.,  14  Barb. 
559  (1853).  Also  borrowing  money 
and  building  branches.  Northern 
R.  R.  V.  Miller,  10  Barb.  260  (1851). 
Also  reducing  ca^pital  stock.  Joslyn  v. 
Pacific  ]Mail  S.  S.  Co.,  12  Abb.  Pr. 
(N.  S.)  329  (1872).  See  also  White 
Hall,  etc.  R.  R.  v.  Myers,  16  Abb.  Pr. 
(N.  S.)  34  (1872);  State  v.  Accommo- 
dation Bank,  26  La.  Ann.  288  (1874). 
The  extension  of  the  line  from  six  to 
seventeen  miles  was  held  to  require 
a  unanimous  acceptance  in  Zabriskie 


1417 


§  501.] 


AMENDMENTS   TO    CHARTERS. 


[CH.   XXVIII. 


grant,  or  any  rights  vested  under  it,  and  which  the  legislature  may- 
deem  necessary  to  secure  either  that  object  or  any  public  right."  ^ 
Under  the  reserved  power  to  amend  a  charter  the  legislature  may 
authorize  the  consolidation  of  railroads ;  ^  pass  a  statute  allowing 
stockholders  to  cumulate  their  votes  in  elections,  thus  enabling  minority 
stockholders  to  elect  a  minority  of  the  board  of  directors ;  ^    reduce 


V.  Haekensack,  etc.  R.  R.,  18  N.  J.  Eq. 
178  (1867).  Under  its  reserved  right 
to  amend,  the  legislature  may  change 
the  name  of  a  corporation.  Phinney 
V.  Trustees,  etc.,  88  Md.  633   (1898). 

1  New  York  &  New  England  R.  R. 
V.  Bristol,  151  U.  S.  556  (1894). 

2  Market  Street  Ry.  v  .  Hellman,  109 
Cal.  571  (1895);  Hale  v.  Cheshire 
R.  R.,  161  Mass.  443  (1894) ;  Bishop  v. 
Brainerd,  28  Conn.  289  (1859) ;  Colby 
V.  Equitable  Trust  Co.,  124  N.  Y.  App. 
Div.  262  (1908)  and  192  N.  Y.  535. 
Contra,  Kenosha,  etc.  R.  R.  v.  Marsh, 
17  Wis.  13  (1863),  a  dictum;  Mowrey 
V.  Indianapolis,  etc.  R.  R.,  4  Biss.  78 
(1866) ;  s.  c,  17  Fed.  Cas.  930 ;  Mills 
V.  Central  R.  R.,  41  N.  J.  Eq.  1,  4 
(1886).  See  also  §  896,  infra.  Under 
the  reserved  right  to  change  corporate 
powers  the  legislature  may  authorize 
consolidation  of  corporations,  espe- 
cially where  any  corporation  that 
amends  its  charter  is  to  be  bound  by 
such  statute  authorizing  consolida- 
tion, and  such  amendment  has  been 
made.  Winfree  v.  Riverside,  etc.  Co., 
75  S.  E.  Rep.  309  (Va.  1912).  Under 
its  reserved  power,  the  legislature 
may  authorize  a  consoUdation  of  rail- 
roads, especially  where  they  are  in  a 
faUing  condition.  A  majority  of  the 
stockholders  may  accept  such  an 
amendment.  Hinds  County  v.  Natchez, 
etc.  R.R.,  85  Miss.  599  (1905).  The 
legislature  may  authorize  a  railroad 
corporation  to  consoUdate  with  other 
companies,  on  a  vote  of  a  majority 
of  its  stock,  provision  being  made  for 
assessing  and  paying  the  value  of 
dissenting  stock.  It  is  immaterial 
that  the  state  had  not  reserved  the 
power  to  amend  the  charter.  Spencer 
V.  Seaboard,  etc.  Co.,  137  N.  C.  107 
(1904).  A  statute  authorizing  cor- 
porations to  sell  all  their  property  on 
a  certain  vote  of  the  stockholders 
applies  to  corporations  existing  at  the 


time  of  the  enactment  of  the  statute, 
the  legislature  having  the  reserved 
right  to  alter,  amend  or  repeal  char- 
ters. Germer  v.  Triple-State,  etc. 
Co.,  60  W.  Va.  143  (1906).  A  sub- 
scription for  stock  is  not  released  by  a 
subsequent  consolidation  of  the  com- 
pany with  another,  unless  such  con- 
solidation is  a  fundamental  altera- 
tion of  the  organization.  Morrill  v. 
Smith  County,  89  Tex.  529  (1896). 
It  has  been  held  that,  under  its  reserved 
power,  the  legislature  may  authorize 
a  road  to  lease  to  another.  Durfee 
V.  Old  Colony,  etc.  R.  R.,  87  Mass. 
230  (1862).  Under  the  reserved  right 
to  amend  the  charter,  an  amendment 
authorizing  a  lease  is  not  valid  except 
with  the  unanimous  consent  of  the 
stockholders.  Dow  v.  Northern  R.  R., 
67  N.  H.  1  (1887),  giving  an  exhaus- 
tive discussion  of  the  question. 

3  Looker  v.  Maynard,  179  U.  S.  46 
(1900).  Where  by  statute  the  state 
retains  power  to  amend  charters  sub- 
sequently granted,  a  subsequent  con- 
stitutional provision  for  cumulative 
voting  applies  to  all  such  corpora- 
tions, whether  organized  by  special 
charter  or  under  the  general  act,  and 
does  not  impair  the  validity  of  a  con- 
tract. So  also  where  a  corporation 
amends  its  charter  under  an  act  pro- 
viding for  cumulative  voting,  such 
cumulative  voting  applies  to  it.  Gregg 
V.  Granby,  etc.  Co.,  164  Mo.  616 
(1901).  Under  the  reserved  right  of 
the  legislature  to  amend  a  charter  of 
an  insiu-anee  company,  it  cannot  pre- 
scribe that  twenty-eight  of  the  fifty- 
two  directors  shall  be  elected  by  policy- 
holders, the  remaining  twenty-four  to 
be  elected  by  the  stockholders,  but 
where  the  original  charter  contem- 
plated voting  by  the  policyholders 
under  certain  contingencies,  the  leg- 
islature may  authorize  the  policy- 
holders, as  well  as  the  stockholders,  to 


1418 


CH.   XXVIII.] 


AMENDMENTS   TO    CHARTERS. 


[§  501. 


water  rates,  provided  the  reduction  is  reasonable  and  leaves  six  per 
cent,  on  the  present  value  of  the  property  used,  even  though  the  original 
cost  was  much  greater ;  ^  provide  that  state  banks  shall  contribute 
towards  a  guaranty  fund  for  all  deposits  in  the  state  banks,^  require  a 
street  railway  to  do  additional  paving ;  ^  require  a  railroad  corporation 
to  allow  other  railroads  to  use  a  bridge  and  terminals  on  payment  of 
reasonable  compensation,  if  such  use  does  not  interfere  with  the  busi- 
ness of  the  first  corporation ;  ^    authorize  a  sale  of  all  the  corporate 


vote  at  elections  without  giving  a 
certain  number  of  directors  to  each, 
and  hence  as  against  the  dissent  of 
minority  stockholders  the  majority 
cannot  amend  the  charter  so  as  to 
exclude  the  stockholders  from  voting 
for  the  above-mentioned  twenty- 
eight  directors.  Lord  v.  Equitable, 
etc.  Soc,  194  N.  Y.  212  (1909),  the 
court  saying  (pp.  228,  229):  "The 
right  to  vote  for  directors,  therefore, 
is  the  right  to  protect  property  from 
loss  and  make  it  effective  in  earning 
dividends.  In  other  words,  it  is  the 
right  which  gives  the  property  value 
and  is  part  of  the  property  itself, 
for  it  cannot  be  separated  therefrom. 
Unless  the  stockholder  can  protect 
his  investment  in  this  way  he  cannot 
protect  it  at  all,  and  his  property 
might  be  wasted  by  feeble  adminis- 
tration and  he  could  not  prevent  it. 
He  might  see  the  value  of  all  he  pos- 
sessed fading  away,  yet  he  would  have 
no  power,  direct  or  indirect,  to  save 
himself,  or  the  company  from  finan- 
cial downfall.  With  the  right  to 
vote,  as  we  may  assume,  his  property 
is  safe  and  valuable.  Without  that 
right,  as  we  may  further  assume,  his 
property  is  not  safe  and  may  become 
of  no  value.  To  absolutely  deprive 
him  of  the  right  to  vote,  therefore,  is 
to  deprive  him  of  an  essential  attribute 
of  his  property.  To  so  undermine 
that  right  as  to  essentially  aflfeet  its 
power  of  protection,  would,  under 
ordinary  circumstances,  undermine  the 
right  to  property  involved  in  the  owner- 
ship of  stock  and  we  have  so  held." 
Although  a  charter  allows  dissolution 
on  a  two  thirds  vote  of  all  stockholders, 
yet  a  subsequent  amendment  requir- 
ing a  two  thirds  vote  of  the  sub- 
scribed capital  stock  is  binding  under 


a  constitutional  provision  that  all 
charters  are  subject  to  alteration  or 
repeal.  Re  College,  etc.  Assoc,  157 
Cal.  596  (1910).  Minority  stock- 
holders cannot  complain  that  the 
majority  under  a  statute  authorizing 
amendments  has  authorized  the  issue 
of  preferred  stock  with  sole  voting 
power  and  control  until  the  stock  is 
redeemed  as  allowed  by  statute.  Re 
Sharood  Shoe  Corporation,  192  Fed. 
Rep.  945  (1912).  Under  the  reserved 
right  to  amend,  the  legislature  may 
change  thd  charter  of  a  library  corpo- 
ration so  that  each  share  shall  have  one 
vote  instead  of  restricting  the  vote  of 
those  who  held  more  than  five  shares. 
Rankin  v.  Newark,  etc.  Assoc,  64  N. 
J.  L.  265  (1900).  Under  a  reserved 
right  to  amend  or  repeal  a  charter  the 
legislature  cannot  take  from  the  stock- 
holders of  an  insurance  company  the 
right  to  elect  all  the  directors  and 
give  to  the  policyholders  the  exclu- 
sive right  to  vote  for  a  majority  of 
them.  Lord  v.  Equitable,  etc.  Society, 
supra. 

^  Stanislaus  County  v.  San  Joaquin, 
etc.  Co.,  192  U.  S.  201  (1904). 

2  Noble  State  Bank  v.  Haskell,  219 
U.  S.  104  (1911). 

^  Fair  Haven  R.  R.  v.  New  Haven, 
203  U.  S.  379  (1906).  Under  the 
reserved  right  to  amend  a  charter  the 
state  may  requh-e  street  railway  com- 
panies to  pave  a  certain  part  of  the 
street.  Marshalltown,  etc  Ry.  v.  City 
of  Marshalltown,  127  Iowa,  637  (1905). 

*  Union  Pac  R.  R.  t;.  Mason  City, 
etc.  R.  R.,  128  Fed.  Rep.  230  (1904). 
Where  in  a  charter  granted  by  Con- 
gress to  a  railroad  corporation  for  a 
bridge,  the  right  is  retained  to  Con- 
gress to  alter,  amend  or  repeal,  and 
thereafter    another    act    of    Congress 


1419 


501. 


AMENDMENTS   TO    Ca-VRTERS. 


[CH.  XXVIII. 


property  on  a  vote  of  two  thirds  in  interest  of  the  stockholders ;  ^  au- 
thorize corporations  to  purchase  stock  in  other  corporations  engaged  in 
a  similar  business,  even  though  the  purpose  is  merely  to  obtain  control  ;2 
authorize  a  mutual  insurance  company  to  reincorporate  as  a  regular 
insurance  company  and  the  pohcyholders  cannot  object ;  ^  revoke  an 
exemption  from  taxation ;  ^  compel  a  building  and  loan  association  to 
limit  the  interest  they  pay  or  else  cease  doing  business ;  '"  restrict  the 
amount  of  new  insurance  which  insurance  companies  may  accept  yearly;  ^ 
authorize  the  corporation  on  a  two  thirds  vote  of  its  stockholders  to 
issue  preferred  stock/  or  provide  that  it  is  no  defense  to  an  action  for 
negligence  that  the  injury  was  caused  by  the  negligence  of  a  co-em- 
ployee.^ A  compulsory  labor  law  applicable  to  corporations,  firms, 
and  individuals,  if  a  deprivation  of  property  without  due  process 
of  law,  cannot  be  justified  as  an  amendment  to  a  charter  under  a  re- 
served right  of  the  legislature.^  Even  though  a  railroad  has  made  a 
survey  and  located  its  route,  yet,  if  it  has  not  condemned  its  right  of 
way  under  the  state  statute,  the  state,  under  the  reserved  right  to  amend 
or  repeal,  may  repeal  the  power  to  so  condemn.^"  A  general  statute 
reserving  the  power  to  amend  or  repeal  charters  is  a  part  of  all  special 
charters  passed   subsequently.^^    A   general   statute   reserving  to  the 


provides  that  such  bridge  shall  be 
open  for  the  use  of  other  railroads 
on  a  reasonable  compensation,  and 
thereafter,  a  mortgage  given  by  the 
corporation  is  foreclosed,  the  purchaser 
takes  the  bridge,  subject  to  the  obli- 
gation to  allow  other  railroads  to  use 
the  bridge,  even  though  the  mortgage 
was  executed  before  the  second  stat- 
ute was  enacted.  The  court  came  to 
this  conclusion  without  stopping  to 
inquire  whether  the  forclosure  and 
sale  "was  anything  more  than  a  reor- 
ganization under  the  form  of  a  judi- 
cial proceeding"  nor  whether,  if  it 
were  a  bona  fide  sale  to  an  independent 
third  party,  the  sale  took  the  prop- 
erty out  of  the  jurisdiction  of  Con- 
gress. Union  Pacific  Co.  v.  Mason 
City  Co.,  199  U.  S.  160  (1905). 

1  Allen  V.  Ajax,  etc.  Co.,  30  Mont. 
490  (1904). 

2  Such  stock  may  be  voted  and  a 
stockholder  cannot  object.  Bigelow 
V.  Calumet,  etc.  Co.,  167  Fed.  Rep. 
704  (1908). 

*  Such  reserved  power  is  effective 
whether  it  appears  in  the  charter  or 
in  the  general  laws  or  in  the  consti- 


tution of  the  state.  Polk  v.  Mutual 
Reserve  Fund,  207  U.  S.  310  (1907). 

^  People  ex  rel.  Cooper  Union  v. 
Gass,  190  N.  Y.  323  (1907). 

^  St.  John  V.  Iowa,  etc.  Ass'n,  136 
Iowa,  448  (1907). 

« Bush  V.  New  York,  etc.  Co., 
135  N.  Y.  App.  Div.  447  (1909). 

^  Hinckley  v.  Schwarzschild,  etc. 
Co.,  107  N.  Y.  App.  Div.  470  (1905). 

8  Lewis  V.  Northern  Pac.  Ry., 
36  Mont.  207  (1907). 

9  Ives  V.  So.  Buffalo  Ry.,  201  N.  Y. 
271,  290,  319  (1911). 

1°  Adirondack  Ry.  v.  New  York 
State,  176  U.  S.  335  (1900).  Under 
the  reserved  right  to  amend  a  charter 
the  state  may  repeal  the  power  of 
eminent  domain  granted  to  the  com- 
pany. Yadkin,  etc.  Co.  v.  Whitney 
Co.,  150  N.  C.  31  (1908). 

"  A  general  statute  reserving  to  the 
state  the  right  to  amend  or  repeal  a 
charter  is  a  part  of  all  special  char- 
ters thereafter  passed,  even  though 
not  expressly  made  a  part  thereof. 
Citizens'  Sav.  Bank,  etc.  v.  Owensboi-o, 
173  U.  S.  636,  644  (1899).  Polk  v. 
Mutual  Reserve  Fund,  207  XJ.  S.  310 


1420 


CH.  XXVIII.] 


AMENDMENTS   TO    CHARTERS. 


[§  501. 


legislature  the  right  to  repeal  and  amend  charters  applies  to  extensions 
of  pre-existing  charters  as  well  as  to  subsequent  grants  of  new  charters.^ 
Where  a  statute  provides  that  any  corporation  accepting  its  benefits 
thereby  waives  its  exemption  from  the  power  of  the  legislature  to  amend 
its  charter,  the  acceptance  of  the  benefits  of  such  a  statute  thereby  works 
that  change  without  any  formal  action  on  the  part  of  the  board  of  di- 
rectors or  stockholders.^  Where  the  legislature  has  reserved  the  right 
to  amend  a  charter,  it  may  do  so  without  any  corporate  action  whatso- 
ever, or  it  may  provide  for  the  amendment  being  approved  by  the  di- 
rectors or  stockholders,  or  both.^  Under  the  reserved  right  of  the  legis- 
lature to  repeal  the  charter,  it  may  be  repealed  if  the  corporation  does 
not  accept  a  compulsory  labor  law,'*  or  may  repeal  the  charter  of  a 
water-works  company,  even  though  the  company  has  given  a  mortgage 
and  the  object  of  the  repeal  is  to  enable  the  city  to  have  its  own  water- 
works, and  even  though  the  repeal  leaves  in  doubt  the  continuance  of 
the  time  grant  from  the  city  to  carry  on  the  water-works  business.^ 
Where  a  city  reserves  the  right  in  its  grant  to  a  telephone  company  to 
repeal  it,  such  repeal  is  legal. ^    An  exclusive  right  of  a  street  railway 


(1907).  Even  though  a  charter  for 
a  street  railway  is  granted  before  a 
constitutional  provision  is  enacted 
reserving  the  right  to  amend,  yet  sub- 
sequent grants  to  the  street  railway 
are  subject  to  such  reserved  right  to 
amend.  A  foreclosure  of  the  com- 
pany and  the  taking  over  of  the  prop- 
erty by  a  new  company  after  the  con- 
stitutional provision  is  enacted  makes 
the  new  company  subject  thereto. 
San  Antonio,  etc.  Co.  v.  Altgelt,  200 
U.  S.  304  (1906).  Where  the  general 
statutes  reserve  the  right  to  amend 
charters,  this  applies  to  all  charters 
subsequently  obtained,  either  by  spe- 
cial or  under  general  incorporating 
acts.  Lord  v.  Equitable,  etc.  Soc, 
194  N.  Y.  212  (1909).  A  general 
statute  reserving  the  right  to  alter, 
amend,  or  repeal  charters  applies  to 
all  subsequent  special  charters  not 
expressly  excepted  from  its  effect. 
Watson  Seminary  v.  Pike  Co.  Court, 
149  Mo.   57    (1899).     See   §2,   supra. 


A  general  antecedent  statute  reserving 
the  right  to  amend  does  not  apply  to 
subsequent  amendments  to  an  old 
charter  where  it  was  not  so  intended. 
A  new  charter  may  be  so  drawn  as  to 
be  free  from  such  a  general  antece- 
dent statute.  New  Jersey  v.  Yard,  95 
U.  S.  104  (1877),  rev'g  37  N.  J.  L. 
228.  Where,  subsequently  to  the  in- 
corporation of  a  company,  a  general 
act  reserves  to  the  legislature  the 
right  to  amend  or  repeal  any  and  all 
charters,  the  legislature  may  repeal 
any  amendments  to  the  charter,  so 
far  as  such  amendments  are  passed 
after  the  general  act,  where  the 
amendments  do  not  expressly  waive 
the  legislative  right  of  amendment  or 
repeal.  But  any  amendment  should 
be  "saving,  whenever  that  power  was 
exerted,  all  rights  previously  vested." 
An  exemption  from  taxation  may  be 
repealed  under  the  reserved  power. 
(Approving  Tomlinson  v.  Jessup,  15 
Wall.  4.54  —  1872,  and  Raih-oad  Co.  v. 


1  Northern  Bank,  etc.  v.  Stone,  88 
Fed.  Rep.  413  (1898). 

-  Louisville  &  N.  R.  R.  v.  State, 
154  Ala.  156  (1907). 

3  Lord  V.  Equitable,  etc.  Soc,  195 
N.  Y.  212  (1909). 


« Ives  V.  So.  Buffalo  Ry.,  201  N.  Y. 
271,  320. 

5  Calder  v.  Michigan,  218  U.  S.  591 
(1910). 

*  Southern,  etc.  Co.  v.  City  of  Rich- 
mond, 98  Fed.  Rep.  671  (1899). 


1421 


§502. 


AMENDMENTS   TO   CHARTERS. 


[CH.  xxviir. 


company  may  be  repealed  under  a  reserved  right  by  the  legislature  to 
revoke,  and  such  repeal  may  be  by  im'plication.^  The  repeal  of  a  char- 
ter, however,  does  not  destroy  street  rights  or  other  similar  franchises.^ 

§  502,  Dissenting  stockholder's  remedy  against  an  illegal  amend- 
ment. — •  Where  an  unauthorized  and  illegal  amendment  has  been  ac- 
cepted by  a  corporation  and  is  about  to  be  acted  upon,  a  stockholder 
has  two  remedies.  If  he  has  not  paid  his  subscription,  he  may  con- 
sider himself  released  from  his  liability  to  pay  the  subscription,  or 
he  may  begin  suit  in  equity  to  obtain  an  injunction  against  or  to  set 
aside  any  action  by  the  corporation  under  the  amendment.^     If  the 


Maine,  96  U.  S.  499  —  1877.)  Credi- 
tors stand  upon  the  same  footing  in 
this  respect.  Louisville  Water  Co.  v. 
Clark,  143  U.  S.  1  (1892). 

1  Wilmington  City  Ry.  v.  Wilming- 
ton, etc.  Ry.,  46  Atl.  Rep.  12  (Del. 
1900).  Under  the  right  reserved  in 
the  constitution  of  the  state  to  revoke 
charters,  the  legislature  may  disregard 
an  exclusive  right  granted  to  a  street 
railway  by  its  special  charter  and  may 
grant  rights  to  another  company. 
Wilmington,  etc.  Ry.  v.  People's  Rv., 
47  Atl.  Rep.  245  (Del.  1900).  Cf. 
§  913,  infra. 

2  "The  charter  of  a  corporation  is 
the  law  which  gives  it  existence  as 
such.  That  is  its  general  franchise, 
which  can  be  repealed  at  the  will  of 
the  legislature.  A  special  franchise 
is  the  right,  granted  by  the  public, 
to  use  public  property  for  a  public 
use,  but  with  private  profit,  such  as 
the  right  to  build  and  operate  a  rail- 
road in  the  streets  of  a  city.  Such  a 
franchise,  when  acted  upon,  becomes 
property,  and  cannot  be  repealed, 
unless  power  to  do  so  is  reserved  in  the 
grant,  although  it  may  be  condemned 
upon  making  compensation."  Lord 
V.  Equitable,  etc.  Soc,  194  N.  Y.  212, 
225  (1909).     See  also  §641,  infra. 

3  This  rule  is  recognized  and  applied 
in  most  of  the  cases  of  this  chapter. 
See  also  Clearwater  v.  Meredith,  1 
Wall.  25  (1863),  holding  that  the 
stockholder  was  released,  and  say- 
ing: "Clearwater  could  have  pre- 
vented this  consolidation  had  he 
chosen  to  do  so;"  Nugent  v.  Super- 
visors, 19  Wall.  241  (1873).  A  stock- 
holder may  enjoin  a  corporation  acting 
under  an  illegal  amendment.     Wood- 


ruff V.  Columbus,  Inv.  Co.,  135  Ga. 
215  (1910).  An  amendment  to  the 
charter  materially  changing  the  ter- 
minus releases  a  dissenting  subscriber 
for  stock  from  his  subscription.  Ke- 
nosha, etc.  R.  R.  V.  Marsh,  17  Wis.  13 
(1863).  A  change  of  the  termini 
under  an  amendment  to  the  charter 
releases  previous  subscribers,  there 
being  no  reserved  right  to  make  such 
amendment.  Snook  v.  Georgia' Imp. 
Co.,  83  Ga.  61  (1889).  A  fundamen- 
tal change  in  the  corporation  releases 
subscribers.  Greenbrier  Ind.  Exposi- 
tion V.  Rodes,  37  W.  Va.  738  (1893) ; 
Buffalo,  etc.  R.  R.  v.  Pottle,  23 
Barb.  21  (1856).  A  subscription  to  a 
corporation  to  be  organized  for  dealing 
in  a  specified  article  cannot  be  enforced 
by  a  corporation  subsequently  organ- 
ized for  manufacturing  and  dealing  in 
that  article.  Woods,  etc.  Co.  v. 
Brady,  181  N.  Y.  145  (1905).  A 
change  in  the  plan  of  organization 
so  as  to  have  a  larger  capital  stock 
than  was  originally  intended  releases 
a  subscriber.  Norwich,  etc.  Co.  v. 
Hockaday,  89  Va.  557  (1893).  A 
change  of  route  releases  the  sub- 
scriber. Champion  v.  Memphis,  etc. 
R.  R.,  35  Miss.  692  (1858).  A  charter 
amendment  enlarging  the  corporate 
objects  from  fire  and  accident  to  fire, 
marine,  and  inland  insurance  releases 
dissenting  stockholders.  Ashton  v. 
Burbank,  2  Dill.  435  (1873);  s.  c, 
2  Fed.  Cas.  26.  A  legislative  amend- 
ment not  accepted  by  the  company  is 
no  defense  to  a  subscription.  Chat- 
tanooga, etc.  R.  R.  V.  Warthen,  98 
Ga.  599  (1896).  In  opposition  to  the 
above  rule  of  law,  there  are  some 
decisions  holding  that  the  subscribers* 


1422 


CH.   XXVIII.] 


AMENDMENTS   TO    CHARTERS. 


[§  503. 


stockholder  has  already  paid  his  subscription,  then  his  only  remedy  is 
an  injunction  or  a  suit  to  set  aside.^  In  Pennsylvania  it  has  been 
held  that  the  stockholder  may  have  an  injunction  herein,  but  only 
until  the  corporation  shall  have  purchased  his  interest  in  the  corpo- 
ration.- This  decision,  however,  has  been  doubted,  and  hardly  seems 
consistent  with  well-established  principles  protecting  persons  in  their 
right  to  retain  their  property  except  as  taken  from  them  under  the 
power  of  eminent  domain.^ 

§  503.  Assent  and  acquiescence  as  a  bar  to  the  stockholder's  rem- 
edy. —  A  stockholder  may  be  estopped  from  objecting  to  an  amend- 
ment by  his  express  or  implied  acquiescence  therein.  Any  acts  in- 
dicating an  acceptance  by  him  of  the  amendment  bind  him  and  bar 
his  suit.*    Acquiescence  may  sometimes  grow  out  of  his  silence  or  delay 

only  remedy  is  an  injunction.     Were    vens  v.  Rutland,  etc.  R.  R.,  29  Vt.  545 


it  not  that  the  great  weight  of  author- 
ity holds  otherwise,  this  view  would 
be  commended  as  the  only  logical 
result  of  the  law.  There  is  no  reason 
why  a  stockholder  who  has  not  paid 
his  subscription  should  be  better  off 
than  he  who  has  met  that  obligation. 
See  §  187,  supra;  also  Hays  v.  Ottawa, 
etc.  R.R.,  61  111.  422  (1871);  Pacific 
R.  R.  V.  Hughes,  22  Mo.  291  (1855) ; 
Martin  v.  Pensaeola  R.  R.,  8  Fla.  370, 
389  (1859);  Ware  v.  Grand  Junction 
Water  Works,  2  Russ.  &  M.  470 
(1831) ;  First  Nat.  Bank  v.  Charlotte, 
85  N.  C.  433  (1881).  The  plea  of 
release  must  allege  acceptance  by  the 
corporation,  and  injury  to  the  defend- 
ant sued  on  his  subscription.  Haw- 
kins V.  Mississippi,  etc.  R.  R.,  35  Miss. 
688  (1858).  The  subscribers'  remedy, 
where  the  charter  differs  from  the 
prospectus  or  contract  of  subscrip- 
tion, is  considered  elsewhere.  See 
§  194,  supra. 

^  This  remedy  also  is  supported  by 
a  large  number  of  the  cases  in  this 
chapter.  See  Stevens  v.  Rutland,  etc. 
R.  R.,  29  Vt.  545  (1851);  Black  v. 
Delaware,  etc.  Canal  Co.,  24  N.  J.  Eq. 
455  (1873) ;  Mowrey  v.  Indianapolis, 
etc.  R.R.,  4  Biss.  78  (1866) ;  s.  c,  17 
Fed.  Cas.  930 ;  Ware  v.  Grand  Junction 
Water  Works,  2  Russ.  &  M.  470 
(1831).  The  stockholder  cannot  en- 
join parties  from  applying  to  the  leg- 
islature for  the  amendment.  Story 
V.  Jersey  City,  etc.  Co.,  16  N.  J.  Eq. 
13   (1863),  reviewing  the  cases;    Ste- 


(1851). 

2  Lauman  v.  Lebanon  Valley  R.  R., 
30  Pa.  St.  42  (1858),  approved  in 
State  V.  Bailey,  16  Ind.  46  (1861).  Cf. 
Ship  V.  Crossk-ill,  L.  R.  10  Eq.  73 
(1870);  Stewart  v.  Austin,  L.  R.  3 
Eq.  299  (1866),  holding  that  the  re- 
covery back  cannot  be  in  a  court  of 
equity. 

'  Mowrey  v.  Indianapolis,  etc.  R.  R., 
4  Biss.  78  (1866) ;  s.  c,  17  Fed.  Cas. 
930. 

^Bedford  R.  R.  v.  Bowser,  48  Pa. 
St.  29  (1864).  Re  Sharood  Shoe  Cor- 
poration, 192  Fed.  Rep.  945  (1912). 
Long  delay  may  constitute  a  ratifica- 
tion herein,  no  formal  acceptance  of  an 
amendment  being  necessary.  Gifford 
V.  New  Jersey  R.  R.,  10  N.  J.  Eq.  171 
(1854) ;  Bangor,  etc.  R.  R.  v.  Smith,  47 
Me.  34  (1859);  State  v.  Sibley,  25 
Minn.  387  (1879) ;  Hope  Mut.  F.  Ins. 
Co.  V.  Beckman,  47  Mo.  93  (1870); 
Covington  v.  Covington,  etc.  Co., 
10  Bush  (Ky.),  69  (1874);  Kenton 
County  Court  v.  Bank  Lick  Tump.  Co., 
10  Bush  (Ky.),  529  (1875) ;  Sumrall  v. 
Sun  Mut.  Ins.  Co.,  40  Mo.  27  (1867) ; 
Smead  v.  Indianapolis,  etc.  R.  R.,  11 
Ind.  104  (1858).  Cf.  Pingry  v.  Wash- 
burn, 1  Aiken  (Vt.),  264  (1826).  See, 
in  general,  Memphis  Branch  R.  R. 
V.  Sullivan,  57  Ga.  240  (1876) ;  Hous- 
ton V.  Jefferson  College,  63  Pa.  St.  428 
(1869);  Danbury,  etc.  R.  R.  v.  Wil- 
son, 22  Conn.  435  (1853);  Vermont, 
etc.  R.  R.  V.  Vermont  Central  R.  R., 
34  Vt.   1    (1861);    Hayworth  v.  Junc- 


1423 


503. 


AMENDMENTS   TO    CHARTERS. 


[CH.  XXVIII. 


under  circumstances  that  called  on  him  to  dissent  if  he  so  intended.^ 
A  court  of  equity  will  go  far  to  aid  a  dissenting  stockholder  where  he 

tion  R.  R.,  13  Ind.  348  (1859) ;  Mills  the  full  amount  of  stock  held  by  them 
V.  Central  R.  R.,  41  N.  J.  Eq.  1  (1886) ;  before  the  reduction,  more  than  a  year 
Zabriskie  v.  Hackensack,  etc.  R.  R.,  having  elapsed  since  the  reduction  and 
18  N.  J.  Eq.  178  (1867);  Ex  parte  no  objection  being  made.  Woodruff 
Booker,  18  Ark.  338  (1857) ;  Upton  v.  v.  Columbus  Inv.  Co.,  135  Ga.  215 
Jackson,  1  Flip.  C.  C.  413  (1874);  (1910).  A  policyholder  in  an  insur- 
s.  c,  28  Fed.  Cas.  844;  Goodin  v.  ance  company  cannot  attack  an  amend- 
Evans,  18  Ohio  St.  150  (1868) ;  also  ment  made  to  the  charter  before  he 
§  640  and  ch.  XLIV,  infra.  Where  took  out  his  policy.  Harrison  v. 
the  charter  of  a  water-works  company  Philadelphia,  etc.,  171  Fed.  Rep.  178 
is  amended  so  that  a  municipality  may  (1909) ;  aff'd,  176  Fed.  Rep.  323. 
subscribe  for  the  stock  and  take  an  i  Commonwealth  v.  Cullen,  13  Pa. 
option  to  purchase  its  property,  and  St.  133  (1850)  ;  Martin  v.  Pensacola, 
the  company  accepts  such  subscrip-  etc.  R.  R.,  8  Fla.  370  (1859) ;  Owen 
tion,  it  is  bound  by  the  option.  Town  v.  Purdy,  12  Ohio  St.  73  (1861). 
of  Southington  v.  Southern,  etc.  Co.,  Contra,  Hamilton  Mut.  Ins.  Co.  v. 
80  Conn.  646  (1908).  Stockholders  Hobart,  68  Mass.  543  (1854).  Parties 
cannot  object  to  an  amendment  of  the  taking  part  in  an  extension  of  the 
charter  increasing  their  liability  if  they  road  cannot  object  that  the  charter 
allow  the  corporation  to  continue  to  do  amendment  authorizing  it  was  un- 
business  and  incur  debts  thereafter,  constitutional.  Jones  v.  Concord,  etc. 
Gilboa  V.  Kimball,  69  Atl.  Rep.  765  R.  R.,  67  N.  H.  234  (1892).  Although 
(R.  I.  1908).  If  the  stockholder  sub-  a  radical  change  in  the  location  of  a 
scribed  after  the  amendment  was  made  railroad  after  a  subscription  has  been 
he  cannot  complain.  Eppes  v.  Missis-  made  releases  the  subscription,  yet 
sippi,  etc.  R.  R.,  35  Ala.  .33,  54  (1859) ;  the  subscriber  may  by  his  acts  be 
McClure  v.  People's  Freight  Ry.,  90  bound  by  such  change.  Lowell  v. 
Pa.  St.  269  (1879).  If  a  stockholder  Washington  Co.  R.  R.,  90  Me.  80 
does  not  object  to  an  amendment,  it  (1897).  Although  a  stockholder  may 
is  not  for  a  person  whose  land  is  enjoin  a  consolidation  of  his  com- 
being  taken  under  eminent-domain  pany  with  another  under  a  statute 
proceedings  to  object.  Ames  v.  Lake  passed  after  the  incorporation,  the  ob- 
Superior,  etc.  R.  R.,  21  Minn.  241,  291  ject  of  the  consolidation  being  differ- 
(1875).  Changes  and  amendments  as  ent  from  that  of  the  original  corpora- 
to  the  route  do  not  release  the  sub-  tion,  yet  where  the  stockholder  delays 
scriber  where  he  took  part  therein,  applying  to  the  court  for  nearly  a 
Owenton,  etc.  Co.  v.  Smith,  13  S.  W.  year,  and  in  the  meantime  the  con- 
Rep.  426  (Ky.  1890).  Bonds  issued  solidated  company  has  borrowed 
under  an  amendment  to  a  charter  money  and  given  mortgages,  and  such 
with  the  consent  of  all  the  stockholders  mortgages  are  about  to  be  foreclosed, 
will  be  enforced,  even  though  the  the  complaining  stockholder  is  guilty 
amendment  was  invalid.  Johnson  v.  of  laches  and  his  remedy  is  barred. 
Mercantile,  etc.  Co.,  94  Ga.  324  Rabe  v.  Dunlap,  51  N..  J.  Eq.  40 
(1894).  "A  stockholder  may  be  (1893).  A  consolidation  of  railroads 
estopped  from  objecting  to  an  amend-  under  an  amendment  to  the  charter 
ment  if  he  actively  favors  it  and  takes  may  be  prevented  by  a  single  stock- 
part  in  having  it  adopted."  Quoted  holder.  But  several  years'  delay  in 
and  approved  in  Casanas  v.  Audubon,  complaining  is  fatal.  The  stockholder 
etc.  Co.,  124  La.  786  (1909).  Where  then  can  only  recover  the  value  of  his 
the  capital  stock  has  been  reduced  and  stock  and  past  dividends.  Deposit 
all  the  stockholders  except  two  have  Bank  v.  Barrett,  13  S.  W.  Rep.  337 
taken  out  certificates  for  reduced  Ky.  (1890).  Where  stockholders  in  a 
amounts  and  a  dividend  is  declared,  college  exchange  their  stock  for  scholar- 
those  two  cannot  claim  a  dividend  on  ships,  a  removal  of  the  college  to  an- 

1424 


CH.   XXVIII.] 


AMENDMENTS   TO    CHARTERS. 


[§  503. 


applies  promptly  and  before  large  investments  and  many  changes  are 
made  on  the  faith  of  the  acts  complained  of.  But  laches  will  not  be 
tolerated  by  the  courts,  especially  where  important  interests  are  in- 
volved.^ Stockholders  are  presumed  to  have  assented  to  a  change  in 
the  charter.^ 


other  location  under  an  amendment  to 
the  charter,  such  amendment  having 
been  made  twenty-five  years  prior  to 
such  removal,  will  not  be  enjoined. 
Bryan  v.  Board  of  Education,  90  Ky. 
322  (1890) ;  aff'd,  1.51  U.  S.  639.  As- 
sent of  a  stockholder  is  not  presumed, 
but  must  be  proven.  March  v. 
Eastern  R.  R.,  43  N.  H.  515  (1862) ; 
s.  c,  40  N.  H.  548.  Union  Locks  and 
Canals  v.  Towne,  1  N.  H.  44  (1817) ; 
Ireland  v.  Palestine,  etc.  Tump.  Co., 
19  Ohio  St.  369  (1869).  Where  the 
directors    vote    at    the    stockholders' 


meeting  in  favor  of  amending  the 
charter,  this  removes  an  objection  that 
as  directors  they  should  have  voted  for 
the  change  in  the  first  instance  at  a 
directors'  meeting.  Bernstein  v.  Kap- 
lan, 150  Ala.  222  (1907).  If  a  statute 
authorizing  an  increase  of  stock  is 
unconstitutional  the  subscribers  there- 
for are  not  liable.  Marion  T.  Co.  v. 
Bennett,  169  Ind.  346  (1907). 

1  See  eh.  XLIV,  infra. 

2  Holmes  v.  Royal,  etc.  Assoc,  128 
Mo.  App.  329  (1908). 


(90) 


1425 


CHAPTER  XXIX. 


"TRUSTS"  AND   UNINCORPORATED  JOINT-STOCK  ASSOCIA- 
TIONS. 


§  503o.  Definition  and  legality  of  a 
"trust"  —  Decisions  in  the 
various  states  on  this  subject 
—  The  anti-trust  act  of  Con- 
gress. 

B.    UNINCORPORATED  JOINT-STOCK 
ASSOCIATIONS. 

504.  Definitions  —  Joint-stock  asso- 
ciations, clubs,  exchanges, 
etc.  —  Expulsion  —  Owner- 
ship of  land. 


§505. 


Conduct  of  business  and  meet- 
ings —  Statutory  joint-stock 
associations. 

Joint-stock  associations  may 
arise  by  implication  of  law. 

How  a  person  becomes  a  mem- 
ber —  Transfers. 

Liability  of  members  to  credi- 
tors and  to  the  association. 

509.  Actions  by  members  against  of- 

ficers and  the  association. 

510.  Dissolution  —  Disposition       of 

property. 


506. 
507. 


508. 


A.        TRUSTS. 

§  503a.  Definition  and  legality  of  a  '^  trust  "  —  Decisions  in  the 
various  states  on  this  subject  —  The  anti-trust  act  of  Congress.  —  The 
word  "  trust  "  was  first  used  to  mean  an  agreement,  between  many 
stockholders  in  many  corporations,  to  place  all  their  stock  in  the  hands 
of  trustees  and  to  receive  therefor  trust  certificates  from  the  trustees. 
The  stockholders  thereby  consolidated  their  interests  and  became 
trust-certificate  holders.  The  trustees  owned  the  stock,  voted  it, 
elected  the  officers  of  the  various  corporations,  controlled  the  business, 
received  all  the  dividends  on  the  stock,  and  used  all  these  dividends  to 
pay  dividends  on  the  trust-certificates.  The  trustees  were  periodically 
elected  by  the  trust-certificate  holders.  The  purpose  of  the  "  trust  " 
was  to  control  prices,  prevent  competition,  and  cheapen  the  cost  of 
production.  The  Standard  Oil  Trust,  the  American  Cotton-seed  Oil 
Trust,  and  the  Sugar  Trust  were  examples  of  this  method  of  combina- 
tion.^ 


1  The  following  is  a  definition  of  a 
trust  as  found  in  the  New  Jersey 
statute  enacted  in  February,  1913,  on 
the  recommendation  of  Governor  Wil- 
son, now  President  of  the  United 
States. 

"1.  A  trust  is  a  combination  or  agree- 
ment between  corporations,  firms  or  per- 
sons, any  two  or  more  of  them,  for  the  fol- 
lowing purposes,  and  such  trust  is  hereby 
declared  to  be  illegal  and  indictable : 


"  (1)  To  create  or  carry  out  restrictions  in 
trade  or  to  acquire  a  monopoly,  either  in  in- 
trastate or  interstate  business  or  commerce. 

"(2)  To  limit  or  reduce  the  production 
or  increase  the  price  of  merchandise  or  of 
any  commodity. 

"(3)  To  prevent  competition  in  manu- 
facturing, making,  transporting,  selling  and 
purchasing  of  merchandise,  produce  or  any 
commodity. 

"(4)  To  fix  at  any  standard  or  figure, 
whereby  its  price  to  the  public  or  consumer 
shall  in  any  manner  be  controlled,  any 
article  or  commodity  of  merchandise,  prod- 


1426 


CH.  XXIX.] 


TRUSTS,    ETC. 


[§  503a. 


Later  the  word  "  trust  "  has  been  given  a  wider  and  more  popular 
meaning.  It  is  used  to  designate  any  combination  of  producers  for  the 
purpose  of  controlling  prices  or  suppressing  competition.  In  this  sense 
of  the  word  all  schemes  whereby  those  who  were  competitors  combine 
their  interests  are  "  trusts." 

During  the  past  twenty  years  trusts  have  come  into  great  promi- 
nence. They  have  multiplied  rapidly  and  have  extended  into  many 
branches  of  business.  They  have  been  the  object  of  great  popular  op- 
position, and  their  legality  has  been  assailed,  both  in  the  courts  and  by 
prohibitory  statutes. 

The  courts  have  held  with  great  uniformity  that  these  combinations 
are  illegal  if  their  purpose  is  to  restrict  production,  raise  prices,  or 
restrain  trade.  The  law  is  clear  that  any  combination  of  competing 
concerns  for  the  purpose  of  controlling  prices,  or  limiting  production, 


uce  or  commerce  intended  for  sale,  use  or 
consumption  in  this  State  or  elsewhere. 

"(5)  To  make  any  agreement  by  which 
they  directly  or  indirectly  preclude  a  free 
and  unrestricted  competition  among  them- 
selves, or  any  purchasers  or  consumers,  in 
the  sale  or  transportation  of  any  article  or 
commodity,  either  by  pooling,  withholding 
from  the  market  or  selling  at  a  fixed  price, 
or  in  any  other  manner  by  which  the  price 
might  be  affected. 

"(6)  To  make  any  secret  oral  agree- 
ment or  arrive  at  an  understanding  without 
express  agreement  by  which  they  directly 
or  indirectly  preclude  a  free  and  unrestricted 
competition  among  themselves,  or  any  pur- 
chasers or  consumers,  in  the  sale  or  trans- 
portation of  any  article  or  commodity, 
either  by  pooling,  withholding  from  the 
market,  or  selling  at  a  fixed  price,  or  in  any 
other  manner  by  which  the  price  might  be 
affected." 

The  committee  of  the  House  of 
Representatives  at  Washington,  in 
their  report,  explained  the  nature  of 
the  Standard  Oil  Trust  and  Sugar 
Trust  very  clearly.  The  committee 
reported  "that  there  exist  a  certain 
number  of  corporations  organized  un- 
der the  laws  of  the  different  states 
and  subject  to  their  control ;  that 
these  corporations  have  issued  their 
stock  to  various  individuals,  and  that 
these  individual  stockholders  have 
surrendered  their  stock  to  the  trustees 
named  in  the  agreements  creating  these 
trusts,  and  accepted  in  lieu  thereof 
certificates  issued  by  the  trustees 
named  therein.  The  agreements  pro- 
vide that  the  various  corporations 
whose    stock    is    surrendered    to    the 


trustees  shall  preserve  their  identity 
and  carry  on  their  business."  See 
4  Ry.  &  Corp.  L.  J.  98.  Mr.  S.  C. 
T.  Dodd,  the  general  solicitor  and 
originator  of  the  Standard  Oil  Trust, 
defined  a  trust  as  "an  arrangement  by 
which  the  stockholders  of  various  cor- 
porations place  their  stocks  in  the 
hands  of  certain  trustees,  and  take  in 
lieu  thereof  certificates  showing  each 
shareholder's  equitable  interest  in  all 
the  stock  so  held.  The  result  is  two- 
fold:  1.  The  stockholders  thereby 
become  interested  in  all  the  corpora- 
tions whose  stocks  are  thus  held.  2. 
The  trustees  elect  the  directors  of  the 
several  corporations."  See  7  Ry.  & 
Corp.  L.  J.  236.  Mr.  Wickersham, 
when  Attorney-General  of  the  United 
States,  defined  a  trust  as  "a  partner- 
ship of  competitive  corporations." 
The  so-called  "Money  Trust,"  which 
was  investigated  by  a  congressional 
committee,  was  defined  at  one  of  the 
hearings  of  that  committee  in  January, 
1913,  "as  an  established  identity  and 
community  of  interest  between  a  few 
leaders  of  finance,  which  has  been 
created  and  is  held  together  through 
stock  holdings,  interlocking  director- 
ates, and  other  forms  of  domination 
over  banks,  trust  companies,  railroads, 
public  service  and  industrial  corpora- 
tions, and  which  has  resulted  in  vast 
and  growing  concentration  and  control 
of  money  and  credit  in  the  hands  of  a 
comparatively  few  men." 


1427 


§  503a.] 


TRUSTS,    ETC. 


CH.   XXIX. 


or  suppressing  competition,  is  contrary  to  public  policy  and  is  void. 
This  principle  of  law  has  been  applied  with  great  rigor  to  some  of  the 
trusts.  The  two  leading  cases  on  the  subject  have  been  the  Sugar 
Trust  decision  in  New  York  ^  and  the  Standard  Oil  Trust  decision  in 
Ohio.^  Many  cases  showing  the  different  circumstances  under  which 
this  rule  has  been  applied  are  given  in  the  notes  below,  arranged  in  the 
alphabetical  order  of  the  various  states.^ 


1  The  state  will,  at  the  instance  of 
the  attorney-general,  forfeit  the  char- 
ter of  a  corporation  whose  stockholders 
have  entered  into  a  "trust"  with  the 
stockholders  of  competing  corporations 
for  the  purpose  of  forming  a  monopoly 
in  and  raising  the  price  of  sugar. 
People  V.  North  River,  etc.  Co.,  121 
N.  Y.  582  (1890).  This  case  broke 
up  the  "Sugar  Trust"  and  drove  it 
into  transferring  all  its  property  to  a 
New  Jersey  corporation  organized 
for  that  purpose. 

2  The  next  important  ease  was 
State  V.  Standard  Oil  Co.,  49  Ohio 
St.  137  (1892).  This  case  declared 
illegal  the  Standard  Oil  Trust.  That 
trust  was  also  subsequently  reorgan- 
ized into  a  New  Jersey  corporation, 

^Arkansas:  It  is  no  defense  to  a 
suit  by  a  cotton  oil  company  to  recover 
back  money  which  it  furnished  to  the 
defendant  to  purchase  cotton  seed 
that  the  plaintiff  had  entered  into  an 
unlawful  combination  to  reduce  the 
price  of  cotton  seed,  the  money  not 
having  been  used  for  that  purpose. 
Epstein  v.  Buckeye,  etc.  Co.,  153  S.  W. 
Rep.  587  (Ark.  1913). 

California:  A  criminal  conviction 
of  an  individual  for  taking  part  in  a 
butcher's  association  in  violation  of  the 
anti-trust  statute  of  California  was 
sustained  in  People  v.  Sacramento,  etc. 
Ass'n,  12  Cal.  App.  471  (1910).  The 
vendor  of  stock  in  a  California  corpora- 
tion cannot  legally  contract  not  to 
engage  in  the  line  of  business  conducted 
by  the  corporation,  because  the  Cali- 
fornia statutes  prohibit  such  a  con- 
tract, unless  the  vendor  sells  the  good- 
will of  the  business.  Dodge  Stationery 
Co.  V.  Dodge,  145  Cal.  380  (1904). 
Master  stevedores  may  form  an  associa- 
tion for  the  purposes  of  fixing  charges 
and  agreeing  that  all  business  done  by 
them  shall  be  for  the  benefit  of  the 


association.  Herriman  v.  Menzies, 
115  Cal.  16  (1896).  "Monopoly  sig- 
nifies the  sole  power  of  dealing  in  a 
particular  thing,  or  doing  a  particular 
thing,  either  generally  or  in  a  par- 
ticular place."  San  Diego  Water  Co. 
V.  San  Diego  Flume  Co.,  108 
Cal.  549  (1895).  A  contract  whose 
effect  is  to  give  a  monopoly  in  the  sale 
of  bags  by  the  vendor  agreeing  to  sell 
to  one  party  exclusively  is  illegal,  and 
no  damages  can  be  collected.  Pacific 
Factor  Co.  v.  Adler,  90  Cal.  110 
(1891).  Although  the  state  is  prose- 
cuting a  suit  to  forfeit  the  charter  for 
entering  into  a  combination,  yet  a 
sale  of  part  of  the  corporate  property 
to  a  stockholder  pending  the  suit  is 
legal,  and  the  receiver  cannot  foUow 
the  property.  A  writ  of  prohibition 
wiU  issue  against  him.  Havemeyer 
V.  Superior  Court,  84  Cal.  327  (1890). 
Where  aU  the  manufacturers  of  lum- 
ber at  a  certain  point  contracted  to 
sell  to  a  corporation  all  the  product 
of  the  miUs  so  far  as  such  product 
was  sold  in  four  counties,  and  the 
mills  agreed  not  to  sell  to  any  other 
parties  in  those  counties  except  upon  a 
forfeit  to  the  corporation,  the  court 
held  that  any  one  of  the  nulls  could 
repudiate  the  contract.  In  a  suit 
brought  by  the  corporation  against 
one  of  the  mills  for  refusing  to  live 
up  to  the  contract,  the  court  held  that 
the  corporation  could  not  recover. 
Santa  Clara,  etc.  Co.  v.  Hayes,  76  Cal. 
387  (1888). 

Colorado:  The  owner  of  a  miU  who 
leases  it  to  a  consoUdated  corporation 
and  becomes  its  general  manager  can- 
not afterwards  retake  his  property 
on  the  ground  that  the  consolidation 
was  an  unlawful  combination  to  con- 
trol prices.  Neither  can  he  do  so  on 
the  ground  that  the  company  had  no 
power  to  act  as  a  holding  company  of 


1428 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  503a. 


These   cases   show  the  complicated   questions   and   important  liti- 
gations that  have  arisen  by  reason  of  the  trusts.     During  the  past  ten 

the  stock  of  other  companies.  Buck-  express  power  to  purchase  stock,  yet 
horn,  etc.  Co.  v.  Consolidated,  etc.  Co.,  it  cannot  exercise  that  power  in  Illinois 
47  Colo.  516  (1910).  A  lessor  to  the  where  no  corporation  can  purchase 
corporation  who  is  also  its  manager  stock  unless  it  is  necessary  to  carry 
and  director  cannot  repudiate  the  lease  into  effect  the  objects  of  the  corpora- 
on  the  gi-ound  that  the  company  was  tion.  The  decree  will  not  merely 
organized  for  an  unlawful  business,  enjoin  the  purchaser  from  voting  the 
Consolidated,  etc.  Co.  v.  Wild,  42  stock  and  receiving  dividends,  but 
Colo.  202  (1908).  may  order  the  stock  to  be  returned  to 

Florida:     A    contract    between    a     the    vendors    and    the    money    repaid, 
manufacturer  and  a  storekeeper  that    The    monopoly    may    be    proved    by 
the  former  would  issue  in  wages  cer-    proving  that  the  purchaser  owned  the 
tain  orders  on  the  store  for  which  the     stock   of  a   competing   manufacturing 
former  would   receive  five   per  cent.,     company.     Dunbar  v.   American   Tel. 
and   would   not   issue   orders   on   any    etc.  Co.,  238  111.  456  (1909).     Where 
other   store  is  illegal   and   cannot  be    one  corporation  purchases  a  majority 
enforced    by    either    party.     Stewart    of   the   stock  of  another  corporation, 
V.  Stearns,  etc.  Co.,  56  Fla.'570  (1908).     thereby  creating  a  tendency  to  restrain 
Georgia:   The  statute  against  trusts    competition,    the    purchase    is    illegal, 
is  unconstitutional,  inasmuch  as  it  ex-    even    though    a    complete    monopoly 
cepts   agricultiu-al   products   and   live    would    not    result.     Minority    stock- 
stock  while  in  possession  of  the  pro-    holders  of  the  purchasing  corporation 
ducer.     But  a  merchant   may   enjoin     may  enjoin  the  purchase.     Dunbar  v. 
other  merchants  from  combining  and     American,  etc.  Co.,  224  111.  9   (1906). 
preventing  others  from   selling  goods    For  a  common  law  indictment  against 
to    him    unless   he   will   agree   to   sell    coal  corporations  for  a  conspiracy  to 
goods  at  prices  fixed  by  them.     Brown    fix  the  price  of  coal,  see  Chicago,  etc. 
V.  Jacobs,  etc.  Co.,  115  Ga.  429  (1902).    Co.  v.  People,  214  111.  421  (1905).     A 
It  is  no  defense  to  a  suit  by  a  corpora-    statute   authorizing  the  consolidation 
tion  for  the  price  of  goods  sold  that  the    of   gas   companies,   is   not   invalid   as 
sale  was  in  connection  with  a  combina-    creating     a     monopoly.       People     v. 
tion    made    by    the    vendor.     Wilder    People's,  etc.  Co.,  205  111.  482  (1903). 
Mfg.  Co.  V.  Corn,  etc.  Co.,  75  S.  E.     The   Illinois   anti-trust   act   was   con- 
Rep   918  (Ga.  1912).  strued  and  upheld  in  People  v.  Butler, 
Illinois:      In     condemnation     pro-    etc.  Co.,  201  111.  236  (1903).     In  Illinois 
ceedings  by  a  railroad   company   the    it  is  held  that  a  contract  of  a  citizen  of 
landowner  cannot  set  up  the  defense    Illinois   not   to   engage  in   the   manu- 
that  the  company  has  not  completed    faeture  of  paper  boxes  for  ten  years  in 
certain  work  within  a  certain  time  as    Illinois    or    Indiana    is    illegal,    as    in 
required  by  the  charter,  nor  the  de-    restraint   of   trade.     Lanzit   v.   J.   W. 
fense  that  the  company  had  entered    Sefton,  etc.  Co.,   184  111.  32(5   (1900). 
into  an  illegal  combination  with  an-    In  the  case  Harding  v.  American,  etc. 
other  companv.     Terre  Haute  &  P.  R.     Co.,   182    111.   551    (1899),   an  Illinois 
Co.   V.   RobbiiQs,   247   111.  376    (1910).     stockholder  in  a  New  Jersey  glucose 
Minority    stockholders   in   a   corpora-    manufacturing     corporation     enjoined 
tion   engaged   in   manufacturing    tele-    in  the  courts  of  Illinois  a  transfer  of 
phone  supplies,   a  business  impressed    the  property  of  that  corporation,  in- 
with  a  public  character,  may  cause  to    eluding  real  estate  in  Illinois,  to  an- 
be  set  aside  a  sale  of  a  majority  of  the    other    New    Jersey    corporation,    the 
stock  to  a  competing  telephone  sup-    latter  being  a  trust  formed  to  absorb 
ply  company  where  the  purchase  is  for    practically  all  the  glucose  factories  of 
the  purpose  of  establishing  a  monopoly,     the  country,  the  court  saying  that  it 
Even  though  the  purchaser  is  a  foreign    need  not  be  proved  that  prices  have 
corporation  with  a  charter  giving  it    actually  been  raised,   but   it  is   suffi- 

1429 


§  503a. 


TRUSTS,    ETC. 


CH.   XXIX. 


years  the  volume  of  such  Utigation  in  the  state  courts  has  decreased, 
but  has  rapidly  increased  in  the  federal  courts,  in  applying  the  anti- 

cient  if  it  is  within  the  power  of 
the  corporation  to  raise  them.  The 
court  said:  "Any  combination  of 
competing  corporations  for  the  pur- 
pose of  controlling  prices,  or  limiting 
production,  or  suppressing  competi- 
tion, is  contrary  to  public  policy  and 
is  void."  A  state  may  maintain  a 
suit  for  an  injunction  against  an  ele- 
vator company  using  all  its  capacity 
for  the  benefit  of  its  stockholders, 
where  the  objection  is  not  raised  that 
there  is  an  adequate  remedy  at  law. 
Central  Elevator  Co.  v.  People,  174 
111.  203  (1898).  Where  a  person  con- 
veys property  to  a  corporation,  the 
object  being  to  place  the  stock  of  that 
corporation  in  the  hands  of  trustees 
to  create  a  trust,  such  person,  having 
recovered  possession  of  his  property, 
may  defend  against  his  contract  to 
convey.  Bishop  v.  American,  etc.  Co., 
157  111.  284  (1895).  Quo  warranto 
lies  against  a  corporation  formed  to 
purchase  substantially  all  the  distil- 
leries in  the  countrv.  Distilling,  etc. 
Co.  V.  People,  156  lU.  448  (1895).  The 
Illinois  statute  of  1891  against  trusts 
is  constitutional.  Ford  v.  Chicago, 
etc.  Assoc,  155  111.  166  (1895).  The 
state  may  forfeit  the  charter  of  a  live- 
stock corporation  where  it  limits  the 
number  of  agents  which  each  of  its 
stockholders  may  employ.  People  v. 
Chicago  L.  S.  Exchange,  170  111.  556 
(1897).  A  stockholder  in  a  corpora- 
tion cannot  sustain  a  bill  to  have  the 
charter  forfeited  and  the  corporation 
wound  up  on  the  ground  that  it  was 
formed  to  purchase  and  combine 
various  competing  linseed-oil  mills 
for  the  piu-pose  of  forming  a  monop- 
oly. The  state  alone  can  ask  for  such 
a  forfeiture.  Moreover,  the  stock- 
holder, by  being  a  stockholder,  is 
estopped  from  complaining,  and  is 
presumed  to  have  had  knowledge  of 
the  facts  from  the  time  that  he  be- 
came a  stockholder.  Coquard  v.  Na- 
tional L.  S.  Co.,  171  111.  480  (1898). 
Although  the  general  statute  author- 
izes incorporation  for  any  "lawful 
purpose,"  yet  an  incorporation  to  buy 
a  majority  of  the  stock  of  each  of  four 


competing  gas  corporations  in  a  city 
is  illegal  where  the  purpose  is  to  create 
a  monopoly.  The  state  may  by  suit 
have  the  charter  forfeited.  People  v. 
Chicago  Gas  T.  Co.,  130  lU.  268 
(1889).  All  gas  companies  owe  a 
duty  to  the  public.  An  agreement  of 
two  companies  in  one  city  to  keep 
out  of  each  other's  territory  is  void. 
Chicago  Gas  L.  Co.  v.  People's  Gas  L. 
Co.,  121  111.  530  (1887).  In  Illinois 
all  the  grain  dealers  in  a  town  se- 
cretly combined  and  made  contracts  by 
which  they  controlled  the  price  of 
grain  and  the  local  storehouse  accom- 
modations. The  parties  succeeded, 
but  disagreed  in  their  division  of  the 
profits.  An  action  for  an  accounting 
was  brought  by  one  against  another. 
The  court  refused  to  aid  either  party. 
The  law  will  leave  the  guilty  con- 
spirators as  it  finds  them.  Craft  v. 
McConoughy,  79  111.  346  (1875). 

Indiana:  Where  three  corporations 
—  one  a  manufacturer  of  plumbing 
materials,  and  another  a  dealer  there- 
in, and  another  a  combination  of  other 
dealers,  —  all  unite,  an  independent 
dealer  may  enjoin  them  from  refusing 
to  deal  with  him.  Knight  v.  Miller, 
172  Ind.  27  (1909).  A  combination  of 
individuals  or  firms  to  regulate  prices 
and  competition  is  not  illegal,  if  reason- 
able, and  does  not  control  all  of  the 
commodity  or  materially  affect  the 
freedom  of  commerce.  Over  v.  Byram, 
etc.  Co.,  37  Ind.  App.  452  (1906).  A 
contract  between  two  railroads  by 
which  one  is  given  the  right  to  cross 
the  other,  and  agrees  not  to  run  any 
tracks  to  certain  quarries  which  are 
reached  by  the  tracks  of  the  other,  is 
illegal  as  creating  a  monopoly  and 
destroying  competition.  Chicago,  etc. 
Ry.  V.  Southern,  etc.  Ry.,  70  N.  E. 
Rep.  843  (Ind.  1904).  Where  two 
competing  gas  companies  agree  on 
rates  to  be  charged  the  public,  and 
agree  not  to  interfere  with  each  others' 
patrons,  the  state  may  forfeit  their 
charters,  or  the  court  may  in  its 
discretion  declare  a  forfeiture  or 
ouster  of  the  right  of  the  defendants 
to  carry  out  the  illegal  acts.     State  v. 


1430 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  503a. 


trust  act  of  congress  of  July  2,  1890.     All  of  the  great  trusts  have  been 
driven  from  their  original  mode  of  organization  and  have  reorganized 


Portland,  etc.  Co.,  153  Ind.  483 
(1899).  A  depot  corporation  has  no 
right  to  give  a  monopoly  to  one  per- 
son of  the  right  to  solicit  cab  business 
at  the  entrance  of  the  depot,  even 
though  such  entrance  is  on  the  com- 
pany's grounds.  Indianapolis,  etc. 
Ry.  V.  Dohn,  153  Ind.  10  (1899).  Cf. 
§  909,  infra. 

Iowa:  Where  a  farmers'  mercantile 
corporation  is  boycotted  by  competi- 
tors, and  in  their  behalf  a  person  buys 
stock  in  the  former  in  order  to  aid  such 
boycott,  the  court  will  refuse  a  man- 
damus to  compel  the  corporation  to 
transfer  the  stock,  and  will  refuse  an 
order  authorizing  him  to  examine  its 
books,  the  court  saying  that  he  was 
"a  malicious  meddler,"  and  purchased 
the  stock  to  betray  the  company  to  its 
competitors.  Funck  v.  Farmers',  etc. 
Co.,  142  Iowa,  621  (1909).  The  Iowa 
statute  against  trusts  applies  to  an 
agreement  of  insurance  companies  to 
charge  uniform  rates.  Beechley  v. 
MulviUe,  102  Iowa,  602  (1897). 

Kansas:  The  state  maintained  a 
suit  to  dissolve  an  unincorporated  live- 
stock exchange  on  the  ground  that  it 
was  in  restraint  of  trade,  in  State  v. 
Aikens,  83  Kan.  792  (1911).  A  speech 
in  which  the  president  of  a  trust 
states  the  extent  of  the  combination  is 
admissible  in  a  criminal  proceeding 
against  his  company  under  an  anti- 
trust act.  State  v.  International,  etc. 
Co.,  79  Kan.  371  (1909).  A  lease  by  an 
electric  light  and  power  company  of  its 
property  to  a  competing  corporation 
with  an  agreement  not  to  engage  in  the 
business  is  ultra  vires,  and  the  rent 
cannot  be  collected  by  suit.  Keene 
Syndicate  v.  Wichita,  etc.  Co.,  69  Kan. 
284  (1904).  A  criminal  prosecution 
against  the  oflSeers  of  a  company  for 
pooling  with  others  to  fix  the  price  to 
be  paid  for  grain,  failed  in  State  v. 
Dreany,  65  Kan.  292  (1902),  but 
another  prosecution  was  successful  in 
State  V.  Smiley,  69  Pac.  Rep.  199 
(Kan.  1902);  aff'd,  196  U.  S.  447 
(1905).  A  dealer  in  cattle  cannot 
enjoin  a  voluntary  association  of 
other    cattle    dealers    from    expelling 


one  of  its  members  for  violating  a 
by-law  prohibiting  him  from  trading 
with  the  plaintiff.  Downs  v.  Bennett, 
63  Kan-  653  (1901).  Where  an  asso- 
ciation of  live-stock  commission  mer- 
chants is  formed  for  the  purpose  of 
regulating  commissions,  with  a  pen- 
alty for  violation  of  the  same,  a  mem- 
ber cannot  enjoin  the  association  from 
expelling  him  for  non-payment  of  the 
penalty.  Greer  v.  Payne,  4  Kan.  App. 
153  (1896).  Insurance  business  is  not 
interstate  commerce.  Foreign  insur- 
ance companies  that  combine  to  control 
and  increase  the  rates  of  insurance  on 
property  inside  the  state  violate  the 
statute  against  trusts,  and  their  local 
agents  are  subject  to  prosecution  there- 
for. State  V.  Phipps,  50  Kan.  609 
(1893). 

Kentucky:  A  corporation  which 
purchases  ice  plants  and  the  output 
of  ice  until  it  controls  all  but  five  or  ten 
per  cent.,  the  sellers  agreeing  not  to 
engage  in  the  business  again  in  that 
county  for  ten  years,  violates  the  anti- 
trust act,  even  though  no  attempt  was 
made  to  control,  raise,  or  fix  the  price 
of  the  ice.  Alerehants'  Ice,  etc.  Co.  v. 
Rohrman,  138  Ky.  530  (1910).  The 
criminal  prosecution  of  the  Harvester 
trust  was  involved  in  International 
etc.  Co.  V.  Commonwealth,  137  Ky. 
668  (1910),  and  144  Ky.  403  (1911). 
Even  a  monopoly  in  restraint  of  trade 
may  bring  suit  for  damages  for  the 
wrongful  destruction  of  its  property. 
Louisville,  etc.  Co.  v.  Burley,  etc.  Soc, 
147  Ky.  22  (1912).  An  indictment 
against  the  International  Harvester 
Company  was  sustained  in  Common- 
wealth V.  International  Harvester  Co., 
144  S.  W.  Rep.  1068  (Ky.  1912).  But 
a  con\dction  was  reversed  in  Inter- 
national Harvester  Co.  v.  Common- 
wealth, 147  Ky.  557  (1912).  The 
International  Harvester  Company  was 
convicted  of  violating  the  anti-trust 
law  in  International,  etc.  Co.  v.  Com- 
monwealth, 145  S.  W.  Rep.  393  (Ky. 
1912).  At  common  law  an  associa- 
tion of  dealers  in  grass  seed  to  control 
the  sale  of  such  seed,  and  to  fix  the 
price,  cannot  enforce  its  executory  con- 


1431 


§  503a. 


TRUSTS,    ETC. 


CH.  XXIX. 


by  conveying  all  their  property  to  a  corporation  organized  for  the  pur- 
pose of  taking  over  the  property.     Such  has  been  the  case  with  the 

tract  to  purchase  seed.  The  com-  41  La.  Ann.  970  (1889).  In  Louis- 
mon  law  condemns  every  scheme  to  iana,  where  several  firms  owned  a 
control  the  market  and  fix  prices.  large  quantity  of  India  bagging,  and 
Brent  v.  Gay,  149  Ky.  615  (1912).  combined  and  agreed  not  to  sell  ex- 
A  corporation  may  be  convicted  for  cept  upon  the  consent  of  a  majority 
entering  into  a  trust,  even  though  the  of  those  who  were  parties  to  the 
agreement  was  made  outside  of  the  agreement,  the  court  refused  both  to 
state,  it  being  shown  that  it  was  carried  uphold  the  agreement  and  to  enforce 
out  in  part  in  the  state.  Interna-  the  penalty  for  a  violation  of  the  con- 
tional,  etc.  Co.  v.  Commonwealth,  tract.  India  Bagging  Assoc,  v.  Koek, 
124  Ky.  543  (1907).  The  anti-trust  14  La.  Ann.  168  (1859). 
statute  of  Kentucky  is  not  void  for  Massachusetts:  A  statute  prohibit- 
uncertainty,  and  an  indictment  which  ing  a  person  engaged  in  general  busi- 
foUows  the  language  of  the  statute  is  ness  from  combining  or  discriminating 
sufficient.  Commonwealth  v.  Grin-  in  the  price  of  his  commodities  to 
stead,  108  Ky.  59  (1900).  The  agree-  destroy  a  competitor  and  acquire  a 
ment  of  two  rival  boats  to  divide  their  monopoly  is  constitutional.  Re  Opinion 
earnings  in  a  certain  proportion,  and  if  of  the  Justices,  211  Mass.  620  (1912). 
either  owner  seUs  he  shall  not  go  into  A  combination  of  ninety  per  cent, 
the  business  again  for  a  year,  is  void,  of  shoe  machinery  manufacturers  is  a 
The  party  who  has  sold  and  then  re-  violation  of  the  anti-trust  act  of  con- 
turned  at  once  to  the  business  is  not  gress,  especially  where  competing' 
liable  in  damages.  Anderson  v.  Jett,  patents  were  thereby  combined,  and 
89  Ky.  375  (1889).  hence  a  contract  of  a  person  to  assign 
Louisiana:  Where  a  draymen's  to  such  monopoly  his  improvements 
union  has  obtained  a  monopoly,  and  in  machinery  is  not  binding.  United 
dictates  who  shall  receive  a  particular  etc.  Co.  v.  La  Chapelle,  212  Mass.  467 
contract,  and  a  contract  is  let  to  one  (1912).  The  court  will  enjoin  a  strike 
by  a  business  firm,  and  then  another  by  a  labor  union  to  compel  an  employer 
member  claims  the  contract,  which  to  employ  none  but  union  men,  the 
the  firm  lets  to  him,  and  then  the  purpose  being  to  obtain  a  monopoly  of 
firm  gives  the  business  to  the  first  the  labor  market.  Folsom  v.  Lewis, 
member,  the  second  cannot  collect  208  Mass.  236  (1911).  A  corporation 
damages.  Fabaeher  v.  Bryant,  46  La.  organized  to  manufacture  and  sell 
Ann.  820  (1894).  A  stockholder  can-  printing  presses  may,  in  making  a  sale, 
not  hold  a  director  liable  for  the  agree  not  to  sell  similar  presses  to 
stock  becoming  worthless  by  reason  any  one  else.  New  York,  etc.  Co.  v. 
of  the  fact  that  the  director  and  Kidder,  etc.  Co.,  192  Mass.  391  (1906). 
others  sold  their  stock,  amounting  to  A  granite  manufacturer  may  hold 
three  fourths  of  the  stock,  to  the  liable  in  damages  an  association  of 
American  Cotton  Oil  Trust,  and  that  his  competitors  which  has  a  by-law 
the  trust  then  dissolved  the  corpora-  that  any  member  doing  business  with 
tion  by  a  three  fourths  vote,  as  any  one  who  is  not  a  member  of  the 
allowed  by  statute,  although  the  association  shall  pay  a  fine  to  the 
directors  as  such  voted  for  the  dis-  association,  the  result  having  been 
solution.  Trisconi  v.  Winship,  43  La.  that  the  business  of  the  plaintiff  was 
Ann.  45  (1891).  A  pooling  contract  ruined.  Martell  v.  White,  185  Mass. 
between  two  railroads  competing  for  255  (1904).  Where  three  electric  eom- 
business  between  the  same  points  is  panics  are  combined  into  one,  and 
void  as  against  public  policy.  The  the  officers  of  the  new  company  are 
court  will  leave  the  parties  where  the  same  as  the  officers  of  the  old, 
they  are.  The  arrangement  in  this  and  agree  not  to  engage  in  the  same 
ease  was  for  a  division  of  earnings,  business  for  five  years  in  competition 
Texas,  etc.  Ry.  v.  Southern  Pac.  Ry.,  with   the   new   company,   such  agree- 

1432 


TRUSTS,    ETC. 


[§  503a. 


Sugar  Trust,  the  Standard  Oil  Trust,  and  the  Cotton-seed  Oil  Trust. 
The  decisions  of  the  New  York  court  of  appeals  against  the  Sugar 


ment  is  legal.  Anchor  Electric  Co.  v. 
Hawkes,  171  Mass.  101  (1898),  re- 
viewing   the    authorities.     The    com- 


if  the  merger  in  a  public  sense  after 
five  years  is  unsatisfactory,  to  buy  in 
the    New    Haven's    Boston    &    Maine 


bination    of    two    parties    who    each    shares,    and    (2)    suspensive   repeal   of 


claim   a   patent   on   an   article    not   a 
prime    necessitj^    nor    a    staple    eom- 


the  voting  power  on  Boston  &  Maine 
shares  if  control  of  the  New  Haven 


modity   in    the    market    is    legal    and    itself   passes    to    an    outside   interest. 


may  be  specifically  enforced.  Glouces- 
ter, etc.  Co.  V.  Russia  Cement  Co.,  1.54 
Mass.  92  (1891).  In  Central  Shade- 
Roller  Co.  V.  Cushman,  143  INIass.  353 
(1887),  where  certain  shade-roller 
manufacturers  formed  a  corporation 
to  sell  their  product,  the  court  en- 
joined one  of  the  parties  from  re- 
pudiating the  agreement,  but  said: 
"The  agreement  does  not  refer  to  an 
article   of    prime    necessity,    nor    to    a 


On  their  face  these  provisions  look 
severe,  striking  at  a  principle  of 
ownership  and  opening  a  vista  of 
future  legislative  interference.  .  .  . 
To  the  twofold  conditions  named  of 
Boston  &  Maine  control  should  be 
added  a  third  one  suggested  by  the 
commission  for  control  of  the  New 
Haven  of  its  Massachusetts  trolley 
system  by  a  Massachusetts  corpora- 
tion in  which  the  state  shall  be  rep- 


staple  of   commerce,  nor  to  merchan-    resented    on    the    board    of    directors 


dise  to  be  bought  and  sold  in  the  mar- 
ket. ...  It  does  not  look  to  affect- 
ing competition  from  outside  —  the 
parties  have  a  monopoly  by  their  pat- 


with  provision  for  sale  of  control  if 
the  plan  after  ten  years  works  out 
badly  for  the  public.  This  applies 
to  the  trolleys  substantially  the  same 


ents  —  but  only  to  restrict  competition  policy  as  that  outlined  for  the  steam 

in     price     between     themselves.  .  .  .  railroad    merger   and   with    the    same 

When  it  appears  that  the  combination  arguments  in  its  favor." 
is  used  to  the  public  detriment,  a  dif-  Michigan:     It   is   no   defense    to   a 

ferent     question     mil     be      presented  suit  by  a  foreign  corporation  against 

from  that  now  before  us."      In  1908  an  agent  for  funds  collected  by  him, 

a    special    commission    on    commerce  to  allege  that  the  plaintiff  is  an  illegal 

and  industry  in  Massachusetts   made  trust.       International,     etc.     Co.     v. 

a  report  on  the  question  of    allowing  Eaton    Circuit    Judge,    163    Mich.    55 

the  New   York,  New  Haven  &  Hart-  (1910).     The  owner  of  a  secret  process 

ford   R.  R.  Co.  to  own  a  majority  of  cannot  bind  the  purchaser  not  to  sell 

the    stock    of    the    Boston    &    Maine  to  wholesale   or  retail  dealers     or  at 

R.  R.  Co.,  and  the  following  summary  less  than  a  fixed  price,  except  with  the 

of  its  report  is  taken  from  the  Rail-  owner's  consent.     Hill  Co.  v.  Gray  & 


road  Gazette  of  March  27th,  1908: 
"The  proposals  for  safeguarding  the 
merger  of  the  two  large  railroad  sys- 
tems,    which,     combined,     create     a 


Worcester,  163  Mich.  12  (1910). 
A  stockholder  in  selling  his  stock 
may  agree  not  to  go  into  the  business 
carried  on  by  the  corporation,  and  the 


unique  and  firm  railroad  monopoly  in    Michigan     statute     prohibiting     such 


the  six  New  England  states»  are  nat- 
urally   the    real    nucleus    of    this    im- 


contracts  except  to  protect  the  trans- 
feree of  the  business  does  not  apply. 


portant    report.     They    can   be    sum-    Buckhout   v.  Witwer,   157   Mich.   406 


marized  almost  in  a  single  sentence. 
They    allow    well-nigh    free     control 


(1909).     Where     by     consent     of     all 
the  stockholders   the  corporate  prop- 


and  operation  by  the  New  Haven  of  erty  is  sold  and  the  proceeds  distrib- 

the  Boston  &  Maine  —  the  localization  uted  and  one  of  them  secretly  receives 

features    not    being    important  —  but  an    additional    price    and    afterwards 

subject  to  some  pretty  radical  restric-  is    sued    by    another    stockholder    for 


tions  based  on  new  and  contingent 
conditions.  Those  restrictions  are 
twofold:     (1)   The  right  of  the  state. 


his  pro  rata  share  thereof,  he  may 
defend  on  the  ground  that  the  whole 
transaction    was    to    create    a    trust. 


1433 


§  503a. 


TRUSTS,    ETC. 


CH.  XXIX. 


Trust  and  of  the  supreme  court  of  Ohio  against  the  Standard  Oil  Trust 
convinced  the  trusts  that  their  original  mode  of  organization  to  con- 


Erpelding  v.  McKearnan,  143  Mich. 
409  (1906).  Quo  warranto  lies  on 
the  relation  of  a  private  individual 
to  compel  a  foreign  corporation  to 
show  its  existence  as  a  corporation 
and  its  authority  for  doing  business 
in  the  state,  and  may  attack  its  cor- 
porate existence  as  being  an  illegal 
trust.  Attorney  General  v.  Booth  & 
Co.,  143  Mich.  89  (1906).  A  pooling 
agreement  between  competing  inter- 
state steamboat  lines  whereby  the 
earnings  are  united  and  expenses  de- 
ducted and  the  balance  divided  in  a 
certain  way  is  in  violation  of  the 
anti-trust  act  of  congress.  White  Star 
Line  v.  Star,  etc.,  141  Mich.  604 
(1905).  A  lessee  cannot  defeat  an 
action  for  rent  on  the  ground  that  the 
property  was  leased  to  create  a 
monopoly  unless  he  proves  the  lessor 
is  a  party  to  the  scheme.  Hartz  v. 
Eddy,  140  Mich.  479  (1905).  A  con- 
tract by  which  a  salt  manufacturing 
company  agrees  to  sell  all  its  output 
to  another  corporation,  the  latter  hav- 
ing a  right  to  stop  the  manufacturing 
by  the  former  and  pay  a  certain  sum 
in  lieu  of  purchasing  such  output, 
may  be  shown  to  be  a  part  of  a  plan 
to  establish  a  monopoly,  even  though 
on  the  face  of  the  contract  it  is  legal. 
Detroit  Salt  Co.  v.  National  Salt  Co., 
134  Mich.  103  (1903).  In  ascertain- 
ing the  market  price  of  articles  sold, 
the  price  as  fixed  by  a  combination  in 
the  trade  will  not  be  considered. 
Lovejoy  v.  Michels,  88  Mich.  15 
(1891).  A  contract  of  a  concern  not 
to  manufacture  a  certain  line  of  arti- 
cles in  some  states  for  five  years  is 
void.  Western,  etc.  Assoc,  v.  Starkey, 
84  Mich.  76  (1890).  Where  three  per- 
sons interested  in  a  match  factory 
agreed  to  unite  their  property  with 
that  of  their  competitors  in  one  large 
corporation,  a  monopoly  —  the  Dia- 
mond Match  Company  —  the  courts 
will  not  enforce  the  contract  between 
these  three  persons  which  specifies 
the  proportion  in  which  each  of  the 
three  was  to  participate  in  the  profits 
coming  to  them  jointly  from  the 
monopoly.    The  history,  character,  and 


purpose  of  the  match  monopoly  are 
fully  stated  in  this  decision.  Rich- 
ardson V.  Buhl,  77  Mich.  632  (1889). 
Minnesota:  A  state  may  exclude  a 
foreign  corporation  from  doing  intra- 
state business  if  it  enters  into  any  com- 
bination in  restraint  of  trade.  State 
V.  Creamery,  etc.  Co.,  115  Minn.  207 
(1911).  The  state  may  forfeit  a  license 
to  a  foreign  corporation  doing  business 
in  the  state  if  it  is  violating  local  anti- 
trust laws.  State  v.  Standard  Oil  Co., 
Ill  Minn.  85  (1910).  A  state  may 
cancel  a  permit  to  a  foreign  corpora- 
tion to  do  business  in  the  state  where 
it,  being  in  the  churn  manufacturing 
business,  has  bought  out  its  competi- 
tors, even  though  the  combination 
consisted  largely  of  patents  issued  by 
the  United  States  government.  State 
V.  Creamery,  etc.  Co.,  110  Minn.  415 
(1910).  The  rule  of  a  board  of  trade 
that  the  members  shall  charge  a  uni- 
form and  fixed  commission,  and  shall 
not  deal  in  grain  outside  •  of  the  ex- 
change, is  not  a  combination  in  re- 
straint of  trade.  State  v.  Duluth 
Board  of  Trade,  107  Minn.  506  (1909). 
A  gas  manufacturing  company  may 
agree  to  sell  all  of  its  coke  to  a  fuel 
company.  State  v.  St.  Paul,  etc.  Co., 
92  Minn.  467  (1904).  A  member  of 
a  commission  merchant  corporation 
which  has  been  formed  to  regulate 
the  prices  to  be  paid  for  produce  may 
sue  the  corporation  for  damages 
caused  by  his  being  boycotted,  even 
though  he  helped  to  form  the  corpora- 
tion and  was  afterwards  suspended. 
Ertz  V.  Produce,  etc.  Co.,  82  Minn. 
173  (1901).  It  is  legal  for  a  large 
number  of  retail  lumber  dealers  to 
form  a  voluntary  association,  and 
agree  that  they  will  not  deal  with 
any  manufacturing  or  wholesale  dealer 
who  sells  directly  to  customers,  and 
thereby  deprives  the  retail  dealer 
of  business,  and  the  by-laws  of  their 
association  may  provide  that  the 
secretary  shall  notify  all  members 
of  the  names  of  wholesalers  who 
sell  in  this  manner  to  consumers. 
An  injunction  against  the  secretary 
giving  such  notices  will  not  be  granted. 


1434 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  503a. 


trol  prices  and  suppress  competition  was  subject  to  attack  and  must 
be  abandoned.     The  result  was  that  the  trusts  for  the  most  part  re- 


Bohn  Mfg.  Co.  v.  Hollis,  54  Minn. 
223  (1893).  By-laws  of  an  exchange 
restricting  the  freedom  of  members 
to  reduce  prices  and  establish  officers 
for  selling  are  void.  Kolff  v.  St. 
Paul  Fuel  Exchange,  48  Minn.  215 
(1892). 

Mississippi :  The  vendor  of  goods 
may  collect  the  price  and  it  is  no 
defense  that  it  violated  the  anti-trust 
act.  MeCall  v.  Hughes,  59  S.  Rep.  794 
(Miss.  1912).  It  has  been  held  in 
Mississippi  that  a  long-distance  tele- 
phone company  may  make  a  contract 
with  a  local  company  by  which  the 
latter  agrees  not  to  extend  its  lines  so 
as  to  conflict  with  the  former  and 
agrees  not  to  make  connection  with 
any  other  telephone  company,  and 
the  former  may  purchase  the  stock  of 
the  latter.  Cumberland  Tel.  &  Tel. 
Co.  V.  State,  54  S.  Rep.  670  (Miss. 
1911).  In  the  case  Cumberland  Tel. 
&  Tel.  Co.  V.  State,  99  Miss.  1  (1911), 
it  was  held  that  under  the  statutes 
of  Mississippi  the  remedy  of  the  state 
against  a  telephone  company  for 
monopolizing  the  telephone  business 
was  before  the  Railroad  Commission 
instead  of  a  bill  of  injunction  and  to 
recover  penalties  in  the  courts.  Two 
cotton  oil  companies  in  agreeing  to 
divide  territory  and  purchasing  cotton 
violate  the  anti-trust  act  of  Missis- 
sippi. State  V.  Jackson,  etc.  Co.,  95 
Miss.  6  (1909).  A  constitutional  pro- 
vision that  in  a  criminal  prosecution 
the  accused  shall  not  be  compelled  to 
give  evidence  against  himself  does  not 
apply  to  a  corporation,  but  the  statute 
that  a  corporation  producing  its  books 
and  papers  under  a  subpoena  duces 
tecuvi  in  an  anti-trust  prosecution 
cannot  be  held  guilty  by  reason  of 
such  evidence  applies  also  to  a  depo- 
sition requiring  production  of  such 
books  and  papers.  Cumberland  Tel. 
&  Tel.  Co.  V.  State,  98  Miss.  159  (1910). 
Where  a  New  Jersey  holding  company 
owns  the  majority  of  the  capital  stock 
of  two  competing  street  railway  and 
electric  light  companies  in  Mississippi, 
the  state  may  enjoin  its  voting  such 
stock,  inasmuch  as  an  illegal  trust  is 


thereby  created.  Southern,  etc.  Co.  v. 
State,  91  Miss.  195  (1907).  The  agree- 
ment of  a  cottonseed  oil  purchasing 
company  to  withdraw  from  certain  ter- 
ritory is  in  violation  of  the  Mississippi 
statute.  Kosciusko,  etc.  Co.  v.  Wilson, 
etc.  Co.,  90  Miss.  551  (1907).  The 
anti-trust  act  of  Mississippi  was  con- 
strued in  Yazoo,  etc.  R.  R.  v.  Searles,  85 
Miss.  520  (1905).  Although  two  cot- 
ton compress  companies  have  agreed  to 
consolidate,  and  have  put  their  prop- 
erty in  the  hands  of  a  governing  com- 
mittee to  manage  until  a  new  charter 
is  obtained,  yet  either  corporation  may 
withdraw  from  the  arrangement,  it 
being  ultra  vires.  Greenville,  etc.  Co. 
V.  Planters',  etc.  Co.,  70  Miss.  669 
(1893).  As  to  the  Mississippi  statute, 
see  also  American  F.  Ins.  Co.  v. 
State,  75  Miss.  24  (1897). 

Missouri:  A  purchase  and  sale  of 
goods  in  interstate  commerce  is  not 
affected  by  a  state  anti-trust  act. 
Westmoreland,  etc.  Co.  v.  Missouri 
Glass  Co.,  152  S.  W.  Rep.  387  (Mo. 
1912).  Various  ice  companies  were 
fined  for  forming  a  trust  in  State  v. 
People's  Ice,  etc.  Co.,  151  S.  W.  Rep. 
101  (Mo.  1912).  The  ownership  by 
one  railroad  of  a  small  minority 
interest  in  another  competing  railroad 
which  would  elect  no  more  than  two  of 
thirteen  directors,  does  not  show  an 
illegal  combination.  State  v.  Missouri 
Pac.  Ry.,  241  Mo.  1  (1912).  The 
International  Harvester  Co.  of  America 
organized  in  Wisconsin,  was  ousted 
from  Missouri  by  the  decision  in 
State  V.  International,  etc.  Co.,  237 
Mo.  369  (1911),  but  the  court  made  an 
alternative  judgment  that  it  might 
pay  a  fine  of  $25,000  and  sever  its 
relations  from  the  trust  and  continue 
to  do  business.  A  telephone  company 
may  enjoin  another  telephone  com- 
pany from  violating  a  contract  by 
which  they  agree  to  exchange  busi- 
ness with  each  other  exclusively,  it 
appearing  that  they  occupy  different 
but  contiguous  territory,  and  that  such 
contract  promoted  competition  with 
the  Bell  telephone  system.  Home 
Tel.  Co.  V.  Sarcoxie,  etc.  Co.,  236  Mo. 


1435 


§  503a.] 


TRUSTS,    ETC. 


[cH.  XXIX. 


organized  and  reappeared  in  the  form  of  gigantic  corporations.     For 
a  number  of  years  this  baffled  to  a  large  extent  the  common  law  and  its 

the  state  against  foreign  corporations 
for  violating  an  anti-trust  statute, 
the  state  may  compel  the  corpora- 
tions to  produce  their  stock  books  in 
order  that  the  state  may  investigate 
whether  one  company  owns  a  ma- 
jority of  the  capital  stock  of  the  com- 
peting company.  State  v.  Standard 
Oil  Co.,  194  Mo.  124  (1906).  The 
separate  agreements  of  crushed  gran- 
ite companies  with  a  central  company 
to  sell  only  to  the  latter  are  illegal 
and  cannot  be  enforced.  Finck  v. 
Schneider,  etc.  Co.,  187  Mo.  244 
(1905).  The  Missouri  statute  against 
trusts  does  not  prevent  a  manufac- 
turing corporation  purchasing  the 
plant  and  business  of  another  manu- 
facturing corporation.  State  v.  Con- 
tinental Tobacco  Co.,  177  Mo.  1 
(1903).  In  the  case  State  v.  Armour 
Packing  Co.,  173  Mo.  3.56  (1903),  a 
fine  was  imposed  upon  foreign  pack- 
ing corporations  for  violating  the 
anti-trust  act  of  Missouri.  See  s.  c, 
173  Mo.  156.  The  supreme  court  of 
Missouri,  in  the  case  State  v.  Fire- 
men's, etc.  Co.,  1.52  Mo.  1  (1899), 
rendered  a  judgment  of  ouster  against 
a  large  number  of  insurance  com- 
panies from  doing  business  within  the 
state  on  account  of  their  entering 
into  an  agreement  to  maintain 
uniform  premium  rates.  Where  the 
statute  makes  it  a  criminal  conspiracy 
to  form  a  trust,  it  cannot  also  require 
officers  of  the  corporation  to  make 
sworn  returns  which  might  be  used 
against  them.  State  v.  Simmons 
Hardware  Co.,  109  Mo.  118  (1891). 
See  Skrainka  v.  Sharringhausen,  8 
Mo.  App.  522  (1880),  upholding  a 
pooling  contract  of  certain  owners  of 
stone  quarries  located  in  St.  Louis, 
on  the  ground  that  the  restraint  was 
local  in  its  effect. 

Montana :  The  supreme  court  of 
Montana  has  held  that  a  boycott 
may  be  legal.  Lindsay  &  Co.  v. 
Montana,  etc.,  37  Mont.  264  (1908). 
A  trust  is  "any  form  of  combination 
between  corporations,  or  corporations 
and  natural  persons,  for  the  purpose 
of  regulating  production  and  repress- 


114  (1911).  The  Missouri  Anti- 
Trust  Act  was  applied  in  State  v. 
Standard  Oil  Co.,  218  Mo.  1  (1909) ; 
aff'd,  224  U.  S.  270,  which  was  a  pro- 
ceeding to  forfeit  the  charter  of  a  local 
company  and  at  the  same  time  revoke 
the  licenses  of  two  foreign  companies 
doing  business  in  the  state,  and  the 
court  held  that  the  fact  that  a  holding 
company  owned  a  majority  of  the 
stock  of  the  defendants  does  not  prove 
absolutely  an  unlawful  combination 
but  tends  to  prove  that  fact.  This 
case  held  also  that  corporate  franchises 
are  always  subject  to  forfeiture  at  the 
instance  of  the  state  for  misuser  (such 
as  restricting  or  stifling  competition) 
or  non-user,  even  though  the  statute 
makes  the  acts  a  criminal  offense ; 
also  that  in  a  suit  by  a  state  to  for- 
feit the  charter  of  a  company  which 
has  violated  an  anti-trust  statute  if 
the  corporation  is  found  guilty  the 
court  may  suspend  judgment  of  ouster 
on  the  condition  that  the  corpora- 
tion withdraw  from  the  combination ; 
also  that  a  monopoly  under  the  Mis- 
souri statute  was  defined  to  be  any 
contract  or  combination  whereby  pre- 
vious competing  businesses  are  con- 
trolled by  a  single  corporation  or  a 
few  individuals  or  corporations  acting 
in  concert  whereby  they  control 
prices  and  suppress  competition,  and 
the  test  is  whether  they  have  the 
power  to  raise  prices  and  destroy 
competition  at  pleasure ;  also  that  a 
provision  that  a  corporation  for  vio- 
lating an  anti-trust  statute  may  be 
required  to  produce  its  books  or  papers 
or  else  have  its  answer  stricken  out  is 
constitutional.  At  common  law  a 
labor  organization  cannot  constitute 
a  monopoly  because  monopoly  grows 
out  of  property  and  not  out  of  per- 
sonal service.  Lohse,  etc.  Co.  v. 
Fuelle,  215  Mo.  421  (1908).  A  sub- 
scription liability  cannot  be  enforced 
by  one  of  the  promoters,  as  a  corporate 
creditor,  where  the  corporation  was 
organized  to  sell  the  product  of  various 
competing  plants  in  \iolation  of  the 
anti-trust  act.  Euston  v.  Edgar,  207 
Mo.  287  (1907).     In  a  proceeding  by 


1436 


CH.  XXIX.  I 


TRUSTS,    ETC. 


[§  503a. 


application  by  the  state  courts.     It  is  true  that  in  the  Chicago  Gas 
Company  case  the  supreme  court  of  Illinois  forfeited  the  charter  of  the 


ing  competition  by  means  of  the 
power  thus  centralized."  MaeGinniss 
V.  Boston,  etc.  Co.,  29  Mont.  428 
(1904).  Even  though  a  "trust"  has 
piu-chased  stock  in  a  corporation, 
yet  another  stockholder  cannot  main- 
tain a  suit  in  equity  to  have  such 
stock  forfeited  to  the  corporation 
itself.  His  remedy  is  to  compel  the 
corporation  to  abandon  any  illegal 
contract  or  connection.  Hence,  the 
mere  fact  that  the  Amalgamated 
Copper  Company,  a  New  Jersey  cor- 
poration, has  acquired  a  majority 
of  the  stock  of  a  Montana  Copper 
Company,  as  well  as  of  other  com- 
panies, is  not  sufficient  to  enable  a 
minority  stockholder  in  a  Montana 
company  to  obtain  an  injunction 
against  the  voting  of  such  stock  or 
the  paying  of  dividends  thereon,  or 
the  directors  acting  as  such.  Mae- 
Ginniss V.  Boston,  etc.  Co.,  29  Mont. 
428  (1904). 

Nebraska:  The  criminal  statute  in 
Nebraska  against  trusts  was  construed 
in  Howell  v.  State,  83  Neb.  448  (1909). 
An  agreement  between  retail  lumber 
dealers  to  divide  territory  and  control 
prices  is  illegal.  State  v.  Adams,  etc. 
Co.,  81  Neb.  392  (1908).  An  asso- 
ciation of  retail  lumber  dealers 
which  imposes  a  penalty  on  members 
who  seU  to  consumers  or  to  retailers 
not  eligible  to  membership  is  illegal. 
Cleland  t-.  Anderson,  66  Neb.  252 
(1902).  Under  the  Nebraska  statute, 
in  a  suit  instituted  by  the  state  to  en- 
join a  foreign  corporation  from  doing 
business  in  the  state  on  the  ground 
that  it  is  violating  an  anti-trust  stat- 
ute, the  court  may  order  the  defend- 
ant to  allow  the  plaintiff  to  examine 
the  defendant's  books  and  records  for 
the  purpose  of  obtaining  evidence  in 
the  case.  State  v.  Standard  Oil  Co., 
61  Neb.  28  (1900).  Where  the  stock- 
holders of  a  distilling  corporation 
transfer  their  stock  to  trustees,  for 
the  purpose  of  entering  into  a  trust, 
such  trustees  being  the  holders  of 
the  stock  of  various  other  corpora- 
tions engaged  in  the  same  business, 
and    trust    certificates   are    issued   by 


them  in  place  of  the  stock,  the  state, 
at  the  instance  of  the  attorney-gen- 
eral, will  cause  the  charter  to  be 
annulled  on  the  ground  of  misuser, 
the  corporation  being  no  longer  en- 
gaged in  a  lawful  business.  Although 
the  corporate  property  was  trans- 
ferred just  before  judgment,  the  court 
will  not  allow  its  decree  to  be  evaded. 
State  V.  Nebraska  Distilling  Co.,  29 
Neb.  700  (1890). 

New  Jersey:  The  attorney-general 
may  by  an  information  obtain  a  de- 
cree declaring  void  an  agreement  of 
insurance  companies  to  regulate  insur- 
ance rates  and  to  eliminate  competi- 
tion, and  may  enjoin  them  from  con- 
tinuing to  act  under  such  agreement. 
McCarter  v.  Firemen's  Ins.  Co.,  74 
N.  J.  Eq.  372  (1909),  rev'g  70  N.  J. 
Eq.  291,  which  held  that  the  attornej^- 
general  has  no  inherent  power  to  en- 
join insurance  companies  agreeing  on 
rates  in  restraint  of  trade.  Even 
though  a  holder  of  a  majority  of  the 
stock  of  a  sugar  refining  company, 
which  has  not  commenced  business, 
pledges  his  stock  and  agrees  that 
the  refinery  will  not  be  operated  un- 
til the  loan  is  paid,  and  the  result 
is  that  the  pledgee,  a  competing  sugar 
refining  company,  prevents  the  opera- 
tion of  the  first-named  company, 
nevertheless  the  receiver  of  the  first- 
named  company  cannot  hold  the  latter 
company  liable  for  profits  if  there  were 
no  profits.  Earle  v.  American  Sugar, 
etc.  Co.,  74  N.  J.  Eq.  751  (1908).  A 
vendor's  agreement  not  to  engage  in 
the  business  within  five  hundred  miles 
for  twenty  years  is  legal.  Flecken- 
stein  Bros.  Co.  v.  Fleckenstein,  76 
N.  J.  L.  613  (1908).  A  court  of  equity 
may  enjoin  "boycotting"  with  a  view 
to  "unionizing."  George,  etc.  v.  Glass, 
etc.  Assoc,  72  N.  J.  Eq.  653  (1907).  An 
agreement  to  pay  dividends,  whether 
earned  or  not,  is  illegal,  and  hence 
certificates  of  indebtedness  issued  in 
advance  of  such  dividends  cannot 
be  enforced.  Strickland  v.  National 
Salt  Co.,  79  N.  J.  Eq.  182  (1911). 
Where  a  holding  company  has  il- 
legally  purchased   the   stock  of   com- 


1437 


§  503a. 


TRUSTS,    ETC. 


[CH.  XXIX. 


company,  on  the  ground  that  it  was  formed  to  bring  about  an  illegal 
combination,  but  that  was  over  twenty  years  ago.     New  Jersey,  where 

court  will  appoint  a  receiver  of  such 
company  if  it  attempts  to  evade  the 
decree ;  but  on  proof  that  no  evasion 
has  been  attempted  the  court  will  re- 
fuse to  appoint  a  receiver.  Stockton 
V.  Central  R.  R.  of  N.  J.,  .50  N.  J. 
Eq.  489  (1892).  It  is  not  illegal  for 
one  stockyard  company  to  buy  out 
another  stockyard  company.  Wil- 
loughby  V.  Chicago,  etc.  Co.,  50  N.  J. 
Eq.  656  (1892) ;  Ellerman  v.  Chicago, 
etc.  Co.,  49  N.  J.  Eq.  217  (1891). 

New  York:  See  People  v.  North 
River,  etc.  Co.,  121  N.  Y.  582  (1890). 
While  a  contract  in  general  restraint 
of  trade  is  deemed  illegal  and  void, 
the  law  permits  contracts  in  partial 
restraint  of  trade,  under  some  circum- 
stances where  they  are  not  unreason- 
able and  are  supported  by  sufficient 
consideration.  But  where  the  busi- 
ness to  which  the  contract  relates  is  of 
such  a  character  that  it  cannot  be 
subjected  even  to  the  partial  restraint, 
which  is  contemplated,  without  injury 
to  the  public  interest,  then  such  partial 
restraint  cannot  be  tolerated.  Hence  a 
telephone  company  having  a  contract 
with  a  hotel  to  furnish  exclusive  tele- 
phone service  in  the  hotel  cannot  en- 
join the  hotel  from  allowing  another 
telephone  company  to  install  its  serv- 
ice also.  Central  N.  Y.  Tel.,  etc.  Co. 
V.  Averill,  199  N.  Y.  128  (1910).  A 
non-union  employee  of  a  printing 
company,  even  though  he  is  also  a 
stockholder,  cannot  enjoin  the  com- 
pany from  making  a  contract  with  a 
labor  union  excluding  non-union  labor 
from  the  company's  employ.  Kissam 
V.  United  States,  etc.  Co.,  199  N.  Y. 
76  (1910).  In  the  ease  Locker  v. 
American  Tobacco  Co.,  195  N.  Y.  565 
(1909),  it  was  held  that  a  tobacco 
dealer  could  not  collect  damages  be- 
cause he  could  not  do  business  without 
dealing  -with  the  American  Tobacco 
Company,  and  that  company  had 
made  another  tobacco  company  its 
exclusive  selling  agent  and  refused  to 
sell  any  of  its  goods  to  the  plaintiff, 
there  being  no  charge  of  boycott  to 
destroy  the  plaintiff's  business  or 
combination  between  independent  or 


peting  railroads  and  is  compelled  by 
decree  of  the  court  to  return  the 
same  to  its  stockholders,  the  stock- 
holders are  not  entitled  to  the  par- 
ticular stocks  which  they  turned  in, 
but  are  entitled  to  a  pro  rata  interest 
in  all  the  stocks  so  distributed.  Such 
distribution  may  be  in  kind.  Con- 
tinental, etc.  Co.  V.  Northern,  etc.  Co., 
66  N.  J.  Eq.  274  (1904).  Even  though 
a  corporation  is  selling  its  product  be- 
low cost,  in  order  to  force  another 
corporation  to  combine  with  it,  yet  a 
stockholder  in  the  former  cannot  en- 
join such  sales,  where  neither  of  the 
corporations  has  a  natural  monopoly. 
Trimble  v.  American,  etc.  Co.,  61  N. 
J.  Eq.  340  (1901).  It  is  legal  for  a 
corporation  to  purchase  all  the  com- 
peting concerns  in  a  particular  hne 
of  business,  even  though  the  result  is 
temporarily  to  create  a  monopoly  in 
that  business.  Even  though  the  agree- 
ment of  the  vendor  not  to  engage  in 
business  covers  too  large  a  terri- 
tory, yet  the  court  will  enforce  it  for 
a  reasonable  amount  of  territory. 
Trenton,  etc.  Co.  v.  Oliphant,  58  N.  J. 
Eq.  507  (1899).  A  corporation  formed 
to  create  a  monopoly  in  the  pottery 
business  cannot  enforce  an  agreement 
of  one  of  the  parties  not  to  engage  in 
the  business.  Trenton,  etc.  Co.  v. 
OUphant,  56  N.  J.  Eq.  680  (1898).  An 
injunction  does  not  lie  at  the  instance 
of  the  state  to  restrain  a  corpora- 
tion from  transacting  business,  even 
though  it  was  formed  to  bring  about, 
by  conditions  imposed  upon  selling 
agents,  a  monopoly  in  the  cigarette 
business,  and  had  largely  succeeded 
in  doing  so.  The  remedy,  if  any,  is 
by  quo  warranto.  The  court  reviewed 
the  cases  wherein  injunction  would 
lie.  Stockton  v.  American,  etc.  Co.,  55 
N.  J.  Eq.  352  (1897).  Where  a  con- 
tract between  a  domestic  railroad 
company  and  a  foreign  railroad  com- 
pany is  declared  illegal  and  void  by 
the  court  on  the  ground  that  it  seeks 
to  create  a  monopoly  in  the  coal 
business,  and  the  court  orders  the 
domestic  railroad  company  to  cease 
complying    with    such    contract,    the 


1438 


CH.  XXIX.] 


TRUSTS,    ETC. 


[§  503a. 


most  of  these  vast  companies  are  organized,  was  not  inclined  to  forfeit 
charters  for  any  such  reason.     It  became  evident  that  state  legislation 

Div.  446  (1903).  It  is  legal  for  the 
manufacturers  of  patent  medicines  to 
agree  with  an  association  of  wholesale 
dealers  that  the  former  will  not  sell 
to  any  wholesale  dealers  excepting 
those  who  conform  to  the  latter's 
price  list  in  making  sales.  Park  v. 
Natl.,  etc.  Assoc,  175  N.  Y.  1  (1903). 
The  agreement  of  the  stockholders 
upon  a  sale  of  the  corporate  property 
not  to  engage  in  that  line  of  business 
in  a  certain  county  is  binding  upon 
them.  Union  MiUs  v.  Harder,  116 
N.  Y.  App.  Div.  22  (1906),  modified  in 
191  N.  Y.  483.  A  state  court  has  no 
jurisdiction  to  enforce  the  anti-trust 
act  of  congress,  inasmuch  as  that 
applies  to  interstate  commerce  only, 
and  the  jurisdiction  of  the  federal 
courts  is  exclusive.  The  New  York 
state  anti-trust  act  is  not  violated  by 
the  fact  that  a  company  controls 
ninety  per  cent,  of  the  tobacco  trade, 
and  has  appointed  a  sole  selling  agent 
in  the  state.  Locker  v.  American, 
etc.  Co.,  121  N.  Y.  App.  Div.  443 
(1907) ;  aff'd,  195  N.  Y.  565.  In  the 
case  Attorney-General  v.  Consolidated 
Gas  Co.,  124  N.  Y.  App.  Div.  401 
(1908),  it  is  held  that  the  purchase  by 
one  gas  company  of  the  stock  of  other 
gas  companies  to  prevent  competition 
is  legal,  if  it  does  not  result  in  limit- 
ing the  supply  and  increasing  the  price 
of  gas,  inasmuch  as  a  new  competing 
company  might  be  organized,  and  the 
court  held  that  combinations  con- 
trolling commercial  commodities  are 
different,  inasmuch  as  a  new  competi- 
tor could  not  compete.  Under  the 
New  York  anti-trust  statute  the  court 
may  grant  an  order  at  the  instance  of 
the  attorney-general  requiring  a  person 
to  appear  and  be  examined  before  the 
judge  or  referee  in  view  of  a  suit  to 
be  brought.  In  the  Matter  of  Davies, 
168  N.  Y.  89  (1901).  Where  eighty- 
five  per  cent,  of  the  manufacturers 
of  envelopes  form  a  selling  corpora- 
tion, and  such  corporation  agrees 
with  an  outside  manufacturer  to  pay 
him  ten  cents  a  thousand  for  enve- 
lopes manufactured  by  him  less  that 
fixed  number,  and  he  to  pay  the  cor- 


distinct  manufacturers  or  dealers  in 
tobacco  to  refuse  to  sell  to  plaintiff. 
Chief  Justice  Cullen  said:  "If  the 
aggregation  of  enormous  industries 
under  a  single  control  is  an  economic 
evil,  as  to  which  I  express  no  opinion, 
the  evil  can  be  easily  cured  by  the 
legislature.  Practically  none  of  these 
great  combinations  can  be  made  except 
by  the  formation  of  a  corporation,  and 
the  legislature  has  most  extensive  power 
in  dealing  with  corporations.  True, 
it  may  not  directly  deprive  them  of 
any  of  their  property  rights,  but  none 
of  these  great  combinations  could 
live  unless  incorporated ;  for  doing 
business  as  a  partnership  —  each  part- 
ner liable  for  all  the  obligations  of  the 
firm,  the  partnership  subject  to  dis- 
solution on  the  death  of  every  partner 
—  the  business  would  necessarily  soon 
come  to  an  end."  A  corporation 
leasing  its  property  is  not  chargeable 
with  knowledge  that  the  lessee  is  form- 
ing an  illegal  monopoly,  even  though 
the  president  of  the  former  executed 
the  lease  and  knew  that  fact  by  reason 
of  his  interest  in  the  lessee.  Brook- 
lyn, etc.  Co.  V.  Standard,  etc.  Co.,  193 
N.  Y.  551  (1908).  Where  a  combina- 
tion offers  to  aUow  a  person  to  partici- 
pate they  may  prove  this  in  defense 
of  an  action  brought  by  him  against 
them  for  damages  for  conspiracy. 
KeUogg  V.  Sowerby,  190  N.  Y.  370 
(1907).  A  publisher's  agreement, 
representing  ninety-five  per  cent,  of 
the  book  trade,  fixing  a  price  at  which 
uncopyrighted  as  weU  as  copyrighted 
books  shall  be  sold,  is  in  violation  of 
the  New  York  statute  against  trusts. 
Straus  V.  American,  etc.  Assn.,  177 
N.  Y.  473  (1904).  A  combination  of 
ninety-five  per  cent,  of  all  the  book 
publishers  in  the  United  States  to 
prevent  the  sale  of  books  at  retail  at 
less  than  the  published  price,  such 
combination  also  having  brought  about 
a  combination  of  a  majority  of  the 
wholesale  and  retail  booksellers  in 
the  United  States  for  the  same  pur- 
pose, is  illegal,  under  the  anti-trust 
statute  of  New  York.  Straus  v. 
American,  etc.  Assn.,  85  N.  Y.   App. 


1439 


§  503a. 


TRUSTS,    ETC. 


[CH.   XXIX. 


and  state  courts  could  not  reach  the  root  of  the  evil.     The  prosecuted 
corporation  could  withdraw  from  a  state  and  reappear  in  new  form 

poration  ten  cents  a  thousand  for 
those  manufactured  by  him  in  excess 
of  that  number,  the  agreement  is 
illegal  and  not  enforceable.  The  court 
said  :  "Contracts  by  which  the  parties 
to  them  combine  for  the  purpose 
of  creating  a  monopoly  in  restraint  of 
trade  to  prevent  competition,  to  con- 
trol and  thus  to  limit  production,  to 
increase  prices  and  maintain  them, 
are  contrary  to  sound  public  policy 
and  are  void."  The  court  also  said : 
"Such  a  contract  threatens  a  monop- 
oly whereby  trade  in  a  useful  article 
may  be  restrained  and  its  price  un- 
reasonably enhanced,  and  it  matters 
not  that  the  parties  to  it  may  have 
so  moderately  advanced  prices  that 
the  sum  exacted  for  the  product 
seems  to  some  persons  reasonable,  for 
'the  scope  of  the  contract,  and  not 
the  possibility  of  self-restraint  of  the 
parties  to  it,  is  the  test  of  its  valid- 
ity.'" Cohen  v.  Berlin,  etc.  Co.,  166 
N.  Y.  292,  304  (1901).  In  the  case 
Wood  V.  Whitehead,  etc.  Co.,  165  N.  Y. 
545  (1901),  the  New  York  court  of 
appeals  went  far  towards  eliminating 
the  rule  prohibiting  a  party  from 
contracting  not  to  engage  in  a  busi- 
ness, the  good-will  of  which  he  has 
sold  out.  An  agreement  of  dealers 
in  stone  by  which  all  their  product  is 
sold  by  a  selling  corporation  at  prices 
fixed  by  them,  the  sales  to  be  appor- 
tioned among  them,  is  illegal  and  not 
enforceable.  Cummings  v.  Union,  etc. 
Co.,  164  N.  Y.  401  (1900).  It  is  no 
defense  to  an  action  to  enforce  a  sub- 
scription that  after  incorporation  the 
company  proceeded  to  form  an  illegal 
combination  of  competitors  in  trade. 
U.  S.  Vinegar  Co.  v.  Foehrenbach,  148 
N.  Y.  58  (1895).  A  person  who  buys 
a  trust  certificate,  the  certificate  con- 
taining a  stipulation  binding  the 
holder  to  all  the  terms  of  the  trust 
agreement,  thereby  becomes  a  party 
to  an  illegal  transaction,  and  such 
person  has  no  standing  in  court  to 
obtain  an  accounting  and  distribution 
of  the  property  or  profits.  The  whole 
agreement  and  transaction  being 
illegal,  the  court  will  leave  the  parties 


where  it  finds  them.  The  court 
pointed  out  that  there  was  no  proof 
in  this  case  that  the  defendant  trus- 
tees were  seeking  to  derive  any  per- 
sonal advantage  from  the  agreement, 
but,  on  the  contrary,  were  endeavor- 
ing to  carry  out  the  wishes  of  nearly 
all  of  the  certificate-holders.  Unckles 
V.  Colgate,  148  N.  Y.  529  (1896).  A 
corporation  formed  by  milk  dealers 
to  fix  the  price  to  be  paid  to  farmers, 
etc.,  for  milk  is  illegal.  People  v. 
Milk  Exchange,  145  N.  Y.  267  (189.5). 
Where  an  Illinois  corporation  sues  in 
New  York  on  a  subscription  to  its 
stock,  it  is  no  defense  to  allege  that 
the  company  was  to  create  a  monop- 
oly, where  the  only  proof  was  certain 
prospectuses,  etc.,  issued  before  the 
company  was  organized.  The  defense 
is  not  good  unless  the  company  "was 
formed  for  purposes  illegal  here,  or 
was  doing  acts  prohibited  by  the  laws 
of  this  state  to  its  own  citizens  and 
corporations."  U.  S.  Vinegar  Co.  v. 
Schlegel,  143  N.  Y.  537  (1894).  It  is 
legal  for  a  party  who  contemplates 
constructing  water-works  to  abandon 
the  project  and  enter  the  employ  of 
a  competitor;  and  he  may  collect 
compensation  therefor,  although  a 
part  of  the  compensation  was  due  to 
his  having  abandoned  his  own  enter- 
prise. Oakes  v.  Cattaraugus  Water 
Co.,  143  N.  Y.  430  (1894).  A  carrier 
may  by  special  agreement  give  re- 
duced rates  to  customers  who  stipu- 
late to  give  it  all  their  business,  and 
refuse  those  rates  to  others  who  are 
not  able  or  willing  to  so  stipulate,  pro- 
vided that  the  charge  exacted  from 
those  others  is  not  excessive  or  un- 
reasonable. Lough  V.  Outerbridge,  143 
N.  Y.  271  (1894).  Where  manu- 
facturers form  an  illegal  association 
to  which  they  pay  a  certain  sum, 
which  they  are  to  forfeit  if  they  dis- 
obey its  regulations  and  are  expelled, 
one  of  them  cannot  enjoin  the  asso- 
ciation from  expelling  him.  This 
action  was  to  enforce  the  agreement, 
and  not  to  recover  back  his  money. 
Phoenix  Bridge  Co.  v.  Keystone 
Bridge  Co.,  142  N.  Y.  425  (1894).     In 


1440 


CH.  XXIX.] 


TRUSTS,    ETC. 


[§  503a. 


in  another  state,  where  the  law  was  more  lenient.     Then  it  was  that 
the  anti-trust  act  of  congress  was  suddenly  galvanized  into  life.     At 


People  V.  Sheldon,  139  N.  Y.  251 
(1893),  the  defendant  was  convicted 
of  the  crime  of  conspiracy  under  the 
Penal  Code  of  New  York,  where  he 
and  others  combined  to  raise  the 
price  of  coal  at  retail  and  destroy 
free  competition,  even  though  no  ex- 
.  cessive  price  was  charged. 

A  combination  between  dealers  in 
sheep,  to  sell  only  to  certain  butch- 
ers, the  butchers  agreeing  to  buy  only 
from  them,  excepting  that  such  com- 
missions as  were  received  from  busi- 
ness transacted  with  others  should  be 
paid  into  a  common  pool,  is  illegal. 
A  penalty  for  violating  the  agreement 
cannot  be  collected.  Judd  v.  Harring- 
ton, 139  N.  Y.  105  (1893).  The  pur- 
chaser of  a  trust  certificate  issued  by 
the  trustees,  the  certificate  being  in  a 
form  similar  to  that  of  certificates  of 
stock,  may  compel  the  trustees  to 
transfer  the  same  to  him  on  their 
books,  although  he  is  a  competitor  of 
the  trust  and  has  opposed  it  in  all 
ways  possible.  Rice  v.  Rockefeller, 
134  N.  Y.  174  (1892).  In  this  case 
the  court,  speaking  of  the  nature  of 
the  trust,  said:  "The  agreement  con- 
stituted not  a  partnership,  but  a  trust 
in  behalf  of  the  beneficiaries.  And 
while  it  is  not  a  corporation,  it,  by 
the  agreement,  took  some  of  the 
attributes  of  a  corporation,  in  so  far 
that,  through  its  trustees,  certificates 
of  shares  in  the  equity  to  the  prop- 
erty held  by  them  were  issued,  and 
were  transferable  in  like  manner  ap- 
parently as  are  those  of  corporations." 
Where  several  carbon  manufacturers 
have  formed  a  combination  by  leas- 
ing their  several  concerns  to  a  trustee, 
and  also  assigning  to  him  their  orders 
for  carbons,  and  subsequently  one 
of  them  withdraws,  the  withdrawing 
concern  cannot  sue  for  and  claim 
th.e  amount  due  upon  one  of  the 
orders  assigned  to  and  filled  by  such 
trustee.  The  defendant  ha\dng  in- 
terpleaded, the  trustee  takes  the 
money.  Pittsburgh  Carbon  Co.  v.  Me- 
Millin,  119  N.  Y.  46  (1890).  Where 
a  manufacturer  of  a  peculiar  kind  of 
machinery     under     a     patent     agrees 


with  a  trustee  for  several  corpora- 
tions that  he,  the  manufacturer,  will 
sell  his  machinery  to  them  alone, 
and  they  "agree  to  give  him  a  per- 
centage of  their  profits,  the  agree- 
ment is  legal  and  may  be  enforced  by 
him.  Good  v.  Daland,  121  N.  Y.  1 
(1890).  Even  though  a  party  has  a 
legal  contract  with  a  corporation  by 
which  he  has  the  right  to  purchase 
certain  goods  monthly  for  a  certain 
time,  yet  if  afterwards  the  corpora- 
tion has  sold  out  to  a  trust,  and  the 
trust  assumes  the  contract  and  the 
party  acquiesces  therein  and  sues 
the  trust  for  \'iolation  of  the  contract, 
the  suit  wiU  fail,  the  trust  agreement 
haWng  limited  the  manufacture 
within  a  thousand  miles  radius  of  its 
headquarters.  Falvey  v.  Woolner,  71 
N.  Y.  App.  Div.  331  (1902).  The 
owner  of  a  grain  elevator  may  bring 
suit  for  damages  against  the  owners 
of  other  elevators  and  a  railroad  com- 
pany who  have  entered  into  a  com- 
bination by  which  the  railroad  will 
not  carry  grain  for  any  owner  of  an 
elevator  unless  the  latter  pays  a  cer- 
tain sum  to  the  railroad  company,  the 
intent  being  to  control  the  elevator 
business.  Kellogg  v.  Lehigh  VaUey 
R.R.,  61  N.  Y.  App.  Div.  35  (1901) ; 
s.  c,  93  N.  Y.  App.  Div.  127.  The 
statute  of  New  York  prohibiting  the 
issue  of  stock  at  less  than  par  and 
of  bonds  at  less  than  their  fair  mar- 
ket value  does  not  prohibit  the  issue 
of  stock  and  bonds  by  a  gas  company 
in  payment  for  the  stock  and  bonds 
of  a  competing  gas  company,  even 
though  a  high  value  is  placed  upon 
the  franchise  of  such  competing  com- 
pany as  a  part  of  the  purchase  price. 
Such  a  transaction  is  not  illegal  on 
the  ground  of  creating  a  monopoly, 
nor  is  it  ultra  vires,  provided  the 
charter  of  the  first  company  allowed 
it  to  purchase  stock  and  bonds,  as 
provided  in  the  New  York  statutes. 
Rafferty  v.  Buffalo,  etc.  Co.,  37  N.  Y. 
App.  Div.  618  (1899).  A  person 
agreeing  not  to  engage  in  a  certain 
business  within  a  certain  territory 
cannot  evade  the  contract  by  setting 


(91) 


1441 


503a. 


TRUSTS,    ETC. 


[cE.  XXIX. 


first  that  act  had  been  ignored  by  the  business  pubUc  and  practically 
nullified  by  the  decisions  of  the  United  States  courts.^ 


up  that  the  other  party  is  an  illegal 
combination.  National  Wall  Paper 
Co.  V.  Hobbs,  90  Hun,  288  (1895). 
The  members  of  a  retail  coal  dealers' 
association  formed  to  prevent  and 
actually  preventing  competition  are 
liable  criminally  under  the  New  York 
statutes.  Drake  v.  Siebold,  81  Hun, 
178  (1894).  The  holder  of  trustees' 
certificates,  where  the  trust  is  organ- 
ized on  the  plan  of  trustees  holding 
the  shares  of  stock  of  the  various 
corporations,  is  denied  all  relief  by 
the  courts  as  against  the  trustees.  He 
cannot  compel  them  to  pay  dividends 
or  have  the  property  in  their  hands 
divided  upon  the  dissolution  of  the 
trust.  The  combination  being  illegal, 
the  courts  will  not  aid  any  of  the 
parties.  So  far  as  the  law  is  con- 
cerned, the  trustees  can  appropriate 
the  property  to  their  own  use,  and 
the  holders  of  the  trustees'  certifi- 
cates will  not  be  granted  any  relief. 
Rice  V.  Rockefeller,  Supr.  Ct.  Sp.  T., 
N.  Y.  L.  J.,  April  26,  1894.  Where 
many  manufacturers  under  various 
patents  form  a  corporation  and  con- 
vey to  it  their  patents  and  take  back 
licenses  under  which  the  corporation 
regulates  the  price,  and  they  agree 
not  to  use  any  new  patents  and  not 
to  manufacture  any  new  kind  of 
harrow,  the  combination  is  illegal. 
Any  one  of  the  parties  may  by  suit  in 


equity  be  relieved  from  its  terms. 
Strait  V.  National  Harrow  Co.,  18 
N.  Y.  Supp.  224  (1891).  The  harrow 
trust  was  again  declared  illegal  in 
National  Harrow  Co.  v.  Bement,  21 
N.  Y.  App.  Div.  290  (1897),  but  this 
decision  was  reversed  in  163  N.  Y.  505. 
It  is  established  "that  no  contracts 
are  void  as  being  in  general  restraint 
of  trade  where  they  operate  simply 
to  prevent  a  party  from  engaging  or 
competing  in  the  same  business." 
Hence,  an  agreement  of  one  steam- 
ship company  to  pay  another  com- 
pany a  certain  sum  for  withdrawing 
its  line  of  boats  was  upheld  as  against 
the  dissent  of  a  stockholder  in  the 
former  company.  Leslie  v.  Lorillard, 
110  N.  Y.  519  (1888).  A  large  num- 
ber of  the  proprietors  of  boats  on  the 
canals  made  a  combination.  The  in- 
come from  every  boat,  over  and 
above  a  certain  amount  allowed  to 
the  boat  for  expenses  for  wear  and 
tear,  was  turned  into  the  "pool."  At 
certain  times  the  fund  in  the  "pool" 
was  to  be  divided  among  the  parties 
according  to  the  number  of  their  boats. 
In  an  action  to  enforce  payment 
under  the  agreement  the  court  held 
that  the  whole  arrangement  was 
illegal,  void,  and  not  enforceable. 
Stanton  v.  Allen,  5  Denio,  434  (1848). 
The  proprietors  of  five  lines  of  boats 
engaged      in      canal      transportation 


1  United  States  v.  E.  C.  Knight  Co., 
156  U.  S.  1  (1895).  A  suit  for  damages, 
based  on  the  federal  anti-trust  law, 
failed  in  Bishop  v.  American  Pre- 
servers' Co.,  51  Fed.  Rep.  272  (1892). 
The  statute  appUes  to  illegal  trusts 
of  stock  to  unite  competing  railroads. 
Clarke  v.  Central  R.  R.,  50  Fed.  Rep. 
338  (1892).  In  this  case,  however, 
on  the  final  hearing,  the  bill  was  dis- 
missed. See  Clarke  v.  Richmond, 
etc.  Co.,  62  Fed.  Rep.  328  (1894). 
In  United  States  v.  Patterson,  55  Fed. 
Rep.  605  (1893),  the  federal  statute 
was  held  to  apply  in  certain  partic- 
ulars, and  not  to  apply  in  others. 
The  act  of  congress  relative  to  monop- 


olies does  not  authorize  an  injunc- 
tion except  on  the  part  of  the  govern- 
ment. Blindell  v.  Hagan,  54  Fed. 
Rep.  40  (1893).  An  indictment  of  a 
number  of  lumbermen,  for  raising  the 
price  of  lumber  fifty  cents  a  thousand 
feet,  will  not  lie  under  the  federal 
statute.  United  States  v.  Nelson,  52 
Fed.  Rep.  646  (1892).  Indictments 
under  the  federal  law  against  monoplies 
were  quashed  in  Re  Corning,  51  Fed. 
Rep.  205  (1892);  Re  Terrell,  51  Fed. 
Rep.  213  (1892) ;  Re  Greene,  52  Fed- 
Rep.  104  (1892) ;  United  States  v.  Pat- 
terson, 55  Fed.  Rep.  605,  and  59  Fed. 
Rep.  280  (1893). 


1442 


CH.   XXIX.] 


TRUSTS,    ETC. 


503a. 


In  1897,  however,  the  supreme  court  of  the  United  States  passed 
upon  the  legaHty  of  an  interstate  railroad  pooHng  contract,  and  held 

agreed  to  combine  and  do  business  at 
certain  rates  for  freight  and  passage. 
The  net  earnings  were  to  be  divided 
among  themselves  in  a  fixed  propor- 
tion. One  of  the  parties  sued  another 
to  compel  him  to  make  payment.  The 
court  held  that  the  combination  was 
void  under  the  statutes  of  New  York, 
and  said:  "It  is  a  familiar  maxim 
that  competition  is  the  life  of  trade. 
It  foUows  that  whatever  destroys  or 
even  relaxes  competition  in  trade  is 
injurious  if  not  fatal  to  it."  Hooker 
V.  Vandewater,  4  Denio,  349  (1847). 

A  coal  company  bought  coal  from 
several  corporations  upon  their  con- 
tract not  to  sell  to  any  other  parties 
in  that  locality.  The  purpose  was  to 
enable  the  purchaser  of  the  coal  to 
have  a  monopoly  of  the  market.  The 
party  which  purchased  the  coal  did 
not  pay  for  it.  The  coal  company 
which  had  sold  brought  suit  for  the 
price,  but  the  court  held  that  the  suit 
must  fail.  The  company  had  taken 
part  in  an  illegal  contract  and  com- 
bination. In  such  eases  the  parties 
are  outside  of  the  pale  and  protection 
of  the  law.  The  courts  wiU  not  aid 
either  party.  Arnot  v.  Pittston,  etc. 
Co.,  68  N.  Y.  558  (1877).  Many  salt 
manufacturers  in  New  York  state 
combined  to  limit  the  production  and 
control  the  price  of  salt.  They  formed 
a  corporation,  and  each  of  the  par- 
ties leased  to  the  corporation  his 
manufactory  of  salt.  Each  of  the 
parties  was,  however,  to  continue  the 
manufacture  of  salt  in  his  manufac- 
tory, but  only  to  a  Limited  extent,  and 
was  to  sell  the  product  to  a  corpora- 
tion at  a  fixed  price.  The  agreement 
was  carried  out.  One  of  the  parties 
could  not  collect  from  the  corporation 
the  price  for  the  salt  delivered  to  it, 
and  accordingly  he  brought  suit.  But 
the  court  decided  that  he  could  not 
collect.  He  lost  his  salt,  and  also 
the  price  of  it.  The  law  declares  such 
combinations  illegal,  and  will  not 
aid  any  of  the  parties.  Clancey  v. 
Onondaga,  etc.  Co.,  62  Barb.  395 
(1862).  The  agreement  of  the  vari- 
ous   members    of    the    ."Wire    Trust" 


not  to  sell  at  less  than  a  certain  price 
is  void.  A  forfeit  cannot  be  recovered 
back  by  one  of  the  parties.  De  Witt, 
etc.  Co.  V.  New  Jersey,  etc.  Co.,  9 
Ry.  &  Corp.  L.  J.  314  (N.  Y.  C.  P., 
1891).  The  receiver  of  one  of  the 
corporations  forming  a  "trust"  may 
enjoin  it  from  reorganizing  in  the 
shape  of  one  large  corporation.  Gray 
V.  De  Castro,  etc.  Co.,  10  N.  Y.  Supp. 
632  (1890).  Although  the  charter  of 
one  of  the  corporations  whose  stock 
is  held  by  a  "trust"  is  forfeited,  yet 
the  receiver  cannot  have  a  receiver 
appointed  of  the  "trust"  property. 
This  would  amount  to  a  receivership 
of  all  the  property  of  a  person  who 
happened  to  be  a  stockholder  in  an  in- 
solvent corporation.  Gray  v.  Oxnard, 
etc.  Co.,  N.  Y.  L.  J.,  June  6,  1890. 
The  receiver  of  the  company  whose 
charter  is  forfeited  has  no  right  to  an 
accounting  from  the  other  corpora- 
tions as  partners.  He  is  confined 
to  the  property  of  his  own  company. 
Gray  v.  Oxnard,  etc.  Co.,  11  N.  Y. 
Supp.  118  (1890) ;  afSrmed  in  59  Hun, 
387  (1891),  on  the  ground  that  an 
illegal  contract  cannot  be  enforced. 
A  receiver  of  an  insolvent  corporation 
may  recover  money  due  it  from  an 
illegal  "trust"  though  the  corpora- 
tion was  a  party  to  the  "trust."  Pitts- 
burg Carbon  Co.  v.  McMillin,  53  Hun, 
67  (1889).  A  contract  whereby  the 
stockholders  of  one  corporation  were 
to  buy  only  from  the  stockholders  of 
another,  and  the  stockholders  of  the 
latter  were  to  sell  only  to  the  stock- 
holders of  the  former,  was  upheld  in 
Live-Stock  Assoc,  etc.  v.  Levy,  3 
N.  Y.  St.  Rep.  514  (1886).  A  trust 
being  illegal,  a  certificate  holder  may 
have  a  receiver  appointed  of  all  the 
stock  and  assets  held  by  the  trustees, 
and  may  have  an  accounting  by  the 
trustees.  Cameron  v.  Havemeyer,  12 
N.  Y.  Supp.  126  (1890).  Where  a 
"trust"  passes  into  a  receiver's  hands 
by  reason  of  insolvency,  the  receiver 
may  recover  debts  due  the  "trust" 
from  the  constituent  corporations. 
Pittsburg  Carbon  Co.  v.  McMiUin, 
119   N.    Y.   46    (1890).     The   case   of 


1443 


§  503a.] 


TRUSTS,    ETC. 


CH.  XXIX. 


that  such  a  contract  was  in  violation  of  this  anti-trust  act  of  congress 
of  July  2,  1890.^     This  was  followed  by  a  still  more  important  decision 


Diamond  Match  Co.  v.  Roeber,  106 
N.  Y.  473  (1887),  was  not  a  "trust" 
case.  A  stockholder  cannot  main- 
tain a  suit  against  the  corporation  to 
enjoin  other  stockholders  from  selUng 
their  stock  to  a  second  corporation, 
such  second  corporation  and  the  other 
stockholders  not  being  parties  to  the 
suit.  Ingraham  v.  National  Salt  Co., 
36  N.  Y.  Misc.  Rep.  646  (1902) ;  aff'd, 
72  App.  Div.  582  ;  appeal  dismissed,  172 
N.  Y.  644.     See  207  N.  Y.  86  (1912). 

North  Carolina:  A  seller  of  stock 
in  a  livery  company  may  agree  not 
to  engage  in  business  again  in  a  certain 
town,  and  a  company  to  which  the 
purchaser  assigns  the  contract  may 
enforce  it,  as  may  also  any  of  the 
stockholders.  Anders  v.  Gardner,  151 
N.  C.  604  (1910). 

Ohio:  See  State  v.  Standard  Oil 
Co.,  49  Ohio  St.  137  (1892).  The  pro- 
moters of  an  ice  combination  were 
convicted  and  incarcerated  in  the 
workhouse  for  violation  of  the  anti- 
trust statute  of  Ohio,  in  accordance 
with  the  decision  in  Lemmon  v.  State, 
77  Ohio,  427  (1908).  A  statute  mak- 
ing it  a  criminal  offense  to  form  a  trust 
to  prevent  competition  is  constitu- 
tional. State  V.  Gage,  72  Ohio  St. 
210  (1905) ;  see  also  State  v.  Smiley, 

65  Kan.  240  (1902) ;  aff'd,  sub  nom. 
Smiley  v.  Kansas,  196  U.  S.  447  (1905). 
It  is  constitutional  for  the  legislature 
to  prohibit  corporations  from  entering 
into  combinations  to  restrict  competi- 
tion with  a  view  to  raising  prices. 
Quo  warranto  lies  at  the  instance  of 
the  state  against  such  corporations. 
State  V.  Buckeye,  etc.  Co.,  61  Ohio  St. 
520  (1900).  Although  a  combination 
is  illegal,  yet  the  profits  thereof,  when 
placed  in  the  hands  of  a  third  person 
for  the  benefit  of  one  of  the  corpora- 
tions, may  be  garnisheed  for  a  debt  of 
that  corporation.     Geurinck  v.  Alcott, 

66  Ohio  St.  94  (1902).  The  Candle 
Manufacturers'  unincorporated  asso- 
ciation,    formed     to     control     prices. 


etc.,  is  illegal.  A  member  cannot  re- 
cover his  share  of  the  profits.  Emery 
V.  Ohio  Candle  Co.,  47  Ohio  St.  320 
(1890).  Many  salt  manufacturers 
formed  a  "trust"  by  agreeing  to  sell 
all  their  product  to  an  unincorporated 
joint-stock  association.  The  latter 
was  composed  of,  and  its  directors 
were  elected  by,  the  manufacturers. 
The  purpose  of  the  combination  was 
to  have  the  association  buy  the  salt 
from  the  manufacturers  and  sell  it  to 
the  public.  Competition  would  thereby 
be  prevented.  The  court  held  that 
the  combination  was  void,  and  enjoined 
the  association  from  seizing  the  prod- 
uct of  one  of  the  manufacturers. 
Central  Ohio  Salt  Co.  v.  Guthrie,  35 
Ohio  St.  666  (1880). 

Oklahoma :  A  lease  by  one  compress 
company  to  another  to  form  a  monop- 
oly may  be  set  aside  at  the  instance 
of  stockholders  of  the  former.  Ander- 
son V.  Shawnee,  etc.  Co.,  17  Okla.  231 
(1906).     See  130  Pac.  Rep.  316. 

Pennsylvania:  A  coal  operator  in 
selling  his  business  may  agree  not  to 
engage  in  the  business  for  ten  years 
in  territories  traversed  by  the  Ohio 
and  Mississippi  rivers  and  their  trib- 
utaries, and  even  though  such  a 
contract  is  a  violation  of  the  anti- 
trust act  of  congress,  yet  being  divisi- 
ble it  is  legal  in  Pennsylvania.  Mo- 
nongahela,  etc.  Co.  v.  Jutte,  210  Pa. 
St.  288  (1904).  A  combination  of 
brewers  to  control  the  price  of  beer 
within  a  city  is  illegal,  and  the  court 
will  not  enforce  the  agreement.  Nes- 
ter  V.  Continental  Brewing  Co.,  161 
Pa.  St.  473  (1894).  Five  Pennsyl- 
vania coal  corporations,  which  together 
controlled  a  certain  kind  of  coal,  com- 
bined and  agreed  that  sales  should  be 
made  through  a  committee  and  a  gen- 
eral agent,  and  that  thereby  prices 
should  be  fi.xed,  freights  made,  and 
sales  and  deliveries  adjusted.  If  any 
company  sold  more  than  a  fixed  pro- 
portion it  was  to  pay  a  certain  amount 


1  United    States    v.    Trans-Missouri     United    States    v.    Joint,    etc.    Assoc, 
Freight  Assoc,  166  U.  S.  290  (1897).     171  U.  S.  505  (1898). 

1444 


CH.  XXIX.] 


TKUSTS,    ETC. 


[§  503a. 


by  that  court  in  1899,  when  it  was  held  that  congress  had  power  to 
regulate  the  purchase,  sale,  and  exchange  of  commodities  between  the 


to  the  others.  The  combination  was 
made  and  carried  out  in  New  York. 
In  the  course  of  time  one  of  the  com- 
panies sued  another  to  recover  its 
proportion  of  the  amount  which  the 
latter  was  to  pay  for  the  excess  of 
coal  sold  by  it.  The  Pennsylvania 
court  held  that  it  could  not  recover ; 
that  the  combination  was  illegal  and 
void ;  and  that  it  was  a  conspiracy 
under  the  New  York  statute  against 
the  commission,  by  two  or  more  per- 
sons, of  "any  act  injurious  ...  to 
trade  or  commerce."  Morris  Run 
Coal  Co.  V.  Barclay  Coal  Co.,  68  Pa. 
St.  173  (1871).  The  courts  will  refuse 
a  charter  to  a  company  whose  business 
is  to  be  "to  promote  the  business  of 
such  retail  coal  dealers  as  become 
members  thereof,  and  to  protect  them," 
etc.,  the  intent  being  to  combine  the 
retail  coal  dealers.  Re  Richmond 
Retail  Coal  Co.,  9  Ry.  &  Corp.  L.  J. 
31  (Phila.  1890). 

Rhode  Island:  A  corporation  may 
be  indicted  for  criminal  conspiracy 
in  forming  an  illegal  trust.  State  v. 
Eastern  Coal  Co.,  29  R.  I.  254  (1908). 
Three  out  of  four  oleomargarine  com- 
panies in  New  England  may  legally 
agree  to  consolidate  into  one  company 
in  order  to  stop  sharp  competition. 
They  may  also  agree  not  to  do  business 
separately  for  five  years  anywhere. 
Oakdale  Mfg.  Co.  v.  Garst,  18  R.  I.  484 
(1894). 

South  Carolina:  Where  a  New  Jer- 
sey corporation  has  brought  about  an 
illegal  combination  and  trust  of  fer- 
tilizer corporations  and  has  obtained 
permission  to  do  business  in  South 
Carolina,  a  suit  lies  against  it  at  the 
instance  of  the  state  to  cancel  the 
conveyances  of  property  to  it  in  the 
state  and  to  have  receivers  appointed 
of  the  South  Carolina  corporations 
that  entered  into  the  combination, 
and  to  set  aside  all  illegal  contracts 
and  to  revoke  the  license  to  the  New 
Jersey  corporation  to  do  business  in 
the  state.  State  v.  Virginia-Carolina, 
etc.  Co.,  71  S.  C.  544  (1905). 

South  Dakota:  In  that  state  this 
tendency  of  the  law  to  prevent  unfair 


competition  has  led  to  a  statute  where- 
by it  is  made  a  criminal  offense  for  a 
corporation  to  ruin  a  competitor  by  re- 
ducing prices  below  cost  where  that 
competitor  does  business,  the  larger 
concern  being  able  to  do  so  by  reason  of 
its  maintaining  fuU  prices  at  all  other 
points  where  the  smaller  company  does 
no  business.  In  the  ease  State  v. 
Central  Lumber  Co.,  24  S.  Dak.  136 
(1909),  a  criminal  conviction  of  a 
lumber  company  for  violating  this 
statute  was  upheld  ;  aff'd,  226  U.  S.  157. 
Tennessee :  The  attorney-general 
may  obtain  a  perpetual  injunction 
against  a  foreign  oil  company  doing 
business  in  the  state  where  its  agents 
are  causing  people  to  cancel  purchases 
of  oil  from  another  company,  the  pur- 
pose being  to  establish  a  monopoly. 
State  V.  Standard  Oil  Co.,  120  Tenn. 
86  (1908).  It  is  legal  for  a  telephone 
company  to  buy  out  a  local  competing 
company,  in  order  to  avoid  a  ruinous 
rate  war.  State  v.  Cumberland,  etc. 
Co.,  114  Tenn.  194  (1905).  The 
Tennessee  statute,  prohibiting  foreign 
corporations  from  doing  business  in 
the  state  where  they  have  combined 
to  lessen  competition  and  influence 
prices,  is  legal,  and  the  state  may  file 
a  bill  to  restrain  foreign  corporations 
from  doing  business  in  the  state  where 
they  have  violated  such  statute. 
State  V.  Schiltz,  etc.  Co.,  104  Tenn. 
715  (1900).  Where  two  manufactur- 
ing corporations  organize  a  third  to 
sell  their  product,  and  to  pay  for  the 
stock  and  distribute  the  stock  among 
their  stockholders,  a  debt  due  from  one 
of  them  to  the  new  corporation  will  not 
be  allowed  to  participate  in  the  dis- 
tribution of  the  assets  of  the  debtor 
as  against  other  creditors,  under  the 
statute  of  Tennessee  allowing  such 
defense.  American,  etc.  Co.  v.  Stand- 
ard, etc.  Co.,  59  S.  W.  Rep.  709 
(Tenn.  1900).  A  shipper  cannot  main- 
tain a  bill  in  equity  to  compel  a  rail- 
road to  forward  his  freight  by  a  cer- 
tain route,  even  though  he  claims  that 
the  reason  it  is  not  forwarded  by  that 
route  is  because  of  an  agreement 
between  the  railroads  fixing  the  rate 


1445 


§  503a.] 


TRUSTS,    ETC. 


[CH.  XXIX. 


states,  and  hence,  under  the  anti-trust  act  of  1890,  the  United  States 
government  might  enjoin  a  combination  in  restraint  of  trade  by  means 


and  fixing  the  percentage  of  traffic 
which  each  was  to  carry.  Post  v. 
Southern  Ry.,  103  Tenn.  184  (1899). 
A  by-law  of  a  plumbers'  association 
by  which  any  member  who  does  work 
in  competition  with  another  shall 
pay  a  certain  sum  to  the  association 
is  illegal.  Bailey  v.  Association  of 
Master  Plumbers,  etc.  103  Tenn.  99 
(1899).  It  is  illegal  for  an  Ohio  cor- 
poration to  purchase  a  majority  of  the 
stock  of  a  Tennessee  corporation  for 
the  purpose  of  controlling  the  latter, 
even  though  they  are  engaged  in  a 
similar  business,  the  object  being  to 
form  a  monopoly.  Hence  the  purchas- 
ing company  cannot  enforce  the  con- 
tract as  to  certain  things  which  were 
to  be  done  by  the  vendor  of  the  stock. 
Marble  Co.  v.  Harvey,  92  Tenn.  115 
(1892).  A  combination  of  four  cot- 
tonseed oil  corporations,  by  an  agree- 
ment that  the  possession  and  use  of 
all  their  property  should  be  turned 
over  to  certain  persons  to  run,  is  a 
partnership,  and  contrary  to  the  rule 
of  law  that  a  corporation  cannot 
become  a  partner.  One  of  the  four 
corporations  sued  and  recovered  pos- 
session of  its  property.  Mallory  v. 
Hanaur  Oil  Works,  86  Tenn.  598  (1888). 
Texas :  A  city  may  file  a  bill  to 
cancel  a  contract  with  a  waterworks 
company  to  supply  the  city  with 
water  for  a  term  of  years,  it  amounting 
to  practically  a  monopoly  contrary  to 
law.  Ennis  Waterworks  v.  City  of 
Ennis,  144  S.  W.  Rep.  930  (Tex.  1912). 
An  exclusive  right  given  by  a  railroad 
company  to  an  express,  company  to 
do  the  express  business  on  that  rail- 
road is  in  violation  of  the  anti-trust 
statute  of  Texas.  State  v.  Missouri, 
etc.  Ry.,  99  Tex.  516  (1906).  Where 
several  ice  companies  in  the  city  agree 
to  sell  ice  to  a  single  corporation  only, 
this  is  a  violation  of  the  Texas  anti- 
trust law.  Crystal,  etc.  Co.  v.  State, 
23  Tex.  Civ.  App.  293  (1900).  The 
charter  of  a  gas  company  formed  to 
combine  all  the  electric  light  and  gas 
interests  in  the  city  was  forfeited  at 
the  instance  of  that  state  under  the 
anti-trust    statute,    in    the    case    San 


Antonio,  etc.  Co.  v.  State,  22  Tex. 
Civ.  App.  118  (1899).  Even  though 
a  cotton  compress  company  purchases 
six  cotton  compresses  located  in  dif- 
ferent parts  of  the  state,  yet  if  the 
price  for  compressing  cotton  is  fixed 
by  a  state  commissioner  there  is  no 
violation  of  the  anti-trust  act.  State 
V.  Shippers',  etc.  Co.,  95  Tex.  603 
(1902).  In  Waters,  etc.  Oil  Co.  v. 
State,  19  Tex.  Civ.  App.  1  (1898),  the 
state  forfeited  the  right  of  a  foreign 
corporation  organized  under  the  laws 
of  Missouri  to  do  business  in  Texas, 
the  corporation  having  agreed  with 
various  merchants  and  other  dealers 
in  oils  in  Texas  so  that  such  parties 
should  not  sell  any  oils  except  those 
of  that  corporation.  The  Texas  stat- 
ute against  combinations  was  declared 
unconstitutional  in  Re  Grice,  79  Fed. 
Rep.  627  (1897),  as  violating  the  right 
of  contract  guaranteed  by  the  federal 
constitution.  A  contract  between  a 
brewer  and  a  dealer  by  which  certain 
territory  is  given  exclusively  to  the 
dealer,  and  the  dealer  agrees  not  to 
buy  of  others,  is  contrary  to  the  Texas 
statute.  Texas  Brewing  Co.  v.  Tem- 
pleman,  90  Tex.  277  (1896).  A  manu- 
facturer of  windmills  may  grant  an 
exclusive  territory  for  their  sale  to  a 
firm,  even  though  such  firm  agrees 
not  to  handle  any  other  kind  of  wind- 
mill. Welch  V.  Phelps,  etc.  Co.,  89 
Tex.  653  (1896).  An  agreement  or 
combination  of  brewers  as  to  sales  of 
beer  to  dealers  is  legal  at  common 
law,  but  void  under  the  Texas  stat- 
ute. Houch  V.  Anheuser,  etc.  Ass'n, 
88  Tex.  184  (1894).  The  attorney- 
general  cannot  maintain  an  injunc- 
tion against  a  combination  of  insurance 
companies  to  fix  rates  and  commis- 
sions, inasmuch  as  insurance  business 
is  not  a  pubUc  or  quasi-pubUc  busi- 
ness, nor  does  it  concern  a  staple 
of  life.  Queen  Ins.  Co.  v.  State,  86 
Tex.  250  (1893),  holding  also  that  a 
statute  against  trusts  and  combina- 
tions does  not  apply  to  a  combination 
of  fire  insurance  companies  to  fix  uni- 
form rates  and  commissions.  It  is 
held  in  Texas  that  where  the  owner 


1446 


CH.   XXIX. 


TRUSTS,    ETC. 


[§  503a. 


of  contracts,  the  purpose  of  which  was  to  destroy  competition  and  in- 
crease prices.^  Twelve  years  later  came  the  Standard  Oil  Company 
decision,-  and  the  American  Tobacco  Company  decision,^  and  the  Union 
Pacific  decision.'* 


of  land  donates  streets  to  a  city  but 
retains  the  exclusive  right  thereon 
for  street  railways,  electric  light,  gas, 
sewers,  waterworks  and  telephones, 
the  reservation  is  a  monopoly  contrary 
to  public  policy  and  not  sustainable. 
Jones  V.  Carter,  45  Tex.  Civ.  App.  450 
(1907). 

Virginia:  An  exclusive  contract 
from  a  railroad  to  an  advertising  com- 
pany to  place  advertisements  on  the 
railroad  box  cars   is   void.     National, 


etc.  Co.  V.  Louisville,  etc.  Co.,  110  Va. 
413,  (1909). 

Washington  :  A  statute  authorizing 
corporations  to  hold  stock  in  other 
corporations  is  not  unconstitutional  as 
rendering  possible  the  suppression  of 
competition.  State  v.  Superior  Court, 
56  Wash.  214  (1909).  Even  though 
an  electric  powder  company  in  its  eon- 
tract  to  furnish  power  to  a  street  rail- 
way agrees  not  to  furnish  power  to  any 
competing    street     railway,     and     the 


1  Addyston,  etc.  Co.  v.  United 
States,  175  U.  S.  211  (1899). 

2  Where  a  corporation  acquires  the 
stock  of  many  other  corporations 
engaged  in  the  same  business,  thereby 
giving  a  unification  of  power  and  con- 
trol over  a  commodity,  this  raises  a 
presumption  of  an  intent  to  dominate 
or  gain  perpetual  control,  and  if 
accompanied  by  acts  of  unfair  compe- 
tition it  is  in  \'iolation  of  the  anti- 
trust act  of  congress.  Standard  Oil, 
etc.  Co.  V.  United  States,  221  U.  S. 
1  (1911). 

'  Restraint  of  trade  refers  to  acts 
to  the  prejudice  of  public  interests 
by  unduly  restricting  competition  or 
unduly  obstructing  due  course  of 
trade,  and  the  anti-trust  act  of  con- 
gress applies  to  only  such  acts.  United 
States  V.  American  Tobacco  Co.,  221 
U.  S.  106  (1911).  The  New  York 
court  of  appeals  in  the  case  Central 
N.  Y.  Tel.  etc.  Co.  v.  Averill,  199  N.  Y. 
128,  134  (1910)  said,  "While  a  con- 
tract in  general  restraint  of  trade  is 
still  deemed  illegal  and  void,  the 
law  permits  contracts  in  partial 
restraint  of  trade,  under  some  circum- 
stances, where  they  are  not  unreason- 
able and  are  supported  by  sufficient 
consideration." 

*  Where  two  trunk  line  railroads 
are  practically  parallel  and  have  com- 
peted for  a  substantial  amount  of 
through  traffic,  even  though  several 
hundred  miles  apart,  one  of  them  can- 
not   legally    acquire    control    of    the 


other  by  ha\'ing  one  of  its  subsidiary 
companies  acquire  forty-six  per  cent,  of 
the  capital  stock  of  such  competing  rail- 
road company,  this  being  a  dominating 
interest  in  the  stock  leading  to  direc- 
tors and  officers  in  common  between 
the  two  companies  and  the  suppres- 
sion of  competition  in  \'iolation  of  the 
anti-trust  act  of  congress.  United 
States  V.  Union  Pacific  R.  R.,  226 
U.  S.  61  (1912).  In  the  case  United 
States  V.  Union  Pacific  R.  R.,  226  U. 
S.  470  (1913)  the  court  declined  to 
allow  the  Union  Pacific  to  distribute 
among  its  stockholders  the  stock 
which  the  Union  Pacific  held  in  the 
Southern  Pacific,  inasmuch  as  this 
would  enable  the  indi\'iduals  who 
owned  the  stock  of  Union  Pacific 
to  control  the  Southern  Pacific  by  the 
stock  so  distributed,  thereby  continu- 
ing the  combination.  But  the  mere 
fact  that  the  same  persons  own  a 
majority  of  the  stock  of  two  companies 
engaged  in  the  same  line  of  business 
is  not  a  violation  of  the  anti-trust 
act  of  congress.  United  States  v. 
American  Tobacco  Co.,  191  Fed. 
Rep.  371  (1911).  In  distributing  the 
assets  of  a  corporation  which  has  been 
dissolved  for  violation  of  the  anti- 
trust act  of  congress  the  court  may 
forbid  individuals  acquiring  more 
than  a  certain  part  of  the  stock  of 
the  subsidiary  companies  and  may 
forbid  one  company  acquiring  stock 
in  others.  United  States  v.  American 
Tobacco  Co.,  191  Fed.  Rep.  371  (1911). 


1447 


§  503a.]  TRUSTS,    ETC.  [CH.  XXIX. 

The  following  decisions  of  the  supreme  court  of  the  United  States, 
relative  to  the  anti-trust  act  of  congress,  throw  light  on  its  wide  applica- 
tion. This  act  of  congress  applies  only  to  interstate  and  international 
trade. ^  It  does  not  apply  to  purchasers  of  cattle  on  the  market,  who 
form  an  association  by  which  each  agrees  not  to  recognize  any  yard 
trader  or  employ  any  person  to  buy  or  sell  cattle  unless  he  be  a  member 
of  the  association.  Interstate  commerce  is  not  directly  involved  in 
such  an  association,  and,  moreover,  the  purpose  of  the  agreement  was 
clearly  to  regulate  and  not  to  restrict  trade.^  Neither  does  it  apply  as 
a  defense  to  a  mortgage  that  has  been  given  by  a  trust  or  combination 
in  restraint  of  trade.^  The  contract  of  a  manufacturer  of  proprietary 
medicines  under  a  secret  process  for  the  sale  of  his  goods  fixing  the  price 
at  which  they  are  to  be  sold  by  wholesale  and  retail  dealers  and  elimi- 
nating all  competition  is  in  restraint  of  trade  and  invalid  at  common 
law  and  under  the  Sherman  anti-trust  act,  and  hence  such  a  manu- 
facturer cannot  enjoin  a  party  from  purchasing  such  medicines  sur- 
reptitiously and  selling  them  at  any  price  he  pleases.^  An  anti-trust 
law  of  a  state  applies  to  subsequent  violations,  even  though  made  in 
carrying  out  a  contract  made  before  the  statute  was  passed.^    Fines 

contract  is  void,  yet  it  will  be  com-  bids  are  submitted  to  the  association 

pelled  to   continue    to   furnish   power  before    they    are    made,    and    six    per 

until    the    street    railway    can    make  cent,  added  to  the  lowest  bid,  is  ille- 

other   provision.     Seattle^  etc.    Co.    v.  gal.     Milwaukee,  etc.  Assoc,  v.  Niezer- 

Snoqualmie,   etc.   Co.,   40  Wash.   380  owski,   95   Wis.    129    (1897).     A   pur- 

(1905).  chaser    of    goods    cannot    defeat    an 

West  Virginia:  An  agreement  be-  action  for  the  price  on  the  ground 
tween  coal  producers  by  which  they  that  the  vendor  is  an  illegal  trust  or 
form  a  selling  corporation,  and  each  combination.  National  Distilling  Co. 
one  makes  a  further  agreement  there-  v.  Cream  City  Imp.  Co.,  86  Wis.  352 
with  to  sell  its  production  for  three  (1893).  See  Kellogg  v.  Larkin,  3 
years,  is  in  restraint  of  trade,  and  Pin.  (Wis.)  123  (1851).  A  stock- 
hence  the  selling  company  cannot  holder  in  selling  his  stock  in  a  drug 
enforce  such  a  contract  by  a  bill  of  company  may  agree  not  to  engage  in 
injunction.  Pocahontas,  etc.  Co.  v.  the  drug  business  for  five  years  in 
Powhatan,  etc.  Co.,  60  W.  Va.  508  that  locality.  Kradwell  v.  Thiesen, 
(1907).  The  court  will  not  enforce  111  N.  W.  Rep.  233  (Wis.  1907). 
an  agreement  between  two  natural  i  United  States  v.  E.  C.  Knight  Co., 
gas  companies  whereby  they  divide  156  U.  S.  1  (1895). 
the  territory  and  fix  prices.  Charles-  ^  Anderson  v.  United  States,  171 
ton,  etc.  Co.  v.  Kanawha,  etc.  Co.,  58  U.  S.  604  (1898).  The  beef  trust,  how- 
W.  Va.  22  (1905).  ever,  was  held  to  be  in  violation  of 

Wisconsin:     A  retail  dealer  in  coal  the  anti-trust  act  of  congress  of  July 

to   whom    the   wholesale   dealers   wiU  2,    1890,    in    Swift    &    Co.    v.    United 

not    sell   by   reason    of   a    trust    may  States,  196  U.  S.  375  (1905). 

maintain  a  bill  of  injunction  against  ^  Dickerman   v.    Northern   T.    Co., 

the     trust.     Hawarden     v.     Youghio-  176  U.  S.  181  (1900). 

gheny,  etc.  Co.,  Ill  Wis.  545  (1901).  *  Dr.  Miles,  etc.  Co.    v.   Park,  etc. 

A  combination  of  mason  builders  by  Co.,  220  U.  S.  373  (1911). 

which   they   pay   to   their   association  ^  Waters-Pierce   Oil    Co.    i;.    Texas, 

six  per  cent,  on  all  contracts,  and  all  212  U.  S.  86  (1909). 

1448 


CH.  XXIX.]  TRUSTS,   ETC.  [§  503a. 

amounting  to  $1,600,000  are  not  so  grossly  excessive  as  to  deprive  a 
corporation  of  its  property  without  due  process  of  law  where  it  has 
assets  of  over  $40,000,000  and  has  paid  dividends  of  several  hundred 
per  cent.^  A  purchaser  of  goods  from  an  illegal  trust  may  refuse  to 
pay  therefor  if  the  terms  of  purchase  are  fixed  by  an  illegal  agreement 
and  not  by  an  independent  purchase  not  connected  with  the  trust 
agreement.^  The  Mississippi  anti-trust  act  which  the  supreme  court 
of  that  state  construes  as  rendering  illegal  an  agreement  between  retail 
lumber  dealers  not  to  purchase  any  lumber  from  wholesale  dealers 
who  also  sell  direct  to  consumers,  does  not  deprive  such  retail  dealers 
of  freedom  of  contract  amounting  to  a  deprivation  of  property  without 
due  process  of  law.'  An  indictment  under  the  anti-trust  act  of  congress 
of  July  2,  1890,  against  individuals  for  a  conspiracy  to  suppress  com- 
petition by  a  competitor,  the  American  Sugar  Refining  Company,  is 
good,  even  though  some  of  the  acts  of  conspiracy  are  barred  by  the 
statute  of  limitations,  the  conspiracy  being  a  continued  one,  namely, 
loaning  money  on  the  majority  of  the  stock  of  the  competing  company 
as  collateral  security,  and  then  voting  the  stock  to  prevent  competition.* 
It  is  a  violation  of  the  anti-trust  act  of  congress  for  coal-carrying  rail- 
roads to  own  the  stock  of  a  holding  company,  w^hich  in  its  turn  owns 
the  stock  of  independent  coal-mining  companies.^  The  anti-trust  act 
of  congress  will  sustain  a  bill  filed  by  the  government  against  the  Termi- 
nal Railroad  Association  of  St.  Louis,  which  has  acquired  a  monopoly 
of  railroad  terminals  in  that  city  in  the  interest  of  certain  railroads,  and 
in  entering  a  decree  the  court  may  enjoin  the  carrying  out  of  the  objec- 
tionable features  of  the  administration  of  such  a  monopoly  and  allow 
the  company  to  proceed  with  the  business  by  permitting  other  railroads 
to  avail  themselves  of  the  terminal  facilities  on  equal  terms,  the  contracts 
being  changed  under  supervision  of  the  court,  so  as  to  bring  this  about.* 
Enameled  iron  wire  manufacturers  controlling  eighty-five  per  cent,  of  the 
business  cannot  evade  the  anti-trust  act  of  congress  by  utilizing  a  cer- 
tain patent  so  that  the  company  owning  the  patent  licenses  other  com- 

1  Waters-Pierce    Oil   Co.   v.    Texas,  sixty-five  per  cent,  of  the  price  of  the 

212  U.  S.  86  (1909).  coal  at   tidewater.      Although  two  of 

"^  Continental,   etc.    Co.   v.    Voight,  such  railroads  have  acquired  a  control- 

etc.  Co.,  212  U.  S.  227  (1909).  ling  interest  in  the  stock  of  competing 

'  Grenada,    etc.    Co.  v.  Mississippi,  coal-carrying  roads  and  of   coal  com- 

217  U.  S.  433  (1910).  panics,   yet   that   question   cannot   be 

*  United  States  v.  Kissel,  218  U.  S.  litigated  except  by  separate  proceed- 
ed (1910).  ings.     United  States  v.   Reading  Co., 

5  It  is  also  illegal  for  such  raih-oads  226  U.  S.  324  (1912). 
to   make  contracts   with  independent         *  United    States    v.    Terminal,    etc. 

coal  mining  companies  to  take  all  the  Assoc,   of    St.    Louis,   224   U.   S.   383 

latter's  output,  delivery  to  be  at   the  (1912).    See  also  228  U.  S.  87. 
mouth  of  the  mines  at  a  price  equal  to 

1449 


§  503a.]  TRUSTS,    ETC.  [CH.  XXIX. 

panics  by  contracts  unreasonably  restricting  the  output  and  price  of 
the  article.^  The  state  may  enact  a  statute  rendering  it  illegal  for  a 
corporation  to  sell  its  goods  at  a  lower  price  in  one  section  of  the  state 
than  in  others  where  the  object  of  the  reduced  price  is  to  eliminate  com- 
petition.^ Manufacturers  under  various  non-competing  patents  may 
combine  even  though  all  of  the  patents  are  used  in  making  shoe  manu- 
facturing machinery.^  A  suit  by  a  gas  company  to  enjoin  an  illegal 
reduction  of  rates  cannot  be  defeated  on  the  ground  that  the  company 
had  violated  an  anti-trust  statute.^  It  is  a  violation  of  the  anti-trust 
act  of  congress  for  a  New  Jersey  corporation  to  acquire  a  majority  of 
the  stock  of  two  competing  interstate  railroad  companies.^  A  state 
cannot  maintain  a  bill  in  equity  to  enforce  the  anti-trust  act  of  congress 
of  July  2,  1890.^  A  combination  between  manufacturers  of  and  dealers 
in  grates,  mantels  and  tiles,  whereby  the  dealers  agree  to  buy  and  sell 
for  members  only,  except  for  higher  prices,  and  the  manufacturers 
agree  not  to  sell  to  any  except  members,  on  penalty  of  forfeiture  of 
membership,  is  in  violation  of  the  anti-trust  act  of  congress.^  A  city 
may  maintain  a  suit  for  damages  against  a  combine  that  has  caused  it 
to  pay  more  than  it  should  for  articles  purchased,  such  suit  being  au- 
thorized by  the  act  of  congress  of  July  2,  1890.^  The  idea  of  monopoly 
is  not  now  confined  to  a  grant  of  privileges  but  is  understood  to  include 
a  condition  produced  by  the  acts  of  individuals  and  the  suppression  of 
competition  by  unification  of  interest  or  management  or  through  agree- 
ment and  concert  of  action.  It  is  the  power  to  control  prices  which 
makes  both  the  inducement  to  make  such  combinations  and  the  concern 
of  the  law  to  prohibit  them.^  The  anti-trust  act  of  -congress  of  July 
2,  1890,  renders  illegal  a  boycott  by  a  labor  organization.^*^     A  court 

1  Standard,  etc.  Co.  v.  United  States,  ^  Chattanooga  Foundry  v.  Atlanta; 
226  U.  S.  20  (1912).  203  U.  S.  390  (1906). 

2  Central  Lumber  Co.  v.  South  ^  National,  etc.  Co.  v.  Texas,  197 
Dakota,  226  U.  S.  157  (1912).  U.  S.  115  (1905). 

3  United  States  v.  Winslow,  227  i»  Loewe  v.  Lawlor,  208  U.  S.  274 
U.  S.  202  (1913),  the  court  saying  in  (1908).  The  anti-trust  act  of  1890 
regard  to  the  anti-trust  act  of  con-  applies  to  boycotts  and  blacklisting 
gress  (p.  217),  "The  disintegration  in  restraint  of  interstate  commerce, 
aimed  at  by  the  statute  does  not  Gompers  v.  Bucks,  etc.  Co.,  221  U.  S 
extend  to  reducing  all  manufacture  418  (1911)  ;  holding  also  that  for  civil 
to  isolated  units  of  the  lowest  de-  contempt  the  court  may  fine  a  person 
gree."  but  not  imprison  him  except  to  require 

*  Peoria,    etc.    Co.    v.    Peoria,    200  him  to  comply  with  the  order  of  the 

U.  S.  48  (1906).  court;     and     that     where     contempt 

^  Northern  Securities  Co.  v.  United  consists    not    in    defendant     refusing 

States,  193  U.  S.  197  (1904).  to  do  an  act  but  in  his  doing  some- 

^  Minnesota   v.  Northern   Securities  thing  which  has  been  prohibited,   he 

Co.,  194  U.  S.  48  (1904).  cannot  be  imprisoned,  but  only  fined, 

^  Montagu    &    Co.    v.    Lowry,    193  unless  the  contempt  instead  of  being 

U.  S.  38  (1904).  civil  for  the  benefit  of  the  complain- 

1450 


CH.    XXIX. I 


TRUSTS,    ETC. 


[§  503a. 


of  equity  may  enjoin  a  boycott  where  it  is  a  conspiracy  causing  ir- 
reparable damage  to  a  person's  business  or  property.^  A  corporation 
may  be  compelled  to  produce  its  books  and  papers  for  examination  by  a 
grand  jury,  even  though  it  is  charged  with  a  criminal  violation  of  a 
statute,  but  where  there  is  no  act  of  congress  authorizing  such  examina- 
tion, a  subpoena  duces  tecum  requiring  it  to  produce  all  its  books  and 
papers  before  a  grand  jury  is  unreasonable  and  as  indefensible  as  a 
search  warrant  would  be  if  couched  in  similar  terms.-  IMinority  stock- 
holders may  maintain  a  bill  in  equity  to  cancel  a  lease  which  their  corpo- 
ration has  made  of  its  property  with  a  view  to  establish  an  illegal  monop- 
oly.^ Congress  has  power  to  enact  a  statute  authorizing  a  legislative 
committee  or  the  interstate  commerce  commission  to  investigate  the 
affairs  of  corporations  engaged  in  interstate  commerce.^  A  statute  of  a 
state  prohibiting  a  foreign  corporation  from  doing  business  in  the  state, 
if  such  corporation  is  connected  with  a  trust,  is  constitutional.^  A 
statute  making  it  a  criminal  offense  to  form  a  trust  to  prevent  com- 
petition is  constitutional.^  An  act  of  congress  that  interstate  railroads 
shall  not  transport  products  in  which  it  has  an  interest  direct  or  indirect, 
does  not  apply  to  articles  owned  by  mining  or  coal  or  other  companies 


ant,  is  criminal,  and  a  proceeding  has 
been  instituted  and  tried  in  behalf  of 
the  state  or  government. 

1  Gompers    v.  Bucks,  etc.  Co.,   221 
U.  S.  418  (1911). 

2  Hale  V.  Henkel,  201  U.  S.  43 
(1906).  Officers  of  a  corporation  can- 
not excuse  their  failure  to  produce 
books  and  papers  called  for  by  a  sub- 
poena duces  tecum  in  a  proceeding 
before  the  grand  jury  on  the  ground 
that  such  books  and  papers  are  not 
in  their  possession  or  under  their 
control,  and  they  cannot  object  on 
the  ground  that  the  books  and  papers 
are  immaterial.  Nelson  v.  United 
States,  201  U.  S.  92  (1906).  A  sub- 
poena duces  tecum  commanding  the 
secretary  and  treasxirer  of  a  corpora- 
tion, which  is  charged  with  violat- 
ing an  anti-trust  act,  to  appear  and 
produce  practically  all  the  corre- 
spondence and  documents  of  the  cor- 
poration since  its  organization,  in 
order  to  enable  the  district  attorney 
to  prove  a  violation  of  the  statute,  is 
an  unreasonable  search  and  seizure 
of  papers,  which  is  prohibited  by  the 
fourth  amendment  of  the  Constitu- 
tion of  the  United  States.     In  re  Hale, 


139  Fed.  Rep.  496  (1905).  For  other 
decisions  to  the  effect  that  there  is  a 
very  decided  limit  to  the  powers  of 
the  legislative  or  executive  branches 
of  the  government  to  compel  the  pro- 
duction of  the  private  books  and 
papers  of  a  corporation  for  inspec- 
tion, and  that  there  is  also  a  limit, 
even  in  judiciary  proceedings,  see 
Matter  of  Application  of  Pacific  Rail- 
way Commission,  32  Fed.  Rep.  241 
(1887);  Kilbourn  v.  Thompson,  103 
U.  S.  168  (1880). 

'  Shawnee,  etc.  Co.  v.  Anderson, 
209  U.  S.  423  (1908). 

^  Interstate  Com.  Commission  v. 
Baird,  194  U.  S.  25  (1904);  Inter- 
state Com.  Commission  v.  Brinson, 
154  U.  S.  447  (1894) ,  In  re  Chapman, 
166  U.  S.  661  (1897). 

5  Waters-Pierce,  etc.  Co.  v.  Texas, 
177  U.  S.  28  (1900).  The  anti-trust 
statute  of  Texas  was  upheld  in  Na- 
tional, etc.  Co.  V.  Texas,  197  U.  S.  115 
(1905). 

estate  V.  Gage,  72  Ohio  St.  210 
(1905) ;  see  also  State  v.  Smiley,  65 
Kan.  240  (1902) ;  aff'd  suh  nom.  Smi- 
ley V.  Kansas,  196  U.  S.  447    (1905). 


1451 


§  503a.] 


TRUSTS,    ETC. 


CH.  XXIX. 


in  which  the  railroad  is  a  stockholder.^  The  ownership,  however,  of  a 
majority  or  even  in  some  cases  of  a  minority  of  the  stock  of  a  corporation 
may  constitute  such  control  as  to  amount  to  the  same  thing  as  control- 
ling the  company  itself.  Hence,  in  determining  whether  or  not  one 
company  owning  stock  in  another  company  controls  it  in  restraint  of 
trade,  such  control  may  exist  even  though  the  former  does  not  own  a 
majority  of  the  latter,  inasmuch  as  additional  stock  may  easily  be 
acquired.^ 


1  United  States  v.  Delaware,  etc.  Co., 
213  U.  S.  366  (1909). 

2  Pearsall  v.  Great  Northern  Ry., 
161  U.  S.  646  (1896).  A  railroad  com- 
pany owning  and  operating  a  sys- 
tem of  railroads  cannot  legally  acquire 
forty-six  per  cent,  of  the  capital 
stock  of  a  competing  railroad  com- 
pany, thereby  dominating  it,  any 
more  than  a  holding  company 
could  legally  own  the  capital  stock  of 
both  railroad  companies  and  thereby 
dominate  them  and  suppress  competi- 
tion in  violation  of  the  anti-trust  act 
of  congress.  United  States  v.  Union 
Pacific  R.  R.,  226  U.  S.  61  (1912). 
Where  a  New  Jersey  corporation 
holds  a  majority  of  the  stock  and 
thereby  controls  nineteen  oil  companies 
and  through  them  various  other  oil 
companies,  thereby  enabling  the  New 
Jersey  corporation  to  fix  rates  of  trans- 
portation on  the  buying  and  selUng 
price  of  petroleum  and  its  products 
and  prevent  competition  between  such 
various  corporations,  this  is  in  viola- 
tion of  the  anti-trust  act  of  congress 
of  July  2,  1890,  and  at  the  instance 
of  the  United  States  government  the 
court  will  enjoin  the  New  Jersey  com- 
pany from  voting  the  stock  or  con- 
trolling the  other  corporations,  and 
will  enjoin  the  other  corporations  from 
paying  any  dividends  to  the  New 
Jersey  company  or  allowing  it  to  vote 
the  stock  or  control  them,  and  will 
enjoin  all  the  defendants  from  making 
any  similar  monopoly  by  means  of 
trustees  or  by  transferring  the  prop- 
erties themselves,  or  by  carrying 
out  any  similar  plan  resulting  in  such 
restraint  of  commerce,  but  the  defend- 
ants were  allowed  to  distribute  among 
their  stockholders  the  stocks  held  by 
the     defendants.     United     States     v. 


Standard  Oil  Co.,  173  Fed.  Rep.  177 
(1909).  Modified  in  221  U.  S.  1. 
A  consolidation  of  tobacco  companies 
into  one  company,  which  thereby  con- 
trols seventy-five  per  cent,  of  the 
business  in  the  United  States,  is  a  com- 
bination in  restraint  of  trade,  and  is  a 
violation  of  the  act  of  congress  of  July 
2,  1890.  United  States  v.  American, 
etc.  Co.,  164  Fed.  Rep.  700  (1908); 
rev'd  on  other  points  in  221  U.  S.  106 
(1911).  Where  one  sugar  refining 
company  loans  money  to  the  majority 
stockholder  of  another  sugar  refining 
company  and  votes  the  stock  and  elects 
directors  who  cause  the  latter  company 
to  stop  business,  the  latter  company 
may  hold  the  former  and  also  its  own 
guilty  directors  liable  in  treble  dam- 
ages, under  the  anti-trust  act  of  con- 
gress of  July  2,  1890.  Pennsylvania, 
etc.  Co.  V.  American,  etc.  Co.,  166  Fed. 
Rep.  2.54  (1908).  Where  one  sugar 
company  acquires  control  of  the  stock 
of  another  sugar  company  and  elects 
the  board  of  directors  of  the  latter, 
which  board  then  votes  to  stop  the 
business,  this  is  in  violation  of  the  anti- 
trust act  of  congress  of  July  2,  1890, 
but  a  prosecution  therefor  is  barred  in 
three  years.  United  States  v.  Kissel, 
173  Fed.  Rep.  823  (1909) ;  s.  c,  218 
U.  S.  60.5.  Even  though  a  holding  com- 
pany is  violating  the  anti-trust  act  of 
congress  and  owns  forty-nine  per  cent, 
of  the  capital  stock  of  a  manufacturing 
company,  yet  unless  it  is  proved  that 
such  stock  is  used  to  aid  the  combina- 
tion, the  manufacturing  company  can- 
not be  prosecuted  under  such  act. 
United  States  v.  Du  Pont,  etc.  &  Co., 
188  Fed.  Rep.  127(1911).  In  the  case 
United  States  v.  Union  Pae.  R.  R.,  188 
Fed.  Rep.  102  (1911),  where  the  Union 
Pacific     Railroad     had     purchased     a 


1452 


CH.  XXIX. 


TRUSTS,    ETC. 


[§  503a. 


The  foregoing  are  the  decisions  in  the  supreme  court  of  the  United 
States.     A  state  court  has  no  jurisdiction  to  enforce  the  anti-trust  act 


minority  of  the  stock  of  the  Southern 
Pacific  Company  "sufficient  in  amount 
according  to  the  practical  experience  of 
men  to  enable  the  purchaser  to  domi- 
nate or  control  the  policies  and  opera- 
tions of  the  other,"  the  court  said  (p. 
114)  :  "We  recognize  the  proposition 
that,  if  the  necessary  and  direct  result 
of  the  purchase  of  the  Huntington 
stock  was  to  destroy  or  substantially 
suppress  free  and  natural  competition 
before  then  existing  between  the  two 
companies,  or  if  that  purchase  put  it 
within  the  power  of  the  Union  Pacific 
Company  to  destroy  or  suppress  such 
competition,  the  latter-named  com- 
pany would  undoubtedly  be  held  to 
have  intended  the  natural  and  rea- 
sonable consequences  of  its  act,  and, 
notwithstanding  the  dominant  pur- 
pose just  mentioned,  would  have 
violated  the  anti-trust  law."  In  that 
case,  however,  it  was  held  that  those 
two  companies  were  not  competitors, 
within  the  meaning  of  the  anti-trust 
act  of  congress.  Rev'd  in  United  States 
V.  Union  Pac.  R.  R.,  226  U.  S.  61 
(1912).  The  following  decisions  are 
at  common  law  or  under  state  statutes. 
Minority  stockholders  in  a  corporation 
engaged  in  manufacturing  telephone 
supplies,  a  business  impressed  with  a 
public  character,  may  cause  to  be  set 
aside  a  sale  of  a  majority  of  the  stock 
to  a  competing  telephone  supply  com- 
pany where  the  purchase  is  for  the 
purpose  of  establishing  a  monopoly. 
Even  though  the  purchaser  is  a  foreign 
corporation  with  a  charter  giving  it 
express  power  to  purchase  stock,  yet 
it  cannot  exercise  that  power  in  Illinois, 
where  no  corporation  can  purchase 
stock  unless  it  is  necessary  to  carry 
into  effect  the  objects  of  the  corpora- 
tion. The  decree  will  not  merely 
enjoin  the  purchaser  from  voting  the 
stock  and  receiving  dividends,  but 
may  order  the  stock  to  be  returned  to 
the  vendors  and  the  money  repaid. 
The  monopoly  may  be  proved  by 
proving  that  the  purchaser  owned  the 
stock  of  a  competing  manufacturing 
company.  Dunbar  v.  Amercian  Tel. 
etc.  Co.,  238  lU.  456  (1909).     A  stock- 


holder in  an  underground  railroad  in 
New  York  City  may  file  a  bill  to  set 
aside  a  sale  by  the  other  stockholders 
of  their  stock  to  a  holding  company, 
which  holding  company  has  acquired  a 
majority  of  the  capital  stocks  of  such 
underground  road  and  of  the  surface 
railways  (the  elevated  railways  being 
already  leased  to  the  underground  rail- 
way), thereby  suppressing  competition 
and  creating. a  combination  of  com- 
peting railroads,  the  plaintiff  alleging 
also  that  the  holding  company  has 
issued  ninety  million  dollars  of  watered 
stock  and  two  hundred  million  dollars 
of  bonds  without  proper  payment 
therefor.  Even  though  the  surface 
roads  were  passed  into  a  receiver's 
hands,  such  receiver  need  not  be 
made  a  party  defendant,  although 
a  proper  party  defendant  with  the 
consent  of  the  court  which  appointed 
him.  Continental  Securities  Co.  v. 
Interborough,  etc.  Co.,  165  Fed.  Rep. 
945  (1908) ;  s.  c,  183  Fed.  Rep.  132. 
Cf.  203  Fed.  Rep.  521.  Under  the 
statutes  of  Alabama  a  heat,  light,  and 
power  company  may  purchase  the 
stock  of  a  competing  company.  Do- 
herty  &  Co.  v.  Rice,  186  Fed.  Rep.  204 
(1910).  Where  a  foreign  railroad  com- 
pany owns  stock  in  an  Ohio  railroad 
company  and  the  capital  stock  of  the 
latter  is  being  increased,  the  right  of 
the  foreign  corporation  to  subscribe  for 
its  part  may  be  questioned  on  the 
ground  that  it  cannot  legally  hold  any 
stock  in  the  Ohio  company  by  reason 
of  restricting  competition  in  trans- 
portation. Mannington  v.  Hocking 
Valley  Ry.,  183  Fed.  Rep.  133,  159 
(1910),  holding  that  a  Virginia  railroad 
corporation  authorized  by  its  charter 
to  own  stock  in  other  railroad  cor- 
porations, domestic  or  foreign,  might 
legally  acquire  stock  in  an  Ohio  rail- 
road company,  and  that  the  statutes 
and  public  policy  of  Ohio  did  not  forbid 
such  ownership,  where  the  two  rail- 
roads are  connecting  and  not  competing 
lines,  and  no  trust  or  combination  to 
restrict  trade  is  involved.  The 
Missouri  anti-trust  act  was  applied 
in    State    v.    Standard    Oil    Co.,    218 


1453 


§  503o. 


TRUSTS,    ETC. 


[CH.  XXIX. 


of  congress,  inasmuch  as  that  appHes  to  interstate  commerce  only, 
and  the  jurisdiction  of  the  federal  courts  is  exclusive.^     And  even  in 


Mo.  1  (1909),  aff'd,  224  U.  S.  270,  which 
was  a  proceeding  to  forfeit  the  charter 
of  a  local  company  and  at  the  same  time 
revoke  the  licenses  of  two  foreign  com- 
panies doing  business  in  the  state,  and 
the  court  held  that  the  fact  that  a  hold- 
ing company  owned  a  majority  of  the 
stock  of  the  defendants  does  not  prove 
absolutely  an  unlawful  combination 
but  tends  to  prove  that  fact.  A  New 
Jersey  holding  company  may  legally 
acquire  a  majority  of  the  stock  of  the 
street  railways  in  different  cities  in 
Tennessee  by  issuing  shares  of  the 
New  Jersey  company  in  exchange  for 
such  shares  of  the  street  railway  com- 
panies. There  is  nothing  illegal  in 
such  a  holding  company,  provided  it 
does  not  create  a  monopoly  or  an  un- 
lawful restraint  of  trade  or  suppression 
of  competition,  and  hence  a  minority 
stockholder  in  one  of  the  street  railway 
companies  cannot  maintain  a  suit  to 
set  aside  such  pirrchases.  Clark  v. 
Memphis  St.  Ry.,  123  Tenn.  232 
(1910).  A  corporation  that  has  pur- 
chased stock  in  another  corporation  to 
suppress  competition  cannot  legally 
vote  it,  but  may  sell  it  and  a  bona  fide 
independent  purchaser  may  then  vote 
it.  Steele  v.  United  Fruit  Co.,  190 
Fed.  Rep.  631  (1911).  The  foUowing 
decisions  bear  on  the  subject  of  control 
by  stock  ownership.  Under  the  com- 
modities clause  of  the  act  of  con- 
gress of  June  29,  1906,  prohibiting 
interstate  railroad  companies  from 
transporting  articles  in  which  they 
"may  have  any  interest  direct  or  in- 
direct" with  certain  exceptions,  does 
not  prevent  a  railroad  transporting 
articles  manufactured  by  a  corpora- 
tion in  which  the  railroad  owns 
stock,  without  regard  to  the  amount  of 
stock  held.  United  States  v.  Delaware 
&  Hudson  Co.,  213  U.  S.  366,  404 
(1909) ;  the  court  holding  also  (p. 
413)  that  if  the  words  quoted  above 


referred  to  legal  or  equitable  interest 
in  the  commodities,  thej'  did  not 
include  commodities  owned  by  the 
separate  corporation.  A  later  decision 
in  the  same  litigation.  United  States  v. 
Lehigh  Valley  R.  R.  Co.,  220  U.  S. 
2.57  (1911),  is  to  the  effect  that  where 
the  railroad  owns  the  capital  stock  and 
has  officers  in  common  with  it,  then 
the  statute  applies.  The  court  said  : 
"The  use  of  such  stock  ownership  in 
substance  for  the  purpose  of  de- 
stroying the  entity  of  a  produc- 
ing, etc.,  corporation  and  of  com- 
mingling its  affairs  in  administration 
with  the  affairs  of  the  railroad  company, 
so  as  to  make  the  two  corporations 
\'irtually  one,  brings  the  railroad  com- 
pany so  voluntarily  acting  as  to  such 
producing,  etc.,  corporation  within 
the  prohibitions  of  the  commodities 
clause."  Where  a  holding  company, 
the  Southern  Pacific  Co.,  owns  practi- 
cally all  of  the  stock  of  a  terminal  com- 
pany in  Galveston,  the  Interstate 
Commerce  Commission  has  jurisdic- 
tion over  the  latter  so  far  as  it  engages 
in  interstate  commerce.  Southern 
Pacific  Terminal  Co.  i'.  Interstate  Com. 
Com.,  219  U.  S.  498  (1911),  the  court 
saying  (p.  523)  :  "  In  opposition  to  these 
views  appellants  urge  the  legal  indi- 
viduaUty  of  the  different  railroads  and 
the  terminal  company  and  cite  cases 
which  establish,  it  is  contended,  that 
stock  ownership  simply  or  through  a 
holding  company  does  not  identify 
them.  We  are  not  concerned  to  com- 
bat the  proposition.  The  record  does 
not  present  a  case  of  stock  o'svnership 
merely  or  of  a  holding  company  which 
was  content  to  hold.  It  presents  a 
case,  as  we  have  already  said,  of  one 
actively  managing  and  uniting  the 
railroads  and  the  terminal  company 
into  an  organized  system.  And  it  is 
with  the  system  that  the  law  must  deal, 
not  with  its  elements.     Such  elements 


1  Locker  v.  American,  etc.  Co.,  121 
N.  Y.  App.  Div.  443  (1907) ;  aff'd,  195 
N.  Y.  565,  holding  also  that  the  New 
York  state  anti-trust  act  is  not  violated 


by  the  fact  that  a  company  controls 
ninety  per  cent,  of  the  tobacco  trade, 
and  has  appointed  a  sole  selling  agent  in 
the  state. 


1454 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  503a. 


the  federal  court  an  individual  cannot  obtain  an  injunction.^  In  addi- 
tion to  these  decisions  there  have  been  a  large  number  of  decisions  by 
the  circuit  court  and  the  circuit  court  of  appeals  of  the  United  States. 
These  decisions  are  given  in  the  notes  below.^ 


may,  indeed,  be  regarded  from  some 
standpoints  as  legal  entities  ;  may  have, 
in  a  sense,  separate  corporate  operation  ; 
but  they  are  directed  by  the  same  para- 
mount and  combining  power  and  made 
single    by    it."     Where    a    Kentucky 
holding   corporation   owns    practically 
all  the  stock  of  a  railroad  running  into 
Galveston,  Texas,  and  also  of  a  terminal 
company   owning   the   terminals,    and 
these  companies  have  the  same  officers, 
management  and  interests,  the  Inter- 
state Commerce  Commission  has  juris- 
diction   over    the    terminal    company. 
Eichenberg  v.  Southern  Pacific  Co.,  14 
I.  C.  C.  Rep.  2.50,  264  (1908).     This 
decision    was     affirmed     in     Southern 
Pacific,  etc.  Co.  v.  Interstate  Commerce 
Commission,    219    U.    S.    498    (1911), 
where  the  court  said    (p.  523)  :  "The 
record  does  not  present  a  case  of  stock 
ownership  merely,  or  of  a  holding  com- 
pany which  was  content  to  hold.     It 
presents  a  case,   as  we  have  already 
said,    of   one   actively   managing   and 
uniting  the  railroads  and  the  terminal 
company   into    an    organized    system. 
And  it  is  with  the  system  that  the  law 
must    deal,    not    with    its    elements. 
Such   elements    may,   indeed,    be    re- 
garded from  some  standpoints  as  legal 
entities ;  may  have,  in  a  sense,  separate 
corporate    operation ;     but    they    are 
directed  by  the  same  paramount  and 
combining  power  and  made  single  by 
it.     In  all  transactions  it  is  treated  as 
single."     See    also    §  317,    supra,   and 
§  622  g  and  h,  infra.     203  Fed.  Rep.  295. 
'  National,  etc.  Co.  v.  Mason,  etc. 
Assoc,  169  Fed.  Rep.  259  (1909). 

2  A  contract  between  a  local  tele- 
phone company  and  a  long-distance 
company  that  the  former  will  not  give 
any  of  its  business  to  any  other  long- 
distance company  for  ninety-nine 
years,  is  invalid  as  tending  to  create  a 
monopoly.  United  States  Tel.  Co.  v. 
Central  Union  Tel.  Co.,  202  Fed.  Rep. 
66  (1913).  A  federal  court  will  not 
enjoin  a  holding  company  from  voting 
its  holdings  of  stock  in  various  street 


railways  on  the  ground   that  it  is  a 
violation  of  a  state  anti-trust  act  where 
the  state  courts  hold  to  the  contrary. 
Continental  Securities  Co.  v.  Interbor- 
ough,  etc.  Co., 203  Fed.  Rep.  521  (1913). 
A  minority  stockholder  in  a  railroad 
cannot  enjoin  the  majority  stockholder 
from    selling   its   holdings    to    another 
railroad    company,    even    though    the 
piKchaser     refuses     to     purchase     the 
minority  stock  at  the  same  price,  and 
even  though  such  majority  stockholder 
is  a  railroad  company  itself,  no  damage 
to     the     minority     stockholder     being 
shown.     The     claim     that     the     sale 
would  be  to  a  competing  railroad  in 
violation     of     the     anti-trust     act     of 
congress    cannot    be  sustained  in  the 
state  court.     Delavan   v.   New   York, 
etc.  R.    R.,  154   N.    Y.   App.    Div.  8 
(1912).     See  Hunnewell  v.  N.  Y.,  etc. 
R.    R.,    196    Fed.    Rep.    543    (1911). 
An  indictment  against   the   corporate 
officers    of    a    national    cash    register 
company    for   violation    of    the    anti- 
trust  act   of   July  2,  1890,    was    sus- 
tained in  United   States  v.   Patterson, 
201    Fed.    Rep.    697    (1912).     Retail 
lumber  dealers  who  boycott  wholesale 
lumber  dealers  who  deal  direct  with, 
customers  violate   the    Sherman  anti- 
trust  act.     United   States  v.  Eastern, 
etc.  Assoc,  201  Fed.  Rep.  581  (1912). 
As  to  the  declaration  in  a  suit  at  law  by 
a  private  party  for  treble  damages  for 
violating  the  anti-trust  act  of  congress, 
see  Buckeye  Powder  Co.  v.  Du  Pont  de 
Nemours,  etc.  Co.,  196  Fed.  Rep.  514 
(1912).     An     agent     to     sell     cannot 
defeat  a  suit  by  his  principal  for  the 
price  by  setting  up  the  anti-trust  act 
of  congress,  and   a  state  statute  that 
such     defense    may    be    made     does 
not    apply    to    interstate    commerce. 
International  Harvester  Co.  v.  OKver, 
192  Fed.  Rep.  59   (1911).     An  agree- 
ment   of    sixteen    bathtub    companies 
relative  to  prices  and  terms  and  middle- 
men  is  in  violation  of   the   anti-trust 
act     of     congress.     United     States     v. 
Standard,  etc.  Co.,  191  Fed.  Rep.  172 


1455 


§  503a.] 


TRUSTS,    ETC. 


All  of  these  decisions  demonstrate  that  the  act  of  congress  of  July 
2,  1890,  is  effective  when  rigorously  applied,  but  they  also  demonstrate 

(1911).  A  corner  is  obtaining  control 
of  the  immediate  supply  and  enabling 
the  operators  to  arbitrarily  advance 
the  price  and  generally  is  by  dealings 
in  options  and  futures.  It  is  illegal 
as  a  combination  controlling  prices 
but  is  not  in  restraint  of  competition, 
inasmuch  as  the  higher  price  increases 
competition.  An  indictment  under 
the  anti-trust  act  of  congress  for 
forming  a  corner  in  cotton  was  quashed 
in  part  in  United  States  v.  Patten, 
187  Fed.  Rep.  664  (1911) ;  rev'd,  226 
U.  S.  525.  The  vendee  of  a  major- 
ity of  the  stock  of  a  heat,  light 
and  power  company  may  maintain 
a  bill  for  specific  performance,  even 
though  such  vendee  already  controls 
a  competing  heat,  light  and  power 
company.  Doherty  &  Co.  v.  Rice, 
186  Fed.  Rep.  204  (1910).  Where 
there  are  but  two  boat  lines  between 
two  cities  and  one  of  them  disposes  of 
its  boats  to  the  other  for  a  term  of 
years,  and  transfers  its  good-will  and 
agrees  not  to  compete  during  that 
time,  the  rental  being  more  than  the 
company  could  itself  earn,  the  trans- 
action is  in  violation  of  the  anti-trust 
act  of  congress  of  July  2,  1890.  Darius 
Cole,  etc.  Co.  v.  White  Star  Line,  186 
Fed.  Rep.  63  (1911).  Where  an  Illi- 
nois stockholder  in  a  Louisiana  cor- 
poration has  caused  a  receiver  to  be 
appointed  in  the  United  States  court  in 
Louisiana,  he  cannot  cause  an  an- 
cillary receiver  to  be  appointed  in 
Pennsylvania  to  bring  a  suit  under  the 
anti-trust  act  of  congress  against  a 
New  Jersey  corporation,  there  being 
no  evidence  that  the  corporation  has 
property  in  Pennsylvania.  Bluefields 
S.  S.  Co.  V.  Steele,  184  Fed.  Rep.  584 
(1911).  Although  the  corporation 
may  have  a  right  to  treble  damages  on 
account  of  a  violation  of  the  anti-trust 
act  of  congress,  yet  a  stockholder  or 
creditor  of  the  corporation  cannot 
maintain  the  suit  on  the  ground  of 
injury  to  his  stock  or  debt.  Loeb  v. 
Eastman  Kodak  Co.,  183  Fed.  Rep. 
704  (1910).  While  a  shipper  attack- 
ing the  reasonableness  of  a  freight 
rate  must  apply  first  to  the  Interstate 


Commerce  Commission,  yet  a  coal 
dealer  suing  for  treble  damages  under 
the  anti-trust  act  of  congress  may 
bring  suit  in  the  United  States  court 
against  a  railroad  for  conspiracy  with 
other  railroads  to  monopolize  anthra- 
cite coal  and  raise  its  price  and  the 
price  of  shipment.  Meeker  v.  Lehigh 
Valley  R.  Co.,  183  Fed.  Rep.  548 
(1910).  "A  stockholder  of  a  corpora- 
tion does  not  become  criminally  liable 
for  a  combination  made  by  the  cor- 
poration without  conscious  participa- 
tion therein."  Union  Pacific  Coal  Co. 
V.  United  States,  173  Fed.  Rep.  737, 
744  (1909).  A  corporate  agent  and 
the  corporation  cannot  be  guilty  of  an 
Ulegal  combination  in  restraint  of  trade, 
unless  some  other  corporate  agent  or 
officer  knows  of  it  or  participates  in  it, 
because  a  corporation  can  act  only  by 
agent.  Union  Pacific  Coal  Co.  v. 
United  States,  173  Fed.  Rep.  737 
(1909).  An  individual  cannot  main- 
tain an  injunction  suit  against  a 
violation  of  the  federal  anti-trust 
act  of  July  2,  1890,  his  remedy 
being  for  damages.  National,  etc. 
Co.  V.  Mason,  etc.  Ass'n,  169  Fed.  Rep. 
259  (1909).  A  stockholder  in  a  tele- 
phone company  cannot  maintain  a 
suit  for  treble  damages  under  the 
anti-trust  act  of  July  2,  1890, 
against  another  telephone  company 
which  obtained  control  of  the  former 
company  and  forced  it  into  a  receiver's 
hands,  even  though  thereby  the  stock- 
holder's stock  was  rendered  worthless. 
The  injury  was  to  the  corporation  and 
the  receiver  of  that  corporation  is  the 
proper  party  to  institute  such  a  suit. 
Ames  V.  American,  etc.  Co.,  166  Fed. 
Rep.  820  (1909).  Various  definitions 
of  the  word  "  monopoly  "  were  consid- 
ered in  Continental  Securities  Co.  v. 
Interborough,  etc.  Co.,  165  Fed.  Rep. 
945  (1908) ;  s.  c,  183  Fed.  Rep.  132. 
The  anti-trust  act  of  July  2,  1890, 
applies  to  combinations  in  restraint  of 
interstate  trade,  and  also  to  combina- 
tions to  monopolize  interstate  trade, 
and  in  a  suit  for  damages  by  a  person 
injured  by  a  combination  it  is  sufficient 
if  he  proves  that  he  paid  a  higher  price 


1456 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  503  a. 


that  the  statute  itself,  as  originally  construed,  was  a  very  dangerous  one, 
in  that  it  was  construed  as  declaring  illegal  any  combination  whatso- 


by  reason  of  the  combination.  Mon- 
arch, etc.  Works  v.  American  Tobacco 
Co.,  165  Fed.  Rep.  774  (1908).  Even 
though  the  Michigan  statutes  authorize 
one  mining  company  to  purchase  the 
stock  of  other  mining  companies,  yet 
where  this  results  in  establishing  a 
practical  monopoly  in  a  certain  kind  of 
copper,  a  minority  stockholder  may 
enjoin  the  voting  of  such  stock  so  held 
by  the  purchasing  company,  and  no 
formal  demand  need  first  be  made  by 
him  upon  the  directors  to  institute 
the  suit.  Bigelow  v.  Calumet,  etc. 
Co.,  155  Fed.  Rep.  869  (1907).  On 
final  hearing,  however,  the  bill  in 
this  case  was  dismissed.  See  167  Fed. 
Rep.  721,  holding  that  a  monopoly  or 
agreement  to  come  within  the  pro- 
hibition of  the  anti-trust  act  of  July 
2,  1890,  "must  directly  and  immedi- 
ately affect  interstate  commerce." 
A  boycott  may  be  enjoined.  Rocky 
Mountain,  etc.  Tel.  Co.  v.  Montana, 
156  Fed.  Rep.  809  (1907).  A  stock- 
holder in  a  New  York  City  street 
railway  company  may  file  a  bill  in 
equity  to  set  aside  a  purchase  by  a 
holding  company  of  the  majority  of 
the  stock  of  his  company,  it  being 
shown  that  the  holding  company  had 
acquired  control  of  all  street  rail- 
ways, elevated  railways  and  subways 
in  New  York  City,  the  basis  of  this 
decision  being  that  the  New  York 
statute  prohibiting  monopolies  over- 
rides in  such  a  case  the  New  York 
statute  authorizing  holding  com- 
panies. Burrows  r.  Interborough,  etc. 
Co.,  156  Fed.  Rep.  389  (1907). 

In  the  case  United  States  v.  Stand- 
ard Oil  Co.,  155  Fed.  Rep.  305  (1907), 
a  shipper  was  fined  $29,240,000,  for 
obtaining  a  lower  rate  than  the  pub- 
lished rate  for  transportation  by  a 
railroad  in  violation  of  the  United 
States  statute,  but  this  decision  was 
reversed  in  164  Fed.  Rep.  377,  and  at 
a  subsequent  trial  in  this  case  the 
indictment  was  dismissed.  United 
States  I'.  Standard  Oil  Co.,  170  Fed. 
Rep.  988  (1909).  Under  the  anti- 
trust act  of  congress  a  window-glass 
dealer  may  hold  liable  for  treble  dam- 


ages a  corporation  organized  to  pur- 
chase window  glass  from  manufacturers 
and  sell  it  to  wholesalers,  it  being  shown 
that  such  corporation  sold  more  than 
75  per  cent,  of  the  \\4ndow  glass  and 
had     agreed     with     a      manufacturer 
of    more    than    70    per    cent,    of    the 
window    glass    that    the     corporation 
should  buy  from  no  other  manufac- 
turer,   except    at    lower    prices,    and 
the  manufacturer  agreed  to  sell  to  no 
other  partj^   except   at   higher   prices, 
and    the   corporation   agreed    to   limit 
the   amount   it   would   sell    to   whole- 
sale     dealers,      and     authorized     the 
wholesale  dealers   to   fix   the   price   to 
be  charged  to  retail  dealers,  and  lim- 
ited   the    territory    of    the    wholesale 
dealers,     thereby     monopolizing     the 
business  in  restraint  of  interstate  com- 
merce, and  it  is  unnecessary  to  prove 
that   the   restraint   of   trade   was   un- 
reasonable.    Wheeler,  etc.  Co.  v.  Na- 
tional, etc.  Assoc,  152  Fed.  Rep.  864 
(1907).     A    combination    intended    to 
restrain     interstate     commerce     is     a 
violation    of    the    act    of    congress    of 
July  2,  1890.     United  States  v.  Mac- 
Andrews,  etc.  Co.,  149  Fed.  Rep.  836 
(1907),    holding    also    that    corporate 
officers    who    participate    in    \'iolating 
the     anti-trust     act     of     congress     of 
July  2,  1890,  may  be  indicted  jointly 
with   the  corporation,   although   their 
acts  were  separate  and  done  at  a  dif- 
ferent   time,    and    that    any    business 
scheme  which  tends  to  restrain  inter- 
state   commerce    and    to    deprive  the 
public    of    the    advantages    following 
from  free  competition,  may  be  in  vio- 
lation  of   the   anti-trust   act   of   con- 
gress of  July  2,  1890.     The  measure  of 
damages  in  a  suit  by  a  person  against 
a  combination  as  allowed  by  the  act 
of  congress  of  July  2,  1890,  was  con- 
sidered in  Jayne  v.   Loder,    149    Fed. 
Rep.     21     (1906),     that    suit    having 
grown  out  of  a  combination  of  manu- 
facturers, wholesalers,  and  retailers  in 
drugs   to   control   the  retail   prices  of 
patent  medicines.     A  corporation  or- 
ganized by  wall  paper  manufacturers 
to  buy  their  output  and  sell  the  same 
to  wholesalers,   the  purpose  being   to 


(92) 


1457 


503a. 


TRUSTS,    ETC. 


[CH.  XXIX. 


ever,  whether  it  was  a  reasonable  combination  or  not.     This  condition 
of  things  was  criticized  and  decried  by  judges  and  jurists,  until  1911, 

control  the  price,  which  it  does,  and    former's  product,  even  though  a  minor- 


establishes  a  monopoly,  is  in  viola- 
tion of  the  anti-trust  act  of  congress, 
and  such  corporation  cannot  collect 
for  goods  sold.  Continental,  etc.  Co. 
V.  Voight,  etc.  Co.,  148  Fed.  Rep.  939 
(1906) ;   aff'd,  212  U.  S.  227. 

The  decision  in  Loewe  v.  Lawler, 
148  Fed.  Rep.  924  (1906)  that  a  boy- 
cott by  a  trade-union  is  not  in  re- 
straint of  commerce,  within  the  mean- 
ing of  the  anti-trust  act  of  congress 
of  July  2,  1890,  was  reversed  in  208 
U.  S.  274.  A  boycott  by  a  labor 
organization  does  not  render  the  mem- 
bers of  the  organization  liable  for 
damages  under  the  anti-trust  act  of 
congress  unless  there  is  proof  that 
they  expressly  or  tacitly  approved  or 
ratified  the  boycott.  Lawler  v.  Loewe, 
187  Fed.  Rep.  522  (1911).  Where  a 
holding  company  turns  the  control  for 
a  number  of  years  over  to  a  person  eon- 
trolling  competing  companies,  and  such 
person  causes  contracts  to  be  made 
between  the  various  companies  and 
then  sells  his  own  companies  at  a 
large  profit,  the  holding  company  may 
compel  him  to  divide  the  profit  with 
it,  it  appearing  that  all  the  transac- 
tions were  to  secure  such  profit  and 
the  profit  was  due  to  all  the  companies 
being  so  united.  If  there  is  no  other 
basis  of  division,  the  profits  will  be 
divided  half  to  each.  Bay  State,  etc. 
Co.  V.  Rogers,  147  Fed.  Rep.  557 
(1906).  In  a  suit  for  the  price  of 
goods  it  is  no  defense  that  the  plain- 
tiff is  an  illegal  trust  or  monopoly. 
Chicago,  etc.  v.  General,  etc.  Co.,  147 
Fed.  Rep.  491  (1906).  The  agreement 
of  a  corporation  on  selling  its  prop- 
erty not  to  engage  in  the  same  busi- 
ness, does  not  prevent  one  of  its  offi- 
cers and  stockholders  engaging  in  that 
business,  and  the  stockholders  are  not 
individually  liable  or  subject  to  an 
injunction  because  of  unfair  competi- 
tion practiced  by  the  corporation. 
Hall's,  etc.  Co.  v.  Herring,  etc.  Co.,  146 
Fed.  Rep.  37  (1906) ;  modified  208  U.  S. 
554.  A  brewing  company  is  not 
responsible  for  rebates  given  to  a 
refrigerator  company  that  handles  the 


ity  of  the  stock  of  the  brewing  com- 
pany is  owned  by  the  owners  of  a 
majority  of  the  stock  of  the  refrig- 
erator company.  United  States  v. 
Milwaukee,  etc.  Co.,  145  Fed.  Rep. 
1007  (1906).  A  criminal  prosecu- 
tion by  a  government  against  per- 
sons for  illegally  receiving  rebates 
from  a  railroad  fails,  if  they  were 
merely  stockholders  in  a  corporation 
that  received  the  rebate.  United 
States  V.  Wood,  145  Fed.  Rep.  405 
(1906).  A  holder  of  notes  of  the  cor- 
poration may  collect  them  even 
though  they  were  issued  to  purchase 
stock  in  violation  of  an  anti-trust  stat- 
ute, he  having  no  notice  of  such  pur- 
pose, although  he  knew  of  the  pur- 
chase of  the  stock.  National  Salt  Co. 
V.  Ingraham,  143  Fed.  Rep.  805  (1906). 
The  act  of  congress  of  July  2, 
1890,  does  not  prevent  a  vendor  of 
goods  collecting  the  price  thereof. 
Hadley,  etc.  Co.  v.  Highland,  etc.  Co., 
143  Fed.  Rep.  242  (1906).  A  suit  un- 
der the  act  of  congress  by  a  retail 
druggist  against  three  voluntary  asso- 
ciations consisting  of  the  manufactur- 
ers, wholesalers  and  retailers  of  pro- 
prietary medicines,  drugs,  etc.,  the  suit 
being  for  an  illegal  combination  in 
restraint  of  trade,  was  sustained  in 
Loder  v.  Jayne,  142  Fed.  Rep.  1010 
(1906),  but  this  decision  was  reversed 
in  149  Fed.  Rep.  21.  Where  a  manu- 
facturing company  sells  its  patents,  etc., 
to  a  holding  company  in  consideration 
of  stock  of  the  latter,  under  a  plan  for 
controlling  the  patents  and  business  in 
that  line  of  business,  this  is  entering 
a  combination  within  the  meaning  of 
a  contract  of  the  former  by  which 
royalties  were  to  be  paid  to  another 
corporation.  Brownsville  Glass  Co.  v. 
Appert  Glass  Co.,  136  Fed.  Rep.  240 
(1905).  A  contract  in  restraint  of 
trade  is  different  from  a  combination 
or  conspiracy  in  restraint  of  trade. 
Damages  cannot  be  recovered  in  one 
suit  for  both.  Rice  v.  Standard  Oil 
Co.,  134  Fed.  Rep.  464  (1905).  A  suit 
for  damages  by  a  builder  against  deal- 
ers who  combine  to  control  the  price 


1458 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  503a. 


when  the  act  was  finally  construed  by  the  supreme  court  of  the  United 
States  in  the  Standard  Oil  and  American  Tobacco  cases  as  prohibiting 


of  lumber  was  sustained  in  Ellis  v. 
Inman,  etc.  Co.,  131  Fed.  Rep.  182 
(1904).  In  a  sale  of  the  corporate 
property  the  stockholders  may  legally 
agree  not  to  engage  in  the  same  busi- 
ness for  the  term  of  ten  years.  Davis 
V.  Booth  &  Co.,  131  Fed.  Rep.  31 
(1904).  A  corporation  purchasing  the 
stock  of  another  corporation  cannot 
repudiate  the  contract  on  the  ground 
that  it  will  enable  the  former  to  vio- 
late an  anti-trust  statute.  Ingraham 
V.  National  Salt  Co.,  130  Fed.  Rep. 
676  (1904) ;  s.  c,  139  Fed.  Rep.  684 ; 
aff'd,  143  Fed.  Rep.  805.  An  agree- 
ment of  the  owners  of  brick-making 
plants,  in  selling  their  plants  to  a  cor- 
poration for  stock,  that  they  will  not 
engage  in  the  same  business  within 
fifty  miles  for  ten  years,  is  valid  and  is 
not  in  violation  of  the  anti-trust  act 
of  congress.  Robinson  v.  Suburban 
Brick  Co.,  127  Fed.  Rep.  804  (1904). 
So  also  where  the  stockholders  of  a  sell- 
ing corporation  agreed  not  to  engage 
in  competition  for  ten  years.  Booth 
&  Co.  V.  Davis,  127  Fed.  Rep.  875 
(1904),  modified  in  131  Fed.  Rep.  32. 
In  the  case  City  of  Atlanta  v.  Chatta- 
nooga, etc.  Pipeworks,  127  Fed.  Rep. 
23  (1903),  aff'd,  203  U.  S.  390,  a  mu- 
nicipality collected  damages  under  the 
anti-trust  act  of  congress  against 
manufacturers  who  by  combination 
had  exacted  an  unreasonable  price  for 
water  pipe.     See  204  Fed.  Rep.  433. 

Contracts  by  which  owners  of  pat- 
ents covering  similar  inventions  trans- 
fer them  to  one  person  who  grants 
licenses  to  the  others,  the  purpose  be- 
ing to  keep  up  the  patent  monopoly, 
is  not  in  violation  of  the  anti-trust 
act  of  congress.  United  States,  etc. 
Co.  V.  Griffin,  etc.  Co.,  126  Fed.  Rep. 
364  (1903).  A  contract  between  a 
manufacturer  and  jobbers  that  the 
jobbers  will  not  sell  their  purchases 
outside  of  a  certain  state  is  not  in 
violation  of  the  anti-trust  act  of  con- 
gress, where  the  chief  purpose  is  to 
promote  the  business  and  increase 
trade,  even  though  it  indirectly  or 
incidentally  restricts  competition. 
Phillips  V.  lola,  etc.  Co.,  125  Fed.  Rep. 


593  (1903).  It  is  legal  for  a  tobacco 
company  to  refuse  to  sell  to  persons 
who  deal  with  the  competitors  of  the 
former.  Such  acts  are  not  in  violation 
of  the  anti-trust  act  of  congress. 
Whitwell  V.  Continental,  etc.  Co.,  125 
Fed.  Rep.  454  (1903).  A  combination 
of  lumber  manufacturers  to  control 
prices  is  not  in  violation  of  the  anti- 
trust act  of  congress.  Ellis  v.  Inman, 
etc.  Co.,  124  Fed.  Rep.  956  (1903). 
State  of  Minnesota  v.  Northern  Se- 
curities Co.,  123  Fed.  Rep.  692  (1903) 
(rev'd  in  194  U.  S.  48),  refused  to 
follow  the  decision  in  United  States 
V.  Northern  Securities  Co.,  120  Fed. 
Rep.  721  (aff'd,  193  U.  S.  197),  and 
held  that  a  holding  corporation  own- 
ing a  majority  of  the  stock  of  two 
competing  railroads  was  not  illegal 
either  at  common  law  or  under  the 
statutes  of  Minnesota  prohibiting 
trusts  or  combinations  in  restraint 
of  trade  or  under  the  statutes  of 
Minnesota  prohibiting  the  consolida- 
tion of  parallel  and  competing  lines 
of  railroad.  An  agreement  of  packers 
not  to  compete  in  purchasing  cattle 
and  to  charge  the  same  prices  to  the 
public  for  meat  and  to  restrict  the 
shipments  of  meat  is  in  restraint  of 
trade.  United  States  v.  Swift,  122 
Fed.  Rep.  529  (1903) ;  aff'd,  196 
U.  S.  385.  The  owner  of  a  brewery 
who  has  conveyed  the  same  to  a  cor- 
poration cannot  retake  possession  on 
the  ground  that  the  corporation  was 
an  illegal  trust.  Star  Brewery,  etc. 
V.  United  Breweries  Co.,  121  Fed.  Rep. 
713  (1902).  The  anti-trust  act  of 
congress  of  1890  renders  it  illegal 
for  a  corporation  to  hold  a  majority 
of  the  stock  of  two  competing  inter- 
state railroad  corporations.  United 
States  V.  Northern  Securities  Co., 
120  Fed.  Rep.  721  (1903);  aff'd, 
193  U.  S.  197.  An  association  of 
shingle  manufacturers,  which  closes 
the  mills  of  some  of  its  members 
and  reduces  the  production  and  in- 
creases the  prices,  is  in  violation  of 
the  anti-trust  act  of  congress  of 
July  2,  1890,  where  such  shingles  are 
shipped   from   one   state   to    another. 


1459 


§  503a. 


TRUSTS,    ETC. 


[CH.  XXIX. 


only  such  contracts  and  combinations  as  amount  to  an  unreasonable 
or  undue  restraint  of  trade  and  interstate  commerce  and  does  not  apply 

treble  damages  given  by  the  anti-trust 
act  of  congress  of  July  2,  1890.  Such 
a  suit  is  multifarious,  inasmuch  as 
the  trebie  damages  would  go  to  the 
plaintiff,  while  the  damages  generally 
would  belong  to  the  corporation. 
Metcalf  V.  American,  etc.  Co.,  108 
Fed.  Rep.  909  (1901);  aff'd,  113  Fed. 
Rep.  1020.  It  is  no  defense  to  a 
suit  for  an  infringement  of  patents 
that  the  complainant  is  a  combination 
organized  in  violation  of  the  anti- 
trust act  of  congress.  Otis  Elevator  Co. 
V.  Geiger,  107  Fed.  Rep.  131  (1901). 
The  liabihty  imposed  by  section  7  of 
the  anti-trust  act  of  congress  of  July, 
1890,  rendering  an  illegal  trust  and 
its  members  liable  in  treble  damages 
to  a  person  injured  thereby,  was  en- 
forced in  Lowry  v.  Tile,  etc.  Assoc, 
106  Fed.  Rep.  38  (1900);  aff'd,  115 
Fed.  Rep.  27  and  193  U.  S.  38.  A  suit 
giving  any  person  injured  by  a  trust  a 
right  to  hold  it  liable  in  treble  dam- 
ages cannot  be  brought  by  a  party 
who  helped  form  the  trust.  Bishop 
V.  American,  etc.  Co.,  105  Fed.  Rep. 
845  (1900). 

A  state  statute  against  trusts  is  no 
defense  to  a  purchaser  from  such 
trusts.  Only  the  state  can  raise  that 
question  in  a  direct  proceeding  for 
that  purpose,  unless  the  statute  pro- 
vides other  remedies.  Lafayette,  etc. 
Co.  V.  City  of  Streator,  105  Fed.  Rep. 
729  (1900).  An  association  of  four- 
teen coal  dealers  to  sell  their  coal 
through  one  company,  at  prices  fixed 
by  themselves,  is  illegal,  under  the 
anti-trust  act  of  congress.  United 
States  V.  Chesapeake,  etc.  Co.,  105 
Fed.  Rep.  93  (1900).  A  purchaser  of 
a  manufactured  product  from  a  cor- 
poration, who  gives  his  notes  in  pay- 
ment, cannot  defend  against  such 
notes  on  the  ground  that  the  corpora- 
tion is  a  "trust"  in  violation  of  the 
common  law  and  of  the  act  of  con- 
gress. Union,  etc.  Co.  v.  Connelly,  99 
Fed.  Rep.  354  (1900) ;  aff'd,  184  U.  S. 
540.  A  stockholder  in  a  corporation 
which  has  entered  a  trust  need  not 
as  a  witness  answer  questions  as  to 
his  participation  therein,  inasmuch  as 


even  though  the  association  agree- 
ment does  not  mention  that  fact. 
Gibbs  V.  McNeeley,  118  Fed.  Rep. 
120  (1902).  An  employee  who  has 
made  a  legal  contract  not  to  engage  in 
a  similar  business  within  a  radius  of 
fifteen  hundred  miles  during  a  speci- 
fied term  of  a  period  of  five  years  can- 
not set  up  as  a  defense  to  such  con- 
tract that  his  employer  is  an  illegal 
trust.  Harrison  v.  Glucose,  etc.  Co., 
116  Fed.  Rep.  304  (1902).  A  contract 
by  which  coke  manufacturers  agree 
to  sell  their  output  to  a  corporation, 
to  resell  the  same  at  not  less  than  a 
price  to  be  fixed  by  a  committee  of  the 
manufacturers,  the  profit  earned  above 
a  certain  sum  per  ton  to  be  divided 
among  the  manufacturers,  the  corpora- 
tion agreeing  not  to  sell  the  product 
to  any  other  producers,  the  amount  of 
coal  to  be  furnished  by  each  producer 
to  be  also  fixed  by  the  committee,  af- 
fects interstate  commerce  and  is  in 
violation  of  the  anti-trust  act  of  con- 
gress, the  court  declaring  that  the 
policy  of  that  act  was  to  promote 
individual  competition  and  prevent 
combinations  which  interfered  with 
that  competition,  either  as  between  the 
members  of  the  combination  or  be- 
tween the  members  and  outsiders,  and 
it  is  no  defense  that  no  harm  is  done 
to  the  public,  or  that  the  combination 
has  been  able  to  compete  for  business 
in  a  wider  field.  Chesapeake,  etc.  Co. 
V.  United  States,  115  Fed.  Rep.  610 
(1902).  Under  the  act  of  congress  of 
July  2,  1890,  a  dealer  to  whom  a  manu- 
facturer refuses  to  sell  may  collect 
damages,  the  reason  for  such  refusal 
being  an  illegal  association  of  com- 
petitors, by  which  the  members 
charged  more  to  outsiders  than  to 
members.  Montague  v.  Lowry,  115 
Fed.  Rep.  27  (1902) ;  aff'd,  193  U.  S. 
38.  The  Nebraska  anti-trust  act  of 
1897  is  unconstitutional  as  interfering 
with  the  right  of  citizens  to  make  con- 
tracts. Niagara,  etc.  Co.  v.  Cornell, 
110  Fed.  Rep.  816  (1901).  A  suit  by 
a  stockholder,  to  set  aside  an  illegal 
transfer  of  the  corporate  property, 
cannot  at  the  same  time  ask  for  the 


1460 


CH.  XXIX. 


TRUSTS,    ETC. 


[§  503a. 


to  contracts  or  combinations,  not  unduly  restraining  interstate  or  for- 
eign commerce. 


it  might  tend  to  criminate  him  and 
subject  him  to  a  penalty.  Wyckoff, 
etc.  Co.  V.  Wagner,  etc.  Co.,  99  Fed. 
Rep.  158  (1900).  The  fact  that  a  cor- 
poration is  a  member  of  a  trust  is  no 
defense  to  a  suit  for  infringement  of 
a  patent.  Brown,  etc.  Co.  v.  Troxel, 
98  Fed.  Rep.  620  (1899).  A  perpetual 
lease  which  enables  one  railroad  to 
run  over  the  tracks  of  another  is  en- 
forceable, although  the  lease  contains 
a  provision  that  its  operation  shall 
cease  during  any  period  of  time 
within  which  the  lessee  extends  its 
road  into  certain  coal  territory  or  re- 
ceives coal  from  other  railroads  run- 
ning through  that  territory.  This  last 
provision  is  contrary  to  public  policy 
and  is  void,  but,  being  a  condition 
subsequent,  does  not  affect  the  valid- 
ity of  the  lease  itself.  Metropolitan, 
etc.  Co.  V.  Columbus,  etc.  Ry.,  95  Fed. 
Rep.  18  (1899).  A  combination  of 
wooden-ware  manufacturers,  whereby 
they  lease  their  machines  to  a  cor- 
poration which  is  to  fix  the  price  and 
receive  stock  therefor,  the  dividends 
upon  which  are  guaranteed  by  still 
another  corporation  in  the  combine, 
cannot  collect  such  dividends  by  legal 
proceedings.  Cravens  v.  Carter- 
Crume  Co.,  92  Fed.  Rep.  479  (1899). 
In  a  suit  by  a  corporation  to  enjoin 
strikers  from  obstructing  the  streets, 
etc.,  the  defense  that  the  complainant 
is  an  illegal  combination  in  trade  is  not 
good.  Amer.  Steel,  etc.  Co.  v.  Wire 
Drawers',  etc.  Unions,  90  Fed.  Rep. 
608  (1898).  Even  though  insurance 
companies  have  combined  as  to  rates, 
etc.,  yet  they  may  enjoin  a  state  in- 
surance commissioner  from  illegally 
revoking  their  certificates  of  author- 
ity to  do  business  in  the  state.  Liver- 
pool, etc.  Co.  V.  Clunie,  88  Fed.  Rep. 
160  (1898).  The  United  States  gov- 
ernment may  file  a  bill  in  equity  to  en- 
join importers  and  dealers  in  coal  in  a 
certain  city  from  combining,  so  as  to 
regulate  the  retail  prices  arbitrarily. 
United  States  v.  Coal,  etc.  Assoc,  85 
Fed.  Rep.  252  (1898).  A  corporation 
created  to  form  a  monopoly  in  the 
manufacture  of  harrows  cannot  main- 


tain a  suit  for  infringement.  National 
Harrow  Co.  v.  Hench,  84  Fed.  Rep.  226 
(1898).  A  bill  in  equity  to  restrain  a 
live-stock  exchange  from  carrying  out 
certain  by-laws  which  tended  to  mo- 
nopolize the  business  was  sustained  in 
United  States  v.  Hopkins,  82  Fed.  Rep. 
529  (1897),  but  was  reversed  in  Hop- 
kins V.  United  States,  171  U.  S.  578 
(1898),  on  the  ground  that  the  busi- 
ness involved  was  not  interstate  com- 
merce. The  arrangement  of  the  har- 
row trust,  whereby  seventy  per  cent, 
of  the  manufacturers  assigned  their 
patents  and  good-will  to  a  corporation, 
and  then  acted  as  agents  or  licensees 
of  such  corporation  to  manufacture 
and  sell  on  the  terms  prescribed  by  it, 
is  illegal.  National  Harrow  Co.  v. 
Hench,  83  Fed.  Rep.  36  (1897). 
Where  a  car-manufacturing  corpora- 
tion leases  all  its  property  to  another 
corporation  for  a  term  of  years  and 
agrees  not  to  engage  in  business  dur- 
ing that  time,  "the  contract  between 
the  parties  is  void,  becausp  in  unrea- 
sonable restraint  of  trade,  and  there- 
fore contrary  to  public  policy."  Cen- 
tral Transp.  Co.  v.  Pullman's  Pal- 
ace Car  Co.,  139  U.  S.  24,  53  (1891), 
quoting  from  and  approving  Alger  v. 
Thacher,  36  Mass.  51  (1837).  A  per- 
son may  purchase  at  foreclosure  even 
though  he  represents  the  stockholders, 
and  even  though  the  intention  may  be 
to  organize  a  new  company  to  con- 
tinue an  illegal  combination  in  trade. 
Olmstead  v.  Distilling,  etc.  Co.,  73 
Fed.  Rep.  44  (1895).  In  McCutcheon 
t'.  Merz  Capsule  Co.,  71  Fed.  Rep.  786 
(1896),  several  corporations  agreed  to 
turn  over  their  property  to  one  cor- 
poration and  to  take  stock  and  bonds 
in  payment,  the  price  to  be  thereafter 
fixed  by  appraisers.  After  the  stock 
was  issued  one  of  the  companies 
withdrew,  and  the  court  held  that  the 
company  withdrawing  could  file  a  bill 
to  cancel  the  agreement  on  the  ground 
that  the  company  had  no  power  to 
hold  stock  in  other  corporations,  and 
that  the  agreement  was  not  yet  exe- 
cuted. An  illegal  combination  cannot 
maintain  a  bill  to  enjoin  infringement 


1461 


§  503a.] 


TRUSTS,    ETC. 


[CH.  XXIX. 


The  fact  is  that  the  industrial  movement  of  the  age  is  irresistibly 
towards  consolidation  and  combination,  in  connection  with  the  ex- 
pansion and  extension  of  trade  at  home  and  abroad.  The  law  is  de- 
signed to  check  any  abuses  in  this  tendency,  and  has  been  successful 
in  so  doing.  The  law,  however,  is  not  intended  to  interfere  with  the 
legitimate  demands  of  trade,  and  the  anti-trust  act  of  congress,  as  now 
construed  and  applied  by  the  supreme  court,  will  serve  to  check  the 


upon  its  patents.  National  Harrow 
Co.  V.  Quick,  67  Fed.  Rep.  130  (1895). 
Rent  may  be  collected  on  a  lease  of 
a  manufacturing  plant  to  a  competing 
concern,  even  though  the  intent  was 
to  decrease  competition.  An  agree- 
ment of  the  lessor  not  to  engage  in 
the  business  during  the  term  of  the 
lease  is  valid.  U.  S.  Chemical  Co.  v. 
Provident  Chemical  Co.,  64  Fed.  Rep. 
946  (1894).  A  contract  by  a  manu- 
facturing company  not  to  manufacture 
for  a  certain  period  if  it  is  paid  a  cer- 
tain percentage  on  sales  made  by 
others  is  illegal  and  void.  Oliver  v. 
Gilmore,  52  Fed.  Rep.  562  (1892).  It 
is  no  defense  to  an  infringement  suit 
that  the  complainant  has  formed  a 
monopoly  of  all  patents  bearing  upon 
the  matter.  Strait  v.  National  Harrow 
Co.,  51  Fed.  Rep.  819  (1892).  An  as- 
signment of  patents  by  one  of  several 
parties  to  a  corporation  formed  to 
unite  various  patents  in  a  certain 
business  is  absolute  and  cannot  be 
revoked,  even  though  the  party  was  by 
agreement  to  have  a  salary  of  $6,000 
per  year  and  this  salary  has  not  been 
paid.  Bracher  v.  Hat  Sweat  Mfg.  Co., 
49  Fed.  Rep.  921  (1892).  A  combina- 
tion of  coal  dealers,  to  regulate  prices 
and  provide  for  the  division  of  prices 
with  the  miners  of  the  coal,  is  con- 
trary to  the  act  of  congress,  where 
the  coal-mining  companies  operate 
chiefly  in  one  state,  and  the  contract 
is  made  and  carried  out  in  a  city  in 
another  state.  United  States  v.  Jellico, 
etc.  Co.,  46  Fed.  Rep.  432  (1891).  A 
person  who  has  sold  his  bakery  to  a 
corporation  which  is  a  "trust,"  taking 
stock  in  the  corporation  in  payment, 
may  tender  back  the  stock  and  retake 
possession  of  his  bakery.  The  act  of 
congress  against  combinations  applies. 
American,  etc.  Co.  v.  Klotz,  44  Fed. 
Rep.   721    (1891).     Where   the   stock- 


holders of  a  corporation  enter  into  a 
contract  for  and  in  behalf  of  the  cor- 
poration and  for  its  benefit,  and  the 
corporation  accepts  that  benefit,  the 
latter  is  bound  and  affected  by  the 
contract  and  subject  to  the  liabilities 
of  the  contract  the  same  as  though  it 
had  directly  entered  into  it.  Hence 
it  is  that  a  corporation  is  guilty  of 
entering  into  a  "trust"  in  a  case 
where  its  stockholders  enter  into  the 
"trust."  American  Preservers'  Trust 
V.  Taylor  Mfg.  Co.,  46  Fed.  Rep.  1.52 
(1891).  In  this  case  the  court  held 
that  the  trustees  were  agents,  and 
that  the  corporations  were  among  the 
principals,  and  that  it  was  ultra  vires 
of  the  corporations  to  purchase  stocks, 
bonds,  and  various  properties  through 
these  agents,  the  trustees.  Hence  one 
of  the  corporations  cannot  be  enjoined 
from  breaking  the  contract.  Where,  in 
order  to  enter  into  a  combination,  one 
of  the  corporations  assigns  all  its 
property  to  its  stockholders,  and  they 
assign  it  to  the  new  consolidated  and 
absorbing  corporation,  and  also  agree 
with  that  corporation  not  to  compete 
with  it  in  business,  the  first-named 
corporation  may  be  started  in  the 
business  anew  and  will  not  be  en- 
joined. American  Preservers'  Co.  v. 
Norris,  43  Fed.  Rep.  711  (1890). 

In  controversies  between  a  certifi- 
cate-holder and  the  trustees  the  court 
will  not  consider  the  legality  of  the 
"trust."  Gould  V.  Head,  41  Fed.  Rep. 
240  (1890).  A  certificate-holder  can- 
not enjoin  an  ultra  vires  or  illegal  act 
of  the  trustees  where  he  obtains  serv- 
ice on  only  four  out  of  the  nine  trus- 
tees. Each  trustee  is  liable  per- 
sonally for  past  breaches  of  trust,  but 
an  injunction  against  future  acts  can 
only  be  where  all  the  trustees  are 
made  parties.  Wall  v.  Thomas,  41 
Fed.  Rep.  620  (1890). 


1462 


CH.  XXIX.] 


TRUSTS,    ETC. 


[§  503a. 


abuses  without  interfering  with  the  uses  of  great  corporations.  It  was 
demonstrated  in  England  many  years  ago  in  connection  with  statutory 
prohibitions  against  the  consolidation  of  railroads,  that  the  laws  of 
trade  are  stronger  than  the  laws  of  men.^ 

In  England  in  a  celebrated  litigation  it  was  held  that  a  combina- 
tion of  steamship  companies  as  to  rates  was  not  illegal  at  common 
law,-  but  in  the  United  States  exactly  this  same  thing  is  condemned 
by  the  anti-trust  act  of  congress.^ 


1  In  England,  for  more  than  thirty 
years,  parliament  legislated  against 
the  consolidation  of  railroads.  This 
legislation  proved  to  be  utterly  in- 
effective, and  in  1872  a  parliamentary 
committee  made  an  elaborate  and  ex- 
haustive report  on  the  subject,  and 
said,  among  other  things,  that  con- 
solidation "had  not  brought  with  it 
the  evils  that  were  anticipated,  but 
that,  in  any  event,  long  and  varied 
experience  had  fully  demonstrated  the 
fact  that,  while  parliament  might  hin- 
der and  thwart  it,  it  could  not  pre- 
vent it."  An  able  article  on  "Legal 
Monopoly,"  by  A.  D.  Adams,  is  to  be 
found  in  19  Political  Science  Quar- 
terly, 173. 

-  England :  The  House  of  Lords,  the 
highest  court  in  -England,  in  1891 
affirmed  the  decisions  of  the  courts 
below  in  Mogul  Steamship  Co.  v. 
McGregor,  L.  R.  17  App.  Cas.  25, 
affirming  L.  R.  23  Q.  B.  D.  598,  and 
L.  R.  21  Q.  B.  D.  544,  and  held  that  an 
action  of  conspiracy  would  not  lie 
against  a  company  that  gave  lower 
rates  of  freight  to  parties  who  shipped 
exclusively  by  them,  there  being  in  this 
transaction  no  desire  to  injure  others 
and  no  ill-will.  The  defendant  ship- 
ping companies  and  owners  had  com- 
bined together  and  formed  a  "confer- 
ence" or  "ring,"  and  their  agents  in 
China  had  issued  circulars  to  shippers 
there  to  the  effect  that  exporters  in 
China  who  confined  their  shipments  of 


goods  to  vessels  owned  by  members 
of  the  "conference"  should  be  allowed 
a  certain  rebate,  payable  half-yearly, 
on  the  freight  charged.  The  court 
held  that  the  "conference,"!  being 
formed  by  the  defendants  with  a  view 
of  keeping  the  trade  in  their  own 
hands,  and  not  with  the  view  of  ruin- 
ing the  trade  of  the  plaintiffs,  or 
through  any  personal  malice  or  ill-will 
toward  them,  was  not  unlawful,  and 
that  no  action  for  conspiracy  was 
maintainable.  Lord  Coke,  in  the  great 
and  leading  "Ca;3e  of  the  Monopolies," 
11  Coke,  846  (1602),  declared  that  a 
monopoly  was  illegal  and  void.  Lord 
Coke  said  that  a  monopoly  led  to 
three  results :  an  increase  in  price,  a 
decrease  in  quality  and  the  impover- 
ishment of  artisans  and  others.  An 
agreement  of  manufacturers  that  one 
shall  not  employ  the  discharged  hands 
of  any  other  except  upon  the  written 
consent  of  the  latter  is  void.  Mineral 
Water,  etc.  Soc.  v.  Booth,  L.  R.  36 
Ch.D.  465  (1887).  A  company  which  is 
organized  in  violation  of  a  statute 
cannot  collect  debts  which  are  due  to 
it.  Jennings  v.  Hammond,  L.  R.  9 
Q.  B.  D.  225  (1882),  the  company  in 
this  case  being  organized  in  violation 
of  a  statute  which  prohibited  more 
than  twenty  persons  uniting  in  an 
association  or  partnership  except  under 
certain  conditions.  In  another  case 
many  manufacturers,  in  consequence 
of    troubles    between   themselves  and 


'  A  combination  of  shipowners 
whereby  freight  rates  from  the  United 
States  to  South  Africa  are  regulated 
and  a  forfeit  imposed  on  a  shipper  if 
he  patronizes  any  other  line,  violates 
the  anti-trust  act  of  July  2,  1890, 
even    though     the    combination    was 


made  before  that  date  and  was  made  in 
a  foreign  country.  Any  shipper  may 
sue  for  three  times  the  difference 
between  the  rate  as  fixed  and  a  rea- 
sonable rate.  Thomsen  v.  Union, 
etc.  Co.,  166  Fed.  Rep.  251  (1908), 
rev'g  149  Fed.  Rep.  933. 


1463 


§  503a. 


TRUSTS,    ETC. 


[CH. 


In  England  the  genuine  "  trust  "  has  been  used  for  legitimate  in- 
vestment purposes.  The  trustees  are  authorized  to  invest  the  funds 
of  the  "  trust ''  in  the  stocks  and  bonds  of  miscellaneous  corporations. 
Generally,  however,  they  are  limited  in  the  amount  which  they  may 
invest  in  any  one  direction.  That  which  is  lost  in  one  investment  is 
expected  to  be  made  up  by  large  profits  in  another.  It  is  a  mode  of 
investment  on  a  large  scale,  and  is  made  on  the  principle  of  an  average 
gain  and  loss.^  In  England  it  has  been  held  that  a  workman  who  has 
been  discharged  by  his  employer  at  the  instance  of  a  delegate  of  a  work- 
men's organization,  because  he,  the  workman,  had  at  a  previous  time 
done  work  other  than  that  which  was  his  regular  trade,  cannot  hold 
the  delegate  liable  in  damages,  even  though  the  discharge  was  caused 
by  threats  of  the  delegate  to  the  employer  that  unless  the  discharge  was 
made  all  the  men  would  quit  work.^ 

The  American  "  Car  Trust  "  is  practically  an  agreement  of  several 
owners  of  cars  to  place  them  in  the  hands  of  an  agent  to  sell  on  the  in- 
stallment plan,  the  agent  having  the  power  to  issue  certificates  repre- 
senting an  interest  in  the  installments.^ 


their  employees,  entered  into  an  agree- 
ment and  gave  a  bond  that  they  all 
would  abide  by  the  rates  of  labor, 
hours  of  work,  and  other  regulations 
which  a  majority  of  those  who  entered 
into  the  combination  should  decide 
upon.  The  court  held  that  the  com- 
pact was  in  restraint  of  trade ;  that  it 
was  illegal  and  void,  and  that  the 
bond  could  not  be  enforced.  Hilton 
V.  Eckersley,  6  El.  &  Bl.  47  (1856). 
Cf.  Ontario  Salt  Co.  v.  Merchants' 
Salt  Co.,  18  Grant  (U.  C.)  Ch.  540 
(1871),  where  a  Canadian  "pool"  on 
salt  was  sustained  ;  Wickens  v.  Evans, 
3  Y.  &  J.  318  (1829).  A  salt  company 
which  buys  the  output  of  another 
salt  company,  the  latter  agreeing  to 
limit  such  output  and  not  to  sell  to 
others,  cannot  collect  damages  for 
breach  of  such  contract,  it  being  void 
as  in  restraint  of  trade,  and  its  ille- 
gality need  not  be  pleaded  in  defense. 
North-Western  Salt  Co.  v.  Electro- 
lytic, etc.  Co.,  107  L.  T.  Rep.  4.39 
(1912).  The  word  "monopoly"  orig- 
inally meant  an  exclusive  privilege 
granted  by  the  crown.  The  courts 
held  that  the  crown  could  not  grant 
it.     See   Case  of   the  Monopolies,    11 


Coke,    84    (1602);     Mitchell    v.    Rey- 
nolds, 1  P.  Wms.  181,  187  (1711). 

1  See  Healey,  Company  Law  and 
Practice  (2d  ed.),  p.  191.  For  the 
form  of  articles  of  agreement  of  this 
kind  of  a  "trust,"  and  for  a  detailed 
statement  of  the  various  provisions 
that  are  made,  varying  according  to 
the  character  of  the  enterprise  and  the 
purposes  of  the  participants,  see  Sykes 
V.  Beadon,  L.  R.  11  Ch.  D.  170  (1879) ; 
Smith  V.  Anderson,  L.  R.  15  Ch.  D.  247 
(1880);  Wigfield  v.  Potter,  45  L.  T. 
Rep.  612  (1882) ;  Crowther  v.  Thorley, 
32  W..  Rep.  330  (1884) ;  Credit  Mobi- 
lier  V.  Commonwealth,  67  Pa.  St.  233 
(1870),  the  last  case  being  a  "trust" 
created  to  construct  a  railroad,  the 
cestui  que  trust  being  the  stockholders 
of  a  designated  corporation. 

2  Allen  V.  Flood,  [1898]  A.  C.  1.  Cf. 
Curran  v.  Galen,  152  N.  Y.  33  (1897). 
A  labor  union  is  not  liable  in  damages 
to  a  person  who  is  discharged  by  an 
employer  at' the  instance  of  the  union, 
on  the  ground  that  the  person  so  dis- 
charged is  not  a  member  of  its  organ- 
ization, it  being  shown  that  the  pur- 
pose of  the  agreement  was  to  secure 
efficient    and    approved    workmen    or 


^  See  §  855,  infra. 
1404 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  504. 


B.      UNINCORPORATED   JOINT-STOCK   ASSOCIATIONS. 

§  504.  Definitions — Joint-stock  associations,  clubs,  exchanges, 
etc. — Expulsion  —  Ownership  of  land.  —  A  joint-stock  company 
may  be  defined  to  be  an  association  of  persons  for  the  purpose  of  business, 
having  a  capital  stock  divided  into  shares,  and  governed  by  articles  of 
associations  which  prescribe  its  objects,  organization,  and  procedure, 
and  the  rights  and  Habihties  of  the  members,  except  that  the  articles 
cannot  release  the  members  from  their  liability  as  partners  to  the  credi- 
tors of  the  company.^ 

24  111.  387,  426  (1860),  it  is  said  that 
joint-stock  companies  "have  none  of 
the  rights  and  immunities  of  .  .  . 
a  regularly  incorporated  company. 
These  stock  companies  are  nothing 
more  than  partnerships ;  and  every 
member  of  the  company  is  liable  for 
the  debts  of  the  concern,  no  matter 
what  the  private  arrangements  among 
themselves  may  be."  To  the  same 
effect,  see  Moore  v.  Brink,  4  Hun,  402 
(1875) ;  Skinner  v.  Dayton,  19  Johns. 
513  (1822) ;  Wells  v.  Gates,  18  Barb. 
554  (1854) ;  Keasley  v.  Codd,  2  Car.  & 
P.  408  (1826).  "The  term  'joint-stock 
company'  appears  to  have  originated 
in  England  in  comparatively  recent 
times.  Joint-stock  companies  may  be 
said  to  be  partnerships,  or  individuals 
associated  for  some  specified  purpose, 
under  a  designated  name  or  descrip- 
tion, to  which,  by  some  general  or 
special  statute,  when  they  have  been 
formed  or  composed  in  a  specified 
manner,  some  of  the  powers  or  proper 
attributes  of  a  corporation  have  been 
given."  Dayton,  etc.  R.  R.  v.  Hatch, 
1  Disney  (Ohio),  84,  90  (1855).  Fac- 
tors', etc.  Ins.  Co.  v.  New  Harbor,  etc. 
Co.,  37  La.  Ann.  233,  239  (1885), 
speaks  of  a  joint-stock  company  as 
"a  nondescript  organization,  composed 
of  the  owners  of  certificates  showing 
the  proportion  of  their  respective  in- 
terests in  its  assets  and  liability  for 
its  obligations,  and  who  are  co-owners 
or  proprietors  in  common.  As  no  one 
is  bound  to  own  property  in  indivi- 
sion,  it  follows  that  such  owners  who 
wish  a  division  have  a  right  to  have 
that  property  sold,  and  after  a  liquida- 
tion of  the  affairs  of  the  concern  to 
have   the   residue   distributed   ratably 


preference  in  employees,  no  force  or 
unlawful  act  being  involved.  National, 
etc.  Assoc.  V.  Gumming,  170  N.  Y.  315 
(1902). 

1  "A  joint-stock  company  is  an  asso- 
ciation of  indi\iduals  possessing  a 
common  capital  divided  into  shares, 
of  which  each  member  possesses  one 
or  more.  These  shares  represent  the 
interest  of  the  members,  and  are 
transferable  by  the  owners  without 
the  consent  of  the  other  members  or 
the  creditors  of  the  association."  Kos- 
sakowski  v.  People,  177  111.  563  (1899). 
In  Hedge's  Appeal,  63  Pa.  St.  273 
(1869,  following  the  statute  8  &  9 
Viet.,  c.  110),  it  is  defined  to  be  "a 
partnership  whereof  the  capital  is 
di\-ided,  or  agreed  to  be  divided,  into 
shares,  and  so  as  to  be  transferable 
without  the  express  consent  of  all  the 
copartners."  In  the  statutes  of  Mas- 
sachusetts the  words  "joint-stock  com- 
pany" are  used  to  mean  a  corporation 
organized  under  the  general  incor- 
poration act  of  the  state.  Attorney- 
General  V.  Mercantile  Ins.  Co.,  121 
Mass.  524  (1877).  But  this  is  not  an 
accurate  use  of  the  term.  "The  arti- 
cles of  association  of  an  unincorpo- 
rated joint-stock  company  bear  the 
same  relation  to  it  that  the  charter 
bears  to  an  incorporated  company ; 
they  regulate  the  duties  of  the  offi- 
cers and  the  duties  and  obhgations  of 
the  members  of  such  a  company 
among  themselves ;  they  specify  the 
capital,  Umit  the  duration,  and  define 
the  business  of  the  company."  Bray 
V.  Farwell,  81  N.  Y.  600  (1880),  per 
Earl,  J.  See  also  White  v.  Brownell, 
4  Abb.  Pr.  (N.  S.)  162,  193  (1868); 
6.  c,  2  Daly,  329.     Robbins  v.  Butler, 


1465 


§504. 


TRUSTS,    ETC. 


[CH.  XXIX. 


A  joint-stock  company  lies  midway  between  a  corporation  and  a 
corpartnership ;  ^  and  while  it  has  many  of  the  advantages  and  charac- 
teristics of  each,  it  is  to  be  distinguished  from  them,^  also  from  unin- 
corporated associations  owning  property  and  issuing  certificates  of 
interest,^  from  building  associations,'*  from  clubs, ^  from  social,  benevo- 


among  themselves."  At  common  law 
a  partnership  or  joint-stock  associa- 
tion may  do  business  under  any  name 
that  it  chooses.  See  §  233,  note,  supra  ; 
Preachers'  Aid  Soc.  v.  Rich,  45  Me. 
552  (1858);  2  Perry,  Trusts,  §730; 
Swasey  v.  American  Bible  Soc,  57  Me. 
523  (1869). 

1  The  similarity  of  an  unincorpo- 
rated joint-stock  association  to  a  cor- 
poration was  pointed  out  and  ex- 
plained in  Hibbs  v.  Brown,  190  N.  Y. 
167  (1907). 

2  It  differs  from  a  corporation  in 
that  a  joint-stock  company  has  no 
limited  liability  as  regards  its  stock- 
holders ;  and  it  cannot  sue  or  be  sued 
in  the  name  of  the  association.  It 
differs  from  a  copartnership  in  that  it 
is  not  dissolved  by  a  transfer  of  stock ; 
and  each  member  has  not  the  same 
powers  of  transacting  business  and 
disposing  of  the  assets  as  in  a  partner- 
ship. See  Cox  v,  Bodfish,  35  Me.  302 
(1853).  In  Illinois  it  is  a  criminal 
offense  for  individuals  or  an  unincor- 
porated association  to  use  a  name 
that  implies  incorporation.  Hazelton 
Boiler  Co.  v.  Hazelton,  etc.  Co.,  142 
111.  494  (1892). 

3  An  unincorporated  association 
formed  in  a  state  where  statutory  joint- 
stock  associations  are  unknown,  is 
not  subject  to  the  corporation  tax 
act  of  congress.  Eliot  v.  Freeman, 
220  U.  S.  178  (1911).  See  also  §  622  h, 
infra. 

*  As  to  building  associations,  see 
also  Phelps  v.  American,  etc.  Assoc, 
121  Mich.  343  (1899).  In  building 
associations  general  creditors  are  prior 
in  right  to  withdrawing  members. 
Cook  V.  Emmet,  etc.  Assoc,  90  Md. 
284  (1899).  As  to  the  nature  of  a 
building  and  loan  association  and  the 
legality  of  its  stock,  loans,  and  mode 
of  transacting  business,  see  Mcll- 
waine  v.  Iseley,  96  Fed.  Rep.  62 
(1899);     s.    c,    96    Fed.    Rep.    775. 


Where  a  New  York  building  associa- 
tion has  agreed  to  return  a  member's 
money  on  a  specified  date,  it  cannot  set 
up  that  the  agreement  is  ultra  vires 
when  sued  therefor.  Eastern  Build- 
ing, etc.  Assn.  v.  Williamson,  189  U.  S. 
122  (1903).  The  character  of  a  build- 
ing loan  association  as  regards  usury 
was  considered  in  Preston  v.  Rockey, 
185  N.  Y.  186  (1906).  Associations 
may  be  for  improving  a  water  power. 
Troy  Iron,  etc.  Factory  v.  Corning, 
45  Barb.  231  (1884).  For  building 
a  schoolhouse.  Marston  v.  Durgin, 
54  N.  H.  347  (1874).  For  protect- 
ing business  interests.  Caldicott  v. 
Grifaths,  8  Exch.  898  (1853).  See 
also  Tenney  v.  New  England  Protec- 
tion Union,  37  Vt.  64  (1864) ;  Abels  v. 
McKeen,  18  N.  J.  Eq.  462  (1867); 
Henry  v.  Jackson,  37  Vt.  431  (1865) ; 
Frost  V.  Walker,  60  Me.  468  (1872). 
A  stock  corporation  organized  to 
build  a  building  for  the  benefit  of  a 
library  association  may  sustain  to- 
wards the  latter  the  relation  of  trus- 
tee towards  a  cestui  que  trust,  but 
the  corporation  may  insist  on  its  legal 
rights.  Pittsburgh,  etc.  v.  Mercantile, 
etc  Co.,  189  Pa.  St.  479  (1899). 

5  Park  V.  Spaulding,  10  Hun,  128 
(1877);  Ridgely  v.  Dobson,  3  Watts 
&  S.  (Pa.)  118  (1842);  Loubat  v.  he 
Roy,  40  Hun,  546  (1886) ;  Flemyng  v. 
Hector,  2  M.  &  W.  172  (1836) ;  Re  St. 
James  Club,  2  De  G.,  M.  &  G.  383 
(1852) ;  Ewing  v.  Midlock,  14  Ala. 
(O.  S.)  82  (1837) ;  Todd  v.  Emly,  8  M.  & 
W.  505  (1841);  Reynell  v.  Lewis,  15 
M.  &  W.  517  (1846) ;  Wood  v.  Finch, 
2  F.  &  F,  447  (1861);  Cross  v.  Wil- 
liams, 10  W.  R.  302  (1862) ;  Cockerell 
V.  Aucompte,  5  W.  R.  633  (1857); 
Koehler  v.  Brown,  31  How.  Pr.  235 
(1866) ;  Waller  v.  Thomas,  42  How. 
Pr.  337  (1871);  Hopkinson  v.  Exeter, 
L.  R.  5  Eq.  63  (1867);  Gardner  v. 
Fremantle,  19  W.  R.  256  (1870); 
Delauney  v.  Strickland,  2  Stark.  416 


1466 


CH.  XXIX.] 


TRUSTS,    ETC. 


[§  504. 


lent/  and  mutual-aid  -  organizations,  and  from  associations  formed  for 
business  purposes,  but  without  a  capital  stock,  such  as  stock  and  other 


(1818) ;  Caldieott  v.  Griffiths,  8  Exeh. 
898  (1853) ;  Ebbinghousen  v.  Worth 
Club,  4  Abb.  N.  Cas.  300  (1878).  The 
ordinary  attachment  statute  author- 
izing the  attachment  of  shares  of 
stock  does  not  apply  to  a  club  organ- 
ized for  lawful  sporting  purposes  and 
being  more  of  the  nature  of  a  stat- 
utory joint-stock  association  than  a 
corporation.  Lyon  v.  Denison,  80 
Mich.  371  (1890).  Even  though  the 
trustees  of  a  club  have  been  obliged 
to  pay  the  debts  of  the  club,  yet  they 
cannot  collect  from  the  members. 
Wise  V.  Perpetual,  etc.  Co.,  [1903] 
A.  C.  139,  the  court  saying:  "Clubs 
are  associations  of  a  peculiar  nature. 
They  are  societies  the  members  of 
which  are  perpetually  changing.  They 
are  not  partnerships ;  they  are  not  as- 
sociations for  gain ;  and  the  feature 
which  distinguishes  them  from  other 
societies  is  that  no  member  as  such 
becomes  liable  to  pay  to  the  funds  of 
the  society  or  to  any  one  else  any 
money  beyond  the  subscriptions  re- 
quired by  the  rules  of  the  club,  to  be 
paid  so  long  as  he  remains  a  member. 
It  is  upon  this  fundamental  condition 
not  usually  expressed,  but  understood 
by  every  one,  that  clubs  are  formed ; 
and  this  distinguishing  feature  has 
been  often  judicially  recognized."  An 
unincorporated  club  is  not  a  partner- 
ship, although  the  members  may  be 
liable  as  partners,  and  hence  a  mem- 
ber has  no  power  to  make  contracts 
for  the  association.  Lumbard  v.  Grant, 
35  N.  Y.  Misc.  Rep.  140  (1901) ;  aff'd, 
68  N.  Y.  App.  Div.  639.  A  member 
of  the  club  may  object  to  an  increase 
of  the  annual  dues  where  there  was 
no  provision  in  the  rules  authorizing 
the  alteration  thereof.  Harrington 
V.  Sendall,  [1903]  1  Ch.  921.  A  club 
may  grant  a  pension  to  a  retir- 
ing secretary.  Cyclists',  etc.  Club  v. 
Hopkinson,  [1910]  1  Ch.  179.  Even 
though  an  unincorporated  club  issues 
stock  yet  it  is  not  profit  within  the 
meaning  of  a  statute  imposing  a  stat- 
utory Liability  on  directors  of  corpora- 
tions "for  profit."  Coulombe  v.  East- 
man, 81  Atl.  Rep.  704  (N.  H.  1911). 


iPenfield  v.  Skinner,  11  Vt.  296 
(1839) ;  Beaumont  v.  Meredith,  3  Ves. 
&  B.  180  (1814).  See  also  Thomas  v. 
Ellmaker,  1  Pars.  Sel.  Eq.  Cas.  98 
(1844).  Or  Masonic  lodges.  See  Ash 
V.  Guie,  97  Pa.  St.  493  (1881).  See 
also  Cohn  v.  Borst,  36  Hun,  562 
(1885) ;  Goodman  v.  Jedidjah  Lodge, 
67  Md.  117  (1887);  Schmidt  v.  Abra- 
ham Lincoln  Lodge,  84  Ky.  490 
(1886).  A  by-law  of  a  benevolent 
society,  that,  for  non-payment  of  dues, 
the  names  of  members  shall  be  dropped, 
is  legal  and  self-executing.  Rood  v. 
Railway,  etc.  Assoc,  31  Fed.  Rep. 
62  (1887).  See  McCallion  v.  Hibernia, 
etc.  Soc,  70  Cal.  163  (1886),  involving 
a  secession  from  a  benevolent  associa- 
tion. Benevolent  associations  are  not 
necessarily  copartnerships.  Brown 
V.  Stoerkel,  74  Mich.  269  (1889). 
A  voluntary  association  not  for 
profit  cannot  hold  a  special  meet- 
ing and  change  the  place  of  the 
annual  meeting  unless  the  by-laws  or 
constitution  provide  for  such  special 
meetings.  Kerr  v.  Hicks,  154  N.  C. 
265  (1911).  The  board  of  du-ectors 
of  a  labor  union  may  not  have  author- 
ity to  enter  into  a  contract  with  another 
union.  Barnes  &  Co.  v.  Berry,  169 
Fed.  Rep.  225  (1909).  A  person  who 
has  resigned  as  a  member  of  a  mem- 
bership corporation  cannot  withdraw 
his  resignation,  even  though  it  has  not 
been  accepted,  no  acceptance  being 
necessary.  People  v.  N.  Y.  M.  B. 
Club,  70  N.  Y.  Misc.  Rep.  603  (1911). 

^Lafond  v.  Deems,  81  N.  Y.  507 
(1880);  Fritz  v.  Muck,  62  How.  Pr. 
69  (1881);  Pipe  v.  Bateman,  1  Iowa, 
369  (1855).  Cf.  Thomas  v.  EUmaker, 
1  Pars.  Sel.  Eq.  Cas.  98  (1844) ;  Olery 
V.  Brown,  51  How.  Pr.  92  (1875).  An 
unincorporated  society  which  has 
existed  for  nearly  one  hundred  years, 
organized  by  an  agreement  by  which 
there  is  a  community  of  property,  and 
any  member  dying  or  withdrawing 
not  to  be  entitled  to  any  part  of  such 
property,  is  valid  in  law,  and  such 
agreement  will  be  upheld.  Schwartz 
V.  Duss,  93  Fed.  Rep.  528  (1899); 
afif'd,  187  U.  S.  8  (1902).     A  by-law  in 


1467 


§504. 


TRUSTS,    ETC. 


[CH.  XXIX. 


exchanges/  especially  in  respect  to  the  right  of  expulsion.^    In  the  matter 
of  the  expulsion  of  a  member  from  an  incorporated  exchange,  the  court 


a  mutual  insurance  association  that 
payment  of  dues  shall  be  made  to  a 
certain  person,  but  that  if  the  latter 
does  not  transmit  them  a  member 
shall  still  be  liable  and  subject  to  a 
forfeiture  of  his  insurance,  is  unrea- 
sonable and  void.  Matter  of  Brown 
V.  Order,  etc.,  176  N.  Y.  132  (1903). 
A  provision  in  a  certificate  of  member- 
ship in  a  mutual  benefit  life  insurance 
association  that  the  members  shall 
comply  with  all  the  rules,  does  not 
sustain  a  change  in  the  rules  so  that 
a  member  instead  of  being  assessed 
according  to  age  is  assessed  on  a  more 


burdensome  plan.  The  provision 
refers  to  the  rules  then  existing.  Dow- 
daU  V.  Catholic,  etc.  Assoc,  196  N.  Y. 
405  (1909). 

1  Such  as  stock  exchanges.  See 
White  V.  Brownell,  2  Daly,  329  (1868) ; 
s.  c,  4  Abb.  Pr.  (N.  S.)  162;  Clute  v. 
Loveland,  68  Cal.  254  (1885);  Leech 
V.  Harris,  2  Brewst.  (Pa.)  571  (1869) ; 
State  V.  Chamber  of  Commerce,  20 
Wis.  63  (1865);  Weston  v.  Ives,  97 
N.  Y.  222  (1884),  relative  to  sale  of  a 
seat  by  the  exchange  to  pay  the  mem- 
ber's debts.  See  also  Piatt  v.  Jones, 
96  N.  Y.  24  (1884).     As  to  a  levy  of 


2  A  member  of  a  union  cannot  bring 
a  suit  in  equity  to  declare  void  and 
illegal  a  by-law  that  members  shall  be 
fined  for  accepting  employment  in 
connection  with  non-union  persons, 
and  to  enjoin  the  infliction  of  a  fine 
upon  himself.  His  remedy  is  at  law 
or  by  application  to  the  attorney- 
general.  Thomas  v.  Musical,  etc. 
Union,  121  N.  Y.  45  (1890).  A  by- 
law that  the  members  of  a  news  asso- 
ciation shall  not  publish  news  furnished 
by  other  associations  in  the  same  terri- 
tory is  valid.  The  penalty  for  viola- 
tion may  be  suspension.  Matthews 
V.  Associated  Press,  136  N.  Y.  333 
(1893).  Where  a  member  of  a  stock 
exchange  delays  a  year  before  com- 
plaining of  expulsion  for  non-payment 
of  dues,  and  in  the  meantime  the  seats 
have  become  valuable,  his  suit  will 
fail,  on  account  of  his  laches.  Konta 
V.  St.  Louis,  etc.,  189  Mo.  26  (1905). 
The  directors  of  a  chamber  of  com- 
merce corporation  having  by-laws 
authorizing  them  to  fine  or  expel  mem- 
bers guilty  of  misconduct  may  try  a 
member  on  charges  filed  by  them- 
selves, and  a  court  of  equity  will  not 
interfere  before  a  hearing  has  taken 
place.  Wood  v.  Chamber  of  Com- 
merce, 119  Wis.  367  (1903).  A  live 
stock  exchange  may  expel  a  member, 
even  though  it  has  property,  it  being 
shown  that  expulsion  is  a  proper 
penalty  for  his  conduct,  and  he  was 
given     a   reasonable    opportunity    to 


defend  and  a  fair  hearing.  Harris  v. 
Aiken,  76  Kan.  516  (1907).  Where 
a  member  of  a  lodge  was  expelled 
for  entering  into  a  conspiracy  to 
blackball  applicants  for  admission, 
the  court  refused  to  restore  him  by 
mandamus,  and  said  that  such  a  case 
was  different  from  one  where  prop- 
erty rights  or  money  demands  are 
involved.  State  v.  Grand  Lodge,  53 
N.  J.  L.  536  (1891).  Where  the 
expelled  member  has  the  right  by 
by-law  to  appeal  from  the  decision  to 
a  corporate  meeting,  the  courts  will 
not  interfere  until  such  appeal  is  taken. 
Screwmen's  Benev.  Assoc,  v.  Benson, 
76  Tex.  552  (1890).  As  to  expulsion 
of  a  member  from  a  club  under  a  by- 
law, see  Commonwealth  v.  Union 
League,  135  Pa.  St.  301  (1890).  An 
action  is  not  maintainable  to  compel 
an  unincorporated  voluntary  political 
association  to  admit  a  person  to  mem- 
bership. McKane  v.  Adams,  123  N.  Y. 
609  (1890).  Such  organizations  as 
chambers  of  commerce  sometimes  pro- 
vide for  forfeiture  of  membership  for 
non-payment  of  dues,  and  such  pro- 
vision is  legal.  The  corporation  may, 
however,  sue  for  its  dues  instead  of 
forfeiting  the  membership.  Denver, 
etc.  Commerce  i;.  Green,  8  Colo.  App. 
420  (1896).  As  to  expulsion  of  mem- 
bers from  unincorporated  associations, 
see  Otto  V.  Journeymen  Tailors'  Union, 
75  Cal.  308  (1888).  See  also  §  4a, 
swpra. 


1468 


CH.  XXIX.] 


TRUSTS,    ETC. 


504. 


may  pass  upon  the  question  of  the  jurisdiction  of  the  board  of  directors 
to  expel  a  member,  and  also  as  to  whether  there  was  any  evidence  at 

chaser  takes  nothing.  Lowenberg  v. 
Greenebaum,  99  Cal.  162  (1893).  The 
seat  of  a  member  of  an  exchange  may 
be  reached  by  judgment  creditors  of 
the  owner,  although  the  by-laws  pro- 
vide otherwise.  Habenieht  v.  Lissak, 
78  Cal.  351  (1889).  Members  of  a 
board  of  trade  who  agree  in  writing 
to  abide  by  the  rules  are  bound  by  one 
of  the  rules  providing  for  arbitration. 
Pacaud  v.  Waite,  218  111.  138  (190.5). 
Where,  under  a  by-law  of  a  board  of 
trade,  differences  between  members  are 
arbitrated,  a  court  of  equity  may 
review  the  decision 'in  regard  to  the 
measure  of  damages.  Ryan  v.  Cudahy, 
157  111.  108  (1895).  A  fund  accumu- 
lated by  an  exchange  under  its  charter, 
for  the  benefit  of  the  widows  and  fam- 
ilies of  deceased  members,  cannot,  by 
an  amendment  of  the  by-laws,  be 
distributed  among  the  members. 
Parish  v.  New  York,  etc.  Exchange, 
169  N.  Y.  34  (1901).  A  discharge 
under  the  bankruptcy  act  puts  an 
end  to  the  lien  of  members  of  an 
exchange  upon  the  seat  of  the  bank- 
rupt for  debts  due  to  such  members. 
State  V.  Chamber  of  Commerce,  etc., 
77  Minn.  308  (1899).  A  telegraph 
company  is  not  bound  to  furnish  stock 
exchange  quotations  to  a  person  where 
the  stock  exchange  has  ordered  the 
telegraph  company  not  to  furnish 
quotations  to  that  person,  and  the 
contract  between  the  stock  exchange 
and  the  telegraph  company  required 
the  latter  to  furnish  quotations  to 
only  such  persons  as  the  stock  exchange 
approved,  the  stock  exchange  being 
a  voluntary  association  and  not  a 
corporation.  Matter  of  Renville,  46 
N.  Y.  App.  Div.  37  (1889).  The 
New  York  Stock  Exchange,  being  a 
private,  unincorporated  association, 
may  give  to  one  telegraph  company 
the  exclusive  right  to  have  its  tele- 
graph instruments  and  telegraph  appa- 
ratus on  the  floor  of  the  exchange  to 
collect  and  distribute  quotations,  and 
cannot  be  compelled  to  extend  the 
same  facilities  to  a  competing  tele- 
graph company.  Commercial  Tel.  Co. 
V.  Smith,  47  Hun,  494  (1888) ;  Wilson 


execution  on  a  seat  in  an  exchange, 
see  Bowen  v.  Bull,  12  N.  Y.  Supp.  325 
(1890) ;  Powell  v.  Waldron,  89  N.  Y. 
328  (1882) ;  Ritterband  v.  Baggett,  42 
N.  Y.  Super.  Ct.  556  (1877);  Lond- 
heim  v.  White,  67  How.  Pr.  469  (1884). 
A  seat  in  a  stock  exchange  owned  by 
a  bankrupt  vests  in  the  trustee  and 
may  be  sold  by  him.  Page  v.  Edmunds, 
187  U.  S.  596  (1903).  A  stock 
exchange  seat  is  property,  and  may  be 
reached  by  a  trustee  in  bankruptcy. 
Matter  of  Grant,  132  N.  Y.  App.  Div. 
739  (1909).  A  bankrupt  broker's 
seat  in  the  New  York  Stock  Exchange 
is  subject  to  his  debts  due  from  him 
on  the  exchange  to  be  passed  upon  by 
the  tribunal  provided  by  the  exchange 
itself.  Re  Currie,  185  Fed.  Rep.  263 
(1911).  The  assignee  of  a  stock 
exchange  seat  takes  it  subject  to  the 
rules  of  the  exchange  as  to  debts  of 
the  assignor  to  other  members  of  the 
exchange  having  precedence.  Shan- 
non V.  Cheney,  1.56  Cal.  567  (1909). 
A  seat  in  a  stock  exchange  is  property 
and  is  subject  to  an  inheritance  tax. 
Matter  of  Hellman,  174  N.  Y.  254 
(1903).  A  stock  exchange  seat  is  not 
taxable  in  Maryland.  Mayor,  etc. 
V.  Johnston,  96  Md.  737  (1903).  A 
stock  exchange  seat  may  be  pledged 
to  secure  a  loan  and  such  pledge  need 
not  be  recorded.  Upon  the  death  of 
the  pledgor,  the  stock  exchange  has 
no  right  to  pay  the  proceeds  of  the 
sale  of  the  seat  to  his  administrator, 
where  notice  of  the  pledge  had  been 
given.  Nashua  Sav.  Bank  v.  Abbott, 
181  Mass.  531  (1902).  A  seat  in  the 
exchange  is  property  which  may  be 
reached  by  creditors.  But,  if  an 
assignee  in  bankruptcy  refuses  to  take 
it  and  pay  the  dues,  the  bankrupt  who 
pays  them  may  retain  the  seat.  Spar- 
hawk  V.  Yerkes,  142  U.  S.  1  (1891). 
It  is  legal  for  an  exchange  to  have  and 
enforce  a  by-law  providing  that  the 
seat  of  a  member  shall  be  sold  in  case 
of  his  failure  to  fulfill  his  contracts. 
Rorke  v.  San  Francisco  Stock,  etc. 
Board,  99  Cal.  196  (1893).  A  seat 
in  the  stock  exchange  cannot  be  sold 
under    levy    of    execution.     The    pur- 


1469 


§504.] 


TRUSTS,    ETC. 


[CH.  XXIX. 


all  justifying  the  expulsion.^  Where  the  charter  of  a  mutual  protective 
corporation  does  not  provide  for  expulsion,  and  the  corporation  has 
a  surplus  fund  in  its  treasury,  the  power  of  expulsion  does  not  exist 
unless  the  member  has  been  guilty  of  some  infamous  offense  or  has 
done  some  act  tending  to  the  destruction  of  the  society.^ 

In  corporations  having  a  capital  stock  no  power  of  expulsion  can 
be  exercised  unless  expressly  conferred  by  the  charter  or  by  statute.^ 

A  member  who  has  been  unjustly  expelled  may  have  mandamus 
to  compel  the  corporation  to  restore  him  to  membership.^    Accord- 


V.  Commercial  Tel.  Co.,  18  N.  Y.  St. 
Rep.  78  (1888).  The  rule  of  a  board 
of  trade  that  the  members  shall 
charge  a  uniform  and  fixed  commission, 
and  shall  not  deal  in  grain  outside  of 
the  exchange,  is  not  a  combination 
in  restraint  of  trade.  State  v.  Duluth 
Board  of  Trade,  107  Minn.  506  (1909). 
1  People  V.  New  York  Produce 
Exch.,  149  N.  Y.  401  (1896).  See  also 
Re  Haebler,  149  N.  Y.  414  (1896), 
holding  that  a  by-law  giving  the 
board  of  managers  power  to  discipline 
members  is  legal.  A  stock  exchange 
may  expel  a  member  who  does  not 
fulfill  his  contracts  made  within  the 
exchange,  due  notice,  etc.,  being  given 
to  him  in  the  matter.  Le^\^s  v.  Wil- 
son, 121  N.  Y.  284  (1890).  Stock 
exchanges  cannot  expel  members  for 
carrying  cases  into  courts  instead  of 
arbitrating.  People  v.  New  York 
Cotton  Exch.,  8  Hun,  216  (1876).  As 
to  the  power  of  a  board  of  trade  to  expel 
a  member,  see  Pitcher  v.  Chicago 
Board  of  Trade,  121  111.  412  (1887). 
As  to  the  expulsion  of  a  member  from 
the  New  York  Stock  Exchange,  see 
Belton  V.  Hatch,  109  N.  Y.  593  (1888). 
The  courts  will  not  review  the  expul- 
sion of  a  member  from  the  stock 
exchange,  an  unincorporated  associa- 
tion, unless  it  is  shown  that  the  com- 
mittee has  no  jurisdiction  of  the  sub- 
ject or  that  it  did  not  follow  the 
procedure  required  by  the  constitution 
of  the  association.  The  court  will  not 
reverse  the  decision  unless  there  was 
a  total  absence  of  evidence  warranting 
it  or  the  proceedings  were  contrary  to 
natural  justice.  Young  v.  Eames,  78 
N.  Y.  App.Div.  229  (1903);  aff'd, 
181  N.  Y.  542.  See  also  p.  1471, 
infra. 


2  Weiss  V.  Musical,  etc.  Union,  189 
Pa.  St.  446  (1899). 

3  Evans  v.  Philadelphia  Club,  50  Pa. 
St.  107  (1865);  State  v.  Chamber  of 
Commerce,  20  Wis.  63  (1865);  also 
State  V.  Milwaukee  Chamber  of  Com- 
merce, 47  Wis.  670  (1879).  In  Dick- 
enson V.  Milwaukee  Chamber  of  Com- 
merce, 29  Wis.  45  (1871),  it  is  held 
that  there  may  be  a  lawful  expulsion 
under  a  valid  by-law. 

Expulsion  by  virtue  of  a  by-law 
has  been  held  to  be  unlawful.  People 
V.  Saint  Franciscus  Ben.  Soc,  24  How. 
Pr.  216  (1862) ;  People  v.  Mechanics' 
Aid  Soc,  22  Mich.  86  (1870);  Green 
V.  African  Meth.  Epis.  Soc,  1  Serg.  & 
R.  (Pa.)  254  (1815).  A  resolution 
spread  upon  the  corporate  records 
unjustly  expelling  a  member  is  a  libel, 
and  the  member  offering  the  resolu- 
tion is  liable  to  an  action  thereupon. 
Fawcett  v.  Charles,  13  Wend.  473 
(1835).  Cf.  Adley  v.  Whitstable  Co., 
19  Ves.  Jr.  304  (1815) ;  Chase  v.  East 
Tennessee,  etc.  R.  R.,  5  Lea  (Tenn.), 
415  (1880).  It  is  doubtful  whether  a 
stock  corporation  may  impose  a  fine 
upon  the  stockholders  for  a  violation 
of  its  by-laws.  Monroe,  etc.  Assoc,  v. 
Webb,  40  N.  Y.  App.  Div.  49  (1899). 
See  also  §  4a,  supra. 

*  Black,  etc.  Soc.  v.  Vandyke,  2 
Whart.  (Pa.)  309  (1837);  Common- 
wealth V.  German  Soc,  15  Pa.  St.  251 
(1850) ;  People  v.  Saint  Franciscus 
Ben.  Soc,  24  How.  Pr.  216  (1862); 
State  V.  Carteret  Club,  40  N.  J.  L.  295 
(1878) ;  People  v.  Erie  Medical  Soc, 
32  N.  Y.  187  (1865);  People  v.  New 
York  Ben.  Soc,  3  Hun,  361  (1875); 
Medical,  etc.  Soc.  v.  Weatherly,  75 
Ala.  248  (1883).  Mandamus  does  not 
lie   to   compel   the   New   York  Stock 


1470 


CH.  XXIX.]  TRUSTS,    ETC.  [§  504. 

ingly,  where  a  corporate  body  strikes  off  the  name  of  one  of  its  members 
without  giving  him  previous  notice  of  its  intention  so  to  do,  and  affording 
him  opportunity  to  be  heard  in  his  own  defense,  a  mandamus  to  restore 
will  be  granted;^  and  an  injunction  lies  to  restrain  a  board  of  brokers 
from  irregularly  expelling  one  of  their  members.^  Such  organizations, 
however,  as  chambers  of  commerce  sometimes  provide  for  forfeiture  of 
membership  for  non-payment  of  dues,  and  such  provision  is  legal.  The 
corporation  may  sue  for  its  dues  instead  of  forfeiting  the  membership.^ 
Where  the  expulsion  is  regular  and  authorized  by  the  charter  or 
statute  it  is  conclusive,  and  mandamus  will  not  lie.'*  A  court  of  equity 
has  no  inherent  absolute  power  to  grant  an  interlocutory  injunction 
against  a  member  of  a  voluntary  association  being  suspended.^  A 
member  of  an  unincorporated  association  who  has  been  illegally  expelled 
therefrom  may  sue  for  damages  and  need  not  resort  to  a  mandamus 
to  be  reinstated,  and  such  damages  may  include  loss  sustained  by  being 
deprived  of  the  use  or  enjoyment  of  membership  and  also  may  be  for 
mental  suffering.^  An  act  of  expulsion  cannot  be  impeached  or  attacked 
collaterally.^  At  common  law  there  were  three  causes  for  expulsion : 
where  the  member  was  guilty  of  an  infamous,  indictable  offense;  or 
guilty  of  an  offense  against  his  duty  as  a  corporator ;  or  of  an  offense 
compounded  of  these  two.^  The  remedy  for  expulsion  from  a  corpora- 
tion not  for  profit  is  at  law  and  not  in  equity.^ 

Exchange,  a  voluntary  unincorporated  the  corporation,  grant  an  injunction  to 

association,     to    reinstate    a    member  restrain  a  corporation  from    initiating 

whom    it    has    expelled.     Matter    of  new    members    when    no    danger    of 

Weidenfeld  v.  Keppler,  84  N.  Y.  App.  pecuniary  loss  is  shown  as  likely   to 

Div.  235  (1903) ;  aff'd,  176  N.  Y.  562.  result  to  the  petitioner  from  such  ini- 

As  to  the  damages  to  be  paid  to  a  mem-  tiation.     Thompson  v.  Tammany  Soc, 

ber  who  has  been  unlawfully  expelled  17  Hun,  305  (1879). 

and   is   reinstated   by   the   com-t,    see  ^  Denver  Chamber,  etc.  v.  Green,  8 

People    V.    Musical,    etc.    Union,    118  Colo.  App.  420  (1896). 

N.  Y.  101  (1889).  "  Commonwealth  v.  Pike  Ben.  Soc, 

1  Delacy  v.  Neuse  River  Nav.  Co.,  1  8  Watts  &  S.  247    (1844) ;    People   v. 
Hawks     (N.     C),    274     (1821).     The  Fire  Underwriters,  7  Hun,  248  (1876). 
member    must    have    a    fair    hearing.  ^  Bachman  v.  Harrington,  184  N.  Y. 
Southern  Plank-road  Co.  v.  Hixon,  5  458  (1906). 

Ind.  165  (1854).  e  Lahiff  v.  St.  Joseph's,  etc.  Society, 

2  Leech  v.   Harris,  2  Brewst.    (Pa.)     76  Conn.  648  (1904). 

571    (1869) ;   Hutchinson  v.   Lawrence  ^  Black,    etc.    Soc.    v.    Vandyke,    2 

(N.  Y.  Supr.  Ct.),  N.  Y.  D.  Reg.,  Feb.  Whart.    (Pa.)    309    (1837) ;    Common- 

8,    1887.     Cf.    Italian    Union    Soc.    v.  wealth    v.    Pike    Ben.    Soc,    8    Watts 

Montedonico,   4   Am.    &    Eng.    Corp.  &   S.    (Pa.)   247    (1844);    Society   for 

Cas.  22  (1884).     But  not  as  against  a  Visitation,  etc.   v.  Meyer,  52   Pa.  St. 

medical     society.     Gregg     v.     Massa-  125,  131    (1866).     Cf.  Commonwealth 

chusetts  Medical  Soc,  111  Mass.  185  v.    Oliver,  2  Pars.   Sel.   Cas.  420,  426 

(1872).     So,  also,  the  courts  will  not,  (1849). 

upon  the  application  of  a  member  of  » Bagg's    Case,    11    Coke,    936,    99 

9  AUen  V.  Chicago,  etc.  Assoc,  232  lU.  458  (1908). 
1471 


§  504.] 


TRUSTS,    ETC. 


[CH.  XXIX. 


A  mutual  insurance  company  may  pay  dividends.^  A  joint-stock 
company,  although  it  exercises  the  power  to  issue  stock,  the  same 
as  a  corporation,  yet  when  organized  for  the  purpose  of  transacting 
any  lawful  business,  is  itself  a  lawful  means  of  carrying  on  business.'^ 

The  earlier  cases  declaring  that  joint-stock  companies  were  illegal 
were  so  decided  largely  because  of  the  Bubble  Act,  which  was  in  force 
from  1720  to  1826.^ 


(1616);  Rex  v.  Liverpool,  2  Burr, 
723,  732  (1759);  State  v.  Milwaukee 
Chamber  of  Commerce,  20  Wis.  63 
(1865) ;  People  v.  New  York  Comm. 
Assoc,  18  Abb.  Pr.  271  (1864) ;  People 
V.  Chicago  Board  of  Trade,  45  111.  112 
(1867).  Cf.  Smith  v.  Smith,  3  Desauss. 
(S.  C.)  557  (1813),  where  an  expulsion 
for  misconduct  was  sustained ;  Wool- 
sey  V.  Independent  Order,  etc.,  1 
Am.  &  Eng.  Corp.  Cas.  172  (1883); 
Fisher  v.  Keane,  L.  R.  11  Ch.  D.  353 
(1878) ;  Hopkinson  v.  Exeter,  L.  R. 
5  Eq.  63  (1867) ;  Dawkins  v.  Antrobus, 
L.  R.  17  Ch.  D.  615  (1881);  Gardner 
V.  Fremantle,  19  W.  R.  2.56  (1871); 
People  V.  New  York  Cotton  Exch.,  8 
Hun,  216  (1876) ;  Dean  v.  Bennett,  L. 
R.'6  Ch.  App.  489  (1871).  In  Sturges 
V.  Chicago  Board  of  Trade,  86  111.  441 
(1877),  it  was  held  that  the  remedy 
of  the  expelled  member  was  at  law, 
and  not  in  equity.  But  see  State  v. 
Lusitanian,  etc.,  Soc,  15  La.  Ann.  73 
(1860) ;  Wood  v.  Woad,  L.  R.  9  Exch. 
190  (1874);  Bostwick  v.  Detroit  Fu-e 
Dept.,  40  Mich.  513  (1883);  Hassler 
V.  Philadelphia  JNIusical  Assoc,  14 
PhUa.  233  (1880);  Anacosta  Tribe  v. 
Murbach,  13  Md.  91  (1858) ;  State  v. 
Georgia  Med.  Soc,  38  Ga.  608  (1869) ; 
Washington  Ben.  Soc.  v.  Baeher,  20 
Pa.  St.  425  (1853) ;  Riddell  v.  Harmony 
Fire  Co.,  8  Phila.  310  (1871) ;  State  v. 
Adams,  44  Mo.  570  (1869);  Harm- 
stead  V.  Washington  Fire  Co.,  8  Phila. 
331  (1871);  Commonwealth  v.  Philan- 
thropic Soc,  5  Binn.  (Pa.)  486  (1813) ; 
Commonwealth  v.  St.  Patrick  Benev. 
Soc,  2  Binn.  (Pa.)  448  (1810) ;  People 
V.  Fu-e  Underwriters,  7  Hun,  248  (1876). 
Upon  the  general  question  of  the 
power  to  expel  members,  see  Ang.  & 
A.  Corp.,  §  410  et  seq.;  2  Kent,  Com. 
297.  Where  the  by-laws  specify  the 
grounds  for  expelling  members  from 
the  association  they  cannot  be  expelled 


for  other  reasons.    Dingwall  v.  Amalga- 
mated, etc.  Ry.,  4  Cal.  App.  565  (1906). 

1  In  McKean  v.  Biddle,  181  Pa.  St. 
361  (1897),  where  a  mutual  insurance 
company  for  one  hundred  and  thirty- 
two  years  had  not  paid  dividends,  but 
had  accumulated  a  surplus  of  over 
$4,000,000,  the  court  held  that  the 
company  might  resume  the  payment 
of  dividends.  The  court  also  held 
that  every  corporation  has  the  inherent 
right  to  declare  dividends. 

2  "It  is  too  late  to  contend  that 
partnerships  with  transferable  shares 
are  illegal  in  this  commonwealth. 
.  .  .  The  grounds  upon  which  they 
were  formerly  said  to  be  illegal  in 
England,  apart  from  statute,  have 
been  abandoned  in  modern  times." 
Phillips  V.  Blatchford,  137  Mass.  510 
(1884).  In  the  case  Merchants' 
National  Bank  v.  Wehrmann,  202  U.  S. 
295  (1906),  the  court  said:  ."As  the 
supreme  court  of  Ohio  assumes  such 
partnerships  and  certificates  to  be  valid, 
we  assume  them  to  be."  "  These 
companies,  being  consonant  with  the 
wants  of  a  growing  and  wealthy  com- 
munity, have  forced  their  way  into 
existence,  whether  fostered  by  the  law 
or  opposed  to  it."  Greenwood's  Case, 
3  De  G.,  M.  &  G.  459,  477  (1854) ; 
Townsend  v.  Goewey,  19  Wend.  424 
(1838).  A  laboring  men's  association 
for  the  purpose  of  opposing  capitalists 
has  been  upheld.  Snow  v.  Wheeler, 
113  Mass.  179  (1873). 

3  Enacted  6  Geo.  I,  c  18,  §  18 ; 
repealed,  6  Geo.  IV,  c  91.  In  Massa- 
chusetts there  has  been  an  agitation 
against  established  express  trusts  or 
voluntary  associations  in  that  state  as 
being  objectionable  for  the  same  rea- 
sons that  caused  the  enactment  of  the 
"Bubble  Act,"  but  Mr.  Chandler's 
treatise  on  "  Express  Trusts  Under 
the  Common  Law,"  published  in  1912, 


1472 


CH.  XXIX.] 


TRUSTS,    ETC. 


[§  504. 


Very  high  English  authority,  after  a  thorough  review  of  the  EngUsh 
cases,  gives  the  opinion  that  at  common  law  joint-stock  associations 
are  legal. ^ 

In  Louisiana  and  formerly  in  Illinois  a  contrary  conclusion  was 
arrived  at,-  but  in  Illinois  the  rule  is  now  undoubtedly  different.^ 


effectively  answered  all  of  those  con- 
tentions. 

1  Quoted  and  approved  in  Spots- 
wood  V.  Morris,  12  Idaho,  360  (1906). 
In  England  there  formerly  was  doubt 
upon  this  subject,  but  this  doubt  was 
due  to  the  "Bubble  Act."  This  stat- 
ute was  passed  in  1720  for  the  purpose 
of  suppressing  unincorporated  com- 
panies. At  that  time  they  were 
regarded  as  "dangerous,  mischievous, 
and,  in  short,  public  nuisances."  But 
the  statute  was  repealed  in  1826,  and 
Lindley,  the  great  English  judge  and 
jurist,  says  of  it:  "Juster  views  of 
political  economy  and  of  the  limits 
within  which  legislative  enactments 
should  be  confined  have  led  to  the 
repeal  of  the  statute  in  question, 
which,  though  deemed  highly  bene- 
ficial half  a  century  ago,  probably 
gave  rise  to  much  more  mischief  than 
it     prevented."     Lindley,      Company 


Law  (5th  ed.),  p.  132.  Moreover,  a 
careful  examination  of  the  EngHsh 
authorities  up  to  the  present  day 
shows  conclusively  that  at  common 
law  an  unincorporated  joint-stock  asso- 
ciation is  legal  and  vaUd.  Lindley, 
Company  Law  (5th  ed.),  p.  133.  Cf. 
Greene  v.  People,  21  N.  E.  Rep.  605 
(111.  1889).  In  a  thorough  and 
exhaustive  note  on  this  subject. 
Judge  Lindley  refers  to  Rex  v.  Dodd, 
9  East,  516  (1808),  holding  that  a 
company  with  a  prospectus  limiting 
the  liability  of  subscribers  is  illegal, 
as  a  trap  to  ensnare  the  unwary ; 
Josephs  V.  Pebrer,  3  B.  «&  C.  639  (1825), 
holding  that  unincorporated  companies 
with  transferable  shares  are  illegal ; 
and  Buck  v.  Buck,  1  Campb.  547 
(1808),  and  Rex  v.  Stratton,  1  Campb. 
549,  n.  (1809),  to  same  effect.  He 
states  that  Kinder  v.  Taylor,  Coll. 
Partn.  917  (2d  ed.,  1825) ;  s.  c,  3  L. 


^  See  §  622/i,  infra;  Greene  v.  Peo-  shares  is  legal  in  Illinois  and  a  member 

pie,   21   N.    E.    Rep.   605    (111.    1889).  of  it  cannot  have  it  wound  up  before 

The   highest   court   in   Louisiana   has  the  time  of  its  duration  as  fixed  by  its 

held    that    the    American    Cotton   Oil  articles   of   association   expires.     Hos- 

Trust     was     illegal     and     disqualified  sack    v.    Ottawa,    etc.    Ass'n,    244    111. 

from  doing  business  within  that  state.  274    (1910).     It  is  legal  for  an  unin- 

The  court  held  that,  under  the  stat-  corporated  association  to  use  what  ap- 

utes  of  Louisiana,  an  unincorporated  parently  is   a   corporate   name.     Peo- 

joint  stock  association  is  illegal;  that  pie  v.  Rose,  219  III.  46   (1905).     The 

a  "trust"  was  one  kind  of  an  unin-  secretary  of  state  will  not  be  ordered 

corporated  joint-stock  association,  and  by   mandamus   to   file  a   certificate  of 

consequently   that   it   was  illegal  and  incorporation    of    a    company    to    be 

void.     State  of  Louisiana  v.  American  known  as  the  "LTnited  States  Express 

Cotton  Oil  Trust,  1  Ry.  &  Corp.  L.  J.  Company"    where    there    is    an   unin- 

509    (1887),    the    court    saying:     "A  corporated  association  which  has  used 

joint-stock  company  is  not    known  to  that    name   for    many   years.     People 

the    laws    of    Louisiana."     A    mutual  v.     Rose,     219     III.     46     (1905).     The 

insurance  company  may  be  suflficiently  Illinois    statute    rendering    personally 

a     corporation,    or    assuming    to    be  liable  directors  and  officers  of  a  pre- 

such,  to  sustain  quo  warranto  against  tended     corporation     which     has     not 

it.     Greene    v.    People,    150    111.    513  complied   with  the   statutes   does  not 

(1894) ;   State   v.   Ackerman,    51    Ohio  apply  to  an  unincorporated  joint-stock 

St.  163  (1894).  association.     Gay  v.  Kohlsaat,  223  111. 

'  An  unincorporated  association  for  260  (1906). 
business    purposes    with    transferable 

(93)  1473 


§504. 


TRUSTS,    ETC. 


CH.  XXIX. 


The  real  estate  of  an  unincorporated  association  is  generally  held 
in  the  names  of  trustees  for  its  benefit.^    A  deed  of  land  to  certain  grant- 

J.    Ch.    69 ;    Duvergier   v.    Fellows,    5  and  even  a  consolidation  with  another 

Bing.  248  (1828) ;  aff'd,  10  B.  &  C.  826,  association  does  not  disturb  this  lien, 

and   BlundeU   v.  Winsor,   8   Sim.   601  Crawford   v.    Gross,    140   Pa.    St.   297 

(1837),  contained  dicta  only,  so  far  as  (1891).     A  conveyance  of  land  to  cer- 

they  passed  on  the  legality  of  these  tain    individuals    as    trustees    for    the 

companies.      The       following       cases  members   of   an   unincorporated   asso- 

clearly  estabUsh  the  legality  of  joint-  elation  is  not  void  by  the  statute  of 

stock  associations  :     Harrison  v.  Heath-  uses  and  trusts.     Turner  v.  Ontonagon, 

orn,  6  Man.  &  G.  81    (1843) ;   Garrard  etc.  Co.,  77  Mich.  603  (1889).     In  mat- 

V.  Hardey,  5  Man.  &  G.  471   (1843) ;  ters  of  deeds,  usage  and  long  lapse  of 

Barclay's  Case,  26  Beav.  177  (1858) ;  time  may  validate  deeds  made  out  by 

Re  Aston,  27  Beav.  474  (1859) ;  Grise-  an    unincorporated    association    as    a 

wood's  Case,  4  De  G.  &  J.  544  (1859) ;  corporation.     Baeder   v.   Jennings,    40 

Sheppard  v.  Oxenford,  1  K.  &  J.  491  Fed.     Rep.     199     (1889).     Where    an 

(1855) ;   Rex   v.   Webb,    14   East,   406  unincorporated  association  owns  land 

(1811);  Walburn  v.  Ingilby,   1  M.  &  which  is  held  in  trust  for  it  by  indi- 


K.  61  (1833) ;  and  see  Pratt  v.  Hutchin- 
son,   15   East,   511    (1812);   Ellison   v. 


viduals,  it  may,  upon  becoming  incor- 
porated, compel  the  trustees  to  deed 


Bignold,    2    Jac.    &    W.    510    (1821);    to     it     the     land.     Organized     Labor 
Nockels   V.    Crosby,   3   B.    «fc    C.    814    Hall  t;.  Gebert,  48  N.  J.  Eq.  393  (1891). 


(1825) ;  Kempson  v.  Saunders,  4  Bing. 
5    (1826);    Brown    v.    Holt,    4   Taunt. 


If  a  trustee  who  holds  land  for  the 
benefit    of    a    corporation    commits    a 


587    (1812).     And   the   learned   jurist  breach  of  trust,  any  stockholder  may 

comes  to  this  conclusion:     "The  case  cause    him    to    be    removed.      Fisk    v. 

of  BlundeU   v.   Winsor,   always  reUed  Patton,  7  Utah,  399    (1891).     A  new 

upon  as  an  authority  by   those  who  unincorporated      association      cannot 

contend     that     such    a    company    is  claim   the   land   of  the   one    which   it 

illegal,  has  never  met  with  approba-  succeeds,  where  the  members  are  not 

tion  from  the  bench,  nor  has  it  ever  the  same.     Allen  v.  Long,  80  Tex.  261 

been     followed.     Upon     the     whole,  (1891).     Although  the  association  has 

therefore,  it  appears  that  there  is  no  been    dormant    for    many    years,    yet 

case  deciding  that  a  joint-stock  com-  a  new  association  formed  of  part  of 

pany  with  transferable  shares,  and  not  the  members  of  the  old  cannot  convey 

incorporated     by    charter    or     act    of  the  land  of  the  old  one.     Allen  v.  Long, 

parliament,  is  illegal  at  common  law;  80   Tex.   261    (1891).     A   deed   to   an 

that   opinions   have   nevertheless   dif-  unincorporated  association  vests  title 

fered    upon    this    question ;    that    the  in   it   as   soon   as   it   is   incorporated, 

tendency  of  the  courts  was  formerly  Clifton,  etc.  Co.  v.  Randell,  82  Iowa, 

to     declare     such     companies    illegal;  89    (1891).     Cf.   ch.    XLI,    infra.     An 

that   this   tendency  exists  no  longer;  absolute   deed   to   an  individual   may 

and  that  an  unincorporated  company  nevertheless  be  construed  as  in  trust, 

with   transferable   shares   will   not   be  where  there  is  a  declaration  in  writing 

held  illegal  at  common  law  unless  it  by  him  that  he  holds  it  in  trust  for  a 

can  be  shown  to  be  of  a  dangerous  and  church.     Reorganized  Church,  etc.  v. 

mischievous  character,  tending  to  the  Church  of  Christ,  60  Fed.   Rep.  937 

grievance   of   her   majesty's    subjects.  (1894).     If  the  trustees  have  no  power 

The  legality  at  common  law  of  such  to  sell  the  land,  except  on  the  vote  of 

companies     may     therefore     be     con-  the  stockholders,  a  conveyance  with- 

sidered  as  finally  established."  out    that   consent   is   void.     WilUs    v. 

^  When  an  association  holds  land  in  Greiner,    26    S.    W.    Rep.    858    (Tex. 

the  name  of  trustees  for  the  benefit  1894).     Where  an  unincorporated  asso- 

of    certificate-holders,   the    certificates  ciation  pays  for  land  and  takes  title 

constitute    an    equitable    lien    on    the  in  the  name  of  a  corporation,  the  latter 

proceeds  from  the  sale  of  the  lands,  may  be  compelled  to  convey  the  land 

1474 


CH.  XXIX.] 


TRUSTS,    ETC. 


[§504. 


ees  as  trustees  for  an  unincorporated  association  is  not  void,  but  is  up- 
held by  the  court.  The  trust  is  an  active  one,  and  is  not  executed  at 
once  by  force  of  the  statute.^  An  unincorporated  joint-stock  associa- 
tion to  buy,  lease,  and  sell  land  is  legal,  even  though  the  title  to  the 
land  is  held  in  the  name  of  trustees  who  cannot  act  except  upon  a  three 
fourths  vote  of  the  shareholders.  A  shareholder  cannot  have  a  receiver 
appointed  and  the  business  wound  up  on  the  ground  of  such  an  asso- 
ciation being  illegal.^  The  agreement  under  which  an  unincorporated 
joint-stock  association  is  formed  may  provide  that  the  title  to  land  pur- 
chased by  the  organization  shall  be  taken  by  a  trustee  and  shall  not  be 
sold  except  with  the  concurrence  of  the  shareholders.^  Shares  of  stock 
in  an  association  are  personal  property,  even  though  the  property  of 
the  association  consists  of  real  estate.''  A  deed  to  persons  as  trustees, 
the  beneficiaries  being  the  members  of  an  association,  transfers  title, 
and  the  New  York  statute  does  not  vest  the  title  in  the  beneficiaries, 
the  trustees  being  beneficiaries  also.^  The  English  cost-book  mining 
companies  were  organized  on  this  principle.^    A  deed  or  devise  to  an 


to  the  former,  upon  the  former  becom- 
ing incorporated.  Church,  etc.  v. 
Algemeine,  etc.  31  N.  Y.  App.  Div. 
133  (1898) ;  aflf'd,  164  N.  Y.  606.  It 
is  well  settled  that  the  shareholders 
in  an  unincorporated  association  can- 
not convey  or  dedicate  to  the  public 
any  land  that  is  held  by  trustees  for 
its  benefit.  Ward  v.  Davis,  3  Sandf. 
502  (1850).  The  interest  of  one  of  the 
cestuis  que  trust  of  such  a  trust,  con- 
sisting of  real  estate,  is  personalty, 
and  descends  as  such  upon  his  death. 
Mallory  v.  Russell,  71  Iowa,  63  (1887). 
A  scheme  by  which  shares  are  sold,  each 
share  representing  a  lot  in  a  tract  of 
land,  and  upon  a  sale  of  all  the  shares 
the  shareholders  elect  a  board  of  direc- 
tors, who  sell  at  auction  the  best  lots 
and  distribute  the  remaining  lots  by 
the  remaining  shareholders  drawing 
the  remaining  lots  "by  lot,"  is  not  a 
lottery  scheme  prohibited  by  statute. 
Elder  v.  Chapman,  176  111.  142  (1898). 
iHart  V.  Seymour,  147  111.  598 
(1893). 

2  Howe  V.  Morse,  174  Mass.  491 
(1899). 

3  Spotswood  V.  Morris,  12  Idaho, 
360  (1906). 

<  Matter  of  Jones,  172  N.  Y.  575 
(1902).  Even  though  the  property  of 
an    unincorporated    joint-stock    asso- 


ciation consists  of  real  estate,  yet  the 
stock  is  personal  property  and  cannot 
be  sold  under  an  execution  as  real 
estate.  In  re  Pittsburg,  etc.  204  Pa. 
St.  432  (1903). 

5  Iving  V.  Townshend,  141  N.  Y.  358 
(1894). 

« These  mining  companies  existed 
in  the  counties  of  Cornwall  and  Dev- 
onshire. They  were  first  heard  of  in 
the  courts  about  the  year  1850.  Their 
plan  of  reorganization  and  operation 
arose  from  custom.  Their  organiza- 
tion and  mode  of  business  were  as 
follows :  Many  persons,  desirous  of 
working  a  mine,  would  cause  the  title 
or  lease  thereto  to  be  taken  in  the 
names  of  one  or  more  persons  called 
trustees.  The  business  was  then  car- 
ried on  by  an  agent  called  a  "purser," 
or  by  a  board  of  managers  elected  by 
the  participants,  who  were  called  the 
"adventurers."  The  latter,  of  course, 
were  the  beneficiaries  of  the  "trust." 
Any  adventurer  had  a  right  to  trans- 
fer his  interest  to  a  transferee.  There 
was  no  fixed  capital  stock.  Calls  for 
money  were  made  on  the  adventurers, 
according  to  their  shares,  as  often  as 
it  was  needed.  For  a  full  statement 
of  the  character  of  these  mining  com- 
panies, see  Kittow  v.  Liskeard  Union, 
L.  R.  10  Q.  B.  7  (1874).     See  also  Re 


1475 


§504.] 


TRUSTS,    ETC. 


[CH.  XXIX. 


unincorporated  association  is  not  a  valid  conveyance  of  title.^     However, 
a  deed  dated  before  incorporation,  but  actually  delivered  after  incor- 


Bodmin,  etc.  Co.,  23  Beav.  370  (1857), 
holding  that  the  court  would  not  take 
judicial  notice  of  the  nature  of  a  cost- 
book  mining  company ;  Hybart  v. 
Parker,  4  C.  B.  (N.  S.)  209  (1858), 
holding  that  the  purser  could  not  sue 
at  law  on  an  unpaid  call ;  Re  Wrysgan, 
etc.  Co.,  28  L.  J.  (Ch.)  894  (1859),  as 
to  right  to  relinquish  shares,  also 
describing  the  functions  of  the  purser 
and  managing  directors ;  Johnson  v. 
Goslett,  18  C.  B.  728  (1856),  affirmed 
in  3  C.  B.  (N.  S.)  569  (1857),  giving  the 
full  terms  of  the  articles  of  agreement ; 
Thomas  v.  Clark,  18  C.  B.  662  (1856), 
where  the  court  said:  "Every  part- 
nership has  a  right  to  make  its  own 
regulations  as  to  the  mode  of  trans- 
ferring shares  or  interests  therein;" 
Re  Prosper,  etc.  Co.,  L.  R.  7  Ch.  286 
(1872),  relative  to  rights  upon  a 
resignation ;  Mayhew's  Case,  5  De 
G.,  M.  &  G.  837  (1854),  holding  that 
by  a  transfer  of  his  share  "the  liability 
of  the  transferrer  is  entirely  divested 
from  him  and  passes  to  the  transferee  ;" 
Re  Wrysgan  Co.,  5  Jur.  (N.  S.)  215 
(1859),  where  the  court  said:  "The 
various  phases  of  absurdity  which 
these  joint-stock  companies  display 
are  such  that  the  marvel  in  my  mind 
is  daily  increasing  how  any  man  can 
become  a  member  of  a  joint-stock 
company ;"  Northey  v.  Johnson,  19  L. 
T.  Rep.  (O.  S.)  104  (1852),  holding  that 
after  transfer  the  transferrer  is  not 
liable  for  the  debts  incurred. 

It  is  clearly  established  that  the " 
adventurers  in  a  cost-book  mining 
company  are  personally  and  individ- 
ually liable  as  partners  for  the  debts 
incurred  in  the  enterprise.  Peel  v. 
Thomas,  15  C.  B.  714  (1855) ;  Newton 
V.  Daly,  1  F.  &  F.  26  (1858) ;  Harvey 
V.  Clough,  8  L.  T.  Rep.  (N.  S.)  324 
(1863);  Tredwen  v.  Bourne,  6  M.  & 
W.  461  (1840);  Ellis  v.  Schmoeck,  5 
Bing.  521  (1829) ;  Lanyon  v.  Smith,  3 
B.  &  S.  938  (1863),  holding  a  trans- 
ferrer liable  for  debts  incurred  pre- 
vious to  the  transfer.  To  same  effect, 
Geake  v.  Jackson,  15  W.  R.  338  (1867). 
They  are  hable,  also,  to  indemnify 
the    directors    or    trustees.     Ex    parte 


Chippendale,  4  De  G.,  M.  &  G.   19, 

52  (1854).  See  also  Birch's  Case, 
2  De  G.  &  J.  10  (1857),  and  Fenn's 
Case,  4  De  G.,  M.  &  G.  285  (1854), 
where  the  members  who  had  exer- 
cised their  right  to  withdraw  were 
held  not  liable.  In  Hart  v.  Clarke,  6 
De  G.,  M.  &  G.  232  (1854),  an  ad- 
venturer compelled  the  company  to 
account  to  him  for  his  share  of  the 
profits.  The  adventurers  have  no 
interest  in  the  land,  and  consequently 
a  transfer  of  their  shares  is  not  a 
transfer  of  an  interest  in  land.  Spar- 
ling V.  Parker,  9  Beav.  450  (1846); 
PoweU  V.  Jessopp,  18  C.  B.  336  (1856) ; 
Hayter  v.  Tucker,  4  K.  &  J.  243  (1858). 
The  cost-book  mining  company  was 
frequently  spoken  of  as  a  species  of 
joint-stock  company.  Re  Wrysgan 
Co.,  5  Jur.  (N.  S.)  215  (1859) ;  Geake 
V.  Jackson,  15  W.  R.  338  (1867); 
Watson  V.  Spratley,  10  Exeh.  222 
(1854),  where  the  court  said:  "The 
interest  of  the  shareholder  in  the  great 
incorporated  joint-stock  companies,  ' 
and  in  the  smallest  mine  conducted 
upon  the  cost-book  principle,  is,  in  its 
essential  nature  and  quality,  identi- 
cal." For  an  American  mining  case 
applying  similar  principles,  see  Treat 
V.  Hiles,  68  Wis.  344  (1887). 

1  As  to  the  effect  of  a  deed,  grant,  or 
bequest  of  real  estate  to  an  unin- 
corporated association,  see  Webb  v. 
Weatherhead,  17  How.  576  (1854); 
Gerard,  Titles  to  Real  Estate  (3d  ed.), 
p.  420;  Owens  v.  Missionary  Soc,  14 
N.  Y.  380  (1856);  3  Washb.  Real 
Prop.  264  (4th  ed.) ;  Holmes  v.  Mead, 
52  N.  Y.  332  (1873) ;  Goesele  v.  Bime- 
ler,  5  McLean,  223  (1851);  s.  c,  10 
Fed.  Cas.  528;  aff'd,  14  How.  589; 
German  Land  Assoc,  v.  Scholler,  10 
Minn.  331  (1865) ;  Peabody  v.  Eastern 
Methodist  Soc,  87  Mass.  540  (1863) ; 
Towar  v.  Hale,  46  Barb.  361  (1866) ; 
1  Dart,  Vend.  &  P.  (5th  ed.)  21; 
Chapin  v.  Chicopee  Universalist  Soc, 
74  Mass.  580  (1857) ;  African  M.  E. 
Church  V.  Conover,  27  N.  J.  Eq.  157 
(1876) ;  Leonard  v.  Davenport,  58 
How.  Pr.  384  (1877);  Sherwood  v. 
American  Bible  Soc,  4  Abb.  App.  Dec. 


1476 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  504. 


poration  is  good.^  An  unincorporated  association  may  take  a  bequest.' 
A  bequest  to  a  supposed  corporation,  the  charter  of  which  has  expired, 
is  vaUd.^  In  New  York  it  is  held  that  a  devise  to  a  trustee  for  the  bene- 
fit of  an  unincorporated  association  is  invahd  at  common  law  because 
the  beneficiary  is  indefinite  and  uncertain  and  because  the  power  of 
alienation  is  unlawfully  suspended,  and  because  it  is  a  passive  trust 
which  fails  because  there  is  no  competent  cestui  que  trusts  But  in 
New  Jersey  a  different  rule  prevails  and  it  is  held  that  a  devise  of  real 
estate  to  an  unincorporated  association  does  not  fail.  The  title  descends 
to  the  heir  at  law,  who  holds  the  same  as  trustee  for  the  use  and  benefit 
of  the  association.^  A  devise  or  bequest  to  a  corporation  to  be  there- 
after created  is  valid. ^  A  deed  to  a  corporation  before  its  charter  was 
taken  out  may  be  accepted  after  the  charter  is  granted  and  is  valid, 
even  though  a  slightly  different  name  is  adopted  from  that  which  ap- 
pears in  the  deed.^  "  That  a  valid  devise  or  bequest  may  be  limited 
to  a  corporation  to  be  created  after  the  death  of  the  testator,  provided 
it  is  called  into  being  within  the  time  allowed  for  the  vesting  of  future 
estates  is  not  denied."  ^  In  general  a  deed  to  a  corporation  not  in  ex- 
istence is  void.^     But  where  promoters  pay  for  land  and  take  a  deed  in 


227  (1864) ;    McKeon  v.  Kearney,  57  ^  American  Bible  Soc.  v.  American 


How.  Pr.  349  (1878) ;  Gibson  v.  Mc- 
Call,  1  Rich.  L.  (S.  C.)  174  (1844); 
Byam  v.  Bickford,  140  Mass.  31 
(1885),  holding  that,  although  a  deed  to 
the  association  is  ineffectual,  yet  that  it 
passes  title  to  the  members  of  the  asso- 
ciation. They  cannot  take  by  devise 
in  New  York.  White  v.  Howard,  46 
N.  Y.  144  (1871) ;  Philadelphia  Bapt. 
Assoc.  V.  Hart,  4  Wheat.  1  (1819). 

1  San  Diego,  etc.  Co.  v.  Frame,  137 
Cal.  441  (1902).  A  grant  assigned  to  a 
corporation  before  it  is  incorporated 
takes  effect  upon  its  incorporation. 
Hecht  V.  Acme  Coal  Co.,  113  Pac.  Rep. 
786  (Wyo.  1911).  A  deed  to  a  cor- 
poration before  it  is  organized  is  not 
void,  but  is  valid  in  equity  and  conveys 
title  to  the  individuals  as  partners. 
Smith  V.  First,  etc.  Bank,  43  Tex.  Civ. 
App.  495  (1906).     CJ.  note  9  below. 

2  In  re  Winchester's  Estate,  133 
Cal.  271  (1901).  An  unincorporated 
association  may  be  made  the  recipient 
of  a  bequest.  Hadden  v.  Daudy,  51 
N.  J.  Eq.  154  (1893). 

3  Snider  v.  Snider,  70  S.  C.  555 
(1905). 

*  Murray  v.  Miller,  178  N.  Y.  316 
(1904). 


Tract  Soc,  62  N.  J.  Eq.  219  (1901), 
the  court  refusing  to  follow  the  New 
York  decisions  to  the  contrary. 

^  See  §  694,  infra. 

'  Sumter,  etc.  Co.  v.  Phoenix  Ins. 
Co.,  76  S.  C.  76  (1907). 

8  Tilden  v.  Green,  130  N.  Y.  29,  47 
(1891),  the  court  holding,  however, 
that  the  devise  should  be  to  the  cor- 
poration to  be  formed,  and  should  not 
be  in  trust  to  the  executors  to  con- 
vey to  such  corporation  when  formed 
if  the  executors  think  best.  See  also 
Burrill  v.  Boardman,  43  N.  Y.  254 
(1871) ;  Inglis  v.  Trustees  of  Sailors' 
Snug  Harbor,  3  Pet.  99  (1830). 

^  Provost  i'.  Morgan's,  etc.  R.  R.,  42 
La.  Ann.  809  (1890).  A  lease  to 
a  corporation  not  yet  organized  is 
void.  Utah,  etc.  Co.  v.  Keith,  18 
Utah,  464  (1899).  See  also  §  243, 
supra  and  note  1,  supra.  A  deed  to 
certain  persons  "as  incorporators"  of 
a  company  not  yet  incorporated  does 
not  vest  title  in  the  company  when 
incorporated.  McCandless  v.  Inland, 
etc.  Co.,  112  Ga.  291  (1900);  s.  c, 
115  Ga.  968.  A  statute  validating 
deeds  made  to  supposed  corpora- 
tions,   which    afterwards    become    in- 


1477 


§  505. 


TRUSTS,    ETC. 


CH.  XXIX. 


the  name  of  the  proposed  corporation,  the  vendor  cannot  claim  that 
the  deed  was  void,  even  though  the  corporation  was  not  actually 
organized  until  three  years  after  such  deed  was  given.^ 

The  question  of  whether  a  deed  to  a  de  facto  corporation  may  be 
questioned  by  any  one  other  than  the  state  is  considered  elsewhere.^  An 
unincorporated  association  may  enjoin  a  corporation  from  taking  its 
name  where  injury  is  shown. ^ 

§  505.  Conduct  of  hu^ness  and  meetings  —  Statutory  joint- 
stock  association.  —  There  is  an  essential  difference  between  a  joint- 
stock  company  as  it  exists  at  common  law  and  a  joint-stock  company 
having  extensive  statutory  powers  conferred  upon  it  by  the  state  within 
which  it  is  organized.  The  latter  kind  of  joint-stock  companies  are 
found  in  England  and  in  the  state  of  New  York.  To  such  an  extent 
have  these  statutory  powers  been  conferred  on  joint-stock  companies 
that  the  only  substantial  difference  between  them  and  corporations 
is  that  the  members  are  not  exempt  from  liability  as  partners  for  the 
debts  of  the  company.''  Accordingly,  joint-stock  companies,  both 
those  of  England  and  New  York,  have  been  held  to  be  corporations 
in  many  respects,  although  expressly  declared  by  statute  not  to  have 
that  character.^    A  joint-stock  association  under  the  laws  of  the  state 

corporated,  applies  to  deeds  made 
after  such  statute.  Cumberland,  etc. 
Co.  V.  Daniel,  52  S.  W.  Rep.  446 
(Tenn.  1899).  Where  no  organiza- 
tion meetings  are  held  and  no  officers 
elected,  and  no  by-laws  adopted,  and 
no  certificates  of  stock  issued,  and  no 
seal  adopted,  and  no  records  kept, 
the  incorporation  does  not  exist,  even 
though  a  certificate  of  incorporation 
was  issued  by  the  state  officers.  Hence 
a  deed  delivered  to  such  corporation 
does  not  give  title.  Wall  v.  Mines,  130 
Cal.  27  (1900).  A  vendor  of  property 
to  a  concern  which  he  supposed  was 
a  partnership,  but  turns  out  to  be  a 
corporation,  may  repudiate  the  con- 
tract on  discovering  that  fact,  inas- 
much as  the  minds  of  the  parties 
never  met.  Consumers'  Ice  Co.  v. 
Webster,  etc.  Co.,  32  N.  Y.  App.  Div. 
592  (1898). 

>  White  Oak,  etc.  v.  Murray,  145 
Mo.  622  (1898). 

2  See  §§  637,  694,  infra. 

3  Aiello  V.  Montecaloo,  21  R.  I.  496 
(1899).  It  is  legal  for  an  unincor- 
porated association  to  use  what  ap- 
parently is  a  corporate  name.  People 
V.  Rose,  219  111.  46  (1905).     The  sec- 


retary of  state  will  not  be  ordered 
by  mandamus  to  file  a  certificate  of 
incorporation  of  a  company  to  be 
known  as  the  "United  States  Express 
Company"  where  there  is  an  unincor- 
porated association  which  has  used 
that  name  for  many  years.  People  v. 
Rose,  219  111.  46  (1905).  Where  a 
person  is  doing  business  under  a  com- 
pany name  he  may  transfer  title  to 
notes  running  to  such  company  by 
signing  his  own  name.  Gardner  v. 
Wiley,  46  Oreg.  96  (1905). 

*  Quoted  and  approved  in  Eliot  v. 
Freeman,  220  U.  S.   178,   186   (1911). 

^  In  the  case  Ostrom  v.  Greene, 
161  N.  Y.  3.53  (1900),  the  court  said 
that  a  voluntary  unincorporated  asso- 
ciation of  seven  or  more  persons, 
without  capital  stock,  is,  under  the 
statutes  of  New  York,  neither  a  joint- 
stock  company,  nor  a  corporation,  nor 
a  partnership,  but  that  its  proceed- 
ings would  be  tested  by  the  law  of 
corporations  and  partnerships  so  far 
as  applicable.     See  Thomas  v.  Dakin, 

22  Wend.  9  (1839) ;    Warner  v.  Beers, 

23  Wend.  103  (1840);  Parmly  v. 
Tenth  Ward  Bank,  3  Edw.  395  (1840) ; 
People    V.    Watertown,     1     Hill,    616 


1478 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  505. 


of  New  York  is  sufficiently  a  corporation  to  sustain  an  indictment  in 
Illinois  against  an  employee  for  embezzling  the  funds. ^  ^^^le^e  a 
voluntary  unincorporated  association  has  no  constitution,  or  by-laws. 


(1841) ;  Bank  of  Watertown  v.  Water- 
town,  25  Wend.  686  (1841) ;  Willough- 
by  V.  Comstock,  3  Hill,  389  (1842); 
Leavitt  v.  Yates,  4  Edw.  134  (1843) ; 
Leavitt  v.  Tylee,  1  Sandf.  Ch.  207 
(1843) ;  People  v.  Niagara  County,  4 
Hill,  20  (1842);  Boisgerard  v.  New 
York  Banking  Co.,  2  Sandf.  Ch.  23 
(1844) ;  Re  Bank  of  DansviUe,  6  Hill, 
370  (1844);  Gifford  v.  Livingston,  2 
Denio,  380  (1845);  Case  v.  Me- 
chanics' Banking  Assoc,  1  Sandf.  693 
(1848);  Leavitt  v.  Blatchford,  17  N. 
Y.  521  (1858) ;  s.  c,  5  Barb.  9  ;  Cuyler 
V.  Sanford,  8  Barb.  225  (1850) ;  Gillet 
V.  Moody,  3  N.  Y.  479  (1850) ;  Tal- 
mage  v.  Pell,  7.  N.  Y.  328  (1852); 
Tracy  v.  Talmage,  18  Barb.  456 
(1854);  Gillet  v.  Phillips,  13  N.  Y. 
114  (1855);  Falconer  v.  Campbell,  2 
McLean,  195  (1840) ;  s.  c,  8  Fed.  Cas. 
963 ;  Duncan  v.  Jones,  32  Hun,  12 
(1884).  A  joint-stock  association  ex- 
isting in  New  York  and  suable  by  the 
laws  of  New  York  by  service  on  its 
president  may  be  sued  as  a  cor- 
poration in  Ohio,  although  not  actually 
incorporated  in  New  York.  Adams 
Express  Co.  v.  State,  55  Ohio  St. 
69  (1896).  The  United  States  Express 
Company,  an  unincorporated  associa- 
tion under  the  laws  of  the  state  of  New 
York,  is  treated  as  a  corporation  in 
other  states.  Edgeworth  v.  Wood, 
58  N.  J.  L.  463  (1896).  The  taxation 
statutes  of  Pennsylvania  imposing 
taxes  upon  corporations  organized 
in  another  state  do  not  apply  to  an 
unincorporated  association,  an  ex- 
press company  organized  in  New 
York.  Sanford  v.  Gregg,  58  Fed.  Rep. 
620  (1893).  The  English  joint-stock 
company  is  much  the  same.  "The 
company  has  a  name  as  an  associa- 
tion, maintaining  the  identity  of  the 
body  through  all  changes  of  its  mem- 
bers ;  its  property  is  divided  into 
transferable  shares ;  and  it  has  con- 
ferred upon  it  the  legal  capacity  to 
sue  and  be  sued  in  the  name  of  one 
of  its  officers,  and  such  a  suit  .  .  . 
may  be  brought  by  or  against  a  mem- 

14- 


ber  as  well  as  a  third  person."  It 
is  a  corporation,  though  the  English 
statute  declares  it  is  not.  Oliver  v. 
Liverpool,  etc.  Ins.  Co.,  100  Mass.  531 
(1868) ;  aff'd  sub  nom.  Liverpool  Ins. 
Co.  V.  Massachusetts,  10  Wall.  566 
(1870).  So,  also,  Tvith  the  New  York 
joint-stock  companies.  Fargo  v.  Louis- 
ville, etc.  Ry.,  6  Fed.  Rep.  787  (1881)  ; 
Sanford  v.  Supervisors  of  New  York, 
15  How.  Pr.  172  (1858);  Waterbury 
V.  Merchants'  Union  Exp.  Co.,  50 
Barb.  157  (1867).  As  regards  the 
liability  of  the  members  for  the  debts 
of  the  company,  it  is  held  to  be  a 
copartnership.  Boston,  etc.  R.  R.  v. 
Pearson,  128  Mass.  445  (1880) ;  Oliver 
V.  Liverpool,  etc.  Ins.  Co.,  100  Mass. 
531  (1868)  ;  aff'd  sub  nom.  Liverpool 
Ins.  Co.  V.  Massachusetts,  10  Wall.  566 
(1870).  The  refusal  of  the  legislature 
to  call  them  corporations  is  impor- 
tant as  cutting  off  the  exemption  of 
the  members  from  liability  to  cred- 
itors ;  an  exemption  which,  at  com- 
mon law,  belongs  to  all  corporations. 
Joint-stock  companies  in  England 
have  always  been  largely  statutory. 
See  Van  Sandau  v.  Moore,  1  Russ.  441 
(1826).  In  New  York  the  English 
decisions  on  these  companies  are 
doubtless  good  authority,  since  they 
exist  under  statutes  which  are  much 
aUke.  In  New  York  the  statutes 
relative  to  taxation  of  corporations  do 
not  apply  to  joint-stock  companies. 
They  are  not  corporations.  People  v. 
Coleman,  133  N.  Y.  279  (1892) ;  Hoey 
V.  Coleman,  46  Fed.  Rep.  221  (1891). 
An  unincorporated  joint-stock  associa- 
tion is  legal  in  New  York.  Under  the 
statutes  of  that  state  such  associations 
are  corporations  for  many  purposes. 
People  V.  Wemple,  117  N.  Y.  136  (1889). 
1  Kossakowskd  v.  People,  177  111.  563 
(1899) .  An  unincorporated  joint-stock 
express  company  may  be  indicted  as  a 
corporation,  under  the  Interstate  Com- 
merce Act.  United  States  v.  Am.  Exp. 
Co.,  199  Fed.  Rep.  321  (1912).  United 
States  V.  Adams  Ex.  Co.,  229  U.  S.  381 
(1913). 
•9 


§  505.]  TRUSTS,    ETC.  [cH.  XXIX. 

or  rules,  the  conduct  of  its  meetings  may  be  in  accordance  with  the 
ordinary  parhamentary  rules  of  deliberative  assemblies.^  Notice  of  the 
time  and  place  must  be  given. ^  A  minority  of  an  unincorporated  volun- 
tary association  may  adjourn  from  time  to  time,  even  if  a  majority  of 
all  the  members  is  necessary  to  constitute  a  quorum  in  order  lawfully 
to  transact  business.^  Where  officers  of  an  association  are  unanimously 
elected,  the  election  is  not  illegal  even  though  some  were  not  entitled 
to  vote.^  A  voluntary  unincorporated  association,  without  articles, 
constitution,  or  rules,  may  remove  its  president  or  other  officer  at  any 
time  and  without  notice,  except  that  the  meeting  held  for  that  purpose 
must  be  duly  held,  but  cannot  expel  a  member  without  notice.^  Neither 
the  president  nor  the  treasurer  of  an  unincorporated  joint-stock  asso- 
ciation need  be  stockholders  unless  the  agreement  so  provides.®  An 
unincorporated  association  may  purchase  its  own  stock,  and  a  ques- 
tion of  whether  a  reduction  of  the  capital  stock  is  thereby  effected  is 
a  question  of  intention.^  A  bond  issued  by  an  unincorporated  joint- 
stock  association,  negotiable  in  form,  is  negotiable  in  law.^  An  unin- 
corporated express  company  cannot  be  compelled  to  divulge  to  railroad 
commissioners  the  business  it  does  outside  of  the  state,  the  purpose 
of  the  investigation  not  being  connected  with  taxation.^  A  limited 
partnership  under  the  Pennsylvania  statutes  is  not  a  corporation  suffi- 
cient for  purposes  of  jurisdiction  in  the  federal  court.^"     Partnership 

1  Ostrom  V.  Greene,  161  N.  Y.  353  *  Matter  of  Supreme  Council,  etc., 
(1900).  The  majority  rule  does  not  142  N.  Y.  App.  Div.  307  (1911). 
apply  to  a  community  irrigation  ditch.  ^  Ostrom  v.  Greene,  161  N.  Y.  353 
Cendelaria  v.  Vallejos,  13  N.  M.  146  (1900),  the  court  saying:  "The  hold- 
(1905).  The  members  cannot  act  ing  of  an  office  unprotected  by  rules  is 
except  in  meeting  assembled.  The  not  an  individual  right,  but  is  subject 
majority  do  not  rule.  Livingston  v.  to  change  at  the  pleasure  of  the  asso- 
Lyneh,    4    Johns.    Ch.    573     (1820);  elation." 

Irvine  v.  Forbes,  11  Barb.  587  (1852).  « National  Casket  Co.  v.  Stolts,  135 

But  the  articles   may   provide   other-  Fed.  Rep.  534  (1905). 

wise.     Waterbury  v.  Merchants'  Union  '  Booth  v.   Dodge,  60  N.   Y.   App. 

Exp.  Co.,  50  Barb.  157  (1867).  Div.  23  (1901).     Treasury  stock  in  a 

2  Irvine    v.    Forbes,    11    Barb.    587  limited  partnership  held  in  the  name 
(1852).  of  a  trustee  for  the  purposes  thereof 

3  Ostrom  V.  Greene,  161  N.  Y.  353  is  legal.     Stradley  v.  Cargill,  etc.  Co., 
(1900),  the   court   saying  in  regard  to  135  Mich.  367  (1904). 

the    adjourned    meeting:      "Personal  « Hibbs  v.  Brown,   190  N.   Y.    167 

notice  to  every  member  was  unneces-  (1907). 

sary,  for  it  was  the  same  in  effect  as  ^  State  v.  United  States,  etc.  Co.,  81 

if    the    association    had    sat    in    con-  Minn.  87  (1900). 

tinuous    session    and    had    adjom-ned  i"  Great,  etc.  Co.  v.  Jones,  177  U.  S. 

each  day  to  the  next."     In  this  case  449  (1900),  overruUng  Andrews  Bros, 

the  court  stated  that  it  was  open  to  Co.  v.  Youngstown  Coke  Co.,  86  Fed. 

question  as  to  whether  a  majority  of  Rep.    585.     A   joint-stock   association 

all  the  members  in  an  unincorporated  is   not   a   corporation   as   regards   the 

association  was  necessary  in  order  to  jurisdiction     of     the     federal     court, 

constitute  a  quorum.  Saunders  v.  Adams,  etc.  Co.,  136  Fed. 

1480 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  505. 


associations  organized  under  the  laws  of  Michigan  are  controlled  by 
the  laws  relative  to  corporations.^  But  the  Michigan  statute  allowing 
cumulative  voting  does  not  apply  to  an  unincorporated  joint-stock 
association,  even  though  the  latter  exercises  certain  statutory  powers. 


Rep.  494  (1905).  Afi  unincorporated 
association  is  not  a  corporation,  so 
far  as  the  jurisdiction  of  the  federal 
courts  is  concerned,  even  though  by 
statute  the  members  are  not  liable 
for  its  debts.  Fred  Maeey  Co.  v. 
Macey,  135  Fed.  Rep.  725  (1905).  A 
New  York  joint-stock  company  is  not 
a  corporation  as  regards  the  jurisdic- 
tion of  the  United  States.  Rountree 
r.  Adams  Exp.  Co.,  165  Fed.  Rep.  152 
(1908).  An  unincorporated  express 
company  of  New  York  cannot  be  sued 
in  Pennsylvania  in  the  United  States 
court  on  the  mere  allegation  that  the 
president  is  a  citizen  of  New  York. 
Taylor  t^.  Weir,  171  Fed.  Rep.  636 
(1909).  A  Louisiana  partnership, 
though  considered  a  legal  entity  in 
that  state,  is  not  such  in  regard  to  the 
jurisdiction  of  the  United  States 
court.  Empire,  etc.  Co.  v.  Neumond, 
199  Fed.  Rep.  800  (1912).  An  unin- 
corporated express  company  need  not 
obtain  a  permit  from  a  state  under  a 
statute  requiring  foreign  corporations 
to  do  so.  Commonwealth  v.  Adams 
Express  Co.,  123  Ky.  720  (1906).  A 
"partnership"-  organized  under  the 
Pennsylvania  statute  is  really  a  cor- 
poration and  its  franchise  and  rights 
may  be  sold  for  its  debts.  Keystone 
Bank  v.  Donnelly,  196  Fed.  Rep.  832 
(1912).  In  a  suit  in  New  York  against 
a  Michigan  partnership  association 
organized  under  the  laws  of  Michigan, 
proof  that  it  is  a  corporation  should  be 
given.  Collier  v.  Postum,  etc.  Co., 
150  N.  Y.  App.  Div.  169  (1912). 

A  New  York  joint-stock  association 
cannot  sue  as  such  in  the  federal 
courts.  Chapman  v.  Barney,  129  U.  S. 
677  (1889).  A  partnership  associa- 
tion under  the  statutes  of  Pennsyl- 
vania is  not  a  corporation  to  the  ex- 
tent that  the  estate  of  a  stockholder 
is  liable  on  a  claim  arising  after  the 
death  of  such  stockholder.  Bodey  v. 
Cooper,  82  Md.  625  (1896).  Nor  is 
it  a  corporation  within  the  meaning 


of  the  tax  statutes.  Gregg  v.  San- 
ford,  65  Fed.  Rep.  151  (1895).  An 
association  formed  under  the  Pennsyl- 
vania statutes  is  a  partnership  and 
not  a  corporation.  Hence  it  cannot  be 
sued  in  Massachusetts  in  the  name 
under  which  it  does  business.  Ed- 
wards V.  Warren,  etc.  Works,  168 
Mass.  564  (1897).  In  Carter  v.  Pro- 
ducers' Oil  Co.,  182  Pa.  St.  551  (1897), 
the  court  said  in  regard  to  Pennsyl- 
vania joint-stock  associations  organ- 
ized under  the  statutes:  "Whether 
the  partnership  association  ought  to 
be  classified  by  the  professor  of  legal 
science  as  a  species  of  the  genus  cor- 
poration, or  the  genus  partnership,  or 
whether  it  should  be  set  apart  as  a 
new  genus,  seems  to  me  unimportant. 
If  a  corporation,  it  is  so  pecuhar  in 
its  features  that  the  general  lav/  of 
corporations  cannot  be  applied  to  it 
without  important  modifications ;  if  a 
partnership  it  so  differs  from  the 
common  type  that  the  general  law  of 
partnerships  is  but  slightly  appUcable. 
Both  the  law  of  corporations  and 
the  law  of  partnerships  are  to  be  re- 
sorted to  in  the  absence  of  statutory 
regulations,  the  choice  being  deter- 
mined by  the  nature  of  the  feature 
under  consideration.  ...  A  partner- 
ship association  differs  from  the  com- 
mon type  of  partnerships  in  that  the 
members  vote,  and  do  not  act  with 
the  powers  of  partners,  and  in  that 
they  are  subject  to  no  joint  liability. 
It  differs  from  the  common  type  of 
corporations  in  that  the  members 
have  a  right  to  admit  or  refuse  mem- 
bership in  the  company  to  the  trans- 
feree of  the  interest,  as  well  as  in  some 
other  particulars."  204  Fed.  Rep.  32. 
1  Under  the  Michigan  statute  a 
limited  partnership  is  governed  by 
corporation  law  instead  of  partnership 
law.  Armstrong  v.  Stearns,  156  Mich. 
597  (1909).  Rouse,  etc.  Co.  v.  Detroit, 
etc.  Co.,  Ill  Mich.  251  (1896). 


1481 


§§  506,  507.]  TRUSTS,  ETC.  [cH.  XXIX. 

and  not  even  a  provision  in  the  constitution  that  certain  provisions 
therein  shall  apply  to  all  associations  and  joint-stock  companies  having 
any  of  the  powers  or  privileges  of  corporations  not  possessed  by  indi- 
viduals or  partnerships  affects  this  conclusion.^  Under  the  partnership 
association  statute  of  Pennsylvania,  a  by-law  may  be  enacted  taking 
away  the  voting  power  from  any  stock  which  is  sold,  even  though  it 
is  purchased  by  an  existing  member.^  The  vice-president  or  secretary 
of  an  unincorporated  joint-stock  association  has  no  authority  to  sell 
any  of  its  property.^  An  unincorporated  joint-stock  association  is 
not  such  a  general  partnership  as  gives  each  partner  the  right  to  sell 
property  or  borrow  money.* 

§  506.  Joint-stock  associations  may  arise  hy  implication  of  law.  — 
Joint-stock  associations  are  generally  formed  by  the  mutual  agree- 
ment and  direct  intent  of  the  parties.  They  may,  however,  arise  by 
implication  of  law.  Thus,  an  ineffectual  attempt  at  an  incorporation 
may  make  the  parties  members,  not  of  a  corporation,  but  of  a  joint- 
stock  company.^  In  like  manner,  after  the  charter  of  a  corporation 
expires  and  the  parties  continue  to  do  business,  they  do  so  as  a  joint- 
stock  company.^  An  unincorporated  association  of  the  owners  of  an 
irrigation  plant  may  be  bound  by  the  by-laws  even  though  it  has  no 
capital  stock.'^ 

§  507.  How  a  person  becomes  a  member  —  Transfers.  —  A  person 
becomes  a  member  of  a  joint-stock  company  by  any  act  on  his 
part,  which  indicates  an  intent  to  become  a  member  and  a  consent  or 

1  Attorney  General  v.  McVichie,  138  *  Spotswood  v.  Morris,  12  Idaho, 
Mich.  387  (1904).  360  (1906). 

2  Carter  v.  Producers'  Oil  Co.,  182  ^  /gg  Mendenhall,  9  Nat.  Bankr. 
Pa.  St.  551  (1897).  Reg.  497  (1874) ;  s.  c,  17  Fed.  Cas.  10  ; 

*  A  chairman  of  a  joint-stock  associa-  Whipple  v.  Parker,  29  Mich.  369,  380 
tion  has  no  power  to  agree  to  give  a  (1874) ;  and  see  eh.  XIII,  supra.  Cf. 
person  $16,000  of  stock  for  services  in  Foster  v.  Moulton,  35  Minn.  458 
obtaining  a  transfer  of  patents,  and  (1886).  A  purchaser  of  stock  in  a 
the  fact  that  the  association  keeps  the  company  which  both  the  vendor  and 
patents,  which  it  has  paid  for,  does  not  the  vendee  believe  to  be  incorporated, 
obligate  it  to  issue  such  stock.  Dickin-  and  which  has  not  been  incorporated, 
son  y.  Matheson,  etc.  Co.,  161  Fed.  Rep.  may  rescind,  where  the  vendor  stated 
874  (1908).  Where  a  person  sub-  that  the  company  was  incorporated, 
scribes  for  stock  in  an  unincorporated  and  it  is  no  defense  that  the  prop- 
joint-stock  association,  a  part  of  the  erty  of  the  company  has  since  de- 
transaction  being  that  he  shall  be  predated  in  value.  In  this  case  the 
employed  for  a  year  at  a  certain  salary,  attorney  was  instructed  to  procure  a 
and  such  contract  of  employment  is  charter,  but  made  no  attempt  to  do 
signed  by  only  one  manager  instead  so.  Bolton  v.  Prather,  35  Tex.  Civ. 
of  two,  as  required  by  statute,  he  may  App.  295  (1904). 

rescind  and  demand  his  money.     Hoyt  «  Watertown  Nat.  Bank  v.  Landon, 

V.  Paw  Paw,  etc.  Co.,   158  Mich.  619  45  N.  Y.  410  (1871). 

(1909).     Spotswood     V.     Morris,      12  '  Strang  v.   Osborne,   42  Colo.    187 

Idaho,  360  (1906).  (1908). 

1482 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  507. 


acquiescence  therein  by  the  company  itself.^  He  may  also  become  a 
member  by  a  transfer  made  to  him  of  another  member's  interest,  un- 
less the  articles  of  association  restrict  the  right  of  transfer.^  A  share- 
holder in  an  unincorporated  joint-stock  company  who  has  sold  his 
stock  cannot  then  claim  that  the  association  became  dissolved  by  the 
death  of  a  member,^  A  member  of  an  old  association,  which  sells  all 
its  property  to  a  new  one,  does  not  become  a  member  of  the  new  one 
until  he  in  some  way  assents  to  its  constitution  and  by-laws.''  A  pro- 
vision in  the  articles  of  association  of  a  joint-stock  association  to  the 
effect  that  no  member  nor  his  executors,  administrators,  or  other  legal 


1  The  formalities  need  be  no  greater  sent  of  the  directors,  yet,  where  such 
than  in  forming  an  ordinary  partner-  provision  is  for  many  years  disre- 
ship.  Sehuylerville  Nat.  Bank  v.  Van  garded,  a  stockholder  who  so  trans- 
Derwerker,  74  N.  Y.  234  (1878) ;  ferred  his  stock  at  a  time  when  the 
Pettis  V.  Atkins,  60  111.  454  (1871) ;  assets  equaled  the  liabilities  cannot 
Machinists'  Nat.  Bank  v.  Dean,  124  be  held  liable  as  a  stockholder.  Wads- 
Mass.  81  (1878).  Cf.  Volger  v.  Ray,  worth  v.  Duncan,  164  111.  360  (1896) ; 
131  Mass.  4.39  (1881).  It  is  not  Wadsworth  v.  Lawrie,  164  111.  42 
necessary  that  certificates  of  the  stock  (1896).  See  also  §  622,  infra.  Where 
be  issued  in  order  to  constitute  an  unincorporated  partnership  issues 
membership.  Dennis  v.  Kennedy,  19  so-called  certificates  of  stock  repre- 
Barb.  .517  (1854) ;  Boston,  etc.  R.  R.  senting  a  specified  interest  in  such 
V.  Pearson,  128  Mass.  445  (1880).  partnership,  and  one  of  the  partners 
Evidence  of  subscription  and  payment  assigns  his  certificates  as  collateral 
of  an  assessment  is  sufficient.  Frost  security  and  afterwards  sells  them, 
V.  Walker,  60  Me.  468  (1872).  But  the  purchaser  is  entitled  to  his  share 
not  of  subscription  without  any  par-  of  the  partnership  property  and  to 
ticipation.  Hedge's  Appeal,  63  Pa.  St.  demand  an  accounting,  even  though 
273  (1869).  the    certificates    provided    that    they 

2  A  transfer  of  the  certificate  of  stock  were  not  transferable.  The  transfer 
has  such  effect  although  not  registered  of  such  certificates  as  security  need 
in  the  stock  book.  Butterfield  v.  not  be  recorded  as  a  chattel  mortgage. 
Beardsley,     28     Mich.     412     (1874).  Rommerdahl  v.  Jackson,  102  Wis.  444 


Transfer  may  be  before  the  certifi- 
cates are  issued.  Butterfield  v. 
Spencer,    1    Bosw.    1    (1856).     But   if 


(1899).     As    to    the    liability    of    the 
transferee,  see  next  section. 

A    member's    interest    cannot     be 


the    articles    of    association    prohibit  reached     by     execution.     Kramer     v. 

transfer,  the  transferee  takes  only  the  Arthurs,   7   Pa.   St.    165   (1847).     But 

right  to  profits,  not  as  a  partner,  but  see    Lindley,  Partn.    (2d  Am.  ed.),  p. 

as   an   assignee,   and   a   transfer   does  837.     The    holders    of    certificates    in 

not  carry  dividends  already  declared,  an     unincorporated     irrigating     ditch 

Harper    v.     Raymond,     3     Bosw.     29  association    are    tenants    in    common, 

(1858).     So,    also,    where    transfer    is  and    any    one    may    sell    his    interest 

allowed  only  on  consent  of  certain  offi-  without  the  consent  of  the  other.     A 

cers  who  refuse.     Kingman  v.   Spurr,  transfer  conveys  his  water  rights  and 

24  Mass.  235  (1828).     If  a  transfer  is  interest    in    the    property.     Biggs     v. 


improperly  allowed,  the  company  is 
liable  to  the  party  injured.  Cohen  v. 
Gwynn,  4  Md.  Ch.  357  (1848).  Al- 
though an  unincorporated  associa- 
tion's articles  provide  that  transfers  26  (1905) 
of  stock  shall  be  made  only  with  con- 

1483 


Utah,  etc.  Co.,  7  Ariz.  331  (1901). 

'Taber    v.    Breck,    192    Mass.    355 
(1906). 

<  Konta  V.  St.  Louis,  etc.,  189  Mo. 


§  508.] 


TRUSTS,    ETC. 


[CH.  XXIX. 


representatives  should  sell  or  transfer  his  stock  until  after  it  had  been 
offered  to  the  association  or  other  members,  does  not  prevent  an  executor 
transferring  the  stock  to  the  residuary  legatee.^  A  life  estate  in  the 
shares  of  a  joint-stock  company  is  the  same  as  in  an  incorporated  com- 
pany.2 

§  508.  Liability  of  members  to  creditors  and  to  the  association.  — 
A  joint-stock  company  is,  in  regard  to  the  liability  of  its  members  to 
creditors  of  the  company,  a  partnership ;  its  members  are  liable  as 
partners ;  ^    and  the  ordinary  rules  of  partnership  exist  between  the 

1  Lane  v.  Albertson,  78  N.  Y.  App.  joint  conduit  committee  to  construct 
Div.  607  (1903).  See  also  §§  622c  conduits  for  such  wires,  each  company 
and  622d,  infra.  is  liable  for  its  proportionate  part  of 

2  Bishop  V.  Bishop,  81  Conn.  509  the  debts  of  such  committee.  Wagner 
(1909).  V.  Edison,  etc.  Co.,  141  Mo.  App.  .51 

^Wadsworthr.  Duncan,  164  111.360  (1909).     Where  a  sale   of  land   to  an 

(1896) ;    McFadden  v.  Leeka,  48  Ohio  unincorporated  association  is  canceled 

St.  513  (1891);    Jenne  v.  Matlack,  41  for  fraud,   the  members  are  liable  as 

S.  W.  Rep.   11   (Ky.   1897);    Wescott  partners  to  account  for  the  proceeds 

V.  Fargo,  61  N.  Y.  542  (1875) ;    With-  of  such  parts  of  the  land  as  have  been 

erhead  v.  Allen,  3  Keyes,  562  (1867) ;  sold     by     the     association.     Snow     v. 

Cross  V.  Jackson,  5  HUl,  478  (1843) ;  Hazlewood,  179  Fed.  Rep.  182  (1910). 

Skinner    v.    Dayton,     19   Johns.    513  The    secretary    of   an   unincorporated 

(1822) ;    Wells  v.  Gates,  18  Barb.  554  association    for    profit    may    hold  the 

(1854) ;    Boston,  etc.  R.  R.  v.  Pearson,  members     personally     liable     for     his 

128  Mass.  445  (1880) ;   Taft  v.  Warde,  salary.     Ranken  v.  Probey,  131  N.  Y. 

106  Mass.  518  (1871) ;   s.  c,  111  Mass.  App.  Div.  328  (1909) ;   s.  c,  136  N.  Y. 

518  (1873) ;    Bodwell  v.  Eastman,  106  App.  Div.  134.     Members  of  an  unin- 

Mass.  525  (1871) ;    Tappan  v.  Bailey,  corporated  association  who  sign  a  note 

45     Mass.     529     (1842) ;      Cutler     v.  for     it     are     personally    liable,     even 

Thomas,  25  Vt.   73    (1852) ;    Kramer  though  the  names  are  followed  by  the 

?;.  Arthurs,  7  Pa.  St.  165  (1847);    Gott  words  secretary,  treasurer,  etc.  Evans 

V.    Dinsmore,    111    Mass.    45    (1872);  v.   Lilly   &   Co.,   95   Miss.   .58    (1909). 

NeweU  v.  Borden,  128  Mass.  31  (1879).  In  Frost  v.  Walker,  60  Me.  468  (1872), 

See  also  §504,  supra.     Contra,  Irvine  the  court  said:     "An  unincorporated 

V.  Forbes,  11  Barb.  587  (1852) ;    Liv-  joint-stock  company  is  a  mere  part- 

ingston  v.   Lynch,   4   Johns.    Ch.   573  nership,  and  each  member  is  personally 

(1820),  overruled  as  dicta  by  Town-  liable  for  all  its  debts.     It  is  important 

send  V.  Goewey,  19  Wend.  424  (1838) ;  for  the  public  to  know  that  if  persons 

Allen   V.   Long,   80   Tex.    261    (1891);  connect   themselves   with   a  company 

Ridenour    v.    Mayo,    40    Ohio    St.    9  of    this    description    they    are    every 

(1883).     An    unincorporated    associa-  one  of  them  liable  to  pay  the  demands 

tion  to  conduct  a  cooperative   store,  upon    it."     The    officers    who    enter 

certificates    similar    to    certificates    of  into  a  contract  for  the  company  are 

stock  being  issued  to  the  members,  is  liable  thereon  personally.     "It  is  im- 

a    partnership,    and    each    member  is  material    whether    they    be    so    held 

liable  for   the   debts,    there   being   no  because  they  held  themselves  out  as 

notice  to  the  creditor  of  -any  limitation  agents   for   a   principle    that    had    no 

of  liability,  and  the  managing  agent  existence,    or     on     the     ground     that 

who  has  conducted  the  affairs  may  pur-  they    must,    under    the    contract,    be 

chase   goods   on   credit   and   give   the  regarded  as  principals  for   the  siniple 

association's    notes    therefor.     Ashley  reason  that  there  is  no  other  principal 

V.    Dowling,    203    Mass.    311    (1909).  in    existence."     Lewis    v.    Tilton,    64 

Where  several  companies  owning  and  Iowa,     220     (1884) ;      Fredendall     v. 

using  wires  in  the  streets   organize   a  Taylor,     26     Wis.     286     (1870).     Ae- 

1484 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  508. 


members  themselves/  including  the  right  to  contribution  as  between 


quiescence  in  the  dealings  of  other 
members  with  third  persons  binds 
a  member.  Pennsylvania  Ins.  Co.  v. 
Murphy,  5  Minn.  36  (1860) ;  Wells  v. 
Gates,  18  Barb.  554  (1854).  A  na- 
tional bank  which  has  taken  as  se- 
curity for  a  debt  and  then  acquired 
shares  of  stock  in  an  unincorporated 
association,  formed  for  speculative 
purposes,  is  not  liable  on  said  stock, 
its  acquisition  having  been  ultra  vires. 
Merchants'  National  Bank  v.  Wehr- 
mann,  202  U.  S.  295  (1906).  Those 
who  actively  take  part  in  a  purchase 
are  liable  whether  the  others  are  or 
not.  Winona  Lumber  Co.  v.  Church, 
6  S.  Dak.  498  (1895).  A  member  of  a 
mutual  insurance  company  cannot 
contest  an  assessment  by  the  receiver 
on  the  ground  that  it  is  excessive. 
Collins  V.  Welch,  141  Mich.  676 
(1905).  This  Uability  as  partners 
applies  only  to  associations  having 
a  definite  membership,  and  does  not 
apply  to  a  public  meeting  held  to 
promote  the  construction  of  a  shoe 
shop,  the  subscriptions  made  at  such 
meeting  having  been  duly  paid,  even 
though  it  was  further  voted  "to 
stand  back  of  the  committee."  In 
any  case  the  suit  would  be  at  law 
and  not  in  equity.  Cheney  v.  Good- 
mn,  88  Me.  563  (1896).  A  lease 
to  an  unincorporated  association  binds 
personally  all  members  assenting  to 
it.  Reding  v.  Anderson,  72  Iowa, 
498  (1887).  Members  of  cooperative 
trading  associations  are  liable  as 
partners  for  the  debts  of  the  concern. 


Davidson  v.  Holden,  55  Conn.  103 
(1887).  And  sometimes  are  liable 
also  for  debts  contracted  after  they 
have  sold  their  stock.  See  Shamburg 
V.  Abbott,  112  Pa.  St.  6  (1886). 
The  members  of  an  unincorporated 
association  to  enforce  the  Uquor 
laws  are  not  liable  to  an  attorney 
for  services  in  prosecuting  cases. 
McCabe  v.  GoodfeUow,  133  N.  Y.  89 
(1892).  The  vice  president  and  the 
treasurer  of  an  unincorporated  fair 
association  are  liable  for  premiums 
offered.  Murray  v.  Walker,  83  Iowa, 
202  (1891).  Members  of  a  joint-stock 
company  are  personally  liable  for  the 
debts  of  the  company.  Durham  Fer- 
tilizer Co.  V.  Clute,  112  N.  C.  440 
(1893) ;  People  v.  Coleman,  133  N.  Y. 
279  (1892).  In  the  case  Seacord  v. 
Pendelton,  55  Hun,  579  (1890),  the 
court  reviewed  the  authorities  and 
decided  that  the  stockholders  in  a  bank 
which  was  not  incorporated  were  not 
liable  to  depositors,  there  being  no 
allegation  that  the  stockholders  had 
any  articles  of  association  or  partner- 
ship, or  had  performed  any  act,  or 
had  knowledge  of  the  business  or  con- 
sented thereto. 

A  subscription  of  specified  amounts 
by  several  individuals  to  driU  and 
operate  a  gas  well  does  not  render 
them  partners  as  to  creditors  who 
were  aware  of  the  terms  of  the  sub- 
scription. Clark  v.  Rumsey,  59  N.  Y 
App.  Div.  435  (1901).  See  also  §  76, 
supra.  A  joint-stock  association  to 
organize  and  carry  on  a  school  is  a 


iBullard  v.  Kinney,  10  Cal.  60 
(1858).  The  remedy  of  one  member 
against  another  is  in  equity.  Huth 
V.  Humboldt  Stamm,  61  Conn.  227 
(1892).  One  member  cannot  sue  an- 
other at  law  for  his  part  of  the  profits 
of  the  business,  which  is  under  con- 
trol of  the  latter.  JMjT-ick  v.  Dame,  63 
Mass.  248  (1852) ;  Duff  v.  Maguire,  99 
Mass.  300  (1868);  Whitehouse  v. 
Sprague,  7  Atl.  Rep.  17  (Me.  1886). 
A  person  induced  to  put  money  into  an 
enterprise  on  false  representations 
that  it  is  a  joint-stock  company  may 
recover    back    his    money.     Lebby    v. 


Ahrens,  26  S.  C.  275  (1887).  A  di- 
rector of  an  unincorporated  associa- 
tion who  contracts  for  it  is  not  liable 
personally.  Abbott  v.  Cobb,  17  Vt. 
593  (1845)  ;  Alexander  v.  Worman,  6 
H.  &  N.  100  (1860).  A  person  taking 
a  lease  to  himself  as  a  committee  for 
an  unincorporated  association  is  per- 
sonally Uable  thereon.  McKinnie  v. 
Postles,  4  Pen.  (Del.)  16  (1901). 
A  member  of  a  mutual  telephone  asso- 
ciation cannot  sue  it  as  a  partnership. 
Hanley  v.  Elm  Grove,  etc.  Co.,  150 
Iowa,  198  (1911). 


1485 


508.] 


TRUSTS,    ETC. 


[CH. 


themselves.^  The  members  of  a  pilot  association  are  not  personally 
liable  for  the  negligence  of  one  of  them.^  Where  a  building  society 
illegally  carries  on  the  banking  business,  the  depositors  cannot  claim 
priority  over  the  shareholders  of  the  society.^  The  members  of  a 
political  organization  are  not  liable  for  its  debts  except  debts  necessary 
for  the  preservation  of  the  association.^  The  individual  members 
of  a  club  are  not  liable  for  the  salary  of  the  manager,  even  though  the 
club  is  unincorporated.'^     The  presiding  officer  of  a  voluntary  associa- 


partnership.  Sebastian  v.  Booneville, 
etc.  Co.,  56  S.  W.  Rep.  810  (Ky.  1900). 
A  member  of  an  unincorporated  church 
is  not  Uable  for  its  debts  unless  he 
authorized  the  incurring  of  the  same 
or  ratified  them.  First,  etc.  Bank  v. 
Rector,  59  Neb.  77  (1899).  A  note 
signed  by  the  trustees  as  trustees  of 
an  unincorporated  association  is  per- 
sonally binding  upon  them.  McKen- 
ney  v.  Bowie,  94  Me.  397  (1900).  The 
note  of  an  unincorporated  association 
signed  by  the  treasm-er  as  treasurer 
may  be  collected  from  him  personally. 
Kierstead  v.  Bennett,  93  Me.  328 
(1899).  A  subscriber  to  stock  in  an 
unincorporated  association  is  not  re- 
lieved from  liability,  even  though 
some  of  the  subscriptions  necessary 
to  make  up  the  amount  required  by 
the  subscription  paper  were  forgeries 
and  others  obtained  by  false  represen- 
tations, if  it  be  shown  that  the  asso- 
ciation accepted  the  building  to  con- 
struct which  it  was  formed.  Haney, 
etc.  Co.  V.  Adaza,  etc.  Co.,  108  Iowa, 
313  (1899).  In  Pennsylvania  the  pro- 
bate court  may  allow  the  executor  of 
an  estate  to  loan  the  funds  of  the 
estate  to  an  unincorporated  associa- 
tion in  which  the  estate  is  interested. 
In  re  Mustin's  Estate,  188  Pa.  St.  544 
(1898).  If  proof  is  given  by  plaintiff 
that  a  copartnership  existed,  and  the 
defense  is  that  it  was  a  corporation, 
the  defendant  must  prove  that  fact. 
Although  the  company  had  a  presi- 
dent and  secretary,  this  in  itself  does 
not  raise  a  presumption  of  a  corpora- 
tion. Clark  V.  Jones,  87  Ala.  474 
(1889).  A  notice  to  stockholders  that 
they  will  be  held  liable  under  a  stat- 
ute is  not  served  on  the  members  of 
an  unincorporated  association  by  serv- 
ing such  notice  on  the  chief  officer  of 
such  association.     Wells  v.   Robb,  43 


Kan.  201  (1890).  Where  a  creditor 
of  a  bank  sues  the  stockholders  as 
partners,  the  burden  of  proof  is  on 
him  to  prove  that  no  corporation  ex- 
isted, it  being  shown  that  the  bank 
always  acted  as  a  corporation  and 
held  itself  out  as  such  and  was  sup- 
posed so  to  be  by  the  stockholders. 
Hallstead  v.  Coleman,  143  Pa.  St.  352 
(1891).  The  supposition  or  belief  of 
the  members  that  they  are  not  liable 
beyond  the  par  value  of  their  stock 
does  not  protect  them  from  liability. 
Farnum  v.  Patch,  60  N.  H.  294 
(1880) ;   and  see  §  233,  note,  supra. 

1  Morrissey  v.  Weed,  12  Hun,  491 
(1878) ;  Skinner  v.  Dayton,  19  Johns. 
513  (1822) ;  Ray  v.  Powers,  134  Mass. 
22  (1883);  Whitman  v.  Porter,  107 
Mass.  522  (1871);  TyrreU  v.  Wash- 
burn, 88  Mass.  466  (1863).  But  not  if 
the  expense  was  incurred  contrary  to 
the  articles  of  association.  Danforth 
V.  Allen,  49  Mass.  334  (1844) ;  Clark 
V.  Reed,  28  Mass.  446  (1831).  Where 
the  constitution  of  an  unincorporated 
association  limits  the  debts,  and  the 
directors  incur  a  larger  amount  of 
debts,  the  directors  cannot  obtain  con- 
tribution from  the  stockholders.  Mc- 
Fadden  v.  Leeka,  48  Ohio  St.  513 
(1891). 

2  Guy  V.  Donald,  203  U.  S.  399 
(1906). 

3  Re  Birkbeck,  etc.  Soc,  [1912] 
2  Ch.  183  (1912). 

^  Hosman  v.  Kinneally,  43  N.  Y. 
Misc.  Rep.  76  (1904).  Members  of  a 
political  organization  are  not  liable 
for  moneys  borrowed  by  the  managers 
to  pay  to  newspapers,  such  debt  not 
being  necessary  to  preserve  the  or- 
ganization. Siff  V.  Forbes,  135  N.  Y. 
App.  Div.  39  (1909). 

*  Georgeson  v.  Caffrey,  71  Hun,  472 
(1893).    See  also  §  504,  supra.    A  volun- 


1486 


CH.  XXIX.] 


TRUSTS,    ETC. 


508. 


tion  is  not  liable  for  a  breach  of  a  contract  which  was  authorized  at  a 
meeting  where  he  did  not  preside,  even  though  he  had  appointed  a 
committee  to  confer  with  the  party  in  relation  thereto.  The  mere 
fact  that  he  was  present  when  the  minutes  were  approved  does  not 
render  him  liable.^ 

The  question  whether  a  stockholder  may  limit  his  common-law  or 
statutory  liability  by  an  express  contract  with  the  company's  creditors 
to  that  effect  is  discussed  elsewhere.^  The  underwriters  of  an  unin- 
corporated Lloyds  insurance  association  may  be  liable  personally  on  its 
policies,  even  though  by  the  terms  of  the  policy  each  underwriter  as- 
sumed only  his  proportionate  part  of  the  loss,  where  that  provision  is 
not  prominently  set  forth.  The  rule  is  that  the  members  of  an  associa- 
tion may  contract  against  personal  liability,  but  the  notice  to  that 
effect  must  be  so  plain  and  fair  that  the  person  contracting  with  the 
association  knew  of  it,  or  it  was  his  own  fault  that  he  did  not  know 
it.^  But  where  the  articles  of  association  of  an  unincorporated  joint- 
stock  association  provide  that  the  members  shall  not  be  personally 
liable  for  the  debts,  a  person  who  loans  money  to  the  association  on  its 
note,  which  expressly  states  that  it  is  given  under  such  articles,  cannot 
hold  the  members  personally  liable.^    The  bonds  and  coupons  of  an 


tary  association  for  the  promotion  of 
athletics  is  not  presumed  to  be  a  part- 
nership. O'Rourke  v.  Kelly,  etc.  Cor- 
poration, 156  Mo.  App.  91  (1911). 
A  receiver  of  a  social  club  in  collecting 
amounts  due  from  the  members  and 
annual  dues  cannot  do  so  by  a  bill 
in  equity  against  all  of  them.  Rogers 
V,  Boston  Club,  205  Mass.  261  (1910). 

1  Meriwether  v.  Atkin,  137  Mo.  App. 
32  (1909). 

^  See  §  216,  supra. 

^  Imperial,  etc.  Co.  v.  Jewett,  169 
N.  Y.  143  (1901).  A  case  is  not  made 
out  against  the  members  of  an  insurance 
association  by  proving  a  policy  signed 
by  the  manager,  there  being  no  proof 
as  to  who  the  members  were,  even 
though  their  names  were  printed  on 
the  back  of  the  policy.  Scranton 
Traction  Co.  v.  SchHchter,  202  Pa.  St. 
6  (1902).  A  provision  in  a  policy  of 
insurance  that  the  capital  stock  and 
assets  of  the  insuring  company  shall 
alone  be  liable  thereon,  and  that  stock- 
holders shall  not  be  liable,  prevents 
a  suit  against  an  undisclosed  principal 
of  the  insurance  company.  Western, 
etc.,  Co.  V.  Helvetia,  etc.,  Co.,  163 
Fed.  Rep.  644  (1908). 


*  Bank  of  Topeka  v.  Eaton,  100  Fed. 
Rep.  8  (1900).  In  the  case  Hibbs  v. 
Brown,  112  N.  Y.  App.  Div.  214, 
(1906) ;  aff'd,  190  N.  Y.  167,  the  court 
said  (p.  219) :  "There  can  be  no  doubt, 
however,  that  it  is  competent  for  the 
members  of  a  joint-stock  association  to 
have  the  contracts  so  drawn  as  to 
confine  the  liability  to  the  assets,  and 
thus  create  the  same  situation  as  to 
their  rights  and  liabilities  as  if  the 
joint-stock  association  were  a  cor- 
poration and  they  were  stockholders." 
The  members  of  a  joint-stock  associa- 
tion are  liable  as  partners,  but  a  cred- 
itor may  agree  to  waive  such  personal 
liability.  Industrial,  etc.  Co.  v.  Texas, 
etc.  Assoc,  31  Tex.  Civ.  App.  375 
(1903).  Coupons  are  negotiable,  even 
though  the  trust  deed  securing  them 
provides  for  a  waiver  of  default  in 
and  postponed  payment  of  such  cou- 
pons, inasmuch  as  such  provisions 
merely  control  any  procedure  under 
the  trust  deed  for  enforcing  payment. 
Neither  is  negotiability  destroyed  by 
a  provision  that  the  members  of  the 
unincorporated  joint-stock  association 
shall  not  be  personally  liable.  Hibbs 
V.   Brown,    190  N.   Y.    167    (1907),   a 


1487 


§  508. 


TRUSTS,    ETC. 


[cH.  XXIX. 


unincorporated  joint-stock  association  may  be  negotiable,  even  though 
they  provide  against  personal  liability  of  the  stockholders,  and  even 
though  the  trustee  of  the  mortgage  securing  their  payment  may  with 
the  consent  of  a  majority  of  the  bondholders  in  interest  waive  default 
in  payment  of  the  coupons.^  A  member's  subscription  in  an  associa- 
tion may  be  enforced  by  a  suit  at  law.^ 

In  enforcing  the  liability  of  members  of  a  joint-stock  company  by 
a  suit  in  equity,  if  the  parties  are  very  numerous  or  unknown,  they  need 
not  all  be  joined  as  defendants.^    Suits  by  or  against  unincorporated 


minority  of  the  court  declaring,  how- 
ever, that  the  provision  exempting  the 
stockholders  from  personal  liability 
■was  void.  Shareholders  in  a  Pennsyl- 
vania partnership  association  are  not 
liable  personally  for  its  debts.  Ro- 
mona,  etc.  Co.  v.  Bolger,  179  Fed. 
Rep.  979  (1910). 

iHibbs  V.  Brown,  112  N.  Y.  App. 
Div.  214  (1906);  aff'd,  190  N.  Y. 
167. 

2  If  the  subscription  runs  to  the 
trustees  personally  they  may  sue 
thereon.  Otherwise  all  must  join  as 
plaintiffs.  Cross  v.  Jackson,  5  Hill, 
478  (1843) ;  Townsend  v.  Goewey,  19 
Wend.  424  (1838).  It  seems  that  a 
subscription  to  a  voluntary  associa- 
tion is  enforceable  by  a  corporation 
which  took  the  place  of  the  proposed 
voluntary  association,  where  the  sub- 
scriber knew  of  the  change  of  plan 
and  did  not  object.  Osborn  v.  Crosby, 
63  N.  H.  583  (1885).  Subscrip- 
tions to  its  stock  are  collectible  the 
same  as  subscriptions  to  stock  of  cor- 
porations. Bullock  V.  Falmouth,  etc. 
Co.,  85  Ky.  184  (1887).  See  ch.  IV, 
supra.  A  subscription  agreement 
signed  by  various  parties  to  pay  the 
amount  set  opposite  their  respective 
names  towards  a  creamery  is  several 
and  not  joint.  Cornish  v.  West,  82 
Minn.  107  (1901).  A  citizen  of  Mary- 
land who  holds  a  loss  claim  against 
a  Pennsylvania  mutual  insurance  com- 
pany which  is  insolvent  cannot  have 
a  receiver  appointed  in  Maryland  if 
it  is  impracticable  for  the  Maryland 
courts  to  levy  the  necessary  assess- 
ments to  wind  up  the  affairs  of  the 
association.  Stockley  v.  Thomas,  89 
Md.  663  (1899). 

3Mande\-ille   v.   Riggs,   2   Pet.   482 


(1829),  reversing  Riggs  v.  Swann,  3 
Cranch,  C.  C.  183  (1827);  s.  c,  20 
Fed.  Cas.  788.  See  also  Phipps  v 
Jones,  20  Pa.  St.  260  (1853) ;  Dennis 
V.  Kennedy,  19  Barb.  517  (1854) 
Wood  V.  Draper,  24  Barb.  187  (1857) 
Smith  V.  Lockwood,  1  Code  Rep.  (N 
S.)  319  (1851);  Birmingham  v.  Gal- 
lagher, 112  Mass.  190  (1873) ;  Snow  v 
Wheeler,  113  Mass.  179  (1873);  Pipe 
V.  Bateman,  1  Iowa,  369  (1855) ;  Mar- 
shall V.  Lovelass,  Cam.  &  N.  (N.  C.) 
217  (1801) ;  Lloyd  v.  Loaring,  6  Ves. 
Jr.  773  (1802) ;  Deems  v.  Albany,  etc. 
Line,  14  Blatchf.  474  (1878) ;  s.  c,  7 
Fed.  Cas.  348.  See  also  note  5,  p. 
1466,  supra.  As  regards  the  prac- 
tice in  bringing  actions  against  mem- 
bers of  an  unincorporated  association, 
see  Kneeland,  Attachments,  ch.  XVI. 
Suit  on  an  obligation  of  an  unincor- 
porated association  should  be  not 
against  it  in  its  collective  name,  but 
the  suit  should  be  in  equity  against 
some  of  the  members  and  all  others 
having  the  same  interest  to  compel 
the  defendants  after  judgment  to  see 
that  the  treasurer  pays  the  claim. 
Maisch  v.  Order  of  Americus,  223  Pa. 
St.  199  (1909).  An  association  of 
members  may  be  sued  by  suing  some  of 
them  as  representing  themselves  and 
the  others.  Wolfe  v.  Limestone,  etc., 
223  Pa.  St.  357  (1912).  The  directors 
of  an  unincorporated  club  may  be 
personally  sued  on  a  lease  without 
joining  the  remaining  members.  Pel- 
ton  V.  Place,  71  Vt.  430  (1899).  The 
trustees  of  an  unincorporated  asso- 
ciation may  sue  on  a  bond  given  to 
them  and  need  not  add  their  title  as 
plaintiffs.  Heeker  v.  Cook,  20  Colo. 
App.  282  (1904).  In  New  Jersey  an 
unincorporated  express  company  may 


1488 


CH.   XXIX. I 


TRUSTS,    ETC. 


[§  508. 


associations  must  be  brought  in  the  name  of  or  against  all  the  members.^ 
One  stockholder  cannot  bring  a  suit  at  law  against  another  on  a  demand 
growing  out  of  the  association  until  a  settlement  and  a  balance  is  struck, 


be  sued  in  its  own  name  whether  it 
be  regarded  as  a  corporation  or  not. 
Saunders  v.  Adams  Exp.  Co.,  71  N.  J. 
L.  520  (1904).  Although  an  unin- 
corporated express  company  is  sued  as 
a  company,  yet  the  proofs  may  show 
that  it  is  a  partnership.  A  statute 
relative  to  "express  companies"  ap- 
plies to  an  unincorporated  company. 
United  States  Exp.  Co.  v.  State,  164 
Ind.  196  (1905). 

1  Williams  v.  Bank  of  Michigan,  7 
Wend.  539,  542  (1831);  Detroit 
Schuetzen  Bund  v.  Detroit  Agitations 
Verein,  44  Mich.  313  (1880) ;  Mears  v. 
Moulton,  30  Md.  142  (1868);  Mc- 
Greary  v.  Chandler,  58  Me.  537  (1870). 
In  Minnesota  suits  by  or  against  an 
unincorporated  association  must  be  in 
the  names  of  members.  St.  Paul,  etc. 
i;.  St.  Paul,  etc.,  94  Minn.  351  (1905). 
Where  the  bondholders  are  recon- 
structing the  property  they  may  be 
personally  liable,  but  a  suit  against 
them  must  be  against  them  individu- 
ally and  not  as  "bondholders."  Stand- 
ard, etc.  Co.  V.  Muncey,  33  Tex.  Civ. 
App.  416  (1903).  Where  several  per- 
sons construct  a  telephone  line,  each 
paying  his  proportion  of  the  cost,  the 
telephone  line  to  be  for  their  personal 
use,  and  there  being  no  profit  in- 
volved, they  are  liable  jointly  for  re- 
pairs, but  they  are  not  partners,  and 
in  a  suit  against  them  all  must  be 
joined.  Clements  v.  Miller,  13  N.  Dak. 
176  (1904).  An  unincorporated  trade 
union  cannot  be  sued  in  its  company 
name,  but  must  be  sued  in  the  name 
of  all  its  members.  Karges,  etc.  Co. 
V.  Amalgamated,  etc.  165  Ind.  421 
(1905).  A  suit  against  an  unincor- 
porated association  should  not  be 
against  it  in  its  company  name. 
Farmers'  Mutual  v.  Reser,  43  Ind.  App. 
634  (1909).  A  firm  doing  business  in 
an  apparent  corporate  name  cannot  be 
held  hable  on  a  judgment  obtained  by 
one  of  its  employees  for  a  personal 
injury,  the  suit  being  against  such 
corporate  name  as  a  corporation. 
Baxter   v.  Jones,    185   Fed.    Rep.   900 


(1910).  An  unincorporated  telephone 
association  cannot  maintain  a  suit 
in  the  name  of  two  of  its  members 
for  themselves  and  the  others.  West- 
brook  V.  Griffin,  132  Iowa,  185  (1906). 
One  or  more  members  of  an  unincor- 
porated association  may  sue  for  the 
benefit  of  all.  Liggett  v.  Ladd,  17 
Oreg.  89  (1888).  In  Ferine  v.  Grand 
Lodge  A.  O.  U.  W.,  48  Minn.  82 
(1892),  where  an  insurance  policy  was 
sued  upon,  the  court  held  that  it  was 
immaterial  that  the  defendant  was 
not  incorporated,  inasmuch  as  it  had 
held  itself  out  as  a  corporation.  The 
court  may  direct  a  writ  of  mandamus 
to  be  served  upon  the  resident  gen- 
eral agent  of  the  company.  State  v. 
Adams,  etc.  Co.,  66  Minn.  271  (1896). 
By  statute,  in  Ohio,  one  or  more  of 
the  stockholders  may  sue  for  the  bene- 
fit of  the  association.  Piatt  v.  Colvin, 
50  Ohio  St.  703  (1893).  In  a  suit 
against  an  unincorporated  association, 
the  members  of  which  are  so  scattered 
as  to  render  ser\'ice  upon  all  impos- 
sible, ser-vice  upon  its  officers  is  suffi- 
cient to  give  the  court  jurisdiction 
over  the  members.  An  unincorpo- 
rated association  acting  as  a  cor- 
poration may  be  sued  as  a  corpora- 
tion in  its  corporate  name  by  one  of 
its  members.  Fitzpatrick  v.  Rutter, 
160  m.  282  (1895).  A  member  of  an 
unincorporated  church  may  bring  suit 
in  behalf  of  himself  and  the  other 
members  for  a  debt  due  the  church. 
Perkins  v.  Siegfried's  Adm'r,  97  Va. 
444  (1899).  As  to  a  bill  in  equity  in 
the  United  States  court  against  an 
unincorporated  association  having 
many  members,  see  Amer.  Steel,  etc. 
Co.  V.  Wire  Drawers',  etc.  Unions,  90 
Fed.  Rep.  598  (1898).  An  agreement 
between  an  improvement  company 
and  purchasers  of  lots  that  the  profits 
wiU  be  used  for  certain  improvements 
may  be  enforced  by  one  lot  purchaser 
in  behalf  of  all.  Whiting  v.  Elmira, 
etc.  Assoc,  45  N.  Y.  App.  Div  349 
(1899). 


(94) 


1489 


§  508.]  TRUSTS,    ETC.  [cH.  XXIX, 

unless  payment  Is  fraudulently  withheld,  the  parties  being  partners.^ 
But  often  suit  may  be  maintained  against  the  officers  or  a  committee 
of  a  voluntary  association  without  bringing  in  all  the  members.^  An 
unincorporated  association  formed  for  pecuniary  profit  is  a  partnership, 
it  being  different  in  this  respect  from  an  association  formed  for  other 
objects.  The  obligation  of  its  members  for  the  debts  is  joint,  and  if  a 
creditor  enters  a  judgment  against  one  of  the  members,  he  cannot  there- 
after obtain  judgment  against  any  other  member.^  A  statute  may  pro- 
vide that  service  upon  an  officer  of  an  unincorporated  association  shall 
be  binding  on  all  the  parties  in  enforcing  their  liability.'*  A  member 
who  transfers  his  interest  is  nevertheless  liable  for  precedent  debts 
of  the  association.^  Members  who  sell  their  stock  and  withdraw  are 
liable  for  subsequent  debts  where  proper  notice  of  their  withdrawal  has 
not  been  given,  the  same  as  in  a  partnership.^  The  members  are  liable 
for  past  contracts,  even  though  they  dissolve  the  association.^  A  pur- 
chaser of  stock  in  an  unincorporated  association  is  not  liable  to  creditors 
for  debts  contracted  before  he  became  a  member.^  The  rights  and  Ha- 
bilities  of  a  member  depend  upon  the  law  of  the  place  of  the  domicile 
of  the  company  itself.^  The  rules  applicable  to  stockholders  in  cor- 
porations are,  by  analogy,  applied  to  members  in  these  companies,  es- 
pecially as  regards  their  defenses  to  subscriptions^*'  and  meetings  of  the 

iMilligan    v.    Mackinlay,    209    111.  « Christy   v.   Sill,    131    Pa.   St.   492 

358  (1904).  (1890).     The  transferee  of  a  share  in 

2  Spaulding  v.  Evenson,  149  Fed.  an  unincorporated  company  is  liable 
Rep.  913  (1906) ;  aff'd,  150  Fed.  Rep.  for  all  debts  existing  at  the  time  of 
517.  In  a  suit  against  an  association,  or  after  the  transfer.  Taylor  v.  Ifill^ 
service  on  one  member  who  is  expressly  1  N.  R.  566  (1863).  Although  a  stock- 
or  impliedly  authorized  to  represent  holder  purchased  his  stock  from  the 
the  rest  binds  them.  Romona,  etc.  association,  which  was  insolvent  at 
Co.  V.  Bolger,  179  Fed.  Rep.  979  (1910).  the  time,  yet  he  cannot  offset  this  as 

3  United  Press  v.  Abell  Co.,  87  N.  Y.  capital  contributed  by  him.  Barndol- 
App.  Div.  345  (1903).  lar  v.  Du  Bois,  142  Pa.  St.  565  (1891). 

*  Patch  Mfg.  Co.  V.  Capeless,  79  Vt.  A  member  is  not  liable  for  debts  con- 
1  (1906).  A  judgment  against  the  traeted  before  he  became  a  member, 
association  is  conclusive  of  liabihty  Hornberger  v.  Orchard,  39  Neb.  639 
of  those  who  were  members  when  the  (1894). 

original    liability    was    created.     Tar-  ^  Cutler  v.  Thomas,  25  Vt.  73  (1852). 

bell  &  Whitham  v.  Gifford,  82  Vt.  222,  "  That  the  full  capital  stock  must 

(1909).  be  subscribed  before  any  subscription 

*  Morgan's  Case,  1  De  G.  &  Sm.  750  is  collectible  ;  see  Bray  v.  FarweU,  81 
(1849) ;  Tyrrell  v.  Washburn,  88  Mass.  N.  Y.  600  (1880).  Contra,  Tappan  v. 
466  (1863).  For  the  liability  as  Bailey,  45  Mass.  529  (1842) ;  Boston, 
affected  by  the  transfer  of  stock,  see  etc.  R.  R.  v.  Pearson,  128  Mass.  445 
Smith  V.  Virgin,  33  Me.   148   (1851).  (1880) ;  Pitchford  v.  Davis,  5  M.  &  W. 

6  New  York,  etc.  Bank  v.  Crowell,  2  (1839).  Forfeiture  of  stock  releases 
177  Pa.  St.  313  (1896).  the    member   only    as    to    subsequent 

^  Camden,  etc.  R.  R.  v.  Guarantors    debts.     Skinner  v.  Dayton,  19  Johns, 
of    Pennsylvania,    59    N.    J.    L.    328    513    (1822). 
(1896). 

1490 


CH.   XXIX.] 


TRUSTS,    ETC. 


[§  509. 


company.^  These  associations  cannot  be  taxed  on  a  franchise,  as  cor- 
porations may  be.  Although  a  law  library  corporation  has  a  capital 
stock  which  is  fully  paid,  yet  a  by-law  may  assess  annual  dues  upon  the 
members."  But  where  a  certificate  of  membership  in  a  mutual  benefit 
association  provides  that  the  members  shall  comply  with  future  regu- 
lations, this  does  not  justify  increasing  the  rate  of  assessment  by  by- 
law.^ In  Rhode  Island  it  is  held  that  mandamus  does  not  lie  against 
an  unincorporated  association  nor  its  officers  in  their  official  or  unofficial 
capacity.^  The  jurisdiction  of  the  federal  courts  is  considered  else- 
w^here.^ 

§  509.  Actions  by  members  against  officers  and  the  association.  — 
The  members  may  bring  an  action  to  remedy  the  fraud,^  ultra  vires 
acts,^  and  negligence  ^  of  the  trustees.     The  owner  of  a  certificate  of 


^  See  §  505,  supra. 

-  Omaha  L.  L.  Assoc,  v.  Connell,  55 
Neb.  396  (1898).  Cf.  §§241-243, 
supra. 

3  Green  v.  Royal  Arcanum,  206 
N.  Y.  591  (1912). 

^  Doyle  V.  Burke,  29  R.  I.  123 
(1908). 

*  See  §  505  supra. 

^  The  other  members  are  not  proper 
parties.  Boody  v.  Drew,  46  How.  Pr. 
459  (1874).  A  farmers'  cooperative 
store  carried  on  by  farmers  who  con- 
tribute to  the  capital  and  take  a  cer- 
tificate of  stock  is  a  partnership,  it 
being  unincorporated,  and  if  the  man- 
ager by  a  fraudulent  chattel  mort- 
gage gets  possession  of  the  assets  he 
may  be  brought  to  account  therefor 
by  one  of  the  members.  Snyder  v. 
Lindsey,  157  N.  Y.  616  (1899).  An 
officer  may  be  enjoined,  but  not 
removed.  The  suit  must  not  be  in  the 
interest  of  a  rival  company.  Water- 
bury  V.  Merchants'  Union  Exp.  Co., 
50  Barb.  157  (1867).  Trustees  receiv- 
ing gifts  are  Uable  therefor  to  the 
company.  Re  Fry,  4  Phila.  Rep.  129 
(1860).  Trustees  cannot  sell  to  the 
company.  Robbins  v.  Butler,  24  111. 
387  (1860).  The  treasurer  may  be 
compelled  to  pay  over  funds  belonging 
to  the  company.  Sharp  v.  Warren, 
6  Price,  131  (1818).  The  trustees 
are  liable  in  tort  for  their  frauds  on 
the  company.  Dennis  v.  Kennedy,  19 
Barb.  517  (1854).  A  committee  to 
build  may  be  made  to  account  where 
they    secretly    contract    with    them- 


selves, though  the  contract  is  nomi- 
nally with  other  persons.  Whitman 
V.  Bowden,  27  S.  C.  53  (1887).  A 
member  of  an  unincorporated  social 
club  must  make  out  a  strong  ease  of 
mismanagement  before  the  courts 
will  interfere.  RoUins  v.  Denver  Club, 
43  Colo.  345  (1908). 

'  A  member  cannot  be  compelled  to 
accept  the  stock  of  another  company 
for  his  interest,  a  consolidation  of  the 
two  ha\ing  been  made.  Frothingham 
V.  Barney,  6  Hun,  366  (1876).  But  he 
may  not  be  able  to  prevent  the  consol- 
idation. McVicker  v.  Ross,  55  Barb. 
247  (1869).  An  ultra  vires  act  may  be 
enjoined.  Abels  v.  McKeen,  18  N.  J. 
Eq.  462  (1867).  The  members  need 
not  make  good  the  officers'  debts  paid 
by  the  latter,  growing  out  of  ultra 
vires  acts.  Crum's  Appeal,  66  Pa.  St. 
474  (1870).  But  the  officers  them- 
selves are  liable  to  third  persons.  Sul- 
livan V.  CampbeU,  2  Hall  (N.  Y.),  271 
(1829).  And  possibly  the  members. 
SulHvan  v.  Campbell,  2  Hall  (N.  Y.), 
271  (1829).  If  a  member  has  not 
participated  or  acquiesced  in  the 
ultra  vires  act  he  is  not  liable  thereon. 
Roberts's  Appeal,  92  Pa.  St.  407 
(1880).  Cf.  Van  Aernam  v.  Bleistein, 
102  N.  Y.  355  (1886),  holding  the  mem- 
bers liable  for  a  libel ;  aff'g  Van  Aer- 
nam v.  MeCune,  32  Hun,  316. 

8  Re  Fry,  4  Phila.  129  (1860).  The 
trustees  of  an  unincorporated  bank 
are  liable  for  depositing  its  money 
with  a  stock-brokerage  house  even 
though  the  agreement  exempted  them 


1491 


I  510.] 


TRUSTS,    ETC. 


[CH.  XXIX. 


interest  in  land  used  for  a  cemetery  may  maintain  a  suit  in  equity  to 
compel  the  association  to  account  for  sales.^  In  New  York  a  member 
may,  by  statute,  sue  the  company,  in  the  same  manner  that  a  stock- 
holder in  a  corporation  may  sue  the  corporation.^  A  bill  in  equity  by 
a  member  of  an  unincorporated  association  to  enjoin  the  directors  from 
enforcing  an  alleged  illegal  by-law  must  join  all  the  directors  as  de- 
fendants.^ 

§  510.  Dissolution  —  Disposition  of  property.  —  Where  the  term 
of  existence  of  a  joint-stock  company  is  fixed  by  its  articles  of  associa- 
tion, it  cannot  be  dissolved  at  the  instance  of  a  member  before  the  ex- 
piration of  that  time.'*  It  may,  however,  be  dissolved  where  the  en- 
terprise becomes  wholly  impracticable  or  its  attainment  impossible, 


from  liability  except  for  wilful  mis- 
conduct. Holmes  v.  McDonald,  226 
111.  169  (1907).  Where  by  reason  of 
negligence  of  the  trustees  a  second 
mortgage  is  not  protected  and  con- 
sequently is  foreclosed,  the  share- 
holders may  hold  the  trustees  person- 
ally liable.  Ashley  v.  Winkley,  209 
Mass.  509  (1911). 

1  Tyndall  v.  Pinelawn  Cemetery, 
198  N.  Y.  217  (1910). 

2  Code  Civ.  Proc,  §  1919 ;  Westeott 
V.  Fargo,  61  N.  Y.  542  (1875) ;  Salts- 
man  V.  Shults,  14  Hun,  256  (1878). 
At  common  law  the  name  is  not  recog- 
nized and  the  suit  would  fail.  Habicht 
V.  Pemberton,  4  Sandf.  657  (1851); 
Pipe  V.  Bateman,  1  Iowa,  369  (1855) ; 
Ewing  V.  Medlock,  14  Ala.  (O.  S.) 
82  (1837) ;  Schmidt  v.  Gunther,  5 
Daly,  452  (1874). 

3  Greer,  etc.  Co.  v.  Stoller,  77  Fed. 
Rep.  1  (1896). 

*  Von  Schmidt  v.  Huntington,  1  Cal. 
55  (1850).  See  also  Smith  v.  Virgin, 
33  Me.  148  (1851).  Cf.  Lindley,  Partn. 
234;  Lafond  v.  Deems,  81  N.  Y.  507 
(1880).  An  unincorporated  associa- 
tion for  business  purposes  with  trans- 
ferable shares  is  legal  in  Illinois  and  a 
member  of  it  cannot  have  it  wound 
up  before  the  time  of  its  duration  as 
fixed  by  its  articles  of  association 
expires.  Hossack  v.  Ottawa,  etc. 
Ass'n,  244  111.  274  (1910).  The  mi- 
nority cannot  force  a  dissolution  as  in 
the  case  of  partnership.  Equity  will 
not  aid,  unless  there  is  good  reason  for 
dissolution.  Hinkley  v.  Blethen,  78 
Me.  221  (1886).     The  minority  of  an 


Odd  Fellows'  lodge  cannot  compel 
a  sale  of  the  property  and  distribu- 
tion. Robbins  v.  Waldo  Lodge,  78 
Me.  565  (1887);  and  see  Bagley  v. 
Smith,  10  N.  Y.  489  (1853).  Where 
the  articles  of  association  of  an  unin- 
corporated joint-stock  association 
authorize  dissolution  at  any  time  upon 
the  vote  of  a  majority  in  interest, 
such  dissolution  may  be  had,  although 
it  is  for  the  purpose  of  transferring  all 
the  assets  to  a  foreign  corporation  for 
stock  of  the  latter,  the  privilege,  how- 
ever, being  given  to  each  stockholder 
to  receive  payment  in  cash  on  the  basis 
of  a  certain  valuation  of  the  assets, 
which  valuation  is  fair  and  adequate. 
Francis  v.  Taylor,  31  N.  Y.  Misc.  Rep. 
187  (1900) ;  aflf'd,  52  N.  Y.  App.  Div. 
631.  The  nature  of  a  horticultural 
society  issuing  a  certificate  of  interest 
in  the  property  to  each  member  was 
considered  in  Re  Jones,  [1898]  2  Ch.  83, 
upon  an  application  for  dissolution 
and  distribution  of  the  assets.  An 
unincorporated  bank  which  is  owned 
entirely  by  one  individual  is  his  pri- 
vate property,  even  though  the  bank 
has  a  president  and  cashier.  Long- 
fellow V.  Barnard,  58  Neb.  612  (1899). 
A  court  will  wind  up  a  partnership, 
even  before  its  fixed  time  of  existence 
has  expired,  if  it  is  insolvent  or  un- 
profitable or  incapable  of  proceeding. 
Jennings  v.  Baddeley,  3  K.  &  J.  78 
(1856) ;  Baring  v.  Dix,  1  Cox,  Ch.  213 
(1786);  Bailey  v.  Ford,  13  Sim.  495 
(1843);  Holladay  v.  Elliott,  8  Oreg. 
84  (1879) ;  Seighortner  v.  Weissen- 
born,  20  N.  J.  Eq.  172  (1869) ;  Brien 


1492 


CH.  XXIX. 


TRUSTS,    ETC. 


[§  510. 


but  not  always  because  of  the  misconduct  of  its  officers.^  The  death 
of  a  member  does  not  dissolve  it ;  -  nor  does  a  transfer  of  one's  interest.^ 
The  dissolution  of  one  of  the  subordinate  unincorporated  organizations 
by  the  general  organization  does  not  vest  in  the  latter  the  property  of 
the  former.'*  The  incorporation  of  the  association  by  a  part  of  the 
members  does  not  dissolve  the  association.^  The  incorporation  of  an 
'association  is  a  material  change  in  the  association,  which  is  not  legal 
unless  authorized   by   an   amendment  to   its  articles  of  association.^ 


V.  Harriman,  1  Tenn.  Ch.  467  (1873) ; 
Howell  V.  Harvey,  5  Ark.  270  (1843) ; 
Van  Ness  v.  Fisher,  5  Lans.  236  (1871). 

'  Waterburj'  v.  JNIerehants'  Union 
Exp.  Co.,  50  Barb.  157  (1867).  Contra, 
Mills  V.  Hurd,  32  Fed.  Rep.  127  (1887). 

2  McNeish  v.  U.  S.  Hulless  Oat  Co., 
57  Vt.  316  (1884).  Cf.  Walker  v. 
Wait,  50  Vt.  668  (1878).  The  death 
of  a  stockholder  does  not  dissolve  the 
association  nor  release  his  estate  from 
subsequently  incurred  debts.  Phil- 
lips V.  Blatchford,  137  Mass.  510 
(1884).  The  death  of  a  member  does 
not  dissolve  the  company,  but  if  it 
has  not  paid  dividends  for  twenty- 
three  years  and  is  not  Ukely  to  pay 
any,  a  court  may  decree  dissolution. 
Willis  V.  Chapman,  68  Vt.  459  (1896). 
The  death  of  a  shareholder  does  not 
dissolve  'an  unincorporated  joint-stock 
association  where  the  agreement  under 
which  it  was  organized  provides  to 
the  contrar5\  Spotswood  v.  Morris, 
12  Idaho,  360  (1906).  A  shareholder 
in  an  unincorporated  joint-stock  com- 
pany who  has  sold  his  stock  cannot 
then  claim  that  the  association  became 
dissolved  by  the  death  of  a  member. 
Taber  v.  Breck,  192  Mass.  355  (1906). 
A  syndicate  formed  to  control  property 
for  ten  years  and  carry  its  debts  is  not 
dissolved  by  the  death  of  one  of  the 
syndicate.  Babcock  v.  Farwell,  245 
111.  14  (1910). 

^  A  transfer  of  his  stock  by  a  mem- 
ber does  not  dissolve  a  joint-stock 
association  under  the  Pennsylvania 
law.  Re  Globe  Refining  Co.,  151  Pa. 
St.  558  (1892). 

*  Wicks  V.  Monihan,  130  N.  Y.  232 
(1891).  The  withdrawal  of  a  charter 
by  a  higher  body  from  one  of  its 
branches  does  not  affect  the  right  of 
the  latter  to  its  property.  WeUs  v. 
Monihan,  129  N.  Y.  161  (1891). 


s  See  Schwartz  v.  Duss,  187  U.  S.  8 
(1902).  A  part  of  the  members  of 
an  unincorporated  association  cannot 
proceed  to  incorporate  it  against  the 
objections  of  the  others.  Rudolph  v. 
Southern  Ben.  League,  23  Abb.  N.  C. 
199  (1889).  Where  an  unincorporated 
association  appoints  a  committee  to 
incorporate,  and  they  do  so,  and  then 
proceed  to  run  an  opposition  business, 
the  association  cannot  enjoin  them 
from  so  doing.  Paulino  v.  Portuguese 
Ben.  Assoc,  18  R.  I.  165  (1893).  A  ' 
committee  appointed  by  a  voluntary 
association  to  obtain  a  charter  may 
incorporate  in  the  name  of  the  volun- 
tary association,  and  the  association 
cannot  enjoin  the  use  of  such  name. 
Paulino  v.  Portuguese  Ben.  Assoc,  18 
R.  I.  165  (1893). 

^  National  Grand  Lodge  v.  Watkius, 
175  Pa.  St.  241  (1896).  Where  the 
president  of  an  unincorporated  asso- 
ciation issues  treasury  stock  and 
thereby  obtains  control  of  the  asso- 
ciation and  sells  it  out  to  a  corpora- 
tion organized  by  himself,  the  minor- 
ity stockholders  of  the  association 
may  compel  him  to  account  for  the 
property.  As  regards  the  person  to 
whom  the  stock  was  issued,  however, 
a  general  allegation  that  he  acted  in 
connection  with  the  president  is  not 
sufficient  to  render  him  liable  on  the 
ground  of  fraud.  Booth  v.  Dodge,  60 
N.  Y.  App.  Div.  23  (1901).  Where 
an  unincorporated  association  unani- 
mously agrees  to  incorporate  and  does 
so,  all  rights  pass  to  the  new  cor- 
poration. Red,  etc  Club  v.  Red,  etc. 
Club,  108  Iowa,  105  (1899).  Where 
at  the  time  of  the  organization  of  a 
voluntary  association,  the  statutes 
authorized  such  an  association  to 
become  a  corporation,  a  dissenting 
member    cannot    prevent    such  incor- 


1493 


§  510.] 


TRUSTS,    ETC. 


[CH.  XXIX. 


Upon  dissolution  the  trustees  of  the  company  are  bound  to  convert  the 
property  into  cash  and  distribute  it.^  On  winding  up  an  unincorporated 
banking  association,  past  stockholders  do  not  participate  in  the  final 
distribution,  even  though  they  paid  past  debts.^  One  stockholder 
cannot  sue  another  at  law  for  his  part  of  the  assets.^  In  proceedings 
for  a  dissolution  all  the  members  need  not  be  made  parties.^  Where 
an  express  company,  being  an  unincorporated  stock  association,  has 
twelve  million  dollars  surplus  and  invests  it  in  outside  securities,  and 
then  deposits  the  securities  with  a  trust  company  in  New  York,  and 
then  makes  a  bond  dividend,  the  bonds  to  be  payable  only  out  of  such 

poration  subsequent  to  organization. 
Spiritual,  etc.  v.  Vincent,  127  Wis.  93 
(1906).  A  trustee  holding  property 
for  various  persons  cannot  transfer 
it  to  a  corporation  in  exchange  for 
stock  of  the  latter,  even  though  the 
trust  agreement  authorizes  a  sale  and 
provides  that  the  proceeds  of  the  sale 
shall  be  divided  among  the  benefi- 
ciaries. In  a  suit  to  enjoin  such  sale 
an  action  to  hold  members  of  the 
executive  committee  personally  liable 
for  conspiracy  should  not  be  joined. 
Moody  V.  Flagg,  125  Fed.  Rep.  819 
(1903).  The  benefits  given  by  a  cer- 
tificate issued  by  a  fraternal  benefit 
or  life  insurance  association,  cannot 
be  modified  by  amendments  to  the 
by-laws,  even  though  the  certificate 
provided  that  the  applicant  should 
conform  to  all  by-laws  then  in  force 
or  thereafter  adopted,  and  even  though 
the  certificate  of  incorporation  pro- 
vided that  beneficiaries  should  receive 
such  sums  as  the  by-laws  from  time 
to  time  prescribed.  Evans  v.  So. 
Tier,  etc.  Assoc,  182  N.  Y.  453  (1905). 
1  Frothingham  v.  Barney,  6  Hun, 
366  (1876);  Butterfield  v.  Beardsley, 
28  Mich.  412  (1874).  Upon  the  expi- 
ration of  the  time  for  which  the 
company  was  organized  it  becomes  dis- 
solved, and  the  assets  must  be  dis- 
tributed if  any  one  of  the  members 
insists  thereon.  Mann  v.  Butler,  2 
Barb.  Ch.  362  (1847).  As  to  the  dis- 
tribution of  funds  of  an  incorporated 
benevolent  association,  see  Ashton  v. 
Dashaway  Assoc,  84  Cal.  61  (1890). 
As  to  the  land,  see  §  504,  supra.  As 
to  the  rules  governing  the  distribu- 
tion of  the  assets  of  a  mutual  benefit 
building    corporation,    see    People    v. 


Lowe,  117  N.  Y.  175  (1889).  Where 
the  purpose  of  the  organization  of  a 
volunteer  fire  department  ceases,  and 
the  fund  is  placed  in  the  hands  of 
trustees  for  specified  purposes,  which 
are  not  carried  out,  the  money  does 
not  go  to  the  state  but  belongs  to  the 
members  and  their  personal  represen- 
tatives. Hopkins  v.  Crossley,  138 
Mich.  561  (1904).  The  winding  up  of 
a  land-owning  joint-stock  association 
was  involved  in  Randolph  v.  Nichol, 
74  Ark.  93  (1905).  Where  a  joint- 
stock  association  having  $12,000,000 
surplus  invested  in  securities  issues 
its  bonds  to  the  amount  of  $12,000,000 
to  its  stockholders  as  a  dividend  in 
place  of  distributing  such  Securities 
or  the  proceeds  thereof,  the  interest 
on  the  bonds  to  be  paid  only  from  the 
income  from  the  securities  after  pay- 
ing the  debts,  such  bonds  do  not  belong 
to  a  life  tenant,  but  belong  to  the 
remaindermen.  D'Ooge  v.  Leeds,  176 
Mass.  558  (1900).  Where  a  majority 
of  a  voluntary  association  secede  from 
the  higher  organization  to  which  the 
lower  one  belongs,  they  cannot  take 
the  property  with  them.  Gorman  v. 
O'Connor,  155  Pa.  St.  239  (1893). 
In  general,  see  Clegg  v.  Ellison,  [1898] 
2  Ch.  83. 

2  Stockdale  v.  Maginn,  207  Pa.  St. 
227  (1903). 

'  Whitehouse  v.  Sprague,  7  Atl. 
Rep.  17  (Me.  1886). 

*  Such  as  non-residents  who  cannot 
be  reached.  Angell  v.  Lawton,  76  N.  Y. 
540  (1879).  The  complainant  may 
bring  the  proceeding  in  behalf  of  him- 
self and  others  having  a  common 
interest  with  him.  Mann  v.  Butler,  2 
Barb.  Ch.  362  (1847). 


1494 


CH.  XXIX.]  TRUSTS,    ETC.  [§  510. 

securities,  and  the  creditors  of  the  company  to  have  recourse  to  such 
securities,  a  tax  cannot  be  levied  thereon  in  Kentucky.^  Associations 
cannot  be  taxed  on  a  franchise,  as  corporations  may  be.^ 

1  Coulter  V.  Weir,  127  Fed.  Rep.  897  dent  bore  towards  the  total  number  of 

(1904) ;  modified,  128  Fed.  Rep.  1019.  shares.     Matter  of  Willmer,  153  N.  Y. 

The  former  New  York  inheritance  tax  App.  Div.  804  (1912). 
law  applied  to  shares  held  by  a  non-         ^  Hoadley    v.    Essex    County,     105 

resident   in   an  unincorporated   joint-  Mass.  519  (1870) ;  Gleason  v.  McKay, 

stock    association    doing    business    in  134    Mass.    419    (1883),    holding    the 

New  York,  but  the  tax  was  limited  to  statute    to    be    unconstitutional.     Cf. 

such  part  of  the  assets  in  the  state  as  §  505,  supra. 
the  number  of  shares  of  the  non-resi- 


1495 


CHAPTER   XXX. 


STOCKHOLDERS'   RIGHT  TO   INSPECT  THE  BOOKS  OF  THE 

CORPORATION. 


511.  Common-law  rights. 

512.  Common-law   action   for    dam- 

ages for  refusal. 

513.  Mandamus    is     the    preferable 

remedy. 

514.  Not    granted    as    a    matter    of 

course    unless    the    right    is 
statutory. 

515.  When  it  will  and  will  not  be 


granted  —  Foreign     corpora- 
tion. 
§  516.  Allegations  and  form  of  writ. 

517.  Right    to    inspect    minutes    of 

meetings  of  directors. 

518.  Statutes  giving  right  of  inspec- 

tion. 

519.  Orders  to  corporation  to  allow 

inspection  —  Subpoena    duces 
tecum  —  Bill  of  discovery. 


§  511.  Com77ion-law  rights.  —  The  stockholders  of  a  corporation 
had,  at  common  law,  a  right  to  examine  at  any  reasonable  time,  and 
for  any  reasonable  purpose,  any  one  or  all  of  the  books  and  records  of 
the  corporation.^     This  rule  grew  out  of  an  analogous  rule  applicable 


1  Quoted  and  approved  in  State  v. 
Grymes,  65  W.  Va.  451  (1909).  At 
common  law  a  stockholder  has  a  right 
to  inspect  the  books  of  a  corporation. 
Hobbs  V.  Tom  Reed,  etc.  Co.,  129 
Pac.  Rep.  781  (Cal.  1913).  "At  com- 
mon law  the  stockholders  of  a  corpora- 
tion had  the  right  to  examine,  at 
reasonable  times,  the  records  and 
books  of  the  corporation."  Stone 
V.  Kellogg,  165  111.  192  (1896).  Stock- 
holders "have  the  right,  at  common 
law,  to  examine  and  inspect  all  the 
books  and  records  of  the  corporation 
at  all  seasonable  times,  and  to  be 
thereby  informed  of  the  condition  of 
the  corporation  and  its  property." 
Per  Redfield,  .J.,  in  Lewis  v.  Brainerd, 
53  Vt.  519  (1881).  In  Commonwealth 
V.  Phoenix  Iron  Co.,  105  Pa.  St.  Ill 
(1884),  the  court  said:  "In  the 
absence  of  agreement,  every  share- 
holder has  the  right  to  inspect  the 
accounts  —  a  right  subject  to  the 
necessities  of  the  company,  yet  exist- 
ing. .  .  .  The  doctrine  of  the  law  is 
that  the  books  and  papers  of  the  cor- 
poration, though  of  necessity  kept  in 
some  one  hand,  are  the  common  prop- 


erty of  all  the  stockholders."  The 
right  exists  although  "its  exercise  be 
inconvenient  to  the  bookkeepers  and 
managers  of  the  partnership  business." 
In  Huylar  v.  Cragin  Cattle  Co.,  40 
N.  J.  Eq.  392  (1895),  the  court  said: 
"Stockholders  are  entitled  to  inspect 
the  books  of  the  company  for  proper 
purposes  at  proper  times  .  .  .  and 
they  are  entitled  to  such  inspection 
though  their  only  object  is  to  ascer- 
tain whether  their  affairs  have  been 
properly  conducted  by  the  directors 
or  managers.  Such  a  right  is  neces- 
sary to  their  protection."  Deaderick 
V.  Wilson,  8  Baxt.  (Tenn.)  108  (1874). 
"The  minority  stockholder  should 
have  the  same  right  to  require  a 
statement  from  the  company."  Sage 
V.  Culver,  71  Hun,  42  (1893);  aff'd, 
147  N.  Y.  241.  Unless  a  good  reason 
is  given  for  inspection  it  will  not  be 
granted  at  common  law.  Venner  v. 
Chicago  City  Ry.,  152  111.  App.  398 
(1910).  The  nominal  holder  of  stock 
belonging  to  another  person  has  no 
right  to  examine  the  corporate  books. 
Richmond  v.  Hill,  148  111.  App.  179 
(1909).     The  fact  that  a  stockholder 


1496 


CH.   XXX.] 


INSPECTION    OF   CORPOIV\TE   BOOKS. 


[§  511. 


t6  public  corporations  and  to  ordinary  copartnerships,  the  books  of 
which,  by  well-estabhshed  law,  are  always  open  to  the  inspection  of 
meijibers.^  The  general  rule  is  that  a  stockholder  has  a  right  to  examine 
the  original  papers  and  vouchers  of  the  corporation,  where  some  property 
right  is  involved,  or  some  controversy  exists,  or  some  specific  and  valu- 
able interest  is  in  question,  to  settle  which  an  inspection  of  these  docu- 
ments is  necessary .2  The  supreme  court  of  the  United  States  has  held 
that  a  stockholder  in  a  national  bank  is  entitled  to  inspect  its  books, 
accounts,  and  loans,  to  ascertain  the  value  of  his  stock,  and  whether 
the  business  was  carried  on  according  to  law,  and  if  the  inspection  is 
refused  a  state  court  may  enter  judgment  of  mandamus  requiring  the 
corporation  to  allow  it.^  In  1908  the  Privy  Council  in  England  held 
that  stockholders  had  no  absolute  right  to  inspect  whenever  they  see 


is  interested  in  a  rival  concern  is  not 
a  bar  to  his  examining  the  books. 
Furst  V.  Rawleigh,  154  111.  App.  522 
(1910).  A  shareholder  in  asking  to 
see  the  books  need  not  show  any 
reason  or  occasion  therefor,  and  the 
corporation  must  grant  the  request 
unless  it  can  show  improper  or  ille- 
gitimate purposes.  Pease  v.  Chicago, 
etc.  Co.  167  111.  App.  31  (1912). 
A  stockholder  is  not  entitled  as  a 
matter  of  right  to  inspect  the  stock 
book  or  other^books  of  the  bank.  The 
court  will  not,  although  it  has  the 
power,  grant  a  mandamus  for  the 
inspection  of  the  stock  book  or  other 
books  of  a  bank,  unless  some  special 
grounds  be  disclosed  to  warrant  it. 
Re  Bank  of  Upper  Canada  v.  Baldwin, 
1  Draper  (K.  B.  Can.),  55  (1829).  A 
stockholder  in  a  New  York  corporation 
has  a  common-law  right  to  examine  the 
books  and  papers  of  the  corporation 
where  a  proposition  has  been  made 
for  the  purchase  of  all  the  stock  of 
the  company  and  the  dividends  have 
been  greatly  reduced.  Re  Applica- 
tion of  Steinway,  31  N.  Y.  App.  Div. 
70  (1898) ;  aff'd,  159  N.  Y.  250.  As  to 
the  general  right  of  a  stockholder  to 
examine  the  books  of  a  corporation 
and  the  recognition  of  such  right  in 
equity  by  discovery,  see  Gresley,  Eq. 
Ev.  116,  117;  Kynaston  v.  East  India 
Co.,  3  Swanst.  249  (1819);  Bolton  v. 
Liverpool,  3  Sim.  467  (1831);  s.  c,  1 
Myl.  &  K.  88;  Brace  v.  Ormond,  1 
Meriv.  409  (1816). 

^  Quoted  and  approved  in  Matter  of 


Steinway,  159  N.  Y.  251  (1899).  Com- 
monwealth V.  Phoenix  Iron  Co.,  105 
Pa.  St.  Ill  (1884).  As  to  the  right 
to  inspection  and  to  take  copies  of 
records  in  a  county  clerk's  or  regis- 
ter's office,  see  Randolph  v.  State,  82 
Ala.  527  (1886);  Hanson  v.  Eich- 
staedt,  69  Wis.  538  (1887);  Brewer 
V.  Watson,  71  Ala.  299  (1882) ;  Phelan 
V.  State,  76  Ala.  49  (1884) ;  'Webber 
V.  Townley,  43  Mich.  534  (1880) ;  Dia- 
mond Match  Co.  V.  Powers,  51  Mich. 
145  (1883);  People  v.  Cornell,  47 
Barb.  329  (1866) ;  People  v.  Reilly,  38 
Hun,  429  (1886) ;  People  i;.  Richards, 
99  N.  Y.  620  (1885). 

2  Ellsworth  V.  Dorwart,  95  Iowa,  108 
(1895). 

3  Guthrie  v.  Harkness,  199  U.  S.  148 
(1905),  citing  §  511,  supra.  The  court 
said:  "The  decisive  weight  of  Ameri- 
can authority  recognizes  the  common- 
law  right  of  the  shareholder,  for 
proper  purposes  and  under  reasonable 
regulations  as  to  place  and  time,  to 
inspect  the  books  of  the  corporation 
of  which  he  is  a  member.  .  .  . 
The  right  of  inspection  rests  upon  the 
proposition  that  those  in  charge  of 
the  corporation  are  merely  the  agents 
of  the  stockholders  who  are  the  real 
owners  of  the  property.  ...  In  issu- 
ing the  writ  of  via7idamus  the  court 
will  exercise  a  sound  discretion  and 
grant  the  right  under  proper  safe- 
guards to  protect  the  interests  of  all 
concerned.  The  writ  should  not  be 
granted  for  speculative  purposes  or  to 
gratify  idle  ciiriosity  or  to  aid  a  black- 


1497 


§  511.] 


INSPECTION    OF   CORPORATE   BOOKS. 


[CH.  XXX. 


fit  the  shareholder's  register  and  to  be  suppUed  with  a  hst  of  the  share- 
holders, but  such  right  is  confined  to  cases  where  the  stockholder  has 
in  view  some  definite  right  or  object  of  his  own.^  A  stockholder ^n  a 
street  railway,  which  has  sold  its  property  and  ceased  to  do  business, 
is  entitled  to  examine  the  books  to  ascertain  the  financial  condition 
and  its  financial  transactions,  and  also  to  ascertain  the  value  of  his  stock, 
and  may  have  mandamus  for  that  purpose.-  A  stockholder  cannot 
have  a  receiver  appointed  merely  because  he  is  not  allowed  to  exam- 
ine the  corporate  books  .^  A  by-law  that  no  stockliolder  should  have 
a  right  to  examine  the  books  of  the  corporation,  except  by  special  au- 
thority from  the  board  of  directors,  is  illegal  under  the  Louisiana  con- 
stitution.* A  stockholder  in  a  mining  company  has  a  right  under 
reasonable  circumstances  to  be  allowed  to  examine  the  mine  itself  and 
a  court  may  grant  a  mandamus  to  that  effect.^  A  director  has  an  ab- 
solute right  to  examine  all  the  books  of  the  company,^  even  though 


mailer,  but  it  may  not  be  denied  to  the 
stockholder  who  seeks  the  information 
for  legitimate  purposes." 

1  Bank  of  Bombay  v.  Suleman  Somji, 
99  L.  T.  Rep.  62  (1908).  The  court 
approved  the  following  statement  in 
Taylor  on  Evidence,  "On  the  applica- 
tion of  a  member  the  King's  Bench 
Division  will,  in  general,  grant  a  rule 
for  a  limited  inspection  of  the  docu- 
ments of  the  corporation,  if  it  be  shown 
that  such  inspection  is  requisite  with 
reference  either  to  an  action  then 
instituted  or  at  least  to  some  specific 
dispute  or  question  depending  in  which 
the  applicant  is  interested ;  but,  even 
in  this  case,  the  inspection  will  be 
granted  to  such  an  extent  only  as  may 
be  necessary  for  the  particular  occasion. 
The  rule  was  formerly  sometimes  laid 
down  more  broadly,  and  the  language 
ascribed  to  the  court  in  one  or  two  cases 
might  almost  lead  to  the  inference  that 
members  of  a  corporation  have  an 
absolute  right,  whenever  they  think 
fit,  to  inspect  all  papers  belonging  to 
the  aggregate  body.  But  any  such 
doctrine  is  now  exploded ;  and  the 
privilege  of  inspection  is  now  confined 
to  cases  where  the  member  of  the  cor- 
poration has  in  view  some  definite 
right  or  object  of  his  own,  and  to  those 
documents  which  would  tend  to  illus- 
trate such  right  or  object."  The 
court  also  affirmed  and  approved  the 
decision  in  Rex  v.  Merchant  Tailors' 
Co.,  2  B.  &  Ad.  115. 


2  State  V.  St.  Louis,  etc.  Co.,  124 
Mo.  App.  Ill  (1907). 

3  Smith  V.  Birmingham,  etc.  Co.,  56 
S.  Rep.  721  (Ala.  1911). 

*  State  V.  Citizens'  Bank,  etc.,  51 
La.  Ann.  426  (1899).  A  by-law  that 
stockholders  should  not  be  allowed  to 
examine  the  corporate  books  except  as 
the  directors  may  approve  and  shall 
not  make  extracts  is  illegal  and  void. 
State  V.  Jessup,  etc.  Co.,  77  Atl.  Rep. 
16  (Del.  1910). 

5  Hobbs  V.  Tom  Reed,  etc.  Co.,  129 
Pac.  Rep.  781  (Cal.  1913). 

•People  V.  Throop,  12  Wend.  181 
(1834);  Charlick  v.  Flushing  R.  R., 
10  Abb.  Pr.  130  (1860);  Re  Cianci- 
mino,  N.  Y.  L.  J.  Dec.  23,  1890.  Cf. 
State  V.  Einstein,  46  N.  J.  L.  479 
(1884).  Resident  officers  and  direc- 
tors of  a  foreign  corporation  may  be 
compelled  by  mandamus  to  allow 
another  director  to  examine  the  cor- 
porate books  and  papers.  Machen 
V.  Machen,  etc.  Co.,  85  Atl.  Rep.  100 
(Pa.  1912).  A  director  has  an  absolute 
right  to  examine  the  books  of  the 
company  and  may  have  a  mandamus 
to  enforce  that  right.  People  v.  Cen- 
tral Fish  Co.,  117  N.  Y.  App.  Div.  77 
(1907).  A  director  of  a  New  York 
corporation  is  entitled  as  a  matter  of 
right  to  a  peremptory  mandamus 
allowing  him  to  examine  the  books 
either  alone  or  with  the  aid  of  some 
competent  person  approved  by  the 
court,  but  he  cannot  continue  the  ex- 


1498 


CH.  XXX. 


INSPECTION   OF   CORPORATE    BOOKS. 


[§511, 


he  is  hostile  to  the  corporation.^  But  in  Connecticut  a  contrary  rule 
is  laid  down  where  he  is  seeking  information  in  order  to  organize  a 
rival  company.^  Where  a  director  acquires  knowledge  of  a  secret  pro- 
cess and  then  enters  the  employ  of  another  company  and  uses  it  for 
the  latter  company  he  may  be  enjoined.^ 

A  creditor  of  the  corporation  or  any  person  who  is  a  stranger  to  it 
can  obtain  access  to  its  record  by  a  bill  in  equity  for  discovery.'*  Cor- 
porate books  in  the  hands  of  a  receiver  should  be  open  to  all  parties.^ 


amination  for  three  months,  when 
four  weeks  is  enough,  and  cannot 
have  a  number  of  accountants  assist 
him  when  one  is  enough.  People  v. 
Columbia,  etc.  Co.,  103  N.  Y.  App. 
Div.  208  (1905).  Even  though  the 
secretary  and  treasurer  takes  away 
and  secretes  all  the  books  and  papers 
of  the  company,  yet  the  president 
cannot  have  a  receiver  appointed  in 
order  to  carry  on  the  business  and 
collect  accounts,  no  charge  of  fraud 
being  made  and  no  request  to  the 
board  of  directors  being  shown.  Fal- 
lon V.  United  States,  etc.  Co.,  86  N.  Y. 
App.  Div.  29  (1903).  A  corporation 
may  maintain  replevin  to  recover  its 
records  and  seal  from  one  who  claims 
to  be  its  secretary.  Stovell  v.  Alert, 
etc.  Co.,  38  Colo.  80  (1906).  The 
president  of  a  corporation  is  entitled 
to  a  mandamus  directing  the  secre- 
tary to  allow  him  and  his  attorney  to 
inspect  the  stock  book  and  make  ex- 
tracts therefrom,  and  it  is  immaterial 
what  the  motive  of  the  president  is. 
"An  inspection  of  its  books  by  the 
president  of  the  company  is  a  matter 
of  right."  People,  etc.  v.  Goldstein, 
37  N.  Y.  App.  Div.  550  (1899).  Where 
a  director  was  not  qualified  and  a  new 
director  has  been  elected  in  his  place, 
the  former  cannot  have  mandamus  to 
allow  him  to  inspect  the  company's 
books  and  exercise  other  rights  of  a 
director,  even  though  for  a  time  he 
was  permitted  to  act  as  director.  Peo- 
ple V.  N.  Y.,  etc.  Co.,  34  N.  Y.  Misc. 
Rep.  326  (1901).  After  the  courts 
have  decided  that  certain  persons  are 
directors,  mandamus  will  be  granted 
that  the  defeated  parties  turn  over  the 
books  and  papers  to  the  former. 
Matter  of  Journal  Pub.  Club,  30 
N.  Y.  Misc.  Rep.  326  (1900). 

1  People  V.  Throop,   12  Wend.   181 


(1834).  The  court  will  order  corpo- 
rate officers  to  allow  a  director  to 
e.xamine  the  books,  even  though  he  is 
but  a  dummy  director,  and  an  injunc- 
tion against  their  removing  the  books 
does  not  suspend  the  general  and  ordi- 
nary business  of  the  corporation, 
within  the  meaning  of  the  New  York 
statute.  People  v.  Bonwit  Bros.,  69 
N.  Y.  Misc.  Rep.  70  (1910).  A  direc- 
tor is  entitled  to  examine  all  the  books. 
Lawton  v.  Bedell,  71  Atl.  Rep.  490 
(N.  J.  1908).  A  director  may  have 
mandamus  to  enable  him  to  examine 
the  books  and  papers  of  the  corpora- 
tion. State  V.  Grymes,  65  W.  Va.  451, 
(1909). 

2  Quoted  and  approved  in  State 
V.  Grymes,  65  W.  Va.  451  (1909).  A 
director  who  is  actively  organizing 
a  rival  company  has  no  right  to  exam- 
ine the  letter  files  of  the  former  in 
order  to  aid  the  latter.  The  secretary 
may  forcibly  take  them  from  him. 
Heminway  v.  Heminway,  58  Conn. 
443  (1890).  A  director  is  entitled  to 
look  at  the  books,  even  though  he  has 
promoted  a  competing  concern  and  is 
president  of  the  latter.  Machen  i;. 
Machen,  etc.  Co.,  85  Atl.  Rep.  100 
(Pa.  1912). 

*  Vulcan  Detinning  Co.  v.  American 
Can  Co.,  72  N.  J.  Eq.  387  (1907). 

*■  A  bill  of  discovery  lies  at  instance 
of  corporate  creditors  in  the  courts  of 
one  state  to  compel  corporate  officers 
to  give  the  names  of  stockholders  of 
the  corporation  in  another  state  with 
a  view  to  enforcing  the  statutory  lia- 
bility in  the  latter  state.  Post  v. 
Toledo,  etc.  R.  R.,  144  Mass.  341 
(1887).  As  to  the  remedy  by  sub- 
poena, etc.,  see  §  519,  infra. 

5  See  §  872,  infra ;  Re  Kent,  etc. 
Syndicate,  [1898]  1  Q.  B.  754.  A  re- 
ceiver   of    an    insolvent    bank    must 


1499 


§§  512,  513. 


INSPECTION    OF   CORPOKATE   BOOKS. 


Auditors  are  not  entitled  to  examine  the  corporate  books  when  forbidden 
to  do  so  by  the  board  of  directors.^ 

§  512.  Common-law  action  for  damages  for  refusal. — The  legal 
right  of  a  stockholder  of  a  corporation  to  examine  the  corporate  books 
is  a  right  which  gives  him  a  cause  of  action  at  law  for  damages  against 
the  corporate  officers  if  they  refuse  to  allow  the  inspection.^  The 
plaintiff  is  entitled  to  nominal  damages,  and  to  such  further  damages 
as  he  may  prove.  It  has  been  held  that  he  need  not  allege  or  prove 
any  special  reason  or  purpose  of  his  desire  and  request  to  examine  the 
books ;  ^  but  the  vast  size  of  modern  corporations,  with  thousands  of 
stockholders  and  many  clerks,  renders  it  impossible  to  open  all  the  books 
to  all  the  stockholders,  and  renders  necessary  the  rule  that  some  good 
reason  be  given  by  the  stockliolder  applying  to  examine  the  books. 
A  stockliolder  in  a  New  Jersey  corporation  cannot  maintain  a  suit  in 
equity  to  require  the  corporation  to  bring  its  books  into  the  state  merely 
that  he  may  have  access  to  them.^ 

§  513.  Mandamus  is  the  preferable  remedy.  —  An  action  for  dam- 
ages is  generally  totally  inadequate  as  a  remedy.^    The  stockholder 


allow  the  district  attorney  to  examine 
the  books  and  papers  to  ascertain 
the  condition  of  the  bank  and  whether 
the  officers  had  criminally  received 
deposits  after  the  bank  became  insol- 
vent. McElree  v.  Darlington,  187  Pa. 
St.  593  (1898). 

1  Cuff  V.  London,  etc.  Co.,  Ltd.; 
[1912]  1  Ch.  440. 

2  Lewis  V.  Brainerd,  53  Vt.  510 
(1881).  A  stockholder  has  the  legal 
right  to  inspect  the  books  of  the  cor- 
poration of  which  he  is  a  member, 
but  the  company  is  not  liable  for  a 
refusal  of  the  secretary  to  allow  a 
stockholder  to  examine  the  books. 
Legendre  v.  New  Orleans  Brewing 
Assoc,  45  La.  Ann.  669  (1893). 
Where  the  president  has  custody  of  the 
books  and  refuses  to  allow  a  stock- 
holder to  examine  them,  and  the 
stockholder  desires  to  examine  them 
for  the  purpose  of  ascertaining  whether 
he  should  sell  his  stock,  and  is  obliged 
to  obtain  a  mandamus,  he  may  hold 
the  president  liable  in  an  action  for 
damages,  and  if  the  price  of  the  stock 
has  fallen  during  the  delay  in  obtain- 
ing access  to  the  books  his  measure  of 
damages  is  his  loss,  especially  where  the 
president  was  in  the  meantime  selling 
his  own  stock.     Bourdette  v.  Sieward, 


52  La.  Ann.  1333  (1900).  In  a  suit  by 
a  stockholder  against  an  officer  for 
damages  for  refusal  to  allow  him  to 
examine  the  books,  remote,  collateral 
and  speculative  damages  cannot  be 
recovered.  Even  though  he  alleges 
that  he  would  have  sold  his  stock  if  he 
had  been  allowed  to  examine  the  books, 
and  that  the  stock  subsequently  de- 
clined in  price,  yet  if  there  was  no  mis- 
management and  the  decline  of  the 
stock  is  due  to  causes  which  an  in- 
spection of  the  books  would  not  dis- 
close, he  cannot  recover  the  loss  due 
to  the  decline  in  the  stock.  Bourdette 
V.  Sieward,  107  La.  258  (1902).  A 
minority  stockholder  is  not  entitled  to  a 
receiver  in  a  suit  brought  by  him  for  an 
accounting  and  winding  up  the  com- 
pany, even  though  he  is  refused  an 
inspection  of  the  books  of  the  com- 
pany, and  especially  so  where  he  was 
denied  the  right  for  several  years  for 
the  reason  that  he  did  not  pay  his 
subscription,  and  he  finally  sold  his 
stock.  Ridpath  v.  Sans  PoU,  etc.  Co., 
26  Wash.  427  (1901). 

^  Lewis  V.  Brainerd,  53  Vt.  510 
(1881). 

^Maeder  v.  Buffalo,  etc.  Co.,  132 
Fed.  Rep.  280  (1904). 

^  In  Coekburn  v.  Union  Bank,   13 


1500 


CH.   XXX.] 


INSPECTION    OF    CORPORATE    BOOKS. 


[§  513. 


wishes  to  inspect  the  corporate  books  and  does  not  wish  damages 
or  a  lawsuit.  Accordingly,  in  certain  cases,  upon  the  application  of  a 
stockholder  who  has  been  denied  the  privilege  of  examining  the  corpo- 
rate records,  it  has  been  the  practice  of  the  courts  to  issue  a  mandamus 
to  the  corporate  officers  commanding  them  to  allow  a  specified  stock- 
holder to  examine  the  books  of  the  corporation.^  The  remedy  of  a 
stockliolder  who  wishes  to  examine  the  corporate  books  in  order  to 
bring  suit  against  the  directors  for  fraud  is  by  mandamus,  not  by  an 
order  for  inspection,-  nor  by  a  mandatory  injunction.^  The  usual 
statute  giving  to  the  courts  the  power  to  order  a  corporation  to  allow 
its  stockholders  to  examine  its  books  does  not  take  away  the  common- 
law  right  of  stockholders  to  have  such  an  inspection,  and  does  not  take 
away  the  power  of  the  court  to  grant  a  mandamus  to  enforce  such  com- 
mon-law right.^     A  stockholder's  bill  against  a  corporation  and  directors 


La.  Ann.  289  (1858),  the  court  said 
a  suit  for  damages  "might  last  for  a 
long  time  and  petitioner  suffer  great 
loss  by  being  debarred  from  an  ex- 
amination" of  the  books.  "He  does 
not  ask  for  damages,  but  for  the  exer- 
cise of  a  right.  If  he  has  the  right  he 
ought  to  have  the  exercise  of  it  as 
soon  as  possible ;  for  the  deprivation 
of  his  right  cannot,  perhaps,  be  accu- 
rately estimated  in  damages.  It  may 
be  many  years  before  the  amount  of 
the  damage  can  be  known." 

1  Guthrie  v.  Harkness,  199  U.  S.  148 
(1905).  "It  would  seem,  from  the 
weight  of  authority  and  in  reason, 
that  a  shareholder  is  entitled  to  man- 
damus to  compel  the  custos  of  cor- 
porate documents  to  allow  him  an 
inspection,  and  copies  of  them,  at  rea- 
sonable times,  for  a  specific  and 
proper  purpose,  upon  showing  a  re- 
fusal on  the  part  of  the  custos  to 
allow  it,  and  not  otherwise."  Com- 
monwealth V.  Phoenix  Iron  Co.,  105 
Pa.  St.  Ill  (1884);  s.  c,  sub  nom. 
Phoenix  Iron  Co.  v.  Commonwealth, 
113  Pa.  St.  563  (1886),  explaining  the 
method  of  procedure,  and  holding 
that  the  applicant  need  not  institute 
a  suit  in  a  court  of  equity.  The  old 
rule  that  mandamus  will  issue  only 
for  a  public  purpose  is  no  longer  a 
rule  of  law  so  as  to  prevent  its  use 
herein.  Commonwealth,  etc.,  supra. 
questioning  Rex  v.  Bank  of  England, 
2  B.  &  Aid.  620  (1819) ;  and  Rex  v. 
London  Assur.  Co.,  5  B.  &  Aid.  899 


(1822) ;  s.  c,  1  Dowe  &  R.  510.  See 
also  Rex.  v.  Clear,  4  Barn.  &  C.  899 
(1825) ;  Foster  v.  White,  86  Ala.  467 
(1889).  A  stockholder  may  have  a 
mandamus  to  examine  the  books  of  a 
domestic  corporation,  even  though 
they  are  in  another  state.  State  v. 
Jessup,  etc.  Co.,  7  Pen.  (Del.)  397 
(1909).  An  executor  and  legatee  own- 
ing half  the  capital  stock  of  a  corpora- 
tion may  have  mandamus  to  allow  him 
to  examine  its  books  and  papers,  he 
not  being  interested  in  any  rival 
business.  Matter  of  Hastings,  128 
N.  Y.  App.  Div.  516  (1908) ;  aff'd,  194 
N.  Y.  546.  A  by-law  authorizing  the 
directors  to  refuse  to  allow  the  stock- 
holders to  examine  the  corporate 
books  is  unreasonable  and  illegal. 
State  V.  Jessup,  etc.  Co.,  7  Pen.  (Del.) 
397  (1909).  A  Massachusetts  stock- 
holder in  a  foreign  corporation  may  by 
mandamus  compel  it  to  allow  him  to 
examine  its  books,  it  appearing  that 
such  foreign  corporation  holds  its 
meetings  and  does  its  business  and  has 
its  books  and  records  in  the  state. 
Andrews  v.  Mines  Corporation,  205 
Mass.  121  (1910). 

2  Walsh  V.  Press  Co.,  48  N.  Y.  App. 
Div.  333  (1900). 

'  A  stockholder's  remedy  to  exam- 
ine the  corporate  books  is  by  mandamus 
and  not  by  a  mandatory  injunction. 
Brown  v.  Crystal  Ice  Co.,  122  Tenn. 
239  (1909). 

*  Matter  of  Steinway,  159  N.  Y. 
251  (1899) ;  aff'g31  N.  Y.  App.  Div.  70. 


1501 


§  514.]  INSPECTION   OF   CORPORATE   BOOKS.  [cH.  XXX. 

may  be  to  remedy  certain  alleged  frauds,  and  also  incidentally  to  obtain 
a  disclosure  and  discovery.  The  stockholder  need  not  resort  to  a 
mandamus}  Even  though  a  stockholder  is  also  a  stockholder  in  a 
competing  company,  yet  he  is  entitled  to  examine  the  books  and  records 
of  his  company,  a  trading  corporation,  on  his  allegations  showing  reck- 
less mismanagement,  and  an  intent  to  file  a  bill  in  equity  to  restrain 
the  same.  It  is  no  answer  that  the  company  has  offered  to  buy  his 
shares  at  a  fixed  price.^  In  New  Jersey  it  has  been  held  that  man- 
damus, and  not  an  order  under  a  statute,  is  the  sole  remedy  of  a  stock- 
holder wishing  to  inspect  the  books  of  the  company,  there  being  no  suit 
pending.^  A  federal  court  cannot  grant  a  mandamus  in  behalf  of  a 
stockholder  against  a  national  bank  to  allow  him  to  inspect  its  stock- 
holders' list,  unless  the  amount  in  dispute  exceeds  two  thousand  dollars. 
Moreover,  a  federal  court  has  no  jurisdiction  to  issue  a  mandamus 
independent  of  a  suit.'*  A  secretary  who  has  resigned  in  good  faith 
cannot  be  punished  for  contempt  in  not  producing  the  corporate  books 
in  accordance  with  a  mandamus.^ 

§  514.  Not  granted  as  a  matter  of  course  unless  the  right  is  stat- 
utory. —  The  writ  of  mandamus,  however,  does  not  issue  herein  as 
a  matter  of  course.  It  is  an  extraordinary  remedy,  to  be  invoked 
only  upon  special  occasions.  The  court  does  not  grant  the  mandamus 
until  it  has  taken  into  careful  consideration  all  the  facts  and  circum- 
stances of  the  case.  The  condition  and  character  of  the  books,  the 
reasons  for  refusal  by  the  corporation,  the  specific  purpose  of  the  stock- 
holder in  demanding  inspection,  the  general  reasonableness  of  the 
request,  and  the  effect  on  the  orderly  transaction  of  the  corporate 
business  in  case  it  is  granted,  are  all  considered  in  granting  or  refusing 
the  writ.     It  is  granted  only  in  furtherance  of  essential  justice.® 

1  Weir  V.  Bay  State  Gas  Co.,  91  Fed.  App.  190  (1907) ;  Bauter  v.  Superior 
Rep.  940  (1898).  Where  the  suit  is  Court,  6  Cal.  App.  195  (1907). 
brought  by  the  stockholder  against  ■  «  Quoted  and  approved  in  State  v. 
the  corporation  alone  to  remedy  the  Williams,  110 Tenn.  549  (1903).  "The 
frauds  of  directors  and  have  a  re-  application  is  addresed  to  the  sound 
eeiver  appointed  and  obtain  a  dis-  discretion  of  the  court."  The  reasons 
closure,  the  bill  is  defective  for  non-  for  granting  the  writ  "should  be  clear 
joinder  of  the  guUty  parties.  Edwards  and  cogent.  ...  To  hold  that  every 
V.  Bay  State  Gas  Co.,  91  Fed.  Rep.  942  person  who  shows  himself  to  be  a  stock- 
(1898) ;  Morse  v.  Bay  State  Gas  Co.,  holder  of  stock  is  at  liberty  to  de- 
91  Fed.  Rep.  944  (1898).  mand  an  examination  of  the  transfer 

2  Kuhbaeh  v.  Irving  Cut  Glass  Co.,  books  when  and  as  often  as  he  pleases, 
220  Pa.  St.  427  (1908).  and,  if  refused,  to  apply  for  a  writ  of 

3  Fuller  V.  Alex.  Hollander,  etc.  Co.,  mandamus  to  enforce  an  absolute 
61  N.  J.  Eq.  648  (1900).  right,    would   be    to    establish   a   rule 

*  Large  v.  Consolidated,  etc.  Bank,     highly  prejudicial  to  the  interests  of 

137  Fed.  Rep.  168  (1905).  aU  corporations  and  their  stockholders. 

^  Egilbert  v.  Superior  Court,  6  Cal.     .  .  .     The  power  of  the  court  should 

1502 


CH.  XXX.] 


INSPECTION  OF  CORPORATE  BOOKS. 


[§  514. 


Where,  however,  a  statute  gives  to  stockholders  the  right  to  examine 
corporate  books,  mandamus  seems  to  be  granted  as  a  matter  of  right.^ 


be  exercised  in  such  cases  with  great 
discrimination  and  care."  People  v. 
Lake  Shore,  etc.  R.  R.,  11  Hun,  1 
(1877) ;  af&rmed  sub  nom.  \Re  Sage, 
70  N.  Y.  220  (1877).  See  also  People 
V.  Northern  Pac.  R.  R.,  50  N.  Y. 
Super.  Ct.  456  (1884).  "Discretion 
in  these  matters  should  be  exercised  in 
a  reasonable  manner  and  subject  to 
precedent."  Regina  v.  Wilts,  etc. 
Canal  Nav.,  29  L.  T.  Rep.  922  (1874). 
A  reference  may  be  ordered  by  the 
com-t  to  determine  the  truth  of  the 
allegations  in  the  affidavits  used  to 
obtain  a  mandamus.  People  v.  St. 
Louis,  etc.  Ry.,  44  Hun,  552  (1887). 
Mandamus  is  the  preferable  remedy. 
Legendre  v.  New  Orleans  Brewing 
Assoc,  45  La.  Ann.  669  (1893). 

'  Coquard  v.  National,  etc.  Co.,  171 
111.  480  (1898) ;  Cobb  v.  Lagarde,  129 
Ala.  488  (1901).  Mandamus  lies  to 
enable  a  stockholder  to  examine  the 
corporate  books  as  allowed  by  statute. 
Venner  v.  Chicago,  etc.  Ry.,  246  111. 
170  (1910).  A  domestic  corporation 
cannot  refuse  to  allow  a  stockholder  to 
examine  the  books  on  the  ground  that 
the  books  are  out  of  the  state.  State 
V.  Jessup,  etc.  Co.,  77  Atl.  Rep.  16 
(Del.  1910).  A  statutory  right  of 
stockholders  to  inspect  the  books 
is  mandatory,  while  the  common- 
law  right  is  discretionary.  Under 
the  New  York  statute  a  stockholder 
may  copy  the  names  of  the  stock- 
holders of  record  in  order  that  he  may 
negotiate  for  their  stock.  This  statute 
applies  also  to  a  national  bank  located 
in  New  York  state.  The  court  may 
regulate  the  hours  of  inspection,  and 
may  refuse  to  enforce  this  statutory 
right,  if  it  is  for  an  illegitimate  purpose. 
The  statute  enlarges  and  does  not 
restrict  the  common-law  right.  Peo- 
ple V.  Consolidated  Nat.  Bank,  105 
N.  Y.  App.  Div.  409  (1905).  A  di- 
rector of  a  New  York  corporation  is 
entitled  as  a  matter  of  right  to  a 
peremptory  mandamus  allowing  him  to 
examine  the  books  either  alone  or  with 
the  aid  of  some  competent  person 
approved  by  the  court,  but  he  cannot 
continue    the    examination    for    three 


months,  when  four  weeks  is  enough, 
and  cannot  have  a  number  of  account- 
ants assist  him  when  one  is  enough. 
People  V.  Columbia,  etc.  Co.,  103  N.  Y. 
App.  Div.  208  (1905).  As  to  foreign 
corporations  in  New  York,  see  §  515, 
infra.  See  also  §  518,  infra,  as  to  the 
New  York  statute.  A  statute  re- 
quiring corporations  to  file  certificates 
stating  the  amount  of  the  capital  stock 
paid  in  may  be  enforced  by  mandamus. 
Bay  State  Gas  Co.  v.  State,  4  Pen. 
(Del.)  497  (1904).  Where  the  right 
of  inspection  is  statutory,  mandamus 
will  issue,  even  though  a  stockholder 
desires  to  examine  the  books  for  the 
benefit  of  a  competing  concern  in 
which  he  is  interested.  Johnson  v. 
Langdon,  135  Cal.  624  (1902).  A 
statute  giving  the  right  to  examine  the 
books  and  records  gives  the  right  to 
examine  contracts,  and  this  right  may 
be  enforced  by  mandamus.  Stone  v. 
KeUogg,  165  111.  192  (1896).  Manda- 
mus lies  at  the  instance  of  a  stockholder 
to  compel  his  corporation  to  allow 
him  to  inspect  the  books  of  the  com- 
pany relative  to  the  stock  in  accordance 
with  the  constitution  of  Louisiana, 
the  object  of  the  stockholder  being  to 
ascertain  the  value  of  his  stock  and 
to  guide  his  future  action  in  regard 
thereto.  State  v.  New  Orleans,  etc. 
Co.,  49  La.  Ann.  1556  (1897).  Under 
the  Wisconsin  statute  authorizing  a 
stockholder  to  examine  the  stock  books 
and  accounts,  a  mandamus  may  be 
issued  to  the  officer  having  the  books  in 
charge.  State  v.  Bergenthal,  72  Wis. 
314  (1888).  Under  a  constitutional 
right  to  see  the  list  of  stockholders, 
a  stockholder  has  no  absolute  right  to 
take  a  list  of  them.  Commonwealth 
I'.  Empire  Pass.  Ry.,  134  Pa.  St.  237 
(1890).  Mandamus  lies  to  enforce  the 
statutory  right  of  inspection.  People 
V.  Pacific  Mail  S.  S.  Co.,  50  Barb.  280 
(1867).  Mandamus  will  lie  in  behalf 
of  the  wife  of  a  deceased  stockholder, 
who  holds  the  certificates  made  out  in 
his  name,  to  compel  the  corporation 
to  allow  her  to  examine  the  transfer 
books  in  order  that  she  may  vote  in- 
telligently at  a  coming  election.     Peo- 


1503 


§515. 


INSPECTION   OF   CORPORATE   BOOKS. 


[CH.  XXX. 


In  England  it  is  held  that  where  a  stockholder  has  a  statutory  right 
to  a  list  of  the  stockholders  he  may  enforce  that  right,  not  by  mandamus 
but  by  mandatory  injunction,  and  his  motives  are  immaterial.^  In 
Maryland,  however,  it  is  held  that  even  though  a  statute  gives  the  right 
of  inspection,  yet  if  the  purpose  of  the  stockholder  is  to  harass  the  officers 
and  compel  them  to  buy  the  stock  at  a  high  price  and  injure  the  business 
of  the  company,  and  the  officers  have  already  given  him  all  the  informa- 
tion they  could  without  injury  to  the  business,  he  will  not  be  granted 
a  mandamus}  In  New  Jersey  it  is  held  that  mandamus  does  not  lie 
to  enforce  a  statutory  right  to  examine  the  books,  except  where  it  would 
lie  at  common  law.^ 

§  515.  When  it  will  and  will  not  he  granted  — Foreign  corpora- 
Hqji^  —  It  will  not  be  granted  to  satisfy  curiosity,  nor  to  aid  the  stock- 
market  speculations  of  the  stockliolders.''    Either  some  property  rights 

Concerning  the  New  York  act  requir- 
ing resident  transfer  agents  of  for- 
eign corporations  to  exhibit  to  stock- 
holders the  transfer  book  and  a  list 
of  stockholders,  and  concerning  an 
alternative  writ  of  mandamus  therein, 
see  People  v.  Crawford,  68  Hun,  547 
(1893).  Majidamus  lies  to  compel  the 
resident  agent  of  a  foreign  corpora- 
tion to  open  its  transfer  books  to  a 
stockholder  as  required  by  statute. 
People  V.  Paton,  20  Abb.  N.  Cas.  195 
(1887) ;  s.  c,  5  N.  Y.  St.  316  .  Mann 
damns  lies  to  compel  corporate  ofl&cers 
to  exhibit  to  a  stockholder  the  books 


pie  V.  Eadie,  63  Hun,  320  (1892); 
aff'd,  133  N.  Y.  573.  Mandamus  lies 
to  open  for  the  inspection  of  a  stock- 
holder and  for  taking  memoranda 
therefrom  such  corporate  books  as 
the  statute  prescribes  shall  be  open 
to  him.  Re  Martin,  62  Hun,  557 
(1891).  Mandamus  lies  to  allow  in- 
spection as  required  by  the  statute, 
and  the  fact  that  the  applicant  holds 
a  certificate  of  stock  is  sufficient. 
Martin  v.  Johnston  Co.,  25  Abb.  N. 
Cas.  350  (1890).  Where  there  is  a 
state  statute  allowing  stockholders  to 
examine   the   corporate   books,   a   na 


tional    bank   in   the    state    is    subject    specified    in    the    statute    giving    this 


thereto  and  mandamus  will  issue 
Winter  v.  Baldwin,  89  Ala.  483  (1889). 
Under  a  statute  to  the  effect  that 
"the  stockholders  of  all  private  cor- 
porations have  the  right  of  access  to, 
inspection,  and  examination  of  the 
books,  records,  and  papers  of  the  cor- 
poration, at  reasonable  and  proper 
times,"  a  stockholder  has  the  "right 
to  examine  the  books  at  any  and  all 
reasonable  times,"  and  "when  this 
right  is  claimed  and  refused,  he  is 
entitled  to  a  mandamus  on  the  aver- 
ment that  he  is  a  stockholder  of  the 
corporation ;     that   he   has   demanded 


right.  Ellsworth  v.  Dorwart,  95 
Iowa,  108  (1895).  See  also,  concern- 
ing such  statutes,   §§  515,  518,   infra. 

1  Davies  v.  Gas,  etc.  Co.,  [1909]  1 
Ch.  708 ;  aff'g  [1909]  1  Ch.  248. 

2  Wight  V.  Heublein,  111  Md.  649 
(1910).  Where  a  statute  gives  a 
stockholder  an  absolute  right  to  exam- 
ine the  corporate  books,  he  cannot  be 
refused  even  though  his  motive  is  to 
injure  the  company.  Venner  v.  Chi- 
cago, etc.  Ry.,  246  lU.  170  (1910). 

3  State  V.  National  Biscuit  Co.,  69 
N.  J.  L.  198  (1903). 

^  The  writ  will  not  be  "granted  to 


the  right  of  inspection ;    that  the  time    enable    a    corporator    to    gratify    idle 


was  reasonable  and  proper;  and  that 
the  right  was  denied  him."  He  may 
make  the  examination  through  an 
agent.  Foster  v.  White,  86  Ala.  467 
(1889).  Co7itra,  State  v.  National 
Biscuit  Co.,  69   N.  J.  L.   198  (1903). 


curiosity."  Foster  v.  White,  86  Ala. 
467  (1889) ;  People  v.  Walker,  9  Mich. 
328  (1861).  "  The  interests  of  all  the 
corporators  require  that  the  writ 
shall  not  go  at  the  caprice  of  the 
curious      or      suspicious."     Common- 


1504 


INSPECTION   OF   CORPORATE   BOOKS. 


[§  515. 


of  the  stockholder  must  be  involved,  or  some  controversy  exist,  or  some 
specific  and  valuable  interest  be  in  question,  to  settle  which  an  inspec- 
tion of  the  corporate  records  becomes  necessary.^    Mandamus  should 


wealth  V.  Phoenix  Iron  Co.,  105  Pa.  St. 
Ill  (1884).  "Courts  should  guard 
against  all  attempts  by  combinations 
hostile  to  the  corporation  or  its  exist- 
ing officers  to  use  its  writ  of  man- 
damus to  accomplish  their  personal  or 
speculative  ends."  People  v.  Lake 
Shore,  etc.  R.  R.,  11  Hun,  1  (1877). 
Affirmed  sub  nom.  Re  Sage,  70  N.  Y. 
220  (1877).  Nor  will  the  court  grant 
"a  mere  wrecking  petition  to  ruin  a 
going  concern."  Re  West  Devon,  etc. 
Mine,  L.  R.  27  Ch.  D.  106  (1884). 
Mere  suspicion  is  not  enough  to  jus- 
tify an  order  of  inspection,  even 
though  the  applicant  stockholder  in- 
tends to  bring  suit  against  the  direc- 
tors. Central,  etc.  R.  R.  v.  Twenty- 
third  Street  Ry.,  53  How.  Pr.  45 
(1877). 

'  It  has  been  granted  to  allow  the 
applicant  to  ascertain  whether  a  by- 
law existed  entitling  him  to  an  office 
by  promotion.  Reg.  v.  Saddlers'  Co., 
10  W.  R.  87  (1861).  Mandamus  lies 
at  the  instance  of  a  stockholder  to 
inspect  corporate  books  where  he 
alleges  mismanagement,  and  improper 
use  of  the  funds,  and  improper  increase 
of  salaries,  and  a  failure  to  declare 
dividends,  and  his  object  is  to  see 
whether  the  business  is  properly  eon- 
ducted,  and  he  intends  to  file  a  biU 
in  equity  if  the  disclosures  justify  it, 
and  it  is  no  answer  that  he  is  inter- 
ested in  a  competing  company.  Hod- 
der  V.  George  Hogg  Co.,  223  Pa.  St. 
196  (1909).  AU  the  books  and  papers 
of  a  corporation  may  be  examined  by  a 
stockholder  who  owns  more  than  forty- 
three  per  cent,  of  the  stock  and  who 
claims  that  the  company  is  being  mis- 
managed, and  is  expending  money  on 
a  building  on  land  owned  by  a  rela- 
tive of  the  president.  Even  though  he 
is  engaged  in  a  somewhat  competing 
business,  he  may  have  a  mandamus 
allowing  him  such  inspection,  except- 
ing as  to  the  names  of  customers. 
People  V.  Ludwig,  126  N.  Y.  App.  Div. 
696  (1908).  Mismanagement  and  in- 
tent to  bring  suit  need  not  be  alleged. 


(95) 


"Oftentimes  frauds  are  discoverable 
only  by  examination  of  the  books  by 
an  expert  accountant."  Huylar  v. 
Cragin  Cattle  Co.,  40  N.  J.  Eq. 
392  (1885).  It  is  granted  also  to  a 
stockholder  who  has  a  suit  or  con- 
troversy with  a  party  other  than  the 
corporation  itself.  Rex  v.  Hostmen,  2 
Stra.  1223  (1745);  Mayor  of  South- 
ampton V.  Graves,  8  T.  R.  590  (1800). 
It  has  been  granted  to  enable  a  stock- 
holder to  see  the  discount  book,  al- 
though there  is  no  suit  between  him 
and  the  corporation,  and  no  intent  to 
bring  one.  Cockburn  v.  Union  Bank, 
13  La.  Ann.  289  (1858).  At  an  early 
day,  however,  it  was  held  that  "the 
members  have  no  right,  on  specula- 
tive grounds,  to  call  for  an  examina- 
tion of  the  books  and  muniments  in 
order  to  see  if,  by  possibility,  the 
company's  affairs  may  be  better  ad- 
ministered than  they  think  they  are 
at  present.  If  they  have  any  com- 
plaint to  make,  some  suit  should  be 
instituted,  some  definite  matter 
charged,  ...  or  there  should  be  some 
particular  matter  in  dispute  between 
members,  or  between  the  corporation 
and  individuals  in  it ;  there  must  be 
some  controversy,  some  specific  pur- 
pose, in  respect  of  which  the  e.xamina- 
tion  becomes  necessary."  King  v. 
Merchant  Tailors'  Co.,  2*^6.  &  Ad.  115 
(1831).  A  charter  provision  that  the 
corporate  powers  "shall  be  exercised 
by  a  board  of  directors"  is  immaterial 
herein.  State  v.  Bienville  Oil  Works, 
28  La.  Ann.  204  (1876).  Where  a  re- 
duction of  capital  stock  is  contem- 
plated, a  large  stockholder  has  a  right 
to  inspection  to  ascertain  whether  the 
business  is  being  "prudently  and 
profitably"  carried  on.  State  v.  Bien- 
ville Oil  Works,  28  La.  Ann.  204 
(1876).  The  general  purpose  of  ascer- 
taining "the  condition  of  the  com- 
pany" was  held  insufficient  in  People 
I'.  Walker,  9  Mich.  328  (1861).  The 
stockholder  may  take  memoranda  or 
a  list  of  the  stockholders.  Common- 
wealth I'.  Phoenix  Iron  Co.,  105  Pa.  St. 


1505 


§  515.] 


INSPECTION   OF   CORPORATE   BOOKS. 


[CH.   XXX. 


not  be  granted  where  the  purpose  is  to  obtain  information  for  the  benefit 
of  a  rival  concern.^     Even  though  a  statute  gives  a  stockholder  the 


111  (1884);  Cotheal  v.  Brouwer,  5 
N.  Y.  562  (1851),  affirming  Brouwer  v. 
Cotheal,  10  Barb.  216  (1850) ;  Hide  v. 
Holmes,  2  MoUoy,  372  (1825).  In 
Stettauer   v.   New  York,  etc.   Co.,   42 


dueed  to  buy  stock  from  outside  par- 
ties by  fraudulent  statements  made 
by  the  company,  cannot  have  a  man- 
damus to  compel  the  company  to 
allow  him  to  examine  its  books.     His 


N.J.  Eq.  46  (1886),  where  a  stockholder  application  in  such  a  ease  is  as  a 
filed  a  bill  in  equity  to  compel  cor-  creditor  and  not  as  a  stockholder, 
porate   officers   to   allow   himself   and    Investment  Co.  v.  Eldridge,  2  Pa.  Dist. 


his  accountant  to  examine  the  cor- 
porate books,  its  business  having  been 
closed  and  distribution  of  assets 
made,  but  a  statement  of  its  affairs 
refused,  the  court  held  that  the  bill 
would  not  lie,  since  no  fraud  or  in- 
sufficient distribution  of  assets  was 
alleged.  Mandamus  is  the  proper 
remedy.  Swift  v.  Richardson,  7 
Houst.  (Del.)  338  (1886),  holds  that 
mandamus  will  issue  to  the  officers  of 
a  foreign  corporation  to  exhibit  its 
books  then  in  the  state,  and  allow 
copies  of  records  to  be  taken  by  a 
stockholder  who  intends  to  commence 
suit  against  a  pledgee  of  his  stock ;  the 
controversy   turning   on   the   question 


394  (1893) ;    aff'd,  175  Pa.  St.  287. 

1  State  V.  Jessup,  etc.  Co.,  7  Pen. 
(Del.)  397  (1909).  Mandamus  will 
not  be  issued  to  allow  a  stockholder 
to  examine  books  of  accounts,  papers, 
and  documents  where  he  is  acting  to 
aid  a  competitor.  Bevier  v.  United, 
etc.  Co.,  69  Atl.  Rep.  1008  (N.  J.  1908). 
Where  a  farmers'  mercantile  corpora- 
tion is  boycotted  by  competitors,  and 
in  their  behalf  a  person  buys  stock  in 
the  former  in  order  to  aid  such  boy- 
cott, the  court  will  refuse  a  mandamus 
to  compel  the  corporation  to  transfer 
the  stock,  and  will  refuse  an  order 
authorizing  him  to  examine  its  books, 
the    court    saying    that    he    was    !'a 


of  the  earnings  and  expenses  of  the  malicious  meddler,"  and  purchased 
corporation.  A  person  who  has  been  the  stock  to  betray  the  company  to  its 
induced  to  transfer  property  to  a  cor-  competitors.  Funck  v.  Farmers',  etc. 
poration  in  exchange  for  stock  may  Co.,  142  Iowa,  621  (1909).  Mandamus 
maintain  a  mandamus  to  compel  the  wiU  not  be  granted  to  allow  a  stock- 
company  to  allow  him  to  examine  the  holder  to  examine  the  corporate  books 
books,  papers,  and  records  of  the  com-  where  the  piirpose  is  to  give  informa- 
pany  to  ascertain  whether  certain  rep-  tion  to  a  competing  company  and  thus 
resentations  made  to  him  are  true,  to  embarrass  the  first-named  company, 
the  effect  that  all  the  stock  had  been  People  v.  Consol.  Fire  Alarm  Co.,  145 
issued  for  fuU  value.  State  v.  Pan-  N.  Y.  App.  Div.  427  (1911).  A 
American  Co.,  5  Pen.  (Del.)  391  stockholder  will  not  be  granted  a 
(1904).  Mandamus  to  open  the  stock-  mandamus  to  examine  the  corporate 
ledger  was  denied  in  a  case  where  books  where  he  wishes  the  inspection 
the    owner    of    four    shares  of    stock  to   give   information   to   a   competing 


alleged  that  little  or  no  dividends 
were  paid,  and  the  stock  was  de- 
preciating, no  mismanagement  being 
charged.  A  by-law  authorizing  inspec- 
tion of  books  of  account  does  not 
authorize  inspection  of  the  stock- 
ledger.  Lyon  V.  American  Screw  Co., 
16  R.  I.  472  (1889).     Mandamus  may 


company.  People  v.  Consolidated 
Fire,  etc.  Co.,  142  N.  Y.  App.  Div.  753 
(1911).  A  stockholder  should  not  be 
denied  the  right  to  inspect  corporate 
books  and  records  because  he  is  a 
business  rival  or  a  stockholder  in  a 
rival  concern,  or  is  unfriendly  towards 
the  officers,  yet  if  the  purpose  of  the 


lie  to  compel  the  resident  officers  of  a  inspection  is  to  obtain  lists  of  stock- 
foreign  corporation  to  permit  inspec-  holders  and  investors  to  whom  liter- 
tion.  State  v.  Farmer,  7  Ohio  C.  C.  ature  hostile  to  the  company  will  be 
429  (1892).  A  stockholder  sued  by  a  sent,  the  court  will  not  grant  wandomus, 
corporation  on  an  ordinary  debt,  and  State  v.  German,  etc.  Co.,  152  S.  W. 
who  sets  up  in  defense  that  he  was  in-  Rep.  618  (Mo.  1912). 

1506 


CH.  XXX.]  INSPECTION   OF   CORPORATE   BOOKS.  [§  515. 

right  to  inspect  the  stock  book,  the  court  may  refuse  a  mandamus 
if  the  appHcant's  motive  is  sinister,  thus  leaving  him  to  his  remedy  of  a 
suit  for  the  statutory  penalty.^  At  common  law  a  stockholder  has  a 
right  to  a  mandamus  to  compel  the  corporate  officers  to  allow  him  to 
examine  certain  books  and  papers  of  the  corporation,  where  a  proposi- 
tion has  been  made  for  the  purchase  of  all  the  stock  of  the  corporation, 
and  a  large  reduction  has  been  made  in  the  dividends,  and  the  stock- 
holder is  unable  to  ascertain  the  real  value  of  his  stock.^  Minority 
stockliolders  in  order  to  ascertain  the  value  of  their  stock  have  a  right 
to  examine  the  books  and  papers  where  the  majority  have  given  no 
information  as  to  the  financial  condition.  This  right  may  be  enforced 
by  mandamus  after  due  demand,  and  such  demand  may  be  made  by 
mail.^  The  court  will  grant  a  mandamus  to  a  corporation  to  allow  a 
stockholder  to  examine  its  books  of  account  where  he  honestly  believes 
that  the  company  is  being  mismanaged,  and  it  appears  that  no  harm 
will  be  done  by  allowing  the  inspection.  Such  a  stockholder  may  have 
the  assistance  of  an  expert,  and  may  make  transcripts.^  Where  the 
charter  of  a  national  bank  has  expired  the  state  court  may  compel  its 
directors  to  allow  its  stockholders  to  examine  its  books  and  papers.^ 
Where  there  had  been  no  dividends  for  nine  years,  and  the  officers 
were  partners  in  a  competing  concern,  and  refused  to  allow  inspection, 
mandamus  was  granted  in  order  to  enable  the  applicant  to  ascertain 

>  People  V.  American  Press  Assoc,  v.  Trenton,  etc.  Co.,  60  Atl.  Rep.  1098 

148  N.  Y.  App.  Div.  651  (1912).  (N.  J.  1905). 

^  Re  Application  of  Steinway,  31  ^  The  court  said  :  "According  to  the 
N.  Y.  App.  Div.  70  (1898) ;  aff'd,  159  general  rule  in  this  country,  it  is  not 
N.  Y.  250.  Where  corporate  property  necessary  that  there  should  be  any 
is  held  by  another  corporation  a  stock-  particular  dispute  to  entitle  the  stock- 
holder in  the  former  may  have  a  man-  holder  to  exercise  this  right.  Nothing 
damns  to  enable  him  to  examine  the  more  is  required  than  that,  acting  in 
books  to  ascertain  the  value  of  his  good  faith  for  the  protection  of  the 
stock,  he  having  received  an  offer  for  interests  of  the  corporation  and  his 
it.  Eldred  v.  Elliott,  161  Mich.  262  own  interests,  he  desires  to  ascertain 
(1910).  A  stockholder  owning  a  twen-  the  condition  of  the  company's  busi- 
tieth  of  the  capital  stock  may  examine  ness.  .  .  .  The  coiu-t  will  consider 
the  books  and  take  extracts  to  ascer-  whether  his  desire  for  an  examina- 
tain  its  value,  the  stock  having  no  tion  is  reasonable,  having  reference 
market  value  and  the  company  having  to  the  interests  of  the  corporation  and 
refused  information.  State  v.  Jessup,  his  personal  interest  as  a  member  of 
etc.  Co.,  77  Atl.  Rep.  16  (Del.  it.  Its  effect  upon  the  corporation  in 
1910).  reference  to  competitors  and  other  in- 

3  Neubert    v.    Armstrong,   etc.    Co.,  terests  will  not  be  disregarded."     The 

211    Pa.    582    (1905).     A    stockholder  fact  that  there  is  a  statute  allowing 

may  examine  the  books  to  ascertain  inspection   of   the   stock   and    transfer 

the     value     of     his     stock    which     he  books  does  not    take  away   the  com- 

wishes  in  good  faith  to  sell.     He  will  mon-law  rights.     Varney  v.  Baker,  194 

not  be  allowed  to  use  an  accountant  Mass.  239  (1907). 

where    he    himself    is    familiar    with  =  Matter   of    Tuttle    v.    Iron    Nat. 

the  plan  of  keeping  the  books.     Garcin  Bank,  170  N.  Y.  9  (1902). 

1507 


I  515.]  INSPECTION   OF   CORPORATE    BOOKS.  [cH.  XXX. 

whether  the  real  facts  justified  an  action  for  fraud  on  the  part  of  the 
officers.'  It  is  held  in  Pennsylvania  that  a  stockliolder  cannot  obtain 
a  mandamus  to  allow  him  to  examine  the  books  of  the  corporation  to 
obtain  proof  that  the  stock  is  not  worth  a  certain  sum  which  the  pres- 
ident, in  selling  him  stock,  represented  it  was  worth,  the  court  saying 
that  the  stockholder  had  a  right  to  examine  the  books  only  for  pur- 
poses affecting  his  rights  as  a  stockholder,  and  not  his  rights  as  a 
litigant  with  a  party  other  than  the  corporation.^ 

The  New  York  court  of  appeals  has  sustained  a  mandamus  granted 
in  order  to  enable  the  applicant  to  ascertain  who  are  stockholders, 
with  a  view  to  canvassing  their  votes  for  an  election,^  and  during  the 
past  few  years  there  has  been  a  large  number  of  decisions  in  the  New 
York  courts  defining  the  limits  within  which  mandamus  will  be  granted 
in  behalf  of  stockholders.^ 


1  Commonwealth  v.  Phoenix  Iron 
Co.,  105  Pa.  St.  Ill  (1884).  A  state 
court  may  grant  a  mandamus  to  a 
national  bank  to  allow  one  of  its  stock- 
holders to  examine  its  records  and 
documents  to  ascertain  the  true  finan- 
cial condition  of  the  bank,  its  assets 
and  losses  and  dealings  with  specified 
persons,  and  also  to  investigate  cer- 
tain documents  desired  for  use  in  a  law 
suit  commenced  by  the  stockholder, 
such  suit  being  for  false  representations 
by  the  directors  inducing  the  stock- 
holder to  buy  his  stock.  Woodworth 
V.  Old,  etc.  Bank,  154  Mich.  459 
(1908).  A  stockholder  may  have  man- 
damus to  compel  the  corporation  to 
allow  him  to  examine  its  books  for  the 
purpose  of  enabling  him  to  prosecute 
a  claim  against  the  corporation  itself, 
and  the  inspection  may  be  by  agent  or 
attorney.  State  v.  Monida,  etc.  Co., 
110  Minn.  193  (1910).  A  stockholder 
cannot  claim  the  right  to  examine 
the  books  on  the  ground  that  certain 
stock  is  being  illegally  issued  and 
certain  unlawful  contracts  made  where 
this  is  denied  positively  by  the  com- 
pany and  is  not  proved.  State  v. 
Jessup,  etc.  Co.,  77  Atl.  Rep.  16 
(Del.  1910). 

2  Schondelmeyer  v.  Columbia,  etc. 
Co.,  219  Pa.  St.  601  (1908). 

'  Mandamus  was  granted  in  People 
V.  Eadie,  63  Hun,  320  (1892);  afif'd, 
133  N.  Y.  573,  to  open  the  stock-books 
to  a  stockholder  who  wished  to  ascer- 
tain who  were  stockholders  in  order 


to  confer  with  them  for  the  pxu-pose 
of  changing  the  board  at  an  ap- 
proaching election.  Mandamus  was 
granted  to  a  stockholder  who  wished 
to  persuade  other  stockholders  not 
to  appeal  a  suit  in  which  he  was  in- 
terested adversely  to  the  corporation, 
the  defeated  party.  Reg.  v.  Wilts,  etc. 
Canal  Nav.,  29  L.  T.  Rep.  922  (1874). 
See  also  People  v.  Lake  Shore,  etc. 
R.  R.,  11  Hun,  1  (1877);  aff'd  sub 
nom.  Re  Sage,  70  N.  Y.  220  (1877). 
A  stockholder  in  Pennsylvania  may 
have  a  mandamus  to  compel  the  com- 
pany to  allow  him  to  inspect  and  take 
a  copy  of  the  list  of  stockholders, 
his  purpose  being  to  consult  them  and 
obtain  proxies  from  other  stockhold- 
ers. It  is  immaterial  that  a  receiver 
is  in  charge  of  the  property  under  a 
foreclosure.  Such  a  receiver  has  noth- 
ing to  do  with  the  stock-book.  Com- 
monwealth V.  Philadelphia,  etc.  R.  R., 
3  Pa.  Dist.  115  (1893). 

■*  A  policy  holder  in  a  mutual  insur- 
ance company,  without  capital  stock, 
may  be  granted  a  mandamus  to  be 
allowed  to  see  the  list  of  policy 
holders,  but  not  where  he  is  a  profes- 
sional litigant,  and  to  allow  him  to 
see  the  list  would  divulge  private  and 
personal  information.  People  v.  New 
York,  etc.  Co.,  Ill  N.  Y.  App.  Div.  183 
(1906).  A  stockholder  is  not  entitled 
to  mandamus  to  inspect  the  books  for 
the  purpose  of  maintaining  a  suit 
in  deceit  against  the  directors  on 
account  of  a  false  report  published  by 


1508 


CH.   XXX.] 


INSPECTION   OF   CORPORATE   BOOKS. 


[§  515. 


A  pledgee  of  stock  which  still  stands  in  the  name  of  the  pledgor  is  not 
entitled  to  a  mandamus  to  allow  him  to  inspect  the  corporate  books, 

them,  this  being  a  suit  not  as  a  stock-  ing  him  to  examine  all  the  books  and 
holder   but   as    a    plaintiff    in    a    suit  accounts    of    the   corporation    on    the 
against     individuals,     and     does     not  allegation  that  he  wishes  to  ascertain 
affect  the  management  of  the  corpora-  the  names  and  addresses  of  the  stock- 
tion.     Matterof  Taylor,  117  N.Y.App.  holders,    and    the    further    allegation 
Div.  348  (1907).     A  stockholder  who  that    no    dividends    have    been   paid, 
was  induced   to  purchase  his  stock  by  there  being  no  allegation  that  a  de- 
the  president   may  have  a   mandamus  mand   has   been   made   or   that   it   is 
to  allow  him  to  inspect    the  corporate  necessary    to    examine   all    the   books 
books,  it  appearing  that    no   report  is  and   papers,   or   that   there   has   been 
ever  made  by  the  company,  and  he  is  any  mismanagement,  or  that  the  stock 
unable  to  ascertain   its  condition,  and  has  depreciated  in  value.     Matter  of 
it  has  paid   no  dividends  and    appar-  Latimer  v.  Herzog,  etc.  Co.,  75  N.  Y. 
ently  is  not  doing  any  business.     Mat-  App.  Div.  522  (1902).     Mandamus  vnM 
ter  of  O'Neill,  47  N.   Y.  Misc.   Rep.  not    be   granted    to    enable    a   stock- 
495      (1905).        Mandamus     will     be  holder  to  obtain  proof  concerning  an 
granted   at   the   instance   of   a  stock-  alleged   improper   loan   made   by    the 
holder    to    examine    the    stock-book,  corporation   in   order   that    the   proof 
irrespective  of   his   motive,   inasmuch  may  be  used  to  hold  the  dh-ectors  per- 
as  the  right  is  statutory  in  New  York,  sonally  liable.     People  v.  Produce,  etc. 
especially   where   a   meeting  is   about  Co.,  53  N.  Y.  App.  Div.  93   (1900). 
to    be    held    to    increase    the   capital  The  president  of  a  corporation  is  en- 
stock.     People  V.  Keeseville,  etc.  R.R.,  titled    to    a    mandamus   directing    the 
106    N.    Y.    App.    Div.    349    (1905),  secretary  to  allow  him  and  his  attor- 
the  court  saying  also :    "With  respect  ney    to    inspect    the    stock-book    and 
to    the   general   business    books   of    a  make   extracts    therefrom,    and   it    is 
corporation,  the  court  will  not  order  immaterial   what    the   motive   of    the 
an  inspection  by  the  stockholder  un-  president    is.     "An    inspection    of   its 
less    he     seeks     to     learn     something  books  by   the  president  of   the  com- 
which  he  has  the  right  to  know  for  pany  is  a  matter  of  right."     People, 
his  own  protection,   and    his  applica-  etc.  v.  Goldstein,  37  N.  Y.  App.  Div. 
tion  must  be  in  good  faith  and  not  for  550    (1899).     Mandamus   will    not   be 
the  piirpose  of  injuring  or  annoying  granted  to  allow  a  stockholder  to  ex- 
the   corporation."     A    mandamus   will  amine    the    books    of    the    company 
not  issue  in  behalf  of  a  stockholder  where    such    stockholder    owns    only 
who    is   a    mere    dummy   for    others,  one  thirtieth  of  one  per  cent,  of  the 
whose  purpose  is  to  get  control  of  the  preferred    stock,    and    his   reason    for 
company    and    sell    it    out.     A    man-  examining   the   books   is   that   he  be- 
damus  should  not  give  a  stockholder  lieves  the  company  is  selling  its  prod- 
the  right  to  examine  all  books,  vouch-  uct   at   less    than   cost   by   reason   of 
ers,     records,     papers,    and     minutes  competition,  and  that  consequently  he 
without    restriction    as    to    time   and  has  received  no  dividends,  it  not  be- 
place   and   without   provision   against  ing  shown   that  the  market  price  of 
interfering  with   the  regular  business  the  stock  has  been  decreased.     Matter 
of  the  company.     Matter  of  Coats,  73  of  Pierson,  28  N.  Y.  Misc.  Rep.  726 
N.  Y.  App.  Div.   178  (1902).     But  a  (1899).     Mandamus    does    not    lie    to 
mandamus  will  be  granted  command-  compel  a  corporation  to  allow  a  stock- 
ing  a  corporation   to   allow   a   stock-  holder  to  examine  its  books  and  rec- 
holder  to  examine  the  by-laws  unless  ords,    where    the    only    reason    given 
a   very    strong   case   of   bad    faith   is  therefor  is  that  the  corporation,  a  gas 
made    out    against    him.     Matter    of  company,  has  reduced  its  price  of  gas, 
Coats,  75  N.  Y.  App.  Div.  567  (1902).  and  the  stockholder  wishes  to  aseer- 
A  stockholder  will  not  be  granted  a  tain   whether   it   is    selling    the   same 
peremptory  writ  of  mandamus  allow-  at  a  loss  and  whether  it  is  paying  its 

1509 


§  515.] 


INSPECTION   OF   CORPORATE    BOOKS. 


[CH.    XXX. 


even  though  the  pledgor  became  insolvent  and  is  dead.^  Mandamus 
does  not  lie  where  the  applicant  is  not  a  stockholder  of  record."  A 
stockholder  who  has  made  a  contract  for  the  sale  of  his  stock  and  re- 
ceived a  partial  payment  cannot  claim  the  right  to  inspect  the  books, 
the  other  payments  being  not  yet  due.^  The  temporary  administrator 
of  an  estate  owning  stock  is  not  entitled  to  examine  corporate  books 
where  there  is  a  contest  pending  in  regard  to  the  will.'*  It  has  been 
held  in  Pennsylvania  that  mandamus  will  not  be  granted  to  allow  a 
stockholder  to  make  a  list  of  the  stockholders  where  the  only  purpose 
is  to  combine  them  in  attacking  a  lease  made  by  the  corporation.^ 
Where  a  stockholder  sells  his  stock  after  he  has  applied  for  a  mandamus 
to  inspect  the  books,  the  mandamus  will  be  denied.^  Where  all  the 
directors  and  officers  of  an  Arizona  mining  company  live  in  California 
and  the  corporate  business  is  done  there,  a  California  court  may  grant 
a  mandamus  to  compel  the  officers  to  allow  a  stockholder  to  ex- 
amine the  mine  of  the  company,  even  though  [the  mine  is  located  in 


fixed  charges ;  it  being  shown  that 
the  reduction  was  due  to  other  com- 
panies having  reduced  their  price. 
Matter  of  Pierson,  44  N.  Y.  App.  Div. 
215  (1899).  Mandamus  will  not  lie 
to  compel  a  corporation  to  allow  a 
stockholder  to  examine  its  books, 
even  though  he  alleges  it  is  necessary 
in  order  to  fix  the  taxable  value  of 
the  stock  in  determining  an  inher- 
itance tax,  where  it  is  shown  that  the 
real  object  is  to  obtain  information 
for  the  benefit  of  a  competing  concern, 
to  the  injury  of  the  former.  Matter 
of  Kennedy,  75  N.  Y.  App.  Div.  188 
(1902).  A  stockholder  has  not  an  ab- 
solute right  to  examine  the  books  in 
order  to  enable  him  to  prosecute  a 
suit  against  the  corporation,  and 
mandamus  will  not  issue  where  he 
has  already  been  defeated  in  one 
action.  People  v.  American,  etc.  Co., 
31  N.  Y.  Misc.  Rep.  617  (1900). 

1  Matter  of  First,  etc.  Bank,  28 
N.  Y.  Misc.  Rep.  662  (1899).  A  pledgor 
is  entitled  to  examine  corporate  books, 
even  though  the  stock  has  been  trans- 
ferred into  the  name  of  the  pledgee. 
Booth  V.  Consolidated,  etc.  Co.,  62 
N.  Y.  Misc.  Rep.  252  (1909).  An 
unregistered  pledgee  cannot  maintain 
a  suit  under  the  New  York  statute 
against  the  treasurer  for  the  penalty  for 
refusing  to  furnish  to  him  a  statement 
of  the  affairs  of  the  company.     Pray 


V.    Todd,    71    N.    Y.    App.    Div.    391 
(1902). 

2  Matter  of  Reiss,  30  N.  Y.  Misc. 
Rep.  234  (1900).  An  unrecorded 
stockholder  is  not  entitled  to  inspec- 
tion under  a  statute  unless  he  shows 
that  he  has  applied  for  a  transfer  in 
accordance  with  the  by-law.  Butterfly, 
etc.  Co.  V.  Brind,  41  Colo.  29  (1907). 
The  fact  that  a  stockholder  has  never 
received  his  certificate  of  stock  or 
paid  for  it,  does  not  prevent  his  claim- 
ing the  right  to  inspect  the  corporate 
records  as  a  stockholder.  Woodworth 
V.  Old,  etc.  Bank,  154  Mich.  459  (1908). 

'  State  V.  Whited,  etc.,  104  La.  125 
(1900). 

*  Matter  of  Hastings,  120  N.  Y.  App. 
Div.  756  (1907).  The  representatives 
of  a  deceased  stockholder  cannot  have 
an  inspection  of  all  the  books  and 
papers  to  ascertain  whether  there  is 
any  contract  as  to  the  control,  but 
he  may  have  an  order  to  examine  the 
officers  to  ascertain  in  what  book  such 
an  agreement  would  be,  and  also 
whether  unauthorized  stock  had  been 
issued.  Brewster  v.  Brewster  Co., 
127  N.  Y.  App.  Div.  729  (1908). 

^  Commonwealth  v.  Empire  Pass. 
Ry.,  134  Pa.  St.  237  (1890),  and  note. 
See  criticism  on  this  case  inN.  Y.  L.  J., 
Oct.  13,  1890. 

^  State  V.  New  Orleans,  etc.,  112  La. 
868  (1904). 


1510 


CH.   XXX. 


INSPECTION   OF   CORPORATE    BOOKS. 


[§  515. 


Arizona.^  A  Massachusetts  stockholder  in  a  foreign  corporation 
may  by  mandamus  compel  it  to  allow  him  to  examine  its  books,  it 
appearing  that  such  foreign  corporation  holds  its  meetings  and  does 
its  business  and  has  its  books  and  records  in  the  state.^  WTiere  a 
Michigan  stockliolder  in  a  Connecticut  corporation  is  suing  in  Michigan 
other  stockholders,  on  contracts  relative  to  stock,  he  may  obtain  in 
Delaware  a  mandamus  compelling  the  president,  who  resides  there 
and  has  corporate  books  and  papers  there,  to  allow  him  to  examine 
the  same  and  take  copies.^ 

A  resident  stockholder  in  a  foreign  corporation  having  an  office  in 
the  state  for  the  transaction  of  business  is  entitled  under  the  New 
York  statutes  to  inspect  the  stock-book  kept  within  the  state,  and  if 
the  corporation  has  no  such  book,  to  inspect  any  other  books  in  the 
state  which  will  give  the  information.** 


1  Hobbs  V.  Tom  Reed,  etc.  Co.,  129 
Pac.  Rep.  781  (Cal.  1913).  See  130 
Pac.  Rep.  1196. 

2  Andrews  v.  Mines  Corporation, 
205  Mass.  121  (1910).  Mandamus 
lies  at  the  instance  of  a  foreign  corpora- 
tion to  compel  its  resident  secretary 
to  turn  over  its  seal,  books,  and  papers 
to  his  successor.  State  v.  Guertin, 
106  Minn.  248  (1909).  In  the  case 
Kinney  v.  Mexican  Plantation  Co., 
233  Pa.  St.  232  (1911),  the  court 
refused  to  grant  the  application  of  a 
stockholder  in  a  foreign  corporation 
for  a  mandamus  to  compel  it  to  allow 
him  to  examine  its  books  and  records. 

» Richardson  v.  Swift,  7  Houst. 
(Del.)  137  (1885),  a  carefully  consid- 
ered case;  also  Richardson  v.  Swift, 
7  Houst.  (Del.)  137  (1885).  In  the  case 
Schondelmeyer  v.  Columbia,  etc.  Co., 
219  Pa.  St.  601  (1908),  the  court  held 
that  a  stockholder's  right  to  examine 
the  books  of  a  foreign  corporation, 
such  books  being  in  the  state,  was 
the  same  as  in  a  domestic  corporation. 

^  The  owner  of  a  single  share  of 
stock  in  a  foreign  corporation  trans- 
acting business  in  New  York  has  a 
right  under  the  New  York  statute  to 
examine  its  stock-book  and  make 
memoranda  therefrom.  Henry  v. 
Babcock,  etc.  Co.,  196  N.  Y.  302 
(1909).  A  resident  sales  agent  of  a 
foreign  corporation  is  not  liable  for  a 
penalty  for  not  producing  the  stock- 
book  to  a  stockholder  where  he  has  no 
such  book   and   no   power   to   get   it. 


Hovey   v.    Eiswald,    139   N.    Y.   App, 
Div.  433   (1910).     A  foreign  corpora- 
tion  doing  business   in  New   York   is 
subject    to    a    statutory    penalty    for 
failure  to  keep  the  stock-book  in   its 
New   York  office  and  allow  a  stock- 
holder to  see  it,  even  though  the  stock- 
holder owns  but  one  share  of  stock, 
and  even  though  the  company  main- 
tains only  a  sales  office  and  a  sales 
agent  in  New  York.     Hovey  v.  Proc- 
ter &  Gamble    Co.,   139   N.  Y.  App. 
Div.  521   (1910).     A  stockholder  in  a 
foreign  corporation  is  not  entitled  to 
inspect  its  stock-book  under  the  New 
York   statute   where    the   corporation 
has  no  business  or  office  in  the  state 
but  merely  employs  a  transfer  agent  to 
make  transfers  of  stock.      Althause  v. 
Guaranty  Trust  Co.,  78  N.  Y.  Misc.  181 
(1912).     A  foreign  corporation  doing 
business  in  New  York  is  liable  for  the 
statutory  penalty  for  refusing  to  show 
its    stock-book     to     its     stockholders, 
even   though   it   has   not   qualified   to 
do   business   in   the   state.     Hovey   v, 
De  Long,   etc.   Co.,   147  N.   Y.   App. 
Div.  881   (1911).     Keeping  a  transfer 
agent  in  a  state  for  the  convenience 
of  stockholders   and   to  facilitate   the 
sale   of   stock   is   not   maintaining   an 
"office for  the  transaction  of  business" 
in  the  state  on  the  part  of  a  foreign 
corporation  rendering  it  liable  for  not 
allowing    stockholders  to    inspect    its 
stock-book  as  required    by   the    New 
York  statute.     Wardsworth  v.   Equit- 
able Trust  Co.,  153  N.  Y.  App.  Div. 


1511 


§516. 


INSPECTION  OF  CORPORATE  BOOKS. 


CH.  XXX, 


§  516.  Allegation  and  form  of  writ.  —  The  writ    should    run  to 
the  person  or  officer  who  has  control  of  the  records.^    The  stockholder 


737  (1912).  See  also  People  v.  Knick- 
erbocker T.  Co.,  38  N.  Y.  Misc.  Rep. 
446  (1902).  The  same  rule  applies 
to  domestic  corporations  in  New  York. 
See  §  514,  supra.  See  also  §  518, 
injra.  A  foreign  corporation,  doing 
business  in  New  York,  may  be  re- 
quired to  keep  in  New  York  for 
inspection,  as  required  by  the  New 
York  statutes,  a  stock-book.  People 
V.  Montreal,  etc.  Co.,  Ltd.,  40  N.  Y. 
Misc.  Rep.  282  (1903).  An  order  to 
allow  the  examination  of  the  books  of 
a  foreign  corporation  in  order  to 
frame  a  complaint  will  not  be  granted 
unless  it  is  shown  that  such  books 
are  within  the  state.  Snow,  etc.  v. 
Snow-Church  Co.,  80  N.  Y.  App.  Div. 
40  (1903).  A  stockholder  in  suing  a 
foreign  corporation  for  a  penalty  for 
refusing  to  allow  him  to  inspect  its 
stock-book,  as  required  by  law,  makes 
out  a  prima  facie  case  by  proving 
that  he  went  during  business  hours  to 
the  company's  office  and  made  a  de- 
mand upon  the  person  apparently  in 
charge.  Pelletreau  v.  Greene,  etc.  Co., 
49  N.  Y.  Misc.  Rep.  233  (1906).  The 
New  York  statute  imposing  a  penalty 
on  the  transfer  agent  of  a  foreign  cor- 
poration  having   a   transfer   agent   in 


the  state  and  also  upon  the  corpora- 
tion itself  for  refusing  to  allow  in- 
spection of  its  stock-book  was  en- 
forced in  Tyng  v.  Corporation  Trust 
Co.,  104  N.  Y.  App.  Div.  486  (1905). 
Where  a  bank  refuses  to  allow  a 
stockholder  to  examine  its  stock-book, 
as  authorized  by  the  New  York  stat- 
utes, unless  he  discloses  for  whom  he 
is  acting  and  what  his  purpose  is, 
mandamus  will  not  be  granted  unless 
the  applicant  discloses  those  facts. 
People  V.  National  Park  Bank,  122 
N.  Y.  App.  Div.  635  (1907).  A  stock- 
holder in  a  foreign  corporation  will 
not  be  granted  a  mandamus  to  allow 
him  to  examine  its  stock-book,  as 
prescribed  by  the  New  York  statutes, 
where  his  purpose  is  not  connected 
with  his  interest  as  a  stockholder,  but 
is  for  the  purpose  of  offering  stock  in 
other  corporations  to  the  stockholders 
of  the  former.  People  v.  Giroux,  etc. 
Co.,  122  N.  Y.  App.  Div.  617  (1907). 
A  stockholder  in  a  foreign  corpora- 
tion other  than  a  moneyed  or  railroad 
corporation,  having  an  office  for  busi- 
ness in  New  York  state,  is  entitled  by 
the  statutes  of  the  state  to  inspect  the 
stock-book  and  make  extracts  there- 
from.    Althause  v.   Giroux,   56  N.  Y. 


1  "The  writ  shall  be  directed  to  him 
who  is  to  do  the  thing  required  to  be 
done."  People  v.  Throop,  12  Wend. 
183  (1834).  When  discovery  is  wished 
from  a  corporation  the  better  practice 
is  to  join  as  defendants  the  officers 
who  know  the  facts.  Calahan  v. 
Holland-Cook,  etc.  Co.,  201  Fed.  Rep. 
607  (1912).  Mandamus  lies  to  enforce 
a  statutory  right  of  inspection.  Un- 
reasonable delay  after  a  request  is 
sufficient  to  sustain  the  mandamus. 
The  mandamus  may  run  to  the  presi- 
dent and  general  manager  who  has 
control  of  the  business.  The  fact  that 
the  stockholder  is  interested  in  a 
rival  company  and  is  unfriendly  to- 
wards the  officers  is  immaterial.  Cobb 
V.  Lagarde,  129  Ala.  488  (1901).  In  a 
mandamus  proceeding  to  compel  a 
corporation  to  keep  its  books  open  for 


the  inspection  of  stockholders,  in 
accordance  with  the  statutes,  the 
president  may  be  joined  as  a  party 
defendant,  and  it  is  not  a  sufficient 
reply  that  the  books  are  not  in  his 
possession.  State  v.  Bay,  etc.  Co.,  4 
Pen.  (Del.)  214  (1901).  A  mandamus 
to  compel  the  production  of  the  books 
of  the  corporation  should  run  to  the 
corporation  itself  and  not  to  the  man- 
ager. State  V.  North  American,  etc. 
Co.,  105  La.  379  (1901) ;  s.  c,  31  S.  Rep. 
172  (1902).  The  mandamus  may 
run  to  the  secretary  who  has  charge 
of  the  books.  Merril  v.  Suffa,  42 
Colo.  195  (1908).  Mandamus  may 
be  directed  against  the  officer  ha\ang 
charge  of  the  books.  People  v.  Knicker- 
bocker T.  Co.,  38  N.  Y.  Misc.  Rep. 
446  (1902). 


1512 


CH.  XXX.] 


INSPECTION   OF   CORPORATE   BOOKS. 


[§  516. 


may  make  the  inspection  through  an  agent,  and  may  have  the  aid  of 
an  interpreter,  attorney,  or  expert.^     A  right  to  inspect  gives  the  right 


Misc.   Rep.   508   (1907).      But    where 
he  has  already  instituted  a  suit  and 
then    makes   another   request   for   in- 
spection and  then  sues  for  the  penal- 
ties for  refusal,   it   is   a   defense   that 
he    wishes    to    obtain    the    names  in 
order  to  sell  other  stocks  and  that  he 
had    brought    fourteen    similar   suits. 
Althause  v.   Giroux,   56  N.   Y.   Misc. 
Rep.  511  (1907).     A  stockholder  may 
demand    inspection    under    the    New 
York  statute,  even  though  he  wishes 
to  get  the  names  of  the  stockholders 
to  write  them  in  regard  to  buying  or 
selling   the  stock.     Lawshe  v.   Royal, 
etc.   Co.,   54   N.   Y.   Misc.    Rep.   220 
(1907).     In  the  case  State  v.  Lazarus, 
127  Mo.  App.  401  (1907),  a  Missouri 
stockholder  in   a  foreign  corporation, 
the  books  of  which  were  in  Missouri, 
was  granted    a  mandamus    compelling 
the  custodian  of  the  company  to  show 
to    him    the    records    of    stockholders' 
and    directors'     meetings,     names    of 
stockholders,    the    accounts,  and    de- 
scription  of   its   property,    but   not   a 
secret    process    of    manufactvire,    and 
the   mandamus  was  granted  although 
the     stockholder     was     interested     in 
a  rival   company.     A   resident   stock- 
holder in   a  foreign  corporation  may 
under     the    Alabama    code     have    a 
mandamus  to  compel  it  to  allow  him 
to    examine    its    books     and    papers 
which  are  within  the  state,  where  he 
has  reason  to  believe  that  its  affairs 
are    not    being    properly    conducted. 
Nettles    V.    McConnell,    151    Ala.  538 
(1907).     Mandamus     as     a     separate 
proceeding    not    connected    with    any 
suit  will  not  be  granted  in  New  York 
as  against  a  New  Jersey  corporation 
to    compel    the    opening    of    the  cor- 
porate  books  to   a  stockholder.     The 
application   should   be   made  in  New 
Jersey.     Matter  of  Rappleye,  43  App. 
Div.  84  (1899).     In  Matter  of  Crosby, 
28    N.    Y.    Misc.    Rep.    300    (1899), 
rev'd   for  want   of   jurisdiction   in   43 
N.  Y.  App.  Div.  618,  the  New  York 
court  granted  a  mandamus  in  behalf 
of  a  Texas  stockholder  in  a  Colorado 
corporation  which  did  all  its  business 
in  Mexico,  it  being  shown,  however. 


that  all  the  books  were  kept  in  New 
York  and  that  the  officers  resided 
in  New  York,  and  that  the  applicant 
had  pledged  all  his  stock  and  was  un- 
able to  redeem  the  same  for  want 
of  information  as  to  the  value  of  the 
stock.  The  court  held  also  that  in 
one  and  the  same  proceeding  man- 
damus may  issue  to  two  such  corpora- 
tions which  are  practically  one  from 
a  business  point  of  view.  The  penalty 
imposed  by  statute  in  New  York  for 
refusal  of  a  foreign  corporation  having 
an  office  in  the  state  to  exhibit  its 
stock-book  to  a  stockholder  was 
applied  in  Cox  v.  Island,  etc.  Co., 
65  N.  Y.  App.  Div.  508  (1901); 
modified  in  Cox  v.  Paul,  175  N.  Y. 
328  (1903),  limiting  the  penalty  to 
one  violation.  See  §  514,  supra,  and 
§  518,  infra.  Mandamus  may  issue 
to  an  officer  of  a  foreign  corporation 
in  the  state  commanding  him  to 
show  to  stockholders  books  that  are 
within  the  state,  but  not  books  that 
are  outside  of  the  state.  State  v. 
North  American,  etc.  Co.,  106  La.  621 
(1902).  The  New  York  statute  in 
relation  to  transfer  agents  in  this 
state  of  foreign  corporations  was 
construed  in  People  v.  Lake  Shore, 
etc.  R.  R.,  11  Hun,  1  (1877);  aff'd 
suh  nom.  Re  Sage,  70  N.  Y.  220; 
People  V.  Northern  Pacific  R.  R.,  50 
N.  Y.  Super.  Ct.  456  (1884) ;  Kennedy 
V.  Chicago,  etc.  R.  R.,  14  Abb.  N.  Cas. 
326  (1884) ;  People  v.  U.  S.,  etc.  Co., 
20  Abb.  N.  Cas.  192  (1888) ;  People  v. 
Paton,  20  Abb.  N.  Cas.  195  (1887) ; 
s.  c,  5  N.  Y.  St.  316.  Re  Commer- 
ford  V.  William  J.  Johnston  Co., 
N.  Y.  L.  J.,  Oct.  7, 1890 ;  Ervin  v.  Oregon 
Ry.,  etc.  Co.,  22  Hun,  566  (1880). 

1  In  examining  the  books  a  stock- 
holder may  have  with  him  his  attor- 
ney and  stenographer.  Ellsworth  v. 
Dorwart,  95  Iowa,  108  (1895).  A 
stockholder  who  is  entitled  to  ex- 
amine corporate  books  may  have  with 
him  an  attorney  or  other  person 
familiar  with  that  line  of  business. 
People  V.  Nassau  Ferry  Co.,  86  Hun, 
128  (1895).  He  may  inspect  through 
his  duly  authorized  agent.  State  v. 
.13 


§516. 


INSPECTION   OF   CORPORATE   BOOKS. 


[CH.   XXX. 


to  make  memoranda  or  copies.^  The  request  to  inspect  the  books,  for 
refusal  of  which  the  mandamus  is  asked,  must  be  alleged  to  have  been 
made  at  a  proper  time  and  place,  and  of  the  proper  person,  and  to  have 
been  refused.^  The  application  should  also  state  what  information 
the  applicant  needs,  and  what  books  of  the  corporation  he  wishes  to 
inspect.^     "  The  order  should  be  so  drawn  as  not  to  inconvenience  the 


Bienville  Oil  Works  Co.,  28  La.  Ann. 
204  (1876) ;  Cincinnati,  etc.  Co.  v. 
Hoffmeister,  62  Ohio  St.  189  (1900). 
The  executrix  of  an  estate  may  obtain 
a  mandamus  allowing  her  to  examine 
the  books  of  a  bank  in  which  the  es- 
tate holds  stock  in  order  to  ascertain 
the  real  value  of  the  stock.  A  by-law 
prohibiting  such  examination,  except 
by  special  authority  by  the  board  of 
directors,  is  illegal  under  the  Louisi- 
ana constitution.  The  examination 
may  be  by  an  expert  representing  the 
executrix.  State  v.  Citizens'  Bank, 
etc.,  51  La.  Ann.  426  (1899).  Such 
inspection  may  be  through  agents. 
Bonnardet  v.  Taylor,  1  J.  &  H.  383 
(1861);  Draper  v.  Manchester,  etc. 
Ry.,  7  Jur.  (N.  S.)  pt.  1,  86  (1861). 
But  see  Re  West  Devon,  etc.  Mine, 
L.  R.  27  Ch.  D.  106  (1884) ;  Bank  of 
Utica  V.  Hillard,  6  Cow.  62  (1826).  It 
includes  the  agent,  solicitor,  counsel, 
or  expert  of  the  party  asking  the  in- 
spection. Hide  V.  Holmes,  2  Molloy, 
372  (1825) ;  Blair  t-.  Massey,  L.  R.  5 
Eq.  623  (1871);  Joint^tock  Discount 
Co.'s  Case,  36  L.  J.  (Ch.)  150  (1867) ; 
Bonnardet  v.  Taylor,  1  Johns.  &  H. 
383  (1861) ;  Attorney-General  v.  Wbit- 
wood  Local  Board,  40  L.  J.  (Ch.)  592 
(1871) ;  Lindsay  v.  Gladstone,  L.  R. 
9  Eq.  132  (1869) ;  Williams  v.  Prince 
of  Wales  Ins.  Co.,  23  Beav.  338 
(1875)  ;  State  v.  Bienville,  etc.  Co.,  28 
La.  Ann.  204  (1876) ;  Ballin  v.  Ferst, 
55  Ga.  546  (1875).  But  see  Bartley  v. 
Bartley,  1  Drew.  233  (1852);  Sum- 
merfield  v.  Pritchard,  17  Beav.  9 
(1853) ;  Draper  v.  Manchester,  etc. 
R.  R.,  3  De  G.,  F.  &  J.  23  (1861) ;  Re 
West  Devon,  etc.  Mine,  L.  R.  27  Ch.  D. 
106  (1884).  And  a  shareholder  who 
is  also  the  solicitor  of  opposing  liti- 
gants is  nevertheless  so  entitled.  Reg. 
V.  Wilts,  etc.  Canal  Nav.  Co.,  29  L.  T. 
Rep.  922  (1874);  Kingsford  v.  Great 
Western   Ry.,    16  C.   B.    (N.   S.)   761 


(1864).  But  see  Hutt's  Case,  7  Dowl. 
Pr.  690  (1839) ;  Herschfeld  v.  Clarke, 
11  Exch.  712  (1856).  See  also  notes, 
supra.  The  manner  of  inspection 
must  be  gentlemanly.  Williams  v. 
Prince  of  Wales,  etc.  Co.,  23  Beav.  338 
(1857).  Where  the  statute  gives  the 
stockholders  the  right  to  inspect  the 
corporate  books,  they  may  make  the 
examination  through  an  agent  or 
attorney.  Clawson  v.  Clayton,  33 
Utah,  266  (1908). 

1  Marsh  v.  Sanders,  110  La.  726 
(1903).  Varney  v.  Baker,  194  Mass. 
239  (1907). 

2  The  stockholder  must  first  apply 
to  the  proper  corporate  officer  having 
authority  to  grant  inspection.  Rex  v. 
Wilts,  etc.  Canal  Nav.,  3  Ad.  &  El. 
477  (1835).  And  must  state  to  him 
the  reason  why  he  desires  inspection. 
Rex  V.  Wilts,  etc.  Canal  Nav.,  3  Ad. 
&  El.  477  (1835) ;  also  Rex  v.  Clear, 
4  Barn.  &  C.  899  (1825);  People  v. 
Walker,  9  Mich.  328  (1861).  Man- 
damus lies  at  the  instance  of  a  stock- 
holder to  examine  the  corporate  books 
to  enable  the  stockholder  to  learn  the 
true  condition  of  the  company  and 
of  its  management  and  of  the  value 
of  the  stock.  There  is  no  presump- 
tion that  the  inspection  is  hostile  to 
the  interest  of  the  company,  and  it 
need  not  be  alleged  that  a  demand 
was  made  during  business  hours  at 
the  company's  office,  or  that  the  per- 
son making  the  demand  represented 
the  stockholder,  where  it  is  shown 
that  the  officers  refused  to  grant  in- 
spection under  any  circumstances. 
State  V.  Pacific,  etc.  Co.,  21  Wash.  451 
(1899),  giving  a  very  satisfactory  dis- 
cussion and  review  of  the  authorities. 

3  Morgan's  Case,  L.  R.  28  Ch.  D.  620 
(1884).  This  case  also  states  that  in 
England  it  is  customary  for  many 
banking  companies  to  insert  in  their 
constitutions    a    provision    forbidding 


1514 


INSPECTION   OF   CORPORATE    BOOKS. 


:§  517. 


transaction  of  business."  ^  In  a  stockholder's  application  at  common 
law  for  a  mandamus  to  compel  the  corporation  to  allow  him  to  inspect 
the  cash  book  and  other  books,  the  papers  must  show  for  what  purpose 
the  inspection  is  desired.^  Even  though  a  corporation  does  not  allow 
inspection  of  its  stock-book,  as  required  by  statute,  yet  if,  after  a  man- 
damus has  been  applied  for,  the  corporation  offers  to  pay  the  costs  and 
open  the  stock-book  for  inspection,  the  applicant  is  bound  to  discon- 
tinue the  proceedings.^  Pending  appeal  a  stay  may  be  granted  on  an 
order  giving  the  right  to  inspect  corporate  books."* 

§  517.  Right  to  inspect  minutes  of  meetings  of  directors.  —  It 
would  take  a  strong  case  to  induce  a  court  to  issue  a  mandamus  com- 
manding the  corporate  officers  to  allow  a  stockholder  to  inspect  the 
minutes  of  the  meetings  of  the  directors.^  The  success  of  the  corporate 
enterprise  depends  frequently  upon  the  secrecy  of  the  plans  of  the  di- 
rectors.    In  connection  with  litigations  the  rule,  of  course,  is  different ; 


the  inspection  of  customers'  accounts 
by  shareholders  or  creditors.  Irrele- 
vant parts  of  the  books  may  be  sealed 
up.  Jones  V.  Andrews,  58  L.  T.  Rep. 
601  (1888) ;  Earp  v.  Lloyd,  3  K.  &  J. 
549  (1857) ;  Napier  v.  Staples,  2  Mol- 
loy,  270  (1828)  ;  Hill  v.  Great  West- 
ern Ry.,  10  C.  B.  (N.  S.)  148  (1861); 
Clifford  V.  Taylor,  1  Taunt.  167 
(1808);  Gerard  v.  Penswick,  1 
Swanst.  533  (1818) ;  Dias  v.  Merle,  2 
Paige,  494  (1831) ;  Titus  v.  Cortelyou, 
1  Barb.  444  (1847) ;  People  v.  Pacific 
Mail  S.  S.  Co.,  50  Barb.  280  (1867) ; 
Pynchon  v.  Day,  118  111.  9  (1886).  But 
if  such  irrelevant  matter  cannot  be 
separated,  the  party  must  produce  the 
whole.  Carew  v.  White,  5  Beav.  172 
(1842). 

^  Duffy  V.  Mutual  Brewing  Co., 
N.  Y.  L.  J.,  Oct.  3,  1892,  p.  18,  approv- 
ing the  above  text. 

2  Bruning  v.  Hoboken,  etc.  Co.,  67 
N.  J.  L.  119  (1902).  The  applicant 
must  allege  the  extent  of  his  interest, 
also  wherein  his  object  of  inspection 
is  just  and  useful.  Hatch  v.  City 
Bank,  1  Rob.  (La.)  470  (1842).  The 
case  State  v.  Bienville  Oil  Works, 
28  La.  Ann.  204  (1876),  states  that 
the  preceding  case  "failed  through 
want  of  precision  and  definiteness 
in  stating  some  well-defined  purpose, 
some  reasonable  cause,  and  showing 
that  they  had  some  interest  in  the 
matter.'! 


^  Boardman  v.  MarshaUtown,  105 
Iowa,  445  (1898). 

*  McAlpin  V.  Universal,  etc.  Co.,  55 
Atl.  Rep.  999  (N.  J.  1903). 

^"It  is  highly  proper  that  an  in- 
spection of  the  books  containing  the 
proceedings  of  the  directors  should  be 
obtained  on  special  occasions  and  for 
special  purposes ;  .  .  .  but  the  pro- 
posed daily  and  hourly  inspection 
and  publication  of  all  their  proceed- 
ings would  be  tantamount  to  admit- 
ting the  presence  of  strangers  at  all 
their  meetings,  and  would  probably  ere 
long  be  found  very  prejudicial  to  the 
shareholders."  Regina  v.  Mariquita, 
etc.  Min.  Co.,  1  El.  &  El.  289  (1858). 
"A  private  stockholder  of  an  incor- 
porated company  has  no  right  to  have 
access  to  the  minutes  of  the  proceed- 
ings of  the  directors  unless  that  right 
is  expressly  given  by  the  charter ;  and 
consequently,  and  of  necessity,  he 
must  remain  ignorant  of  their  action 
until  they  choose  to  make  that  action 
known"  (dictum).  Alabama,  etc.  R.  R. 
V.  Rowley,  9  Fla.  .508,  514  (1861). 
See  also  Lindley,  Companies,  under 
"Inspection"  in  Index.  In  Streit  v. 
Citizens'  F.  Ins.  Co.,  29  N.  J.  Eq.  21, 
31  (1878),  the  court  said:  "The  offi- 
cers ought  not  to  have  denied  to  any 
stockholder  an  opportunity,  properly 
applied  for,  to  examine  the  minutes 
of  the  meetings  of  the  directors." 


1515 


§  518.] 


INSPECTION   OF   CORPORATE    BOOKS. 


[CH.   XXX. 


but,  aside  from  this,  it  seems  that  a  stockholder  is  not  entitled  as  a  matter 
of  right  to  a  mandamus  to  allow  him  to  inspect  the  minutes  of  the 
directors'  meetings.  The  same  rule  would  seem  to  apply  to  miscella- 
neous questions  asked  of  the  directors  at  stockholders'  meetings.  A 
by-law  that  directors  shall  establish  a  secret  reserve  fund  which  the 
shareholders  shall  know  nothing  about  and  which  the  auditors  shall  not 
report  to  the  shareholders,  is  contrary  to  the  English  statute  requiring 
the  auditors  to  report  fully  to  the  shareholders.^ 

§  518.  Statutes  giving  right  of  inspection.  —  The  right  to  inspect 
corporate '  records  is  frequently  given  to  stockholders  by  statutory 
provisions.  In  New  York  the  statute  gives  to  all  stockholders  the 
right  to  examine  the  corporate  stock-book,^  and  this  statute  has  been 


1  Newton  v.  BirmiBgham,  etc.  Co., 
Ltd.,  [1906]  2  Ch.  378. 

2  As  to  domestic  corporations,  see 
§  514,  supra,  and  as  to  foreign  cor- 
porations, see  §  515,  supra.  The  New 
York  statute  was  construed  in  Cotheal 
V.  Brouwer,  5  N.  Y.  562  (1851) ;  People 
V.  Pacific  Mail  S.  S.  Co.,  50  Barb.  280 
(1867) ;  Kennedy  v.  Chicago,  etc.  R.  R., 
14  Abb.  N.  Cas.  326  (1884);  Peo- 
ple V.  Mott,  1  How.  Pr.  247  (1845); 
Kelsey  v.  Pfaudler,  etc.  Co.,  3  N.  Y. 
Supp.  723  (1889);  People  v.  Throop, 
12  Wend.  183  (1834).  A  delay  of  one 
day  in  allowing  the  inspection,  owing 
to  the  absence  of  the  person  having 
charge  of  the  books,  does  not  cause 
the  penalty  to  attach.  Kelsey  v. 
Pfaudler,  etc.  Co.,  41  Hun,  20  (1886). 
A  stockholder  is  not  entitled  to  exam- 
ine the  books  to  ascertain  what  price 
the  company  paid  in  retiring  its  bonds 
where  he  has  not  apphed  for  the  infor- 
mation and  does  not  show  that  it  is 
necessary  for  him  to  have  it  to  protect 
his  interests.  Matter  of  Hitchcock, 
149  N.  Y.  App.  Div.  824  (1912). 
Even  though  a  statute  gives  a  stock- 
holder the  right  to  inspect  the  stock- 
book,  the  court  may  refuse  a  man- 
damus if  the  applicant's  motive  is 
sinister,  thus  leaving  him  to  his  rem- 
edy of  a  suit  for  the  statutory  penalty. 
People  V.  American  Press  Assoc,  148 
N.  Y.  App.  Div.  651  (1912).  A  direc- 
tor of  a  New  York  corporation  is 
entitled  as  a  matter  of  right  to  a 
peremptory  mandamus  allowing  him 
to  examine  the  books  either  alone  or 
with  the  aid  of  some  competent  per- 


son approved  by  the  court,  but  he 
cannot  continue  the  examination  for 
three  months  when  four  weeks  is 
enough,  and  cannot  have  a  number  of 
accountants  assist  him  when  one  is 
enough.  People  v.  Columbia,  etc. 
Co.,  103  N.  Y.  App.  Div.  208  (1905). 
A  statutory  right  of  stockholders  to 
inspect  the  books  is  mandatory,  while 
the  common  law  right  is  discretionary. 
Under  the  New  York  statute  a  stock- 
holder may  copy  the  names  of  the 
stockholders  of  record,  in  order  that 
he  may  negotiate  for  their  stock. 
This  statute  applies  also  to  a  national 
bank  located  in  New  York  state. 
The  court  may  regulate  the  hours  of 
inspection,  and  may  refuse  to  enforce 
this  statutory  right,  if  it  is  for  an  ille- 
gitimate purpose.  The  statute  enlarges 
and  does  not  restrict  the  common-law 
right.  People  v.  Consolidated  Nat. 
Bank,  105  N.  Y.  App.  Div.  409  (1905). 
The  right  of  a  stockholder  in  a  foreign 
corporation  having  an  office  or  busi- 
ness in  the  state  to  examine  the  stock- 
book  as  allowed  by  the  New  York 
statute,  gives  him  the  right  also  to 
make  extracts.  Fay  v.  Coughlin,  etc. 
Co.,  47  N.  Y.  Misc.  Rep.  687  (1905). 
Mandamus  will  be  granted  at  the 
instance  of  a  stockholder  to  examine 
the  stock-book,  irrespective  of  his 
motive,  inasmuch  as  the  right  is 
statutory  in  New  York,  especially 
where  a  meeting  is  about  to  be  held  to 
increase  the  capital  stock.  People  v. 
Keeseville,  etc.  R.  R.,  106  N.  Y.  App. 
Div.  349  (1905),  the  covu-t  saying 
also:     ''With   respect   to   the   general 


1516 


CH.  XXX.  I 


INSPECTION    OF   CORPORATE   BOOKS. 


[§  518. 


applied  to  foreign  corporations  having  an  office  and  a  stock-book  within 
the  state.^  Sometimes  the  statute  provides  for  the  inspection  of  all 
corporate  records.^    Mandamus  lies  to  enforce  this  right.^     Injunction 


business  books  of  a  corporation,  the 
court  will  not  order  an  inspection  by 
the  stockholder  unless  he  seeks  to 
learn  something  which  he  has  the 
right  to  know  for  his  own  protection, 
and  his  application  must  be  in  good 
faith  and  not  for  the  purpose  of  injuring 
or  annoying  the  corporation." 

1  See  §  515,  supra. 

2  Ohio  Rev.  Stat.  (1886),  §3312; 
Cal.  Civ.  Code,  §§377,  378;  Penal 
Code,  565;  R.  I.  Pub.  St.,  Ch.  153, 
§  21,  and  Ch.  158,  §  24  (1882) ;  Mich. 
Gen.  Stat.,  §  3173,  for  banks.  See 
also  Colo.  Gen.  Stat.  (1882),  §249; 
Mo.  Rev.  Stat.  (1879),  §§720,  721; 
Vermont  R.  Laws  (1880),  §§3294, 
3295 ;  Mass.  1860,  Ch.  68,  §  10 ;  lU. 
Rev.  Stat.  (1874),  Ch.  32,  §  13.  A 
statutory  right  of  a  creditor  to  exam- 
ine such  portions  of  the  corporate 
books  and  papers  as  relate  to  a  claim 
or  to  the  collection  thereof  is  enforce- 
able, not  by  a  proceeding  at  law  or  by 
a  bill  for  discovery,  but  by  mandamus, 
and  his  motive  is  immaterial.  Hub, 
etc.  Co.  V.  New  England,  etc.  Club, 
67  Atl.  Rep.  574  (N.  H.  1907).  Under 
the  Utah  statute  a  stockholder  has  a 
right  to  inspect  the  corporate  books 
and  to  ascertain  the  names  of  other 
stockholders  in  the  absence  of  any 
reason  for  denying  that  right.  State 
V.  Silver  King,  etc.,  37  Utah,  62  (1910). 
Under  the  Utah  statute  a  stockholder 
may  examine  all  the  books  and  papers 
of  a  corporation  and  may  enforce  the 
right  by  mandamus.  Kimball  v. 
Dern,  116  Pac.  Rep.  28  (Utah,  1911). 
Where  a  statute  gives  the  stock- 
holder the  right  to  inspect  corporate 
records  the  stockholder  need  not  show 
for  what  purpose  he  wishes  the  inspec- 
tion. Mandamus  wiU  issue,  but 
whether  "records"  included  direc- 
tor's minutes  the  court  did  not  decide. 
White  V.  Manter,  84  Atl.  Rep.  890 
(Me.  1912).  In  the  case  State  v. 
Lazarus,  127  Mo.  App.  401  (1907),  a 
Missouri     stockholder     in     a     foreign 


corporation,  the  books  of  which  were 
in  Missouri,  was  granted  a  mandamus 
compelling  the  custodian  of  the  com- 
pany to  show  to  him  the  records  of 
stockholders'  and  directors'  meetings, 
names  of  stockholders,  the  accounts, 
and  description  of  its  property,  but 
not  a  secret  process  of  manufacture, 
and  the  mandamus  was  granted 
although  the  stockholder  was  inter- 
ested in  a  rival  company.  A  minority 
stockholder,  who  has  instituted  suit 
against  the  company  for  mismanage- 
ment and  to  examine  the  books  and  to 
obtain  a  transfer  of  stock  on  the 
books,  will  be  allowed  to  examine  the 
books  of  the  company,  under  the  stat- 
utes of  Ohio,  where  he  alleges  that 
the  company  formerly  paid  dividends 
for  many  years,  and  then  ceased  pay- 
ing them,  and  that  it  was  being  man- 
aged in  the  interests  of  a  rival  com- 
pany. The  order  may  be  served  upon 
the  secretary  and  general  manager, 
especially  where  the  principal  direc- 
tors are  out  of  the  state.  If  the  order 
is  not  complied  with,  the  secretary 
and  manager  may  be  imprisoned  for 
contempt.  Arbuckle  v.  Spice  Co.,  11 
Ohio  Circuits,  726  (1901).  Such 
inspection  will  be  allowed,  even  though 
the  stockholder  making  the  applica- 
tion is  interested  in  a  rival  concern, 
and  even  though  a  subpoena  duces 
tecum  might  issue.  Arbuckle  v.  Spice 
Co.,  11  Ohio  Cu-cuits,  743  (1901).  The 
pleading  in  a  cause  of  action  arising 
under  a  statute  herein  must  clearly 
bring  the  case  within  the  statute. 
Lewis  V.  Brainerd,  53  Vt.  510  (1881). 
The  purpose  of  the  inspection  need 
not  be  stated  to  the  officer.  That  the 
officer  had  notice  of  plaintiff's  stock- 
holdership  must  be  alleged.  Wil- 
liams V.  College  Corner,  etc.  Co.,  45 
Ind.  170  (1873).  Cf.  Queen  v.  Grand 
Canal,  1  Ir.  L.  R.  337  (1839).  For 
New  Jersey,  see  Huylar  v.  Cragin 
Cattle  Co.,  40  N.  J.  Eq.  392  (1885) ; 
s.  c,  7  Atl.  Rep.  521  (1887).     Under 


'  See  §  514,  supra. 
1517 


§  518.] 


INSPECTION  OF  CORPORATE  BOOKS. 


[CH.  XXX. 


lies  to  prevent  a  corporation  refusing  the  statutory  right  of  a  stock- 
holder to  examine  the  books  of  a  private  corporation,  and  it  is  imma- 
terial what  his  motive  may  be.^  A  stockholder  suing  an  officer  of  a 
foreign  corporation  for  penalties  for  refusing  to  allow  inspection  of  the 
stock-book  cannot  accumulate  the  penalties.  He  can  recover  for  but 
one  violation.^  A  statute  which  imposes  a  penalty  in  behalf  of  any 
"  injured  party  "  for  refusal  to  allow  him  to  examine  any  of  the  papers 
of  the  corporation,  cannot  be  enforced  by  a  stockholder  unless  he  shows 
that  he  had  a  good  cause  for  examining  the  papers  and  not  merely  curi- 
osity or  a  desire  to  vex  or  harass  the  management.^  In  New  Jersey 
it  is  held  that  mandamus  does  not  lie  to  enforce  a  statutory  right  to 
examine  the  books,  except  where  it  would  lie  at  common  law.*  A  stat- 
ute requiring  stock  ledgers  to  be  kept  open  for  the  examination  of 
stockholders  appUes  to  pre-existing  as  well  as  subsequently  organized 
corporations.^    Frequently  the  charter  itself  states  that  the  stockholder 


the  statutes  of  New  Jersey  the  court    Weinhenmayer  v.  Bitner,  88  Md.  325 


will  order  the  books  of  the  company 
to  be  brought  within  the  state  on  the 
petition  of  the  president  and  a  direc- 
tor. A  person  having  a  right  to  exam- 
ine the  books  of  the  company  may  do 
so  through  an  attorney.  It  is  imma- 
terial what  the  motive  of  the  applicant 
may  be.  Mitchell  v.  Rubber  Reclaim- 
ing Co.,  24  Atl.  Rep.  407  (N.  J.  1892). 
A  stockholder  in  a  New  Jersey  corpora- 
tion may  by  mandamus  compel  it  to 
produce  within  the  state  its  books  for 
examination  as  authorized  by  stat- 
ute. A  provision  in  the  certificate  of 
incorporation  that  the  directors  shall 
regulate  the  stockholders'  rights  to 
inspect  books  or  accounts,  except  as 
provided  otherwise  by 'statute  or  by 
resolution  of  the  directors  or  resolu- 
tion of  the  stockholders,  does  not 
restrict  the  above  right.  Hodgens  v. 
United  Copper  Co.,  67  Atl.  Rep.  756 
(N.  J.  1907).  As  to  the  law  in  Con- 
necticut, see  Pratt  v.  Meriden  Cutlery 
Co.,  35  Conn.  36  (1868).  See,  in  gen- 
eral, Cain  V.  PuUen,  34  La.  Ann.  511 
(1882).  Where  the  statutes  give  a 
stockholder  the  right  to  examine  all 
accounts  of  corporate  transactions  a 
stockholder  is  entitled  to  a  mandamus 
to  enforce  this  right,  even  though  he 
desires  to  get  information  to  use  in 
his  own  business  in  competition  with 
that  of  the  corporation,  but  the  exam- 
ination must  be  at  a  reasonable  time. 


(1898). 

1  Cincinnati,  etc.  Co.  v.  Hoffmeister, 
62  Ohio  St.  189  (1900). 

2  Cox  V.  Paul,  175  N.  Y.  328  (1903). 

3  Brown  v.  Kildea,  58  Wash.  184 
(1910). 

^  State  V.  National  Biscuit  Co.,  69 
N.  J.  L.  198  (1903).  Even  though  a 
statute  gives  the  right  of  inspection, 
yet  if  the  purpose  of  the  stockholder 
is  to  harass  the  officers  and  compel 
them  to  buy  the  stock  at  a  high  price 
and  injure  the  business  of  the  com- 
pany, and  the  officers  have  already 
given  him  all  the  information  they 
could  without  injury  to  the  business, 
he  will  not  be  granted  a  mandamus. 
Wight  V.  Heublein,  111  Md.  649 
(1910).  Where  a  statute  gives  a 
stockholder  an  absolute  right  to  exam- 
ine the  corporate  books,  he  cannot  be 
refused  even  though  his  motive  is  to 
injure  the  company.  Venner  v.  Chi- 
cago,  etc.    Ry.,    246   111.    170    (1910). 

*  Bay  State  Gas  Co.  v.  State,  4 
Pen.  (Del.)  238  (1904),  holding  also 
that  mandamus  lies  to  compel  a  cor- 
poration to  keep  stock-books  open  for 
examination  by  the  stockholders,  in 
accordance  with  a  statute,  and  if  the 
president  is  in  charge  of  the  books  he 
may  be  made  a  party  defendant,  and 
that  a  statute  requiring  corporations 
to  file  certificates  stating  the  amount 
of  the  capital  stock  paid  in   may  be 


1518 


CH.   XXX. J 


INSPECTION    OF   CORPORATE   BOOKS. 


[§  519. 


shall  have  certain  rights  of  inspection.  In  England  the  Companies  Act 
regulates  specifically  the  stockholders'  right  of  inspection,  and  provides 
for  a  committee  of  investigation  in  behalf  of  the  stockholders  whenever 
an  investigation  is  desired  by  them.^  The  common-law  right  of  in- 
spection remains,  although  a  special  statutory  right  is  also  given.- 
Where  a  by-law  gives  the  stockholders  the  right  to  examine  the  books, 
this  extends  the  common-law  right  and  may  be  enforced  by  man- 
damus.^ 

§  519.  Orders  to  corporation  to  allow  inspection  —  Subpoena 
duces  tecum  —  Bill  of  discovery.  —  An  inspection  of  corporate  records 
is  often  desired  by  a  stockholder  in  connection  with  an  action  which 
is  pending  in  the  courts,  and  it  has  been  the  practice  of  the  courts  to 
grant  applications  for  this  purpose.'*     The  order  to  allow  an  inspection 

=  Matter  of  Steinway,  159  N.  Y.  251 
(1899) ;  People  v.  Lake  Shore,  etc. 
R.  R.,  11  Hun,  1  (1877) ;  affirmed  sub 
nom.  Re  Sage,  70  N.  Y.  220  (1877). 
Varney  v.  Baker,  194  Mass.  239  (1907). 
Even  though  a  statute  authorizes  a 
stockholder  to  examine  the  stock- 
books,  yet  his  common-law  right  to 
examine  any  books  at  times  when  he 
will  not  annoy  the  officials  or  inter- 
fere with  the  conduct  of  the  business 
remains.  State  v.  Donnell  Mfg.  Co., 
129  Mo.  App.  206  (1908). 

3  Wyoming  Coal,  etc.  Co.  v.  State, 
15  Wyo.  97  (1906). 

^  See  cases  in  previous  sections  of 
this  chapter.  A  rule  that  books  and 
papers  cannot  be  examined  before  trial 
when  they  can  be  obtained  on  the  trial 
by  subpoena  duces  tecum,  applies  only 
as  between  the  parties,  and  does  not 
affect  the  right  of  a  stockholder  to 
inspect  the  corporate  records,  the 
corporation  not  being  a  party  defend- 
ant. A  state  com-t  may  grant  a 
mandamus  to  a  national  barLk  to  allow 
one  of  its  stockholders  to  examine  its 
records  and  documents  to  ascertain 
the  true  financial  condition  of  the 
bank,  its  assets  and  losses  and  dealings 
with  specified  persons,  and  also  to 
investigate  certain  documents  desired 
for  use  in  a  law  suit  commenced  by  the 
stockholder,  such  suit  being  for  false 
representations  by  the  directors  induc- 
ing the  stockholder  to  buy  his  stock. 
Woodworth  v.  Old,  etc.  Bank, 
154  Mich.  459  (1908).  See  also 
§  515,  supra.     In  a  suit  for  a  receiver 


enforced  by  mandamus.  A  state  may 
enact  a  statute  giving  stockholders 
the  right  to  examine  the  corporate 
books  of  accounting,  etc.,  and  requir- 
ing such  books  to  be  kept  in  the  state. 
Such  a  statute  is  constitutional.  Ven- 
ner  v.  Chicago,  etc.  Ry.,  246  lU.  170 
(1910). 

1  25  &  26  Vict.,  c.  89,  Table  A.  In 
England,  under  a  statute  allowing  a 
stockholder  to  inspect  the  register  of 
stockholders,  etc.,  an  injunction  lies 
to  restrain  corporate  officers  from 
refusing  this  right.  Holland  v.  Dick- 
son, L.  R.  37  Ch.  D.  669  (1888).  A 
company  which  by  statute  is  bound  to 
allow  an  inspection  of  the  register  must 
allow  a  party  to  take  copies  of  the 
same,  and  an  injunction  lies  in  case 
of  refusal.  Nelson  v.  Anglo-American, 
etc.  Co.,  [1897]  1  Ch.  130.  A  stock- 
holder has  the  right  to  make  a  copy  of 
corporate  records  which  he  is  examin- 
ing. Boord  V.  African,  etc.  Co.,  [1898] 
1  Ch.  596.  A  penalty  for  not  allowing 
inspection  of  the  corporate  books  does 
not  applv  to  a  liquidator.  Re  Kent, 
etc.  Syndicate,  [1898]  1  Q.  B.  754. 
Under  the  English  statute  a  stock- 
holder may  inspect  the  transfer  book 
and  take  copies,  even  though  he  is 
acting  in  the  interest  of  a  rival  com- 
pany. Mutter  V.  Eastern,  etc.  Ry., 
L.  R.  38  Ch.  D.  92  (1888).  A  stock- 
holder suing  to  set  aside  a  fraudulent 
contract  may  have  inspection  even  of 
privileged  matters  between  the  com- 
pany and  its  attorney.  Gouraud  v. 
Edison,  etc.  Co.,  59  L.  T.  813  (1888). 


1519 


§519. 


INSPECTION   OF   CORPORATE   BOOKS. 


CH.  XXX. 


may  be  made  at  any  stage  of  the  action.     A  stockholder  has  this  right 
to  aid  him  in  suits  with  strangers,  and  of  course  his  right  herein  is  more 


by  an  owner  of  one  third  of  the  pre- 
ferred stock  on  the  ground  that  the 
directors  have  wasted  the  funds  and 
the  company  has  become  insolvent, 
the  court  may  allow  the  complaining 
stockholder  to  examine  the  books  and 
papers  of  the  company  to  prepare 
for  trial.  Mc  Geary  v.  Brown,  23 
S.  D.  573  (1909).  In  a  suit  against 
a  foreign  corporation  for  a  part  of 
its  profits  in  accordance  with  a  con- 
tract, the  plaintiff  may  by  motion  have 
an  inspection  of  the  corporate  books 
and  papers  relating  to  the  transac- 
tion. Sullivan  v.  Ryan,  etc.  Co.  148 
N.  Y.  App.  Div.  243  (1911).  In  a 
suit  by  a  minority  stockholder  against 
a  holding  company  to  compel  the 
declaration  of  a  dividend  and  stop 
alleged  diversion  of  the  assets  for  the 
benefit  of  subsidiary  companies  where 
the  essential  facts  are  admitted  by  the 
answer  the  court  will  not  order  the 
defendant  to  bring  its  books  into  the 
state  for  the  inspection  of  the  com- 
plainant. Jones  V.  Youngstown- 
Sharon,  etc.  Co.,  84  Atl.  Rep.  200 
(N.  J.  1912).  The  evidence  sought 
must  be  directly  material  to  the  cause. 
Rex  V.  Hostmen,  2  Stra.  1223  (1745) ; 
Rex  V.  Babb,  3  T.  R.  579  (1790); 
Mayor  of  Southampton  v.  Graves,  8 
T.  R.  590  (1800),  holding  that  a  stranger 
has  no  more  right  to  have  an  inspec- 
tion here  than  in  a  case  where  he 
sues  a  copartnership.  See  Central 
Nat.  Bank  v.  White,  37  N.  Y.  Super. 
Ct.  297  (1874),  holding  that  in  New 
York  the  inspection  is  proper  if  the 
evidence  is  material  and  cannot  other- 
wise be  obtained;  Clinch  v.  Financial 
Corp.,  L.  R.  2  Eq.  271  (1866),  where 
a  director  was  compelled  to  produce. 
In  the  federal  courts  an  inspection  will 
not  be  granted  in  order  to  frame  a 
complaint.  Paine  v.  Warren,  33  Fed. 
Rep.  357  (1888). 

In  a  bill  alleging  fraud  on  the  part 
of  the  directors,  whereby  complainant, 
a  stockholder,  has  been  injured,  the 
latter  may  obtain  such  inspection. 
Walburn  v.  Ingilby,  1  Myl.  &  K.  61 
(1833).  See  Bassford  v.  Blakesley,  6 
Beav.  131  (1842).     On  a  verified  peti 


tion   by   a   single   stockholder   stating 
that  a  mine  owned  by  the  company  is 
being  worked  at  a  loss,  an  inspection 
of  the  company's  books  will  be  granted. 
Re  West  Devon,  etc.  Mine,  L.  R.  27 
Ch.  D.  106  (1884).      In  a  suit  to  hold 
the  directors  of  a  life  insurance  com- 
pany personally  responsible  for   large 
losses  alleged  to  have  been  caused  by 
moneys   improperly   paid   on   policies, 
an     inspection     has     been     allowed, 
although  plaintiff  was  said  to  have  but 
a  trifling  interest  in  the  company  and 
was  desirous  of  injuring  it,  and  had 
published     prejudicial     statements     in 
regard    to    the    matter.     Williams    v. 
Prince   of   Wales   Ins.   Co.,   23   Beav. 
338    (1857).     Where   a   company   was 
being   wound   up,    an   application   on 
behalf    of    twenty-four    out    of    eight 
hundred  and  fifty-six  stockholders,  who 
had    associated    themselves    together 
for  an  investigation  into  the  company's 
affairs,  was  allowed,  with  permission 
to  employ  an  accountant  to  carry  on 
the  examination  of  the  books.     Joint- 
stock  Discount  Co.'s  Case,  36  L.  J. 
Ch.    150    (1867).     See    Emma    Silver 
Min.  Co.'s  Case,  L.   R.   10  Ch.  App. 
194  (1875) ;  People  v.  Lake  Shore,  etc. 
R.    R.,    11    Hun,    1    (1877);    afBrmed 
sub    nom.    Re    Sage,    70    N.    Y.    220 
(1877);    Ex   parte   Buchan,    36    L.    J. 
(Ch.)  150  (1866).     An  inspection  wiU 
not    be    granted    for    the    purpose    of 
fishing  out  a  defense  to  a  suit.     Birm- 
ingham,  etc.   Ry.   V.   White,   1   Q.   B. 
282     (1841);     Imperial     Gas     Co.     v. 
Clarke,  7  Bing.  95  (1830).     See  Hoyt 
V.    American    Exch.    Bank,    1    Duer, 
652    (1853) ;    Shoe   &    Leather   Assoc. 
V.   Bailey,   49   N.   Y.    Super.   Ct.   385 
(1883).     Nor  to  furnish  materials   to 
the  other  side  for  a  new  trial.     Pratt 
V.  Goswell,  9  C.  B.  (N.  S.)  706  (1861). 
Nor    to   ascertain   whether   petitioner 
might  better   accept,  with   the   other 
stockholders,    what    was    offered    her 
for   her   holding  in  an   old   company, 
which  was  being  wound  up,  instead  of 
proceeding    with    an    arbitration.     Re 
Glamorganshire   Banking   Co.,    L.    R. 
28  Ch.  D.  620  (1884).     Nor  to  estab- 
lish a  justification  in  an  action  against 


1520 


CH.   XXX. 


INSPECTION    OF   CORPORATE    BOOKS. 


[§  519. 


extensive  than  the  rights  of  the  other  party  to  the  action.  In  fact,  a 
person  who  is  not  a  stockholder  has  no  more  right  to  an  inspection  of 
the  corporate  books  than  he  has  to  inspect  the  books  of  a  copartnership. 
This  is  the  rule,  even  though  he  is  suing  or  being  sued  by  a  stockholder.^ 


the  petitioner  for  libel,  imputing 
insolvency  to  the  company.  Metro- 
politan, etc.  Co.  V.  Hawkins,  4  iH.  &  N. 
146  (1859).  See  Finlay  v.  Lindsay, 
7  Jr.  L.  R.  (N.  S.)  1  (1857) ;  Collins 
V.  Yates,  27  L.  J.  (Exch.)  150  (1858) ; 
Opdyke  v.  Marble,  44  Barb.  64  (1864). 
Nor  to  examine  all  the  books  of  the 
company  for  fifty  years  back,  because 
petitioner  alleges  that  he  is  dissatisfied 
with  the  management  of  the  company 
and  with  the  accounts,  besides  other 
grounds.  Regina  v.  Grand  Canal, 
1  Jr.  L.  R.  337  (1839).  Nor  where  the 
petition  does  not  specify  the  partic- 
ular books  asked  for,  nor  the  object  of 
the  petitioner  in  making  the  applica- 
tion to  the  officers  and  to  the  court. 
Regina  v.  London,  etc.  Docks  Co.,  44 
L.  J.  (Q.  B.)  4  (1874).  See  Hunt  v. 
Hewitt,  7  Exch.  236  (1852) ;  Pepper  v. 
Chambers,  7  Exch.  226  (1852);  New 
England  Iron  Co.  v.  New  York  Loan, 
etc.  Co.,  55  How.  Pr.  351  (1878); 
Central,  etc.  R.  R.  v.  Twenty-third 
St.  Ry.,  53  How.  Pr.  45  (1877) ;  For- 
syth Comm'rs  v.  Lemly,  85  N.  C.  341 
(1881);  Walker  v.  Granite  Bank,  44 
Barb.  39  (1865),  s.  c,  19  Abb.  Pr.  111. 
The  court  may  direct  the  manner  of 
the  examination.  Williams  v.  Prince 
of  Wales,  etc.  Co.,  23  Beav.  338  (1857). 
An  appeal  may  be  taken  from  an 
order  granting  a  party  leave  to  inspect 
and  examine  the  books  of  a  corpora- 
tion, the  appellant.  Thompson  v. 
Erie  Ry.,  9  Abb.  Pr.  (N.  S.)  212  (1870) ; 
Lancashire,  etc.  Co.  v.  Greatorex,  14 
L.  T.  Rep.  290  (1866) ;  People  v.  Kent 
County  Judge,  38  Mich.  351  (1878) ; 
Forsyth  Comm'rs  v.  Lemly,  85  N.  C. 
341  (1881).  See  Saxby  v.  Easterbrook, 
L.  R.  7  Exch.  207  (1872) ;  Bustros  v. 
White,  L.  R.  1  Q.  B.  D.  423  (1876) ; 
Clyde  V.  Rogers,  24  Hun,  145  (1881); 
appeal  dismissed  in  s.  c,  87  N.  Y. 
625 ;  McCargo  v.  Crutcher,  27  Ala.  171 
(1855);  Sage's  Case,  70  N.  Y.  221 
(1877).  As  to  the  costs  of  an  inspec- 
tion, see  Hill  v.  Philp,  7  Exch.  232 
(1852) ;  Davey  v.  Pemberton,  11   C.  B 


(N.  S.)  628  (1862) ;  Gardner  v.  Danger- 
field,  5  Beav.  385  (1842).  Stock- 
holders obtaining  inspection  may  be 
ordered  not  to  disclose  the  informa- 
tion received.  Ex  -parte  Buehan,  36 
L.  J.  (Ch.)  150  (1866);  Williams  v. 
Prince  of  Wales,  etc.  Co.,  23  Beav.  338 
(1857).  May  examine  through  an 
attorney.  Williams  v.  Prince  of  Wales, 
etc.  Co.,  23  Beav.  338  (1857).  A  pro- 
fessional accountant  may  be  employed. 
Bonnardet  v.  Taylor,  1  J.  &  H.  383 
(1861);  1  Greenl.  Ev.,  §474.  An 
inspection  of  the  stock-ledger  was 
allowed  in  People  v.  Pacific  Mail  S.  S. 
Co.,  50  Barb.  280  (1867).  So  also  of 
the  discount  book.  Cockburn  v. 
Union  Bank,  13  La.  Ann.  289  (1858) ; 
People  V.  Throop,  12  Wend.  183  (1834). 
So  also  of  the  bv-laws.  Harrison  v. 
Williams,  3  B.  &  C.  162  (1824) ;  Reg. 
V.  Saddlers'  Co.,  10  W.  R.  87  (1861). 
See  also  Walburn  v.  Ingilby,  1  Myl. 
&  K.  61  (1833),  where  the  order  was 
to  a  third  person  having  charge  of  the 
books.  "The  courts  of  common  law 
may  also  make  an  order  for  the  inspec- 
tion of  writings  in  the  possession  of 
one  party  to  a  suit  in  favor  of  the 
other."  1  Greenl.  Ev.,  §559.  An 
article  of  the  company  taking  away  the 
right  of  inspection  does  not  prevent 
a  rule  issuing  requiring  its  allowance 
in  pending  litigation.  Hall  v.  Connell, 
3  Y.  &  C.  (Exch.)  707  (1840).  The 
rule  stated  in  the  text  above  applies 
to  joint-stock  companies.  Woods  v. 
De  Figaniere,  1  Rob.  (N.  Y.)  681 
(1863).  In  the  federal  courts  the 
right  is  statutory.  U.  S.  Rev.  Stat., 
§  724.  In  regard  to  the  act  of  Con- 
gress authorizing  courts  to  require 
the  production  of  books  and  writings, 
see  Victor  G.  Bloede  Co.,  etc.  i'.  Joseph 
Bancroft,  etc.  Co.,  98  Fed.  Rep.  175 
(1899).  The  opinions  of  counsel  in 
the  case  of  a  fraudulent  transaction 
are  not  privileged.  Williams  v.  Que- 
brada  Ry.,  [1895]  2  Ch.  751. 

1  Strangers  have  no  more  right  to 
demand  inspection  of  the  books  of  a 


(96) 


1521 


§  519.1 


INSPECTION    OF   CORPORATE   BOOKS. 


The  officers  of  a  corporation  cannot  be  compelled  to  produce  its  books, 
in  a  suit  in  which  the  corporation  is  not  a  party,  even  though  the  books 
may  disclose  facts  material  to  the  issues.^  The  state  in  ascertaining 
the  value  of  stock  in  order  to  fix  an  inheritance  tax  thereon,  cannot  com- 
pel the  corporation  to  produce  its  books  and  papers.-  But  in  a  suit  by 
the  United  States  government  to  break  up  a  combination  and  monopoly 
of  corporations  owning  bridges  and  ferries  across  the  ^Mississippi  river 
at  St.  Louis,  while  a  court  of  equity  may  compel  traffic  associations  to 
produce  their  books  and  papers,  even  though  they  are  not  parties  to 
the  suit  and  it  is  claimed  that  the  books  and  papers  are  immaterial  and 
are  private  books  and  papers,^  yet  it  must  be  showTi  that  the  evidence  is 
material.  In  a  suit  against  stockliolders  for  malicious  prosecution, 
they  may  be  required  by  mandamus  to  produce  certain  books  of  the 
corporation  for  the  inspection  of  the  plaintiff.^  Where  a  foreign  cor- 
poration commences  suit  in  a  state  it  may  be  compelled  to  allow  an  in- 
spection of  its  books  and  papers  in  accordance  with  the  procedure  of 
the  court,  but  if  its  books  are  in  use  out  of  the  state  it  may  file  verified 
copies  of  the  items  specified  with  the  privilege  to  the  defendant  to  verify 
the  same  by  comparison  with  the  originals.^  A  statute  may  provide 
that  a  foreign  corporation  shall  not  be  allowed  to  defend  a  suit  brought 


corporation  during  litigation  in  which 
the  corporation  is  not  interested  than 
they  have  to  demand  a  similar  right 
of  anv  other  person.  IMayor  of  South- 
ampton V.  Graves,  8  T.  R.  590  (1800), 
overruling  earlier  eases.  See  also 
Opdyke  v.  Marble,  44  Barb.  64  (1864) ; 
Morgan  v.  Morgan,  16  Abb.  Pr. 
(N.  S.)  291  (1874).  A  corporation 
will  not  be  compelled  to  open  its 
records  for  the  purposes  of  a  litigation 
in  which  it  is  not  a  party.  Henry  v. 
Travelers'  Ins.  Co.,  35  Fed.  Rep.  15 
(1888). 

1  Southern  Ry.  r.  North  Car.,  etc. 
Com.,  104  Fed.  Rep.  700  (1900). 
Even  though  the  company  is  not  a 
party  to  a  suit  by  the  vendee  of  stock 
against  the  vendor  for  fraud,  the  ven- 
dee is  entitled  to  inspect  its  books  to 
ascertain  the  facts  for  the  suit.  Smith 
V.  Rubel,  149  N.  Y.  App.  Div.  670 
(1912).  A  corporation  not  a  party 
to  an  action  cannot  be  examined 
before  trial  under  the  New  York  code. 
Chartered  Bank,  etc.  v.  North,  etc. 
Co.,  136  N.  Y.  App.  Div.  646  (1910). 
A  bankruptcy  court  may  order  a  cor- 
poration   to    produce    its    books,    this 


being  equivalent  to  a  subpoena  duces 
tecum.  Re  Ironclad  ]Mfg.  Co.,  201 
Fed.  Rep.  66  (1912). 

2  State  V.  Carpenter,  129  Wis.  180 
(1906).  A  statute  authorizing  state 
officers  to  examine  the  private  books 
and  papers  of  an  indi\'idual  or  copart- 
nership to  ascertain  whether  they  have 
affixed  revenue  stamps  to  their  trans- 
fers of  stock  as  required  by  statute  is 
unconstitutional,  as  practically  com- 
pelling a  person  to  be  a  witness  against 
himself  in  a  criminal  proceeding  which 
mav  be  brought.  People,  etc.  v. 
Reardon,  197  N.  Y.  236  (1910). 

3  United  States  v.  Terminal,  etc., 
154  Fed.  Rep.  268  (1907). 

4  Eddv  V.  Bay  Circuit  Judge,  114 
Mich.  668  (1897). 

5  National,  etc.  Co.  v.  Van  Emden, 
120  N.  Y.  App.  Div.  746  (1907). 
Where  a  foreign  corporation  brings 
suit  against  its  resident  treasurer  for 
an  accounting  he  may  obtain  an  order 
of  the  court  that  he  be  allowed  to 
examine  the  books,  records,  and  papers 
of  the  corporation  bearing  on  the  sub- 
ject in  controversy.  Copper  King, 
etc.  V.  Robert,  76  N.  J.  Eq.  251  (1909). 


1522 


CH.   XXX. I 


INSPECTION   OF   CORPORATE   BOOKS. 


[§  519. 


by  the  state  if  it  refuses  to  produce  its  books  and  officers  as  witnesses  in 
that  suit,  even  though  the  books  and  witnesses  are  out  of  the  state,  the 
corporation  faihng  to  show  that  it  had  made  a  bona  fide  effort  to  comply.^ 
If  a  stockholder,  and  sometimes  a  third  person,  is  suing  or  being  sued 
by  a  corporation,  he  is  entitled  to  the  usual  right  of  giving  a  notice  to 
produce  documents,-  or  to  a  discovery  by  an  order .^  In  a  suit  by  a 
shipper  for  the  recovery  of  damages  in  the  nature  of  a  penalty  under 
the  interstate  commerce  act  against  a  railroad  corporation,  the  latter 

1  Hammond,  etc.  Co.  v.  Arkansas,  denee  in  the  ease.  State  v.  Standard 
212  U.  S.  322  (1909).  Oil  Co.,  61  Neb.  28  (1900).     Under  the 

2  See  Wait,  Insolv.  Corp.,  §  519.  statutory  practice  in  Rhode  Island 
See  also  §  714,  infra.  Where  a  defend-  the  court  may  order  the  production 
ant  corporation  does  not  produce  its  of  the  record  book  of  the  corporation 
minute  book  in  accordance  with  the  in  court  or  for  an  inspection.  Arnold  v. 
notice  to  do  so,  the  eAadence  of  its  Pawtuxet,  etc.  Co.,  18  R.  I.  189  (1893). 
president  is  admissible  that  the  board  The  affida\at  to  obtain  the  order  must 
of  directors  had  approved  of  his  show  that  the  information  sought  is 
action  in  entering  into  the  contract  essential.  Imperial  Gas  Co.  v.  Clarke, 
involved  in  the  suit.  Strawbridge  v.  7  Bing.  95  (1830) ;  Williams  v.  Savage 
Clamond  Tel.  Co.,  195  Pa.  St.  118  Mfg.  Co.,  3  Md.  Ch.  418,  428  (1851). 
(1900).  The  officers  may  be  orally  examined 

3  Rex  r.  Travannion,  2  Chitty,  366  by  the  court  with  reference  to  where 
(1818) ;    Swansea   Vale   Ry.   v.   Budd,  the   books   are.     Lacharme   v.   Quartz 


L.  R.  2  Eq.  274  (1866) ;  Macintosh  r 
Flint,  etc.  R.  R.,  1  Ry.  &  Corp.  L.  J. 

384  (Mich.  1887),  a  stockholder's  case. 
An  order  to  allow  examination  of  the 
corporate  records  was  granted  in 
Kirkpatrick  v.  Pope  Mfg.  Co.,  61 
Fed.  Rep.  46  (1894),  where  the  defend- 
ant company  said  that  it  had  not  "vio 


Rock,  etc.  Min.  Co.,  1  H.  &  C.  134 
(1862).  They  may  be  required  to 
make  affidavits.  Ranger  v.  Great 
Western  Rv.,  4  De  G.  &  J.  74  (1859) ; 
Re  Burton,  31  L.  J.  (Q.  B.)  62  (1861). 
In  an  action  against  a  corporation  the 
plaintiff  is  entitled  to  inspect  all  the 
minutes  and  entries  in  the  company's 


lated  a  contract,  but  that  its  successor    books  ha\dng  reference  to  the  subject 


was  liable.  A  receiver  vnW  not  be 
compelled  to  obtain  from  hostile  par- 
ties books  and  papers  in  order  that 
he  may  exhibit  them  to  parties  whom 
he  is  suing.  Schlesinger  v.  EUinger, 
134  Wis.  397  (1908).  Where  a  stock- 
holder files  a  bill  to  obtain  an  account- 
ing,    and     charges     misappropriation. 


in  litigation.  Hill  v.  Great  Western 
Ry.,  10  C.  B.  (N.  S.)  148  (1861) ;  Har- 
rison V.  Williams,  3  B.  &  C.  162 
(1824);  Re  Burton,  31  L.  J.  (Q.  B.) 
62  (1861) ;  Sinclair  v.  Gray,  9  Fla.  71 
(1860).  See  Hill  v.  Manchester,  etc. 
Co.,  5  B.  &  Ad.  866  (1833);  Rex  v. 
Buckingham,  8  B.  &  C.  375   (1828); 


and  makes  a  motion  that  he  be  allowed    Imperial  Gas  Co.  v.  Clarke,  7  Bing.  95 


to  examine  the  books,  the  court  wiU 
wait  until  the  corporation  pleads  or 
answers  before  granting  the  motion. 
Ranger  v.  Champion,  etc.  Co.,  51  Fed. 
Rep.  61  (1892).  Under  the  Nebraska 
statute,  in  a  suit  instituted  by  the 
state  to  enjoin  a  foreign  corporation 
from  doing  business  in  the  state  on  the 
ground  that   it   is   \-iolating   an   anti 


(1830).  The  plaintiff  may  have 
inspection  of  corporate  minutes  in  a 
suit  by  a  superintendent  against  the 
corporation.  Hill  v.  Great  Western 
Ry.,  10  C.  B.  (N.  S.)  148  (1861). 
Or  in  a  suit  by  a  claimant  of  office. 
Re  Burton,  31  L.  J.  (Q.  B.)  62  (1861). 
See  also  §  714,  infra.  An  order  wall 
not  be  granted  for  the  purpose  of  fish- 


trust  statute,  the  court  may  order  the  ing  out  a  defense.  Birmingham,  etc. 
defendant  to  aUow  the  plaintiff  to  Ry.  v.  White,  1  Q.  B.  282  (1841).  See 
examine  the  defendant's  books  and  rec-  also  Credit  Co.  v.  Webster,  53  L.  T. 
ords  for  the  purpose  of  obtaining  e\'i-    Rep.  419  (1885). 

1523 


§  519.]  INSPECTION   OF   CORPORATE    BOOKS.  [CH.  XXX. 

may  be  compelled  by  order  to  produce  at  the  trial  of  the  cause  books  and 
papers  specified  in  the  petition.^  Even  though  the  secretary  of  a  com- 
pany refuses  in  the  trial  of  a  case  to  produce  the  books  of  the  company 
as  ordered  by  the  court,  yet  an  order  committing  him  for  contempt  of 
court  is  illegal  if  the  original  order  amounted  to  an  unreasonable  seizure 
and  search  of  the  company's  records,  especially  where  the  statutes 
provided  for  an  inspection  of  corporate  books  by  a  different  procedure, 
and  it  was  not  shown  that  the  books  would  contain  the  evidence  ex- 
pected.- \Miere  corporate  books  have  been  destroyed,  the  officers  are 
not  guilty  of  contempt  in  not  producing  them.^  Reports  from  officers 
and  employees  of  a  corporation  to  its  executive  officer  in  regard  to  an 
accident  are  privileged  communications.*  In  a  case  involving  fraud, 
however,  the  letters  of  officers  of  a  corporation  to  each  other  may  be 
put  in  evidence.^  A  stockholder  in  telegraphing  to  another  stockholder, 
in  regard  to  a  contested  corporate  election,  is  not  liable  for  libel,  even 
though  he  reflects  on  the  competency  of  the  former  manager.  Both 
parties  being  interested  in  the  communication,  it  is  privileged,  where 
it  is  in  good  faith. ^  An  attorney  for  a  person  interested  in  a  corporation 
cannot  testify  as  to  his  communications  with  such  person  and  may  plead 
his  privilege  unless  the  person  waives  such  privilege."  An  attorney  for 
a  corporation,  who  is  also  a  director,  cannot  refuse  to  testify  as  to  cor- 
porate affairs  on  the  ground  of  privilege.^  An  attorney  is  not  privileged 
from  producing  under  a  subpcena  duces  tecum  before  a  grand  jury 
in  a  federal  proceeding  corporate  books  and  papers  in  his  possession.® 

1  International,  etc.  Co.  v.  Pennsyl-  court  did  not  have  jurisdiction  of  the 
vania     R.    R.,    152    Fed.     Rep.     557    appeal. 

(1907).  ^  Despeaux  v.  Pennsylvania    R.  R., 

2  Ex  parte  Clarke,  126  Cal.  235  149  Fed.  Rep.  798  (1906).  Re  Iron- 
(1899).  In  the  case  Cassatt  v.  Mitch-  clad  M'f  g  Co.,  201  Fed.  Rep.  66  (1912). 
ell,  etc.  Co.,  150  Fed.  Rep.  32  (1907),  "  Ex  parte  Schoepf,  74  Ohio  St.  1 
it  was  held  that  in  an  action  at  law  in  (1906).  In  a  suit  at  law  the  officers 
the  federal  court  against  a  railroad  for  and  employees  of  a  corporation  defend- 
damages  for  discrimination  in  rates,  the  ant  may  be  compelled  by  a  subpoena 
officers  of  the  railroad  cannot  be  ex-  duces  tecum  to  produce  its  books  and 
amined  before  trial  by  an  order  to  that  papers,  and  they  are  not  privileged, 
effect,  and  that  section  727  of  the  Re-  American,  etc.  Co.  v.  Werckmeister, 
vised  Statutes  of  the  United  States  does  165  Fed.  Rep.  426  (1908). 

not  confer  that  power  in  an  action  at  ^  Weiss  v.  Haight,  etc.  Co.,  148  Fed. 

law.     The  remedy  is  a  bill  in  equity  Rep.    399    (1906).      See    Williams    v. 

for  discovery,  and  it  was  held  that  in  a  Quebrada  Ry.,  [1895]  2  Ch.  751. 
suit  against  a  corporation,  a  corpora-  ^  Ashcroft  v.  Hammond,  197  N.  Y. 

tion  is  protected  against  unreasonable  488  (1910). 

searches  the    same   as   an   indi\'idual.  ^  Matter  of  People  v.  Cravath,  58 

The  supreme   court   in   Webster,   etc.  N.  Y.  Misc.  Rep.  154  (1908). 
Co.  V.  Cassatt,  207  U.  S.   181   (1907),  ^  Matter  of   Robinson,    140  N.    Y. 

reversed  this  decision  in  Pennsylvania,  App.  Div.  329  (1910). 
etc.    Co.    V.    Cassatt,    150    Fed.    Rep.  ^  Grant  v.  United  States,  227  U.  S. 

32,   on    the    ground    that    the    latter  74  (1913). 

1524 


CH. 


XXX.] 


INSPECTION   OF   CORPORATE   BOOKS. 


[§  519. 


In  a  suit  in  equity  against  a  corporation,  interrogatories  may  be  at- 
tached to  the  bill  of  complaint  and  the  corporate  officers  may  be  com- 
pelled to  answer  them.^     In  certain  cases  a  bill  of  discovery  may  be  filed.- 

1  Where  one  of  the  purposes  of  a  2  Sandf.  Ch.  301  (1845) ;  Brumly  v. 
bill  is  to  require  the  production  of  the  Westchester,  etc.  Soc,  1  Johns.  Ch. 
records  and  minutes  of  the  meetings  366  (1815) ;  Melntyre  v.  Union  Col- 
of  a  corporation,  and  such  records  are  lege,  6  Paige,  239  (1S37) ;  Vermilyea 
necessary  for  the  plaintiff  to  prove  v.  Fulton  Bank,  1  Paige,  37  (1828). 
his  case,  the  court  may  order  the  But  not  where  the  corporation  is  not 
defendants  to  produce  them  under  a  party.  Ellsworth  v.  Curtis,  10 
penalty  of  having  their  answer  stricken  Paige,  105  (1843).  An  officer  of  the 
from  the  files  of  the  court.  Ramsdell  company  in  answering  interrogatories 
V.  National,  etc.  Co.,  104  Fed.  Rep.  propounded  to  the  company,  need  not 
16(1900).  A  stockholder's  bill  against  give  information  which  he  obtained 
a  corporation  and  directors  may  be  to  outside  of  the  ser^dce  of  the  company 
remedy  certain  alleged  frauds,  and  also  or  which  he  knows  as  an  officer  of  a 
incidentally  to  obtain  a  disclosure  and  predecessor  company.  Welsbach,  etc. 
discovery.  The  stockholder  need  not  Co.  v.  New,  etc.  Co.,  [1900]  2  Ch. 
resort  to  a  mandamus.  Weir  v.  Bay  1.  In  equity  suits  it  is  the  practice 
State  Gas  Co.,  91  Fed.  Rep.  940  (1898).  to  join  as  co-defendants  with  the  cor- 
But  where  the  suit  is  brought  by  the  poration  such  officers  as  may  answer 
stockholder  against  the  corporation  under  oath  such  matters  as  the  eom- 
alone  to  remedy  the  frauds  of  directors  plainant  desires  to  know.  See  §  738, 
and  have  a  receiver  appointed  and  infra;  Glasseott  v.  Copper-Miners,  11 
obtain  a  disclosure,  the  bill  is  defective  Sim.  305  (1840) ;  Re  Barned's  Bkg. 
for  non-joinder  of  the  guilty  parties.  Co.,  L.  R.  2  Ch.  App.  350  (1867) ; 
Edwards  v.  Bay  State  Gas  Co.,  91  Fed.  French  v.  First  Nat.  Bank,  7  Ben.  488 
Rep.  942  (1898) ;  Morse  v.  Bay  State  (1874) ;  s.  c,  9  Fed.  Cas.  786.  This 
Gas  Co.,  91  Fed.  Rep.  944  (1898).  rule  prevails  because  the  corporation 
Where  suit  is  brought  against  a  cor-  itself  cannot  be  convicted  of  perjury, 
poration,  and  its  officers  are  made  McKim  v.  Odom,  3  Bland,  Ch.  (Md.) 
parties  defendant  for  purposes  of  dis-  407,  420  (1828) ;  Wych  v.  Meal,  3  P. 
CO  very,  the  latter  are  not  merely  nom-  Wms.  311  (1734);  Bevans  v.  Ding- 
inal  parties.  Doyle  v.  San  Diego,  etc.  man's  Choice  Turnp.,  10  Pa.  St.  174 
Co.,  43  Fed.  Rep.  349  (1890).  Where  (1849).  The  corporation  itself  may 
an  answer  under  oath  is  waived,  and  be  compelled  to  answer  fully.  See 
no  discovery  is  sought  in  an  action  Gamewell,  etc.  Co.  v.  New  York,  31 
against  a  corporation,  the  officers  are  Fed.  Rep.  312  (1887),  citing  cases.  A 
not  proper  parties  defendant.  Colo-  corporate  officer  may  be  joined  with 
nial,  etc.  Co.  i'.  Hutchinson  Mortgage  the  corporation  as  a  defendant  to 
Co.,  44  Fed.  Rep.  219  (1890).  A  per-  obtain  from  him  a  discovery.  Lord 
son  may  be  made  a  party  defendant  Eldon  said  as  to  this  rule:  "It  orig- 
for  purposes  of  discovery  only.  See  inated  with  Lord  Talbot,  who  rea- 
Lewis  V.  St.  Albans,  etc.  Works,  50  Vt.  soned  thus  upon  it :  that  you  cannot 
477  (1878).  In  an  action  by  a  person  have  a  satisfactory  answer  from  a  cor- 
against  a  corporation  for  any  cause  of  poration,  therefore  you  make  the  sec- 
action,  a  secretary  and  bookkeeper  retary  a  party  and  get  from  him  the 
may  be  made  a  party  defendant  for  discovery  you  cannot  be  sure  of  hav- 
the  purpose  of  getting  an  answer  of  ing  from  them;  and  it  is  added  that 
discovery  under  oath,  which  the  cor-  the  answer  of  the  secretary  may  enable 
poration  cannot  make.  Wych  v.  Meal,  you  to  get  better  information."  Con- 
3  P.  Wms.  310  (1734) ;  Chase  v.  Van-  tinental  Nat.  Bank  v.  Hellman,  66 
derbilt,  62  N.  Y.  307,  314  (1875) ;  Fed.  Rep.  184  (1895). 
Many  v.  Beekman  Iron  Co.,  9  Paige,  ^  A  cross-bill  for  discovery  lies 
188  (1841) ;  Masters  t;.  Rossie,  etc.  Co.,  against    a    corporation,    even    though 

1525 


§519. 


INSPECTION   OF   CORPOKATE   BOOKS. 


[CH.  XXX. 


A  bill  of  discovery  may  be  filed  to  discover  the  names  of  stockliolders,  in 
order  to  enforce  their  statutory  liability.^  A  receiver  may  file  a  bill  in 
equity  against  a  clerk  in  the  employ  of  stock-brokers  to  compel  the  clerk 

to  disclose  who  is  the  real  owner  of  stock  standing  in  his  name,  in  order 
that  the  receiver  may  collect  the  unpaid  part  of  the  subscription  price 

therefor.^     In  New  York,  as  well  as  in  other  states,  an  examination 

the   officers   might   be   called   as   wit-  Ben.  488  (1874) ;  s.  c,  9  Fed.  Cas.  786. 

nesses.     Indianapolis  Gas  Co.  v.  City  But   a   bill   of   discovery   will    not   lie 

of    Indianapolis,    90    Fed.     Rep.     196  against  one  who  is  merely  a  witness. 

(1898).     Officers  may  be  joined  as  par-  Fenton    v.    Hughes,    7    Ves.    Jr.    287 

ties  defendant  in  order  that  they  may  (1802) ;   Dummer  v.   Chippenham,    14 

answer     interrogatories     attached     to  Ves.   Jr.   245    (1807).     As   to   the  dif- 

the  bill  for  the  purpose  of  enabling  ference    between   a    bill    of    discovery 

the   complainant   to    know   whom   to  and  other  bills,  see  Melntyre  v.  Union 

examine  as  witnesses.     Such  answers  College,  6  Paige,  239  (1837) ;  Many  v. 

need  not  be  made  under  oath.     Gulf,  Beekman     Iron     Co.,     9     Paige,     188 

etc.    Co.   V.   Crenshaw,    138   Ala.    134  (1841).     A     discovery     will     not     be 

(1903).     The     proper     procedm-e     in  granted  where  there  is  no  allegation 

equity  to  compel  a  party  to  produce  that   information   is   refused,   or   that 

documents  is  by  bill  or  cross-bill  for  the  party  cannot  examine  the  books, 

discovery  or  by  subpcsna  duces  tecum  or  that  a   mandamus  would  be  inad- 

and  not  by  an  order  based  on  an  affi-  equate.     Wolfe  v.  Underwood,  96  Ala. 

davit.     West    Pub.     Co.    v.     Edward  329     (1892).     Where    laches    appears 

Thompson    Co.,    151    Fed.    Rep.    138  on  the  face  of  a  stockholder's  bill  to 

(1907).     A  bill  for  discovery  against  examine  corporate  books  and  obtain 

the    corporation    alone    is    not    good,  an  accounting  a  demurrer  lies,  and  if 

The  officers  should  be  joined.     Roan-  the  court   has  ab-eady   sustained   one 

oke  St.  Ry.  v.  Hicks,  96  Va.  510  (1898).  demurrer  it  may  dismiss  the  bill  with- 

A  bill  in  equity  at  the  instance  of  a  out  leave  to  amend.     Foss  v.  People's 

stockholder    to    obtain    an    inspection  etc.  Co.,  241  111.  238  (1909).     In  a  bill 

of  the  books  in  order  to  ascertain  the  in  equity  for  discovery  and  relief  the 

financial    condition    of    the    company  officers  may  be  joined  as  defendants 

does  not  lie  where  he  does  not  allege  for  discovery.     Gulf,  etc.  Co.  v.  Jones, 

that  he  has  been  refused  an  inspec-  etc.  Co.,  157  Ala.  32  (1908). 

tion     or     the     required     information.  i  Post)   v.    Toledo,    etc.    R.  R.,    144 

Moreover,  his  remedy  is  by  mandam-  Mass.  341  (1887).     A  bill  in  equity  for 

us.     Trimble    v.    American,    etc.    Co.,  discovery  lies  at  the  instance  of  a  judg- 

61  N.  J.  Eq.  340  (1901).     Where  dis-  ment    creditor    of    a    corporation    to 

covery  is   sought  from   an   officer   he  ascertain  the  names  and  addresses  of 

should   be   made   a   party   defendant,  the  stockholders,  the  object  being  to 

Virginia,  etc.  Co.  v.  Hale,  93  Ala.  542  enforce    the    statutory    liability,    but 

(1890).     A  bill  lies  in  equity  to  compel  such    bill    must    allege    such    liability, 

a   corporation   to   discover,    in   aid   of  Clark  v.  Rhode  Island,  etc.  Works,  24 

a  suit  at  law  for  damages  for  infringe-  R.  I.  307  (1902). 

ment  of  patent.  Colgate  v.  Compagnie  ^  Brown  v.  McDonald,  133  Fed.  Rep. 
Francaise,  23  Fed.  Rep.  82  (1885).  897  (1905).  Where  brokers  have  pur- 
See  also  as  to  a  bill  of  discovery,  chased  stock  in  an  insolvent  corpora- 
McComb  V.  Chicago,  etc.  R.  R.,  19  tion  and  have  made  no  transfer  on  the 
Blatchf.  69  (1881);  Costa  Rica  v.  books  of  the  company,  the  receiver 
Erlanger,  L.  R.  1  Ch.  D.  171  (1875) ;  may  maintain  a  bill  for  discovery 
Glasseott  v.  Copper-Miners,  11  Sim.  against  them  to  make  them  disclose 
305  (1840) ;  Moodalay  v.  Morton,  1  the  names  of  the  parties  for  whom  they 
Bro.  C.  C.  469  (1785) ;  Stettauer  v.  were  purchasing,  the  receiver's  pur- 
New  York,  etc.  Co.,  42  N.  J.  Eq.  46  pose  being  to  collect  the  unpaid  sub- 
(1886) ;  French  v.  Fu-st  Nat.  Bank,  7  scription  rates.     Huey  v.  Brown,   171 

1526 


CH.  XXX.] 


INSPECTION   OF   CORPORATE   BOOKS. 


[§  519. 


before   trial   is   sometimes   granted   by  the   court.^    A  United  States 
cornet  in  an  action  at  law  cannot  mider  section  724  of  the  Revised 


Fed.  Rep.  641  (1909).  A  receiver  may 
by  bill  of  discovery  compel  a  broker  to 
state  who  is  the  real  owner  of  stock 
purchased  by  the  broker,  on  which 
stock  an  assessment  has  been  made. 
Brown  v.  Magee,  146  Fed.  Rep.  765 
(1906).  A  receiver  may  maintain  a 
bill  of  discovery  against  a  broker  to 
compel  him  to  divulge  the  names  of 
the  real  owners  of  stock  which  stands 
in  the  name  of  the  broker's  clerk,  such 
stock  being  unpaid.  Kurtz  v.  Brown, 
152  Fed.  Rep.  372  (1906).  A  broker 
may  be  compelled  to  disclose  the  name 
of  his  customer  for  whom  he  purchased 
stock  and  put  the  stock  in  the  name 
of  a  clerk.  A  receiver  of  the  corpora- 
tion may  file  a  bill  of  discovery  for 
that  purpose  in  order  that  an  assess- 
ment may  be  levied  on  the  stock  for 
the  unpaid  subscription  price.  Brown 
V.  Palmer,  157  Fed.  Rep.  797  (1907). 
'  A  corporation  suing  one  of  its 
officers  to  obtain  the  benefit  of  a  con- 
tract may  examine  him  before  trial 
under  the  New  York  code.  Beer 
Importing  Co.  v.  Boross,  136  N.  Y. 
App.  Div.  649  (1910).  Where  an 
order  requiring  a  corporation  to  pro- 
duce a  certain  agent  for  examination, 
requires  also  service  on  him,  the  cor- 
poration is  not  in  contempt  if  he  is 
not  served.  Wilkens  v.  American 
Bank,  etc.,  133  N.  Y.  App.  Div.  646 
(1909).  A  person  entitled  to  a  com- 
mission on  goods  sold  by  a  corpora- 
tion will  not  be  allowed  to  examine  all 
its  books  and  papers  showing  its  sales, 
but  may  examine  the  officers  to  obtain 
the  proper  information,  and  will  then 
be  given  a  limited  order  for  discovery. 
He  is  not  bound,  however,  to  accept 
an  itemized  statement  from  the  defend- 
ant. Funger  v.  Brooklyn,  etc.  Co., 
132  N.  Y.  App.  Div.  837  (1909). 
A  customer  suing  his  broker  will  not 
be  allowed  to  inspect  the  books  of  the 
latter  before  trial  in  a  suit  for  an 
accounting  upon  an  affidavit  of  a 
former  bookkeeper  of  the  broker  that 
he  believes  the  inspection  will  show 
fraud.  Brickner  v.  Sulzbacher,  130 
N.  Y.  App.  Div.  393  (1909).  An 
order  to  examine  a  corporation  before 


trial  should  run  to  the  corporation, 
and  not  to  the  officers  individually. 
An  order  for  the  examination  of  the 
officers,  which  is  really  intended  to 
obtain  an  inspection  of  the  corporate 
books  and  papers,  will  be  vacated, 
especially  where  the  officers  have  no 
personal  knowledge  of  the  records  and 
no  memory  to  be  refreshed,  because 
an  order  to  inspect  books  and  papers 
is  different  from  an  order  for  exami- 
nation before  trial.  Shumaker  v. 
Doubleday,  etc.  Co.,  116  N.  Y.  App. 
Div.  302  (1906).  When  a  corpora- 
tion denies  that  an  employee  was 
authorized  to  make  a  contract  for  it, 
its  officers  may  be  examined  before 
trial  but  its  books  and  minutes  need 
not  be  produced  unless  it  is  shown 
that  they  contain  entries  relating 
to  that  fact.  Wood  v.  Mott  Iron 
Works,  114  N.  Y.  App.  Div.  108  (1906). 
In  a  stockholder's  suit  to  declare  void 
a  cancellation  of  a  lease  by  the  cor- 
poration, the  corporation  may  be 
examined  before  trial  to  prove  agree- 
ments, correspondence,  etc.,  which 
may  be  removed  from  the  state. 
Jacobs  V.  Mexican,  etc.  Co.,  Ltd.,  112 
N.  Y.  App.  Div.  655  (1906).  There  is 
no  authority  in  New  York,  however, 
for  a  separate  proceeding  to  examine 
an  officer  before  trial,  this  being  done 
by  the  order  for  the  examination  of 
the  corporation  specifying  the  officers 
to  be  examined.  Jacobs  v.  Mexican, 
etc.  Co.,  Ltd.,  112  N.  Y.  App.  Div.  657 
(1906).  In  a  suit  by  a  manager 
against  the  corporation  for  services 
he  may  not  be  granted  a  commission 
to  investigate  the  corporate  books 
generally,  but  may,  in  order  to  pre- 
pare for  trial,  be  entitled  to  examine 
the  officers  before  trial  and  have  the 
books  produced  on  supoena  duces  tecum 
to  enable  them  to  testify.  Harbaugh 
V.  Middlesex,  etc.  Co.,  110  N.  Y.  App. 
Div.  633  (1906).  In  examining  offi- 
cers before  trial  they  may  be  required 
to  produce  the  corporate  books  to 
refresh  their  memories.  Bruen  o. 
Whitman  Co.,  106  N.  Y.  App.  Div.  248 
(1905).  In  a  suit  by  a  stockholder 
against    the    president    for    misrepre- 


1527 


§  519.] 


INSPECTION   OF   CORPORATE   BOOKS. 


CH.   XXX. 


Statutes  compel  one  party  to  an  action  to  produce,  in  advance  of 
the  trial,  books  and  papers  for  examination  and  inspection  of  the 
other  party. ^ 


sentations  inducing  the  former  not 
to  sell  his  stock,  the  defendant  may 
be  examined  before  trial  on  the  ques- 
tion of  his  having  received  from  the 
corporation  $15,000,000  of  stock  for 
property  worth  $800,000,  that  fact 
bearing  on  the  misrepresentation  which 
was  as  to  the  dividend-earning  capacity 
of  the  company.  McDonald  v.  Morse, 
96  N.  Y.  App.  Div.  408  (1904).  Where 
in  a  stockholders'  suit  against  the 
treasurer  to  account  for  property,  an 
order  is  made  for  the  examination  of 
the  treasurer  before  trial,  and  for  the 
production  of  the  corporate  books  to 
refresh  his  memory,  and  the  latter 
does  not  appeal  therefrom,  he  is  guilty 
of  contempt  of  court  if  he  fails  to  com- 
ply therewith.  Pray  v.  Blanchard,  9.5 
N.  Y.  App.  Div.  423  (1904).  A  stock- 
holder in  a  foreign  corporation  bring- 
ing suit  in  New  York  courts  to  set 
aside  an  alleged  fraudulent  sale  of  the 
property  of  the  company  is  entitled  to 
an  order  to  allow  him  to  examine  the 
books  and  papers  of  the  company 
bearing  on  the  subject,  but  he  must 
point  out  the  specific  books  required. 
Snyder  v.  De  Forest,  etc.  Co.,  113 
N.  Y.  App.  Div.  840  (1906).  In  the 
examination  in  New  York  of  an  officer 
of  a  foreign  corporation,  the  books  of 
which  are  in  New  York,  on  a  sub- 
poena to  testify  in  a  suit  pending  in 
another  state,  the  officer  cannot  be 
compelled  to  leave  the  corporate 
books  with  the  commissioner.  Matter 
of  Randall,  87  N.  Y.  App.  Div.  245 
(1903) ;  s.  c,  90  N.  Y.  App.  Div.  192. 
Sections  914  and  915  of  the  New  York 
Code  do  not  authorize  the  New  York 
courts  to  require  the  officers  of  a  cor- 
poration to  produce  its  books  and 
papers  for  the  purpose  of  putting  them 
in  evidence  in  a  suit  pending  in  another 
state,    but   may   authorize   their   pro- 


duction for  use  in  connection  with  the 
testimony  of  a  witness.  Matter  of 
Lee,  41  N.  Y.  Misc.  Rep.  642  (1903). 
In  a  suit  brought  by  a  corporate  credi- 
tor against  many  stockholders  to 
collect  unpaid  subscriptions,  the  plain- 
tiff is  not  entitled  to  an  order  allowing 
him  to  examine  persons  for  the  purpose 
of  ascertaining  the  residence  of  the 
defendants  in  order  that  they  may  be 
served.  Union  Collection  Co.  v.  Su- 
perior Court,  149  Cal.  790  (1906).  In 
a  suit  by  a  stockholder  for  a  decree 
adjudging  that  certain  property  is  held 
in  trust  by  another  corporation  for  his 
corporation,  he  may  have  an  order  to 
examine  an  officer  of  the  former  cor- 
poration before  trial  where  such  officer 
is  the  only  person  by  whom  certain 
facts  may  be  proved,  and  plaintiff  may 
not  be  able  to  compel  him  to  attend 
the  trial.  Grant  v.  Greene,  118  N.  Y. 
App.  Div.  850  (1907).  But  such  an 
order  cannot  be  obtained  in  order  to 
ascertain  what  officer  can  be  served 
with  summons  in  the  state.  Grant  v. 
Greene,  etc.  Co.,  118  N.  Y.  App.  Div. 
853  (1907).  A  corporation  may  appeal 
from  an  order  for  the  examination 
of  one  of  its  officers.  Sherman  v. 
Beacon,  etc.  Co.,  58  Hun,  143  (1890). 
By  examination  before  trial,  plaintiff 
may  ascertain  whether  defendants  are 
proper  defendants,  or  whether  they  are 
a  corporation.  Sweeney  v.  Sturgis, 
24  Hun,  162  (1881).  Where  persons 
sued  as  partners  deny  the  partnership, 
the  plaintiff  may  have  an  examina- 
tion before  trial,  in  order  to  ascertain 
what  the  company  is  and  of  whom  it 
consists.  Clark  v.  Wilcklow,  75  Hun, 
290  (1894).  A  stockholder  who  brings 
a  suit  against  parties  who  have  received 
from  the  corporation  $3,000,000  of 
stock  for  $10,000  worth  of  patents 
may   examine    the    defendants   before 


'  Carpenter  v.  Winn,  221  U.  S.  534  under  section  724  of  the  Revised 
(1910),  rev'g  165  Fed.  Rep.  636.  A  Statutes,  the  remedy  in  equity  being 
party  to  a  suit  in  equity  in  the  United  a  cross-bill  for  discovery.  Oro,  etc. 
States  Court  cannot  be  compelled  by  Co.  v.  City  of  Oroville,  162  Fed.  Rep. 
motion  to  produce  books  and  papers    975  (1908). 

1528 


CH.   XXX. J 


INSPECTION   OF   CORPORATE    BOOKS. 


[§  519. 


Sometimes  a  subpcena  duces  tecum,  issued  in  behalf  of  a  stockholder 
or  of  a  third  person,  may  serve  the  purpose.^  A  subpcena  duces  tecum 
to  appear  before  a  grand  jury  is  sufficient  if  it  refers  to  books  and  papers 
relating  to  business  transacted  between  certain  dates,  in  this  instance 
nearly  two  years,  between  certain  parties,  and  the  corporation  cannot 
refuse  on  the  ground  that  it  is  not  paid  for  the  time,  trouble,  and  expense 
of  collecting  the  documents,  where  it  appears  that  there  is  a  statute 

trial,    in    order    to    prove    what    the  use  of  a  witness.     If  an  inspection  is  de- 
patents  were  worth.     Insurance  Press  sired  by  the  opposite  party  it  is  ob- 
V.  Montauk,  etc.  Co.,  70  N.  Y.  App.  tained  under   §§  803-809.     Matter  of 
Div.    50    (1902).     As    to    the   Massa-  Sands,  98  N.  Y.  App.  Div.  148  (1904). 
chusetts    statute    allowing    an    exam-  An  inspection  of  corporate  books  un- 
ination  of  the  president  before  trial,  der    the    New    York    practice    is    ob- 
see  Gunn  v.  New  York,  etc.  R.  R.,  171  tained  under  §§  803-809  of  the  Code  of 
Mass.  417  (1898).     A  stockholder  who  Civil   Procedure   and   not   under   sub- 
has  exchanged  his  stock  for  bonds,  and  division  7  of  §  872.     Matter  of  Thomp- 
who  sues  the  directors  for  fraud,  indue-  son,  95  N.  Y.  App.  Div.  542  (1904).  In 
ing  him  to  make  such  exchange,  cannot  a   stockholder's   suit    to   hold    the   di- 
examine     them    before    trial.     Butler  rectors  liable  for  misfeasance,   an  in- 
V.    Duke,   39   N.   Y.    Misc.    Rep.   235  speetion    of    the    books    will    not    be 
(1902).     So  also  as  to  a  stockholder  granted  where  the  cause  is  at  issue, 
who  sues  the  directors  for  an  account-  and  the  same  result  can  be  reached 
ing,    on    the    ground    that    they    are  by  a  subpoena  duces  tecum.     Clarke  v. 
interested    in    four    corporations    and  Eastern,  etc.  Assoc,  89  Fed.  Rep.  779 
had  diverted  the  business.     Elmes  v.  (1898).     In  Iowa  a  corporate  servant 
Duke,  39  N.  Y.  Misc.  Rep.  244  (1902).  who  is  required  by  a  subpoena  to  pro- 
1  New  York  Code  Civ.  Proc,  §§  868,  duce  the  corporate  books,  which  show 
869,    872,    873.     See  New   York,    etc.  that  the  corporation  has  \-iolated  the 
R.  R.  V.  Carhart,  36  Hun,  288  (1885) ;  liquor    laws,    need    not    do    so    if    the 
Reichmann  v.  Manhattan  Co.,  26  Hun,  books  are  not  in  his  possession.     But 
433  (1882);   ch.  536,  L.  1880;   Fenlon  otherwise   he   is   guilty    of   contempt. 
V.    Dempsey,    50    Hun,    131     (1888);  U.   S.   Express  Co.   v.   Henderson,   69 
Russell  V.  Manhattan  Ry.,  N.  Y.  D.  Iowa,  40  (1886).     The  president  may 
Reg.,  Dec.  8,  1887 ;   People  v.  Mutual,  be  compelled  by  subpoena  duces  tecum 
etc.  Co.,  74  N.  Y.  434  (1878) ;    Wain-  to    produce    drawings    owned   by    the 
wright  V.  Tiffiny,   13  N.  Y.  Civ.  Pro.  company  in  a   suit   in   which   it   is   a 
222   (1887).     The  transfer  book  may  party.     Johnson,    etc.    Co.    v.    North 
be    thus    examined.     See    Fenlon    v.  Branch  Steel  Co.,  48  Fed.   Rep.   195 
Dempsey,  50  Hun,   131    (1888).     The  (1891).     Stock-exchange  books,  as  evi- 
right   of   a    stockholder   to   compel   a  dence,  must  be  proved  by  the  secre- 
corporation   to   produce   in   court   the  tary.     Terry     v.     Birmingham     Nat. 
corporate  records   has  been   the   sub-  Bank,  93  Ala.  599  (1891) ;  99  Ala.  566. 
jeet   of    some    controversy.     In    New  Where  the  books  of  a  corporation  are 
York,  under  the  old  Code,  it  was  held  within   the  jurisdiction   of   the   court, 
that    a    subpcena    duces    tecum    would  their  production  may  be  compelled  in 
not  always  lie  herein,  but  that  an  order  a  litigation  in  which  the  corporation 
to    the    corporation    to    allow    an    in-  itself  is  a  party.     State  v.  Allen,   104 
speetion     was     the     proper     remedy.  La.  301    (1900).     In  a  suit  by  a  cor- 
La  Farge  v.  La  Farge  F.  Ins.  Co.,  14  poration    to    enforce    a    contract,    de- 
How.    Pr.    26    (1857) ;     Central    Nat.  fendant    cannot    inquire    into    its    in- 
Bank  v.  White,  37  N.  Y.  Super.  Ct.  297    ternal  affairs  and  records  and  papers 
(1874).     Under  §  872  of  the  New  York    relative     to     its     organization.     Dod- 
Code  of  Civil  Procedure,  the  court  may    dridge,  etc.  Co.  v.  Smith,  154  Fed.  Rep. 
order  the  production  of  books  for  the    970  (1907). 

1529 


§  519.]  INSPECTION   OF   CORPORATE   BOOKS.  [cH.  XXX. 

providing  for  compensation  to  witnesses.^  A  subpoena  duces  tecum 
may  be  directed  to  a  corporation  without  being  directed  to  any  partic- 
ular officer,  agent,  or  employee  of  the  corporation.^  A  statute  providing 
for  the  service  of  a  subpoena  duces  tecum  upon  the  corporation  instead 
of  upon  the  officers  who  are  in  charge  of  the  papers  is  legal. ^  A  foreign 
corporation  doing  business  in  the  state  may  be  compelled  by  subpoena 
duces  tecum  to  produce  its  books  and  papers,  which  at  the  time  are 
out  of  the  state.*  Where  bank  books  cannot  be  introduced  in  evidence 
without  stopping  the  business  of  the  bank,  the  cashier  may  testify  as 
to  what  the  books  contain.^  In  the  federal  court  a  subpoena  duces 
tecum  cannot  be  issued  by  the  clerk  of  the  court  in  an  examination  de 
bene  esse  within  the  district,  but  such  subpoena  can  be  issued  only  on 
order  of  the  court  after  preliminary  proof  that  the  documents  called 
for  are  in  the  possession  of  the  witness,  and  are  prima  facie  competent 
and  material  evidence  in  the  case.  Hence  a  general  subpoena  duces 
tecum  to  produce  all  minutes  of  meetings,  stock-books,  etc.,  will  be 
refused  unless  the  foregoing  requirements  are  complied  with.^  The 
secretary  and  treasurer  may  identify  the  cash  book,  journal,  and  ledger 
of  a  corporation,  even  though  he  did  not  make  the  entries  therein. 
Entries  in  such  books  may  be  shown  as  admissions  on  the  part  of  the 
corporation  in  the  suit  between  it  and  a  third  party. ^  A  corporation 
cannot  be  compelled  to  produce  its  president  for  examination  as  a 
witness.^ 

Most  of  the  states  have  statutes  regulating  this  subject,  and  these 
statutes  frequently  displace  the  common-law  procedure.^    A  corporation 

1  Consolidated,  etc.  Co.  v.  Vermont,  corporation  against  an  individual  for 

207  U.  S.  541  (1908),  aff'g  66  Atl.  Rep.  failure  to  deliver  the  stock  of  a  com- 

790.  peting  corporation  according  to  con- 

-  Wilson  V.  United  States,  221  U.  S.  tract,  an  officer  of  the  latter  corpora- 

361     (1911).     A   subpoena  duces  tecum  tion     cannot     on     a     subpoena     be 

without     requiring     the     witness     to  compelled  to  testify  or  disclose  docu- 

testify,  may  be  issued  to  a  corporation  ments  relative  to  trade  secrets  which 

to  produce  its  books  and  papers  and  are  not   material   to   the  controversy, 

served  on  the  treasurer  or  president  and  Crocker- Wheeler  Co.   v.   Bullock,    134 

for   failure    to   comply    they    may   be  Fed.  Rep.  241  (1904). 

committed    for    contempt    of     court.  ^  Matter  of  Randall,  90  N.  Y.  App. 

Wheeler  v.  United  States,  226  U.  S.  478  Div.  192  (1904). 

(1913).  *  Central,   etc.   Co.   v.   Board,   etc., 

3  Consolidated,  etc.  Co.  v.  Vermont,  125  Fed.  Rep.  463  (1903). 

207   U.   S.   541    (1908),   aff'g   66   Atl.  »  In  New  York  the  right  of  inspee- 

Rep.  790.  tion  by  order  is  regulated  by  statute. 

*  Consolidated,  etc.  Co.  v.  Vermont,  Code  Civ.  Proc,  §§  803,  809.  See 
207  U.  S.  541  (1908),  aff'g  66  Atl.  Boorman  v.  Atlantic,  etc.  R.  R.,  78 
Rep.  790.  N.  Y.  599  (1879) ;   Ervin  v.  Oregon  Ry. 

B  Washington,  etc.  Exch.  v.  Wilson  etc.  Co.,  22  Hun,  566  (1880),  holding 

&  McCoy,  152  N.  C.  21  (1910).  that  where  the  books  are  in  use,  only 

*  Dancel  v.  Goodyear,  etc.  Co.,  128  sworn  copies  can  be  required ;  John- 
Fed.  Rep.  753  (1904).     In  a  suit  by  a  son  v.  Consolidated,  etc.  Min.  Co.,  2 

1530 


CH.  XXX.]  INSPECTION   OF   CORPORATE   BOOKS.  [§  519. 

may  enjoin  the  secretary  of  state  from  taking  its  certificate  of  incorpora- 
tion out  of  the  state,  even  though  he  proposes  to  prove  perjury  by  the 
officers  in  swearing  to  the  certificate.^  The  books  of  the  corporation 
are  evidence  in  a  suit  against  a  stockholder  on  a  call,  even  though  the 
entries  are  not  proved  to  be  correct  by  the  person  actually  making  them.^ 
In  a  criminal  prosecution  against  a  corporate  officer  the  corporate  books 
are  not  evidence  against  him  unless  it  is  shown  that  he  had  something 
to  do  with  the  books  or  knowledge  of  their  contents,  or  some  connection 
with  the  entries.^  In  a  suit  by  a  receiver  of  a  national  bank  to  recover 
back  dividends  illegally  paid,  the  books  of  the  bank  are  competent  evi- 
dence to  prove  the  acts  of  the  corporation  and  its  financial  condition, 
except  as  to  dealings  between  the  corporation  and  the  defendant.* 
Corporate  records  are  not  binding  on  a  party  with  which  the  corporation 
deals,  although  they  may  be  prima  facie  evidence,  there  being  no  proof 
that  he  had  notice  of  such  records.^  Congress  has  power  to  enact  a 
statute  authorizing  a  legislative  committee  or  the  interstate  commerce 
commission  to  investigate  the  affairs  of  corporations  engaged  in  inter- 
state commerce.^  But  the  Interstate  Commerce  Act  being  primarily 
to  regulate  interstate  business,  and  secondarily  to  enforce  its  regula- 
tions, its  power  to  investigate  is  limited  to  specific  breaches  of  law  and 
it  cannot  compel  an  individual  to  divulge  his  purchases  and  sales  of 
stock  in  a  railroad  corporation,  even  though  he  is  a  director  therein  and 
the  purpose  of  the  commission  is  to  recommend  legislation,  and  it  is 
doubtful  whether  congress  itself  has  unlimited  power  in  that  respect 
and  whether  it  can  delegate  such  power.^    A  subpoena  duces  tecum 

Abb.  Pr.  (N.  S.)  413  (1867) ;    Walker  son,    154    U.    S.    447    (1894) ;     In    re 

V.    Granite    Bank,    19    Abb.    Pr.    Ill  Chapman,  166  U.  S.  661  (1897).     Un- 

(1865) ;  s.  c,  44  Barb.  39 ;    Thompson  der    the    acts    of    congress    the   inter- 

V.  Erie  Ry.,  9  Abb.   Pr.    (N.  S.)  230  state     commerce     commission      may 

(1870) ;   Fenton  v.  Dempsey,  10  N.  Y.  compel    the   officers   of   an   interstate 

St.  Rep.  733  (1887) ;    People  v.  U.  S.  raiboad  company  to  divulge  its  finan- 

Mercantile  Rep.  Co.,  20  Abb.  N.  Cas.  cial     operations,    including     its    pur- 

192  (1888) ;   Shipherd  v.  Cohen,  N.  Y.  chases   of   stock   in   other   companies, 

D.  Reg.,  Jan.  26,  1888.  but   cannot   compel   an  officer   to   di- 

1  Delaware,  etc.  Co.  v.  Layton,  50  vulge  his  own  personal   purchases  of 

Atl.  Rep.  378  (Del.  1901).  stock.     Interstate  Com.  Com.  t;.  Harri- 

=  Sigua,    etc.     Co.    v.    Brown,     171  man,  157  Fed.  Rep.  432  (1908) ;  aff'd, 

N.  Y.  488  (1902).     See  also  §  727,  infra.  211  U.  S.  407. 

3  People    V.    Burnham,    119   N.    Y.  ^  jjarriman  f.  Interstate  Commerce 

App.  Div.  302  (1907).  Com.,  211  U.  S.  407  (1908),  the  coiu-t 

«  Hayden  v.  Williams,  96  Fed.  Rep.  saying  in  regard  to  the  power  of  inyes- 

279  (1899).  tigation   claimed   by  the  commission, 

s  Northland,  etc.  Co.   v.   Stephens,  "No    such   unlimited   command   over 

116  Minn.  23  (1911).  the  liberty  of    all  citizens    ever  was 

6  Interstate    Com.     Commission    v.  given,  so  far  as  we  know,  in  constitu- 

Baird,   194    U.   S.    25   (1904) ;    Inter-  tional    times,    to   any   commission   or 

state  Commerce  Commission  v.  Brin-  court." 

1531 


§  519.] 


INSPECTION  OF  CORPORATE  BOOKS. 


[CH.  XXX. 


commanding  the  secretary  and  treasurer  of  a  corporation,  which  is 
charged  with  violating  an  anti-trust  act,  to  appear  and  produce  practi- 
cally all  the  correspondence  and  documents  of  the  corporation  since 
its  organization,  in  order  to  enable  the  district  attorney  to  prove  a  viola- 
tion of  the  statute,  is  an  unreasonable  search  and  seizure  of  papers, 
which  is  prohibited  by  the  fourth  amendment  of  the  constitution  of  the 
United  States,^  A  legislative  committee  has  no  right  to  examine  into 
the  books,  business,  and  papers  of  a  corporation  nor  to  compel  the  presi- 
dent to  tell  when  he  bought  his  stock  and  what  he  paid  for  it,  when  the 
committee  already  has  sufficient  information  in  regard  to  the  subject 
of  its  general  inquiry.-  A  corporation  may  be  compelled  to  produce 
its  books  and  papers  for  examination  by  a  grand  jury,  even  though  it  is 
charged  with  a  criminal  violation  of  a  statute ;  but  where  there  is  no 
act  of  congress  authorizing  such  examination,  a  subpoena  duces  tecum 
requiring  it  to  produce  all  its  books  and  papers  before  a  grand  jury  is 
unreasonable  and  as  indefensible  as  a  search  warrant  would  be  if  couched 
in  similar  terms.^    In  Pennsylvania  a  subpoena  duces    tecum  to   a 


1  In  re  Hale,  139  Fed.  Rep.  496 
(1905);  aff'd,  201  U.  S.  43.  For  other 
decisions  to  the  effect  that  there  is 
a  very  decided  limit  to  the  powers  of 
the  legislative  or  executive  branches 
of  the  government  to  compel  the  pro- 
duction of  the  private  books  and 
papers  of  a  corporation  for  inspection, 
and  that  there  is  also  a  limit,  even 
in  judiciary  proceedings,  see  Matter 
of  Application  of  Pacific  Railway 
Commission,  32  Fed.  Rep.  241  (1887) ; 
Kilbourn  v.  Thompson,  103  U.  S.  168 
(1880). 

2  Matter  of  Barnes,  204  N.  Y.  108 
(1912). 

3  Hale  V.  Henkel,  201  U.  S.  43 
(1906).  A  corporation  may  by  a 
subpoena  duces  tecum  be  compelled  to 
produce  its  books  and  papers  for 
examination  by  a  grand  jury.  It  is 
not  a  "person"  within  the  fifth  amend- 
ment of  the  federal  constitution  pro- 
tecting a  person  against  being  a  witness 
against  himself.  Re  Bornn  Hat  Co., 
184  Fed.  Rep.  506  (1911).  A  corpora- 
tion may  be  subpoenaed  as  a  corpora- 
tion with  a  duces  tecum  to  appear 
before  the  grand  jury  and  produce 
books,  but  a  subpoena  to  obtain  two 
certain  books  was  held  to  be  unrea- 
sonable. Re  American  Sugar,  etc.  Co., 
178  Fed.  Rep.  109  (1910).     Officers  of 


a  corporation  cannot  excuse  their 
failure  to  produce  books  and  papers 
called  for  by  a  subpoena  duces  tecum  in  a 
proceeding  before  the  grand  jury  on 
the  ground  that  such  books  and  papers 
are  not  in  their  possession  or  under 
their  control,  and  they  cannot  object  on 
the  ground  that  the  books  and  papers 
are  immaterial.  Nelson  v.  United 
States,  201  U.  S.  92  (1906).  In  a  pro- 
ceeding by  a  state  against  foreign 
corporations  for  violating  an  anti- 
trust statute,  the  state  may  compel  the 
corporations  to  produce  their  stock- 
books  in  order  that  the  state  may 
investigate  whether  one  company 
owns  a  majority  of  the  capital  stock  of 
the  competing  company.  State  v. 
Standard  Oil  Co.,  194  Mo.  1024  (1906). 
Parties  sued  under  the  anti-trust  act 
of  congress  may  be  compelled  to  pro- 
duce books  and  papers  in  advance  of 
the  trial,  under  §  724  of  the  Revised 
Statutes.  American,  etc.  Co.  v.  United 
Fruit  Co.,  1.53  Fed.  Rep.  943  (1907). 
A  manager  of  a  corporation  which  is 
charged  -with  a  criminal  offense  may 
refuse  to  produce  its  books,  inasmuch 
as  it  may  incriminate  him  also.  Ex 
parte  Chapman,  153  Fed.  Rep.  371 
(1907).  An  order  for  the  discovery 
of  documents  will  not  be  refused  on 
the  ground   that  it  may  incriminate. 


1532 


CH.   XXX.] 


INSPECTION    OF    CORPORATE    BOOKS. 


[§  519. 


corporation  to  produce  books  before  the  grand  jury  must  state  a  definite 
pending  criminal  case.  The  rule  is  otherwise  in  New  Jersey,  and  in  the 
United  States  courts.^  The  fourth  amendment  to  the  constitution, 
prohibiting  unreasonable  search  and  seizure  of  papers,  and  the  fifth 
amendment  that  no  person  shall  be  bound  to  incriminate  himself,  do 
not  exempt  a  corporate  oflBcer  from  producing  corporate  documents  in  a 
criminal  proceeding,  even  though  such  officer  wrote  or  signed  such  docu- 
ments and  they  will  be  evidence  against  him.-  An  officer  of  a  railroad 
corporation  may  by  suhpcena  duces  tecum  be  required  to  appear  be- 
fore the  grand  jury  and  bring  certain  letters,  papers,  memoranda,  and 
documents  in  reference  to  freight  claims.^     A  corporation  which  has 


and  that  it  may  give  evidence  of  a 
conspiracy.  National  Assoc,  etc.  v. 
Smithies,  [1906]  App.  Cas.  434.  A 
statute  making  it  a  misdemeanor  for 
stock-brokers  not  to  allow  the  comp- 
troller of  the  state  to  examine  their 
books  to  see  whether  they  have  paid 
a  state  tax  on  transfer  of  stock,  is 
unconstitutional  as  compelling  them 
to  be  witnesses  in  a  criminal  case 
against  themselves.  People  ex  rel. 
Ferguson  v.  Reardon,  124  N.  Y.  App. 
Div.  818  (1908) ;   aff'd,  197  N.  Y.  236. 

1  National  P.  Co.  v.  Garven,  80 
N.  J.  L.  311  (1910),  holding  however 
that  the  public  prosecutor  cannot  under 
the  New  Jersey  statute  obtain  an 
order  of  the  court  to  compel  a  domestic 
corporation  to  bring  its  books  into  the 
state  to  submit  to  the  grand  jury  where 
he  merely  alleges  that  the  grand  jury 
is  investigating  charges  against  in- 
dividuals charged  with  crime. 

2  WUson  V.  United  States,  221  U.  S. 
361  (1911).  Where  the  officers  have 
been  ordered  by  the  coiu*t  to  turn  over 
the  corporate  books  and  papers  to  a 
receiver,  they  cannot  refuse  on  the 
ground  that  they  have  been  indicted 
for  misusing  the  mails  and  the  books 
and  papers  might  incriminate  them. 
If  they  do  refuse  the  court  may 
sequestrate  such  books  and  papers. 
Manning  v.  Mercantile,  etc.  Co.,  242  111. 
584  (1909).  A  constitutional  provision 
that  in  a  criminal  prosecution  the 
accused  shall  not  be  compelled  to 
give  evidence  against  himself  does  not 
apply  to  a  corporation,  but  the  statute 
that  a  corporation  producing  its  books 
and  papers  under  a  subpcena  duces 
tecum    in    an    anti-trust    prosecution 


cannot  be  held  guilty  by  reason  of  such 
evidence  applies  also  to  a  deposition 
requiring  production  of  such  books  and 
papers.  Cumberland  Tel.  &  Tel.  Co.  v. 
State,  98  Miss.  159  (1910) .  228  U.  S.  457. 
^  Santa  Fe,  etc.  R.  R.  v.  Davidson, 
149  Fed.  Rep.  603  (1906).  In  a 
criminal  proceeding  against  a  railroad 
the  railroad  may  be  compelled  to 
produce  papers  from  its  files  proving 
the  offense.  New  York  Central,  etc. 
R.  R.  V.  United  States,  165  Fed.  Rep. 
833  (1908).  A  corporation  cannot 
refuse  to  produce  its  books  and  papers 
before  a  grand  jury  on  the  ground 
that  they  will  incriminate  it.  Such 
an  objection  should  be  taken  at  the 
time  of  producing  the  books,  thus 
giving  the  court  an  opportunity  to  pass 
upon  the  matter.  Consolidated,  etc. 
Co.  V.  Vermont,  207  U.  S.  541  (1908) ; 
aff'g  the  following  case :  A  statute 
requiring  corporations  to  produce, 
upon  notice,  its  books  and  papers  be- 
fore any  grand  jury  or  court  or  com- 
mission, is  legal,  and  the  expense 
thereof  need  not  be  paid  in  advance. 
The  plea  of  privilege  must  be  made  by 
the  witness  himself,  and  not  by  his 
attorney.  A  foreign  corporation  doing 
business  in  the  state  is  also  subject  to 
these  rules,  and  it  cannot  evade  them 
by  removing  its  books  and  papers 
from  the  state,  and  if  it  does  remove 
them  it  may  be  fined.  In  re  Con- 
solidated, etc.  Co.,  80  Vt.  55  (1907). 
The  grand  jury  may  compel  a  corpora- 
tion to  produce  its  minute  books  for 
three  years  and  its  letter  copied  books 
for  three  or  four  months.  United 
States  V.  American,  etc.  Co.,  146  Fed. 
Rep.  557  (1906),  holding  also  that  the 


1533 


§  519.] 


INSPECTION    OF   CORPORATE   BOOKS. 


ICH.  XXX. 


been  indicted  and  its  books  and  papers  seized  in  connection  therewith 
cannot  by  motion  have  such  books  and  papers  returned  where  they 
are  connected  with  the  criminal  charge.^  By  the  New  York  Penal 
Code  it  is  a  criminal  offense  to  destroy  any  book,  paper,  record,  or  written 
instrument  that  may  be  required  in  evidence  or  investigation,  where 
the  destruction  is  with  intent  to  prevent  the  same  being  produced.^ 
A  statute  making  it  a  criminal  offense  for  a  corporate  officer  to  make 
false  entries  in  any  record  or  document  applies  to  false  entries  in  the 
minute  book.^  One  who  contracts  with  the  authorized  agent  of  a  cor- 
poration is  not  a  competent  witness  as  to  the  contract,  or  the  admissions 
and  declarations  of  the  agent,  after  the  latter's  death.'*    A  trustee  in 


secretary  cannot  be  punished  for  con- 
tempt for  failure  to  produce  corporate 
books  before  a  grand  jury  where  he  had 
never  had  possession  of  the  books  and 
they  are  not  subject  to  his  control  and 
he  cannot  obtain  them  except  secretly 
or  by  breach  of  peace.  The  proper 
procedure  is  a  subpoena  to  the  cor- 
poration itself.  In  a  quo  warranto 
proceeding  by  a  state  against  a  cor- 
poration it  may  be  compelled  to  pro- 
duce its  books.  State  v.  Standard 
Oil  Co.,  218  Mo.  1  (1909).  A  provis- 
ion that  a  corporation  for  violating 
an  anti-trust  statute  may  be  required 
to  produce  its  books  or  papers  or  else 
have  its  answer  stricken  out  is  consti- 
tutional. State  V.  Standard  Oil  Co. 
218  Mo.  1  (1909);  aff'd,  224  U.  S. 
270. 

'  United  States  v.  Rice,  192  Fed. 
Rep.  720  (1911). 

2  Penal  Law,  §  812.  In  New  York 
it  is  forgery  in  the  third  degree  to  un- 
lawfully and  corruptly  alter  or  de- 
stroy any  corporate  record  or  writing. 
Penal  Law,  §  889.  In  England  by 
statute  if  any  director,  officer,  or 
member  of  a  corporation  destroys  or 
falsifies  any  of  the  corporate  books  or 
papers  with  intent  to  defraud,  he  is 
guilty  of  a  misdemeanor.  24  &  25 
Vict.,  c.  96,  and  25  &  26  Vict.,  c.  89, 
§  166.  An  attorney  may  be  dis- 
barred for  causing  his  client  to  evade  a 
subpoena  to  appear  before  a  grand  jury 
and  produce  books.  Matter  of  Robin- 
son, 140  N.  Y.  App.  Div.  .329  (1910). 
In  October,  1909,  A.  P.  Heinze  was 
indicted  in  the  Southern  District  of 
New  York  for  causing  the  corporate 


books  to  be  destroyed  or  concealed,  in 
violation  of  section  5399  of  R.  S.  of 
U.  S.  (now  §  135,  ch.  321,  Stat.  1909,  p. 
1113)  in  regard  to  !* obstructing  jus- 
tice." The  prisoner  was  not  tried  on 
that  count,  but  was  tried  and  con- 
victed on  another  count  in  the  same 
indictment  for  causing  a  witness  to 
leave  the  jurisdiction  and  was  fined 
and  imprisoned. 

^  Ex  parte  McKenney,  10  Cal.  App. 
357  (1909) .  Where  stock  is  issued  with- 
out consideration  to  the  treasurer  and 
upon  his  being  advised  by  his  counsel 
it  is  illegal  he  cancels  and  returns  it 
and  takes  back  his  old  certificate  for  a 
smaller  amount  which  he  had  canceled 
he  is  not  guilty  of  forgery,  there  being 
no  concealment  or  corrupt  act  in 
regard  to  it.  Spilker  v.  Abrahams, 
133  N.  Y.  App.  Div.  226  (1909). 
Even  though  the  price  at  which  stock 
is  to  be  sold  is  to  be  the  value  as 
shown  by  the  corporate  books,  a  suit 
in  equity  does  not  he  to  correct  the 
books  where  such  sale  may  never  take 
place.  Druekheb  v.  Harris,  209  N.  Y. 
211  (1913).  The  court  holding  also 
that  the  corporation  itself  has  noth- 
ing to  do  with  a  contract  between  its 
promoters  relative  to  the  sale  of  the 
stock.  Concealment  by  the  president 
of  a  national  bank  of  transactions 
which  are  not  entered  on  the  books 
by  the  bookkeeper  does  not  consti- 
tute false  entries  by  the  president  in 
violation  of  the  act  of  Congress.  United 
States  V.  M'Clarty,  191  Fed.  Rep.  518 
(1911). 

^  Central  Bank,  etc.  v.  Thayer,  184 
Mo.  61   (1904).     See  also  §  11,  supra. 


1534 


CH.  XXX.]  INSPECTION    OF    CORPORATE   BOOKS.  [§  519. 

bankruptcy  of  an  insolvent  corporation  may  by  summary  proceedings 
obtain  possession  of  the  corporate  records  and  stock-books.^  The  cor- 
porate records,  stock-books,  minutes,  etc.,  may  be  sold  at  a  receiver's 
sale.^ 

1  Babbitt  v.  Dutcher,  216  U.  S.  102         ^  Hirschfield   v.    Reading,  etc.   Co.; 
(1910).  82  Atl.  Rep.  690  (Del.  1912). 


1535 


CHAPTER  XXXI. 

LIENS    OF    THE    CORPORATION    ON    STOCK    FOR    THE    STOCK- 
HOLDER'S DEBTS  TO  THE   CORPORATION. 


j§  520,  521.  No  lien  at  common  law. 

522.  A  lien  may  be  created  by  stat- 

ute,  by   charter,   or   possibly 
by  by-law  or  contract. 

523,  525.  Notice  of  the  lien. 

526.  The    lien,     when    established, 

covers    all    the    stockholder's 
shares  and  dividends. 

527.  The  lien  protects  the  corpora- 

tion as  to  all  the  debts  due 
to  it  from   the  stockholders. 


§  528.  Right  of  lien  as  against  miscel- 
laneous parties. 

529.  The   lien   can   be   enforced   for 

the   benefit    of    the   corpora- 
tion only. 

530.  Methods  of  enforcing  the  lien. 

531.  The  corporation  may  waive  its 

lien. 

532.  The  lien  as  affected  by  trans- 

fers and  notice. 

533.  The  lien  on  national  bank  stock. 


§§  520,  521.  No  lien  at  common  law.  —  Corporations,  both  in  this 
country  and  in  England,  frequently  possess  and  exercise  a  lien  on  a 
stockholder's  stock  for  debts  due  from  that  stockholder  to  the  cor- 
poration. In  this  chapter  it  is  proposed  to  consider  the  origin  of  the 
lien ;  the  extent  to  which  it  may  be  exercised  and  enforced  ;  the  waiver 
of  it  by  the  corporation ;  and  its  effect  generally  upon  the  transfer  of 
shares. 

It  is  clear  that  at  common  law  a  corporation  has  no  lien  upon  the 
shares  of  its  stockholders  for  debts  due  from  them  to  the  company.^ 
The-policy  of  the  common  law  has  always  been  to  discountenance  secret 


1  Herrick  v.  Humphrey,  etc.  Co., 
73  Neb.  809  (1905) ;  Central,  etc.  v. 
Smith,  43  Colo.  90  (1908) ;  GemmeU  v. 
Davis,  75  Md.  546  (1892);  Massa- 
chusetts Iron  Co.  V.  Hooper,  61  Mass. 
183  (1851);  Bates  v.  New  York  Ins. 
Co.,  3  .Johns.  Cas.  238  (1802) ;  Steam- 
ship Dock  Co.  V.  Heron,  52  Pa.  St. 
280  (1866);  Merchants'  Bank  v. 
Shouse,  102  Pa.  St.  488  (1883) ;  Fitz- 
hugh  V.  Bank  of  Shepherdsville,  3  T. 

B.  Mon.  (Ky.)  126  (1825) ;  Williams  v. 
Lowe,  4  Neb.  382,  398  (1876) ;  Dana 
V.  Brown,  1  J.  J.  Marsh.  (Ky.)  304 
(1829) ;  Hart  v.  State  Bank,  2  Dev.  Eq. 
(N.  C.)  Ill  (1831);  Farmers',  etc. 
Bank  v.  Wasson,  48  Iowa,  336  (1878) ; 
People  V.  Crockett,  9  Cal.  112  (1858); 
Sargent  v.  Franklin  Ins.  Co.,  25  Mass. 
90  (1829) ;  Neale  v.  Janney,  2  Cranch, 

C.  C.  188  (1819) ;    s.  c,  17  Fed.  Cas. 


1266 ;  McMurrich  v.  Bond  Head  Har- 
bor Co.,  9  U.  C.  Q.  B.  333  (1852); 
Clise  Inv.  Co.  v.  Washington  Sav. 
Bank,  18  Wash.  8  (1897).  Cf.  Weston's 
Case,  L.  R.  4  Ch.  20  (1868).  See  also 
Gibson  v.  Hudson's  Bay  Co.,  MS.  Rep. 
Mich.  T.  12  Geo.  I.  (1726);  7  Vin. 
Abr.  (2d  Lond.  ed.)  125;  Pinkett  v. 
Wright,  2  Hare,  120  (1842) ;  Byrne  v. 
Union  Bank,  9  Rob.  (La.)  433  (1845) ; 
Hussey  v.  Manufacturers',  etc.  Bank, 
27  Mass.  415  (1830) ;  Bryon  v.  Carter, 
22  La.  Ann.  98  (1870) ;  Bank  of  Attica 
V.  Manufacturers',  etc.  Bank,  20  N.  Y. 
501  (1859) ;  Driscoll  v.  West  Bradley, 
etc.  Co.,  59  N.  Y.  96  (1874).  The 
company  has  no  lien  by  reason  of  the 
fact  that  the  certificates  recite  that 
they  are  transferable  only  on  the 
books  of  the  company.  Hardy  v. 
Boyer,  7  Ga.  App.  472  (1910). 


1536 


CH.  XXXI.] 


LIEN   OF  THE   CORPORATION   ON   STOCK. 


[§  522. 


liens,  inasmuch  as  they  hamper  trade  and  restrict  the  safe  and  speedy 
transfer  of  property.^  It  is  upon  this  ground  that  the  courts  refuse  to 
enforce  a  Hen  upon  stock  when  such  lien  is  not  created  by  charter  or  by 
by-law.  A  stockliolder  has  a  right  to  sell  his  stock  and  have  it  trans- 
ferred on  the  corporate  books,  although  there  are  unpaid  calls  due  on 
the  stock  at  the  time  of  transfer,  and  for  refusal  to  transfer  he  may  sue 
for  conversion.^  A  trustee  issuing  certificates  to  represent  an  interest 
in  a  reorganized  property  has  no  lien  on  a  certificate  for  costs  in  a  liti- 
gation concerning  it.^ 

§  522.  A  lien  may  be  created  by  statute,  by  charter,  or  possibly  by 
by-law  or  contract.  —  Such  a  lien  as  this  in  favor  of  the  corporation 
may  be  created  by  statute  ^  or  by  charter,^  and  the  weight  of  authority 
holds  that  it  may  be  created  by  by-law. 

With  respect  to  the  right  of  a  corporation  to  enact  a  by-law  creating 
such  a  lien,  it  is  held  in  many  jurisdictions  that  such  a  by-law  is 
valid  and  binding  upon  all  persons  who  buy  or  transfer  the  shares.® 


'  Quoted  and  approved  in  Boyd  v. 
Redd,  120  N.  C.  335  (1897). 

2  Craig  V.  Hesperia,  etc.  Co.,  113  Cal. 
7  (1896). 

3  Cassagne  v.  Marvin,  143  N.  Y.  292 
(1894). 

*  Pittsburgh,  etc.  R.  R.  v.  Clarke, 
29  Pa.  St.  146  (1857);  First  Nat. 
Bank  v.  Hartford,  etc.  Ins.  Co.,  45 
Conn.  22  (1877) ;  Presbyterian  Cong. 
V.  Carlisle  Bank,  5  Pa.  St.  345  (1847) ; 
Rogers  v.  Huntingdon  Bank,  12  Serg. 
&  R.  (Pa.)  77  (1824) ;  National  Bank 
V.  Watsontown  Bank,  105  U.  S.  217 
(1881).  An  amendment  to  a  bank- 
ing act  whereby  a  lien  is  given  to 
banks  on  stock  of  its  stockholders  for 
debts  due  the  bank  from  them  does 
not  apply  to  stock  already  issued. 
Southern,  etc.  Co.  v.  Fidelity,  etc.  Co., 
105  Ga.  487  (1898).  A  statute  giving 
a  bank  a  lien  on  its  stock  for  debts 
due  to  the  bank  from  the  stockholder 
is  not  nullified  by  another  statutory 
provision  prohibiting  the  bank  from 
loaning  money  on  its  stock.  Battey 
V.  Eureka  Bank,  62  Kan.  384  (1901). 
The  repeal  of  a  statute  giving  a  cor- 
poration a  lien  on  stock  does  not 
affect  a  lien  which  has  already  ac- 
crued. Wright,  etc.  Co.  v.  Hixon,  105 
Wis.  153  (1889). 

6  Union  Bank  v.  Laird,  2  Wheat.  390 
(1817);     Stebbins   v.   Phoenix   F.    Ins. 


Co.,  3  Paige,  350  (1832);  Reese  v. 
Bank  of  Commerce,  14  Md.  271 
(1859);  Brent  v.  Bank  of  Washing- 
ton, 10  Pet.  596  (1836) ;  German  Se- 
curity Bank  v.  Jefferson,  10  Bush 
(Ky.),  326  (1874) ;  Arnold  v.  Suffolk 
Bank,  27  Barb.  424  (1857);  Leggett 
V.  Bank  of  Sing  Sing,  24  N.  Y.  283 
(1862) ;  Bank  of  Utica  v.  SmaUey,  2 
Cow.  770  (1824) ;  Farmers'  Bank  v. 
Iglehart,  6  GiU  (Md.),  50  (1847); 
Bohmer  v.  City  Bank,  77  Va.  445 
(1883);  Hodges  v.  Planters'  Bank,  7 
Gill  &  J.  (Md.)  306  (1835) ;  Sabin  v. 
Bank  of  Woodstock,  21  Vt.  353 
(1849) ;  Cross  v.  Phenix  Bank,  1  R.  I. 
39  (1840);  St.  Louis,  etc.  Ins.  Co. 
V.  Goodfellow,  9  Mo.  149  (1845); 
Mechanics'  Bank  v.  Merchants'  Bank, 
45  Mo.  513  (1870).  The  charter  or 
articles  of  association  of  a  corporation 
may  create  a  lien  on  the  stock.  United, 
etc.  Co.  V.  Winston,  etc.  Co.,  194  Fed. 
Rep.  947  (1912). 

«  Knight  V.  Old  Nat.  Bank,  3  Cliff. 
429  (1871);  s.  c,  14  Fed.  Cas.  772; 
McDowell  V.  Bank  of  Wilmington,  1 
Harr.  (Del.)  27  (1832);  Bank  of 
Holly  Springs  v.  Pinson,  58  Miss.  421 
(1880);  Spurlock  v.  Pacific  R.R.,  61 
Mo.  319  (1875) ;  Re  Baehman,  12  Nat. 
Bankr.  Reg.  223  (1876) ;  s.  c,  2  Fed. 
Cas.  310;  People  v.  Crockett,  9  Cal. 
112    (1858);     Pendergast   v.   Bank   of 


(97) 


1537 


§  522.] 


LIEN   OF   THE   CORPORATION   ON   STOCK. 


[CH.  XXXI. 


There  is  nevertheless  strong  authority  for  the  rule  that  such  a  by- 
law cannot  create  a  lien  on  the  stock  so  as  to  bind  a  bona  fide  pur- 
chaser, or  other  person  into  whose  hands  the  stock  may  come,  to 
whom  actual  knowledge  of  the  by-law  cannot  be  imputed.  It  has  been 
so  held  in  New  York,^  Louisiana,^  Massachusetts,^  Alabama,^  Pennsyl- 


Stockton,  2  Sawyer,  108  (1871) ;  s.  c, 
19  Fed.  Cas.  135;  Lockwood  v. 
Mechanics'  Nat.  Bank,  9  R.  I.  308 
(1869) ;  Cunningham  v.  Alabama,  etc. 
Co.,  4  Ala.  (N.  S.)  652  (1843) ;  Geyer 
V.  Western  Ins.  Co.,  3  Pittsb.  41 
(1867);  Re  Dunkerson,  4  Biss.  227 
(1868);  8.  c,  8  Fed.  Cas.  48;  Young 
V.  Vough,  23  N.  J.  Eq.  325  (1873); 
Brent  v.  I3ank  of  Washington,  10  Pet. 
596,  615  (1836);  Child  v.  Hudson's 
Bay  Co.,  2  P.  Wms.  207  (1723); 
Planters',  etc.  Co.  v.  Selma  Sav.  Bank, 
63  Ala.  585  (1879);  Birmingham 
Trust,  etc.  Co.  v.  East  Lake  Land  Co., 
101  Ala.  304  (1893).  Cf.  Heart  v. 
State  Bank,  2  Dev.  Eq.  (N.  C.)  Ill 
(1831);  Farmers',  etc.  Bank  v.  Was- 
son,  48  Iowa,  336,  340  (1878).  In 
Tuttle  V.  Walton,  1  Ga.  43  (1846),  it 
was  said  that  as  between  the  corpora- 


tors themselves  such  a  by-law  will  be 
held  valid.  A  by-law  creating  a  lien 
in  behalf  of  the  corporation  on  stock 
is  valid  as  against  a  stockholder  and 
any  one  who  purchases  his  stock 
with  notice  that  such  by-law  exists. 
John,  etc.  Co.  v.  Woodside,  87  Md. 
146  (1898).  In  the  ease  Costello  v. 
Portsmouth,  etc.  Co.,  69  N.  H.  405 
(1899),  the  court  upheld  a  by-law  of 
a  brewing  company  which  gave  the 
corporation  a  lien  on  the  stock  of  its 
stockholders  for  any  debts  due  from 
them  to  the  corporation,  and  also 
gave  the  corporation  a  right  to  ap- 
propriate such  stock  at  its  par  value 
in  liquidation  of  such  debts  when 
overdue  three  months.  The  corpora- 
tion actually  did  so  appropriate  the 
stock  of  one  of  its  stockholders  in 
that  manner  and  afterwards  sold  the 


1  DriseoU  v.  West  Bradley,  etc.  Co.,  valid,    even    though    the   stockholder 

59  N.  Y.  96  (1874) ;   Bank  of  Attica  v.  agreed  to  be  bound  by  such  by-laws. 

Manufacturers',  etc.  Bank,  20  N.  Y.  Kinnan  v.  Sullivan,  etc.,  26  App.  Div. 

501  (1859) ;   Rosenback  v.  Salt  Springs  213  (1898). 


Nat.  Bank,  53  Barb.  495  (1868); 
Conklin  v.  Second  Nat.  Bank,  53  Barb. 
512,  note  (1868) ;   s.  c,  aff'd,  45  N.  Y. 


2  Bryon  v.  Carter,  22  La.  Ann.  98 
(1870) ;  Bitot  v.  Johnson,  33  La.  Ann. 
1286    (1881).     Cf.   New   Orleans,   etc. 


655  (1871).     In  the  case  last  cited  it  Assoc,    v.    Wiltz,    10    Fed.    Rep.    330 

was  held  that  not  even  where  the  cer-  (1881). 

tificate  of  stock  contained  a  provision  ^  jn  Nesmith  v.  Washington  Bank, 
that  the  stock  was  not  transferable  23  Mass.  324  (1828),  the  court 
until  all  the  liabilities  of  the  stock-  doubted  whether  a  by-law  could  un- 
holder  to  the  bank  were  paid  did  the  der  any  circumstances  create  a  lien 
bank  acquire  a  lien  upon  the  shares  on  stock  as  against  the  creditors  of 
for  the  subsequent  indebtedness  of  the  stockholder,  but  did  not  decide 
the  stockholder.  And  all  the  New  the  point.  In  Sargent  v.  Franklin 
York  decisions  proceed  upon  the  Ins.  Co.,  25  Mass.  90  (1829),  there  is 
broad  ground  that  the  policy  of  the  a  somewhat  decided  ground  taken 
law  is  to  protect  a  bona  fide  vendee  of  against  the  validity  of  any  by-law 
shares  of  stock  against  secret  or  equi-  which  tends  to  limit  the  free  trans- 
table  claims  thereto.  Cf.  Leggett  v.  fer  of  stocks.  In  Plymouth  Bank  v. 
Bank  of  vSing  Sing,  24  N.  Y.  283  Bank  of  Norfolk,  27  Mass.  454  (1830), 
(1862) ;  McCready  v.  Rumsey,  6  Duer,  Chief  Justice  Shaw  seems  to  doubt 
574  (1857) ;  Arnold  v.  Suffolk  Bank,  the  validity  of  a  by-law  giving  a  bank 
27  Barb.  424  (1857).  A  by-law  pre-  a  lien  on  its  own  stock, 
venting  the  transfer  or  voting  upon  ^  Planters',  etc.  Mut.  Ins.  Co.  v. 
stock  while  dues  remain  unpaid  is  in-  Selma  Sav.  Bank,  63  Ala.  585  (1879). 

1538 


CH.  XXXI.] 


LIEN    OF   THE   CORPORATION    ON   STOCK. 


[§  522. 


vania/  California,^  Missouri,^  Mississippi/  and,  it  seems,  in  some  other 
states.^ 

The  question  sometimes  arises  whether  or  not  the  corporation  has 
authority  to  enact  a  by-law  creating  a  lien  upon  its  stock  in  favor  of 
the  corporation  for  debts  due  it  by  the  stockholders,  where  the  charter 
or  statute  contains  unusual  words  in  defining  the  powers  of  the  corpora- 
tion. It  has  been  held  that,  where  the  directors  are  authorized  to  make 
"  regulations  "  as  to  transfers,  they  may  make  a  by-law  creating  a  lien.^ 
So  various  other  phrases  have  been  held  suflBcient  to  confer  this  power. ^ 


stock  to  a  third  party,  and  the  court 
upheld  the  transaction.  Under  the 
English  statutes  a  by-law  may  provide 
that  the  company  shall  have  a  lien 
on  the  stockholders'  stock  for  debts 
due  from  them  to  the  company.  Allen 
V.  Gold  Reefs,  etc.  Limited,  [1900]  1 
Ch.  656,  rev'g  [1899]  2  Ch.  40. 

1  Steamship  Dock  Co.  v.  Heron,  52 
Pa.  St.  280  (1866) ;  Merchants'  Bank 
V.  Shouse,  102  Pa.  St.  488  (1883). 

2  Anglo-Calif ornian  Bank  v.  Grang- 
ers' Bank,  63  Cal.  359  (1883).  By  by- 
law the  corporation  may  obtain  a  lien 
on  stock  for  the  unpaid  subscription 
price.  People's,  etc.  Bank  v.  Sadler, 
1  Cal.  App.  189  (1905). 

'  A  by-law  giving  the  corporation  a 
lien  on  stock  is  not  good  as  against  a 
bona  fide  purchaser  of  the  certificate 
who  had  no  notice  of  the  by-law. 
Brinkerhoff-Farris,  etc.  Co.  v.  Home 
Lumber  Co.,  118  Mo.  447  (1893).  So, 
also,  as  to  a  pledgee.  Bank  of  Atchi- 
son County  V.  Durfee,  118  Mo.  431 
(1893). 

*  Bank  of  Holly  Springs  v.  Pinson, 
58  Miss.  421  (1880). 

^  Carroll  v.  MuUanphy  Sav.  Bank,  8 
Mo.  App.  249  (1880) ;  Evansville  Nat. 
Bank  v.  Metropolitan  Nat.  Bank,  2 
Biss.  527  (1871);  s.  c,  8  Fed.  Cas. 
891 ;  Lee  v.  Citizens'  Nat.  Bank,  2  Cin. 
Super.  Ct.  (Ohio),  298  (1872).  Cf. 
Neale  v.  Janney,  2  Cranch,  C.  C.  188 
(1819) ;  s.  c,  17  Fed.  Cas.  1266.  A 
lien  of  the  corporation  on  stock  is 
prevented  by  a  statutory  provision 
that  the  company  should  not  loan 
money  on  the  security  of  its  own 
stock.  Nicollet  Nat.  Bank  v.  City 
Bank,  38  Minn.  85  (1887).  Where  a 
statute  prohibits  a  bank  from  making 
a  loan  on  its  own  stock  it  cannot  create 


by  by-law  a  lien  on  such  stock.  Cory- 
don,  etc.  Bank  v.  McClure,  141  Ky. 
481  (1911).  A  lien  granted  by  a  by- 
law is  not  good  as  against  a  transferee 
or  pledgee  of  the  certificate  of  stock  who 
has  no  notice  of  such  by-law.  First 
State  Bank  v.  First  Nat.  Bank,  145 
S.  W.  Rep.  691  (Tex.  1912).  As  to 
national  banks,  see  §  533,  infra. 

^  Cunningham  v.  Alabama,  etc.  Co., 
4  Ala.  (N.  S.)  652  (1843);  Spiu-lock 
V.  Pacific  R.  R.,  61  Mo.  319  (1875); 
Pendergast  v.  Bank  of  Stockton,  2 
Sawyer,  108  (1871) ;  s.  c,  19  Fed.  Cas. 
135.  Cf.  Tuttle  V.  Walton,  1  Ga.  43 
(1846). 

'  Bryon  v.  Carter,  22  La.  Ann.  98 
(1870) ;  Brent  v.  Bank  of  Washington, 
10  Pet.  596,  613  (1836);  Pendergast 
t'.  Bank  of  Stockton,  2  Sawyer,  108 
(1871);  s.  c,  19  Fed.  Cas.  135.  Ex- 
cept when  such  power  is  expressly 
given  to  the  directors  it  can  only  be 
exercised  by  vote  of  the  stockholders. 
Carroll  v.  MuUanphy  Sav.  Bank,  8  Mo. 
App.  249  (1880).  A  charter  power 
given  to  the  directors  of  a  corporation 
"to  make  all  by-laws  not  inconsistent 
with  any  existing  law  of  the  state  for 
the  management  of  its  property,  the 
regulation  of  its  affairs,  and  the  trans- 
fer of  its  stock,"  has  been  held  in 
Missouri  to  include  the  power  in  ques- 
tion. Mechanics'  Bank  v.  Merchants' 
Bank,  45  Mo.  513  (1870).  But  in  New 
York  the  same  language  used  in  the 
general  statute  was  held  not  to  in- 
clude it.  DriscoU  v.  West  Bradley, 
etc.  Co.,  59  N.  Y.  96  (1874).  See  also 
St.  Louis,  etc.  Ins.  Co.  v.  Goodfellow, 
9  Mo.  149  (1845) ;  Vansands  v.  Mid- 
dlesex County  Bank,  26  Conn.  144 
(1857) ;  Bank  of  Attica  v.  Manufac- 
turers'  Bank,   20  N.   Y.   501    (1859). 


1539 


§  523.]  LIEN   OF   THE   CORPORATION   ON   STOCK.  [cH.  XXXI. 

Where,  in  addition  to  the  articles  of  incorporation,  the  statute  provides 
for  articles  of  association,  the  corporation  may  in  the  latter  provide  for 
a  lien  on  the  stock. ^  But  a  lien  created  by  articles  of  association  of  a 
bank,  being  the  same  as  by-laws,  is  not  good  as  against  a  bona  fide 
pledgee  of  the  certificate  of  stock  where  the  certificate  does  not  refer 
to  such  articles  of  association  nor  to  the  lien.^  Inasmuch  as  by  the  laws 
of  England  an  English  corporation  may  amend  its  by-laws  so  as  to  give 
it  a  lien  on  stock  which  will  be  prior  to  any  existing  unregistered  pledge 
or  assignment  of  the  certificates  of  stock,  an  American  pledgee  or  holder 
of  such  certificates  of  stock  is  bound  by  such  by-law.^ 

Upon  the  whole  it  may  be  said  that  the  question  whether  a  corpora- 
tion may,  by  by-law,  create  a  lien  in  its  own  favor  upon  the  shares  of 
its  stockholders  for  debts  due  by  them  to  the  corporation  is  not  settled. 
The  weight  of  authority  in  this  country  is  against  the  validity  of  the 
by-law,  and  such  would  seem  to  be  a  result  most  in  accord  with  public 
policy. 

In  New  Hampshire  such  liens  upon  stock  are  forbidden  by  statute.^ 
The  right  to  create  a  lien  by  contract  is  considered  elsewhere.^ 

§  523.  Notice  of  the  lien.  —  When  a  lien  is  expressly  given  to  the 
corporation  by  its  charter  or  by  statute,  all  persons  purchasing  the 
stock  are  affected  by  the  statute  and  must  take  notice  of  it.^    A  stat- 

For  a  discussion  of   this   question  as  N.  Y.  App.  Div.  367  (1903) ;   aff'd,  179 

applied  to  national  banks,  see  §  533,  N.  Y.  577.     See  also  §  524,  infra. 

infra.     A  statute  that  the  transfer  of  ^  Hudson,  etc.  Co.  v.  Warner  &  Co., 

stock  need  not  be  recorded  on  the  cor-  99  Fed.  Rep.  187  (1900). 

porate    books    except    as    against    the  *  Hill  v.  Pine  River  Bank,  45  N.  H. 

claims    of    the    corporation    does    not  300,  309  (1864). 

give    the    corporation    a    lien    on    the  ^  See  §  523,  infra. 

stock.     Buena  Vista,  etc.  Bank  v.  Grier,  ^  Quoted  and  approved  in  United, 

114  Ga.  398  (1901).  etc.    Co.    v.    Winston,    etc.    Co.,     194 

1  Mohawk  Nat.  Bank  t?.  Schenectady  Fed.  Rep.  947  (1912);  Bishop  v. 
Bank,  78  Hun,  90  (1894) ;  aff'd,  151  Globe  Co.,  135  Mass.  132  (1883) ; 
N.  Y.  665.  Where  the  statute  allows  Dorr  v.  Life  Ins.,  etc.  Co.,  71  Minn, 
the  incorporators  to  include  special  38  (1898) ;  Citizens',  etc.  Bank  v. 
provisions  in  their  articles  of  incorpora-  Kalamazoo,  etc.  Bank,  111  Mich.  313 
tion,  and  a  lien  right  is  inserted,  and  (1896) ;  Birmingham  Trust,  etc.  Co.  v. 
the  certificate  of  stock  on  its  face  East  Lake  Land  Co.,  101  Ala.  304 
refers  to  the  articles  of  association,  a  (1893) ;  Union  Bank  v.  Laird,  2 
purchaser  of  a  certificate  buys  sub-  Wheat.  390  (1817) ;  Bohmer  v.  City 
ject  to  such  lien.  Gibbs  v.  Long  Bank,  77  Va.  445  (1883) ;  Downer  v. 
Island  Bank,  83  Hun,  92  (1894) ;  aff'd,  Zanesville  Bank,  Wright  (Ohio),  477 
151  N.  Y.  657.  The  articles  of  incor-  (1833) ;  Grant  v.  Mechanics'  Bank,  15 
poration  filed  under  the  general  act  Serg.  &  R.  (Pa.)  140  (1826) ;  St. 
may  contain  a  provision  that  the  cor-  Louis,  etc.  Co.  v.  Goodfellow,  9  Mo.  149 
poration  shall  have  a  lien  on  stock  for  (1845) ;  Bank  of  Utica  v.  Smalley,  2 
debts  due  from  the  holder  thereof  to  Cow.  770  (1824) ;  Rogers  v.  Hunting- 
the  corporation.  Dempster  Mfg.  Co.  don  Bank,  12  Serg.  &  R.  (Pa.)  77 
V.  Downs,  126  Iowa,  80  (1904).  (1824) ;    Sewall  v.  Lancaster  Bank,  17 

2  Lyman    v.    State    Bank,    etc.,    81  Serg.  &  R.  (Pa.)  285  (1828).     Cf.  Steb- 

1540 


CH.   XXXI.] 


LIEN   OF  THE   CORPORATION   ON   STOCK. 


[§§  524,  525. 


utory  lien  need  not  be  set  out  in  the  certificate  of  stock  in  order  to  give 
notice  to  the  transferee.^ 

§§  524,  525.  A  Hen  created  by  by-law  binds  only  those  who  take 
the  stock  with  notice  of  the  by-law.  This  is  because  by-laws  do  not 
of  themselves  impart  or  convey  notice.-  A  transferee  of  a  certificate 
of  stock  is  not  bound  to  take  notice  of  a  by-law  giving  a  corporation 
a  lien  on  the  stock  for  debts  due  from  the  registered  owner  to  the  cor- 
poration, even  though  the  certificate  of  stock  stated  on  its  face  that  it 
was  subject  to  the  by-laws.^  So,  too,  a  by-law  enacted  subsequently 
to  a  transfer,  although  the  transfer  has  not  been  recorded  on  the  cor- 
porate books,  cannot  affect  the  rights  of  the  parties  as  to  that  trans- 
fer.^ Where,  however,  a  prospectus,  offering  for  sale  trustee's  trans- 
ferable certificates,  states  that  such  certificates  represent  stock  deposited 


bins  V.  Phenix  F.  Ins.  Co.,  3  Paige,  350 
(1832) ;  Newberry  v.  Detroit,  etc. 
R.  R.,  17  Mich.  141  (1868) ;  Titcomb  v. 
Union  M.  &  F.  Ins.  Co.,  8  Mass.  326 
(1811);  West  Branch  Bank  v.  Arm- 
strong, 40  Pa.  St.  278  (1861);  Me- 
chanics' Bank  v.  Merchants'  Bank,  45 
Mo.  513  (1870) ;  Tuttle  v.  Walton,  1 
Ga.  43  (1846) ;  Dorr  v.  Life  Ins.,  etc. 
Co.,  71  Minn.  38  (1898). 

1  Quoted  and  approved  in  United, 
etc.  Co.  V.  Winston,  etc.  Co.,  194  Fed. 
Rep.  947  (1912)  ;  National  Bank  v. 
Rochester  Tumbler  Co.,  172  Pa.  St. 
614  (1896);  McCready  v.  Rumsey,  6 
Duer,  574  (1857) ;  Reese  v.  Bank  of 
Commerce,  14  Md.  271  (1859) ;  First 
Nat.  Bank  v.  Hartford,  etc.  Ins.  Co., 
45  Conn.  22  (1877).  A  lien  on  stock 
created  by  statute  gives  the  corpora- 
tion a  prior  right  in  the  stock  as  against 
a  subsequent  pledgee  and  purchaser  at 
the  pledgee's  sale,  even  though  the 
certificate  of  stock  gives  no  intimation 
of  a  lien.  Hammond  v.  Hastings,  134 
U.  S.  401  (1890).  A  purchaser  or 
pledgee  of  stock  is  bound  to  take 
notice  of  a  statutory  lien  which  the 
corporation  has  on  such  stock. 
Wright,  etc.  Co.  v.  Hixon,  105  Wis.  153 
(1899).  A  pledgee  of  stock  is  bound 
to  take  notice  of  a  statute  giving  the 
corporation  a  lien  upon  the  stock. 
Curtice  v.  Crawford,  etc.  Bank,  110 
Fed.  Rep.  830  (1901). 

2  Driseoll  v.  West  Bradley,  etc.  Co., 
59  N.  Y.  96,  109  (1874);  Bank  of 
Holly  Springs  v.  Pinson,  58  Miss.  421, 
435    (1880);    Anglo-Californian   Bank 


V.  Grangers'  Bank,  63  Cal.  359  (1883). 
See  also  People  v.  Miller,  39  Hun,  557 
(1886) ;  aff'd,  114  N.  Y.  636,  concern- 
ing the  validity  and  effect  of  by-laws 
regulating  the  sale  and  transfer  of 
seats  or  membership  in  the  commer- 
cial exchanges,  and  the  enforcement 
of  the  liens  created  thereupon  by  such 
by-laws  in  favor  of  other  members 
of  the  corporation.  Where  the  by-law 
under  which  the  lien  is  claimed  di- 
rects that  notice  of  the  lien  should  be 
given  in  the  certificate  of  stock,  this 
provision  must  be  regarded  as  mean- 
ing that  the  lien  should  not  be  as- 
serted against  a  person  not  having 
notice  by  the  certificate.  And  the  issu- 
ance of  certificates  not  containing  this 
notice  is  a  waiver  of  the  lien  con- 
templated by  such  by-law.  Bank  of 
HoUy  Springs  v.  Pinson,  58  Miss.  421 
(1880). 

'  Des  Moines,  etc.  Bank  v.  Warren, 
etc.  Bank,  97  Iowa,  204  (1896).  A 
bona  fide  pledgee  of  a  certificate  of 
stock  is  not  bound  to  know  that  the 
corporation  has  a  by-law  giving  it  a 
lien  on  the  stock  for  the  debts  of  the 
stockholder  of  record.  Just  v.  State 
Sav.  Bank,  132  Mich.  600  (1903).  A 
pledgee  or  transferee  of  a  certificate 
of  stock  is  not  bound  to  take  notice  of 
a  by-law  giving  the  corporation  a  lien 
on  the  stock  unless  the  by-law  appears 
on  the  face  of  the  certificate.  Bank  of 
Culloden  v.  Bank  of  Forsyth,  120  Ga. 
575  (1904).     See  also  §  .522,  supra. 

^People  V.  Crockett,  9  Cal.  112 
(1858). 


1541 


§§"524,  525.]  LIEN   OF   THE   CORPORATION   ON   STOCK.  [cH.  XXXr. 

with  the  trustee,  the  stock  being  in  an  English  corporation,  the  trustee 
is  personally  liable  if  it  turns  out  that  the  English  corporation  had  a 
prior  lien  on  the  stock  to  the  full  extent  of  its  value.  The  trustee  was 
bound  to  take  notice  of  the  lien  created  by  the  by-laws  of  the  English 
corporation.^  By-laws  creating  liens  on  stock  have  been  held  valid 
and  enforceable  as  against  assignees  in  bankruptcy  or  in  insolvency.^ 
A  lien  created  by  by-law  is  binding  upon  a  purchaser  of  the  stock  with 
notice  of  such  by-law,  and  when  taken  in  pledge  for  an  antecedent  debt 
without  any  agreement  to  postpone  collection,  the  pledgee  is  bound  to 
take  notice  of  the  by-law.^ 

A  clause  in  a  charter  declaring  that  debts  due  from  the  stockholders 
must  be  paid  before  a  transfer  will  be  allowed  is  sufficient  to  create  a 
lien  on  the  stock  without  other  action  on  the  part  of  the  corporation.* 
So,  also,  a  power  conferred  by  the  charter  upon  the  directors  to  refuse 
a  transfer  so  long  as  the  stockholder  who  wishes  to  transfer  is  indebted 
to  the  corporation,  supports  the  lien.^ 

•If  A  lien  may  be  created  by  special  agreement  among  the  stockholders.^ 
And  even  a  mere  usage  of  a  corporation  not  to  transfer  stock  while  the 
owner  is  indebted  to  the  corporation  is  sufficient  to  create  a  lien  on  stock, 
as  between  the  corporation  and  its  stockholders,  and  it  will  bind  a 
stockholder  who  borrows  money  with  a  knowledge  of  it.^    An  unwar- 

1  The  rule  of  caveat  emptor  has  tion  creates  a  lien  on  the  stock  in  favor 
been  relaxed  so  as  to  create  an  im-  of  the  corporation.  United  States, 
plied  warranty  of  title  on  the  part  etc.  Co.  v.  Sullivan,  113  Minn.  27 
of  the  seller.     Even  though  the  trus-  (1910). 

tee  acted  as  agent,  yet   the  principal  *  Arnold  v.  Suffolk  Bank,  27  Barb, 

not    being    disclosed,    the    trustee    is  424  (1857). 

liable.     McClure  v.  Central  Trust  Co.,  ^  Vansands    v.    Middlesex    County 

165  N.  Y.  108  (1900).  Bank,    26    Conn.     144     (1857).     The 

2  Morgan  v.  Bank  of  North  America,  stockholders  may  assent  to  a  lien  in 
8  Serg.  &  R.  (Pa.)  73  (1822) ;  s.  c,  11  behalf  of  the  corporation  on  stock  for 
Am.  Dec.  575 ;  Vansands  v.  Middlesex  debts  due  to  the  corporation  from  the 
County  Bank,  26  Conn.  144  (1857) ;  stockholder,  and  the  method  of  fore- 
Re  Bigelow,  1  Nat.  Bankr.  Reg.  632,  closing  it  may  also  be  so  prescribed. 
667  (1868) ;  s.  c,  3  Fed.  Cas.  341,  The  statute  of  limitations  does  not 
343.  run  against  it.     Reading  Trust  Co.  v. 

3  Bronson,  etc.  Co.  v.  Rheubottom,  Reading  Iron  Works,  137  Pa.  St.  282 
122  Mich.  608  (1900).  A  lien  created  (1890).  The  corporation  cannot  ere- 
by  by-law  has  precedence  over  a  judg-  ate  a  lien  on  stock  by  a  by-law ;  but 
ment  against  the  stockholder,  espe-  where  the  surety  of  the  debt  secured 
cially  where  notice  of  the  lien  was  by  the  stock  as  collateral  pays  the 
given  at  the  execution  sale.  Owens  v.  debt,  his  equities  are  not  superior  to 
Atlanta,  etc.  Co.,  122  Ga.  521  (1905).  the  corporation,  and  he  cannot  claim 

*  Farmers'  Bank  Case,  2  Bland.  Ch.  the  certificate  free  from  the  lien,   he 

(Md.)  394  (1830) ;    Kenton  Ins.  Co.  v.  having  aided  in   passing   the   by-law. 

Bowman,     84     Ky.     4.30     (1886).     A  Bank  of  Atchison  County  v.  Durfee, 

statute  that  stock  shall  not  be  trans-  118  Mo.  431  (1893). 
ferred  on  the  corporate  books  while  the  ^  Morgan  v.  Bank  of  North  America, 

transferrer  is  indebted  to  the  corpora-  8  Serg.  &  R.  (Pa.)  73,  88  (1822) ;   s.  c, 

1542 


CH.   XXXI. 


LIEN   OF   THE   CORPORATION    ON   STOCK. 


[§§  524,  525. 


ranted  claim  of  lien  by  a  corporation,  and  consequent  refusal  to  register 
a  transfer  until  the  debt  as  to  which  the  lien  is  asserted  is  paid,  is  a 
conversion  of  the  stock,  and  the  transferrer  may  have  his  action  against 
the  corporation  therefor.^ 

In  Ohio  it  is  held  that  where  the  certificates  of  stock  issued  by  a 
bank  contain  a  provision  on  their  face  that  the  bank  shall  have  a  lien 
on  the  stock  for  all  debts  due  to  it  from  the  registered  owner,  such  lien 
is  valid  and  applies  as  well  to  a  debt  contracted  after  the  certificate 
was  sold  but  before  it  was  presented  for  transfer  on  the  books  of  the  bank. 
The  lien  exists  even  though  neither  the  statutes  nor  the  by-laws  nor  the 
resolutions  of  the  board  of  directors  provided  for  such  lien.  It  is  suffi- 
cient that  such  certificate  of  stock  was  the  one  used  by  the  corporation.^ 
And  the  same  rule  has  been  upheld  in  Pennsylvania  ^  and  in  California, 
Connecticut,  and  elsewhere.^    A  national  bank,  however,  cannot  claim 


1 1  Am.  Dec.  575.  Cf.  Vansands  v. 
Middlesex  Bank,  26  Conn.  144  (1857). 
Where  the  certificates  of  stock  con- 
tain on  their  face  a  statement  that  a 
corporation  has  a  lien  on  the  stock 
for  debts  due  from  the  registered 
owner,  and  for  many  years  all  the 
stockholders  acquiesced  therein,  such 
a  lien  may  be  upheld,  although  there 
is  no  charter  provision  or  by-law 
authorizing  the  lien.  So  held  where 
a  stockholder  brought  an  action  for 
himself  and  other  stockholders  com- 
plaining of  various  misfeasances  and 
malfeasances,  including  the  charge 
that  such  an  illegal  claim  of  lien  ex- 
isted. Reynolds  v.  Bank  of  Mt.  Ver- 
non, 6  N.  Y.  App.  Div.  62  (1896); 
aff'd,  158  N.  Y.  740  (1899).  So  in 
Bryon  v.  Carter,  22  La.  Ann.  98 
(1870),  it  is  held  that  a  by-law  cre- 
ating a  lien,  while  it  may  be  valid  as 
between  the  parties  if  it  be  brought 
to  their  knowledge,  is  not  binding  on 
the  judgment  creditors  of  the  stock- 
holders. 

'  Bank  of  America  v.  McNeil,  10 
Bush  (Ky.),  54  (1873).  Cf.  Dickin- 
son V.  Central  Nat.  Bank,  129  Mass. 
279  (1880) ;  Case  v.  Bank,  100  U.  S. 
446  (1879) ;  Skinner  v.  City  of  London 
M.  Ins.  Corp.,  L.  R.  14  Q.  B.  D.  882 
(1885),  holding  also  that  only  nom- 
inal damages  could  be  recovered 
where  the  terms  of  the  transfer  were 
secret. 

2  Stafford  v.  Produce,  etc.  Co.,  61 
•Ohio  St.  160  (1899). 


^  Where  the  certificate  of  stock 
itself  provides  that  the  stock  is  liable 
to  the  company  for  indebtedness  of 
the  registered  stockholder  to  the  com- 
pany, this  constitutes  a  contract 
which  will  be  upheld  and  enforced  by 
the  courts,  and  dividends  on  the  stock 
may  be  applied  towards  such  indebt- 
edness. In  re  Hovey's  Estate,  198 
Pa.  St.  385  (1901). 

^  By  inserting  in  the  certificate  of 
stock  a  statement  that  the  corpora- 
tion has  a  lien  on  it  for  debts  due  to 
the  corporation,  a  purchaser  takes 
subject  thereto.  It  is  a  contract  lien. 
Jennings  v.  Bank  of  California,  79 
Cal.  323  (1889).  In  Vansands  v.  Mid- 
dlesex County  Bank,  26  Conn.  144 
(1857),  it  is  held  that  a  statement  on 
the  face  of  the  certificate  of  stock 
that  it  is  issued  subject  to  all  debts 
due  from  the  owners  to  the  corpora- 
tion will  bind  a  transferee  as  a  quali- 
fication or  restriction  of  the  trans- 
ferrer's title,  and  that,  too,  although 
no  charter  provision  or  by-law  author- 
izes such  a  lien  on  the  stock.  So,  also, 
Jennings  v.  Bank  of  California,  79 
Cal.  323  (1889).  A  by-law  of  a  cor- 
poration, organized  to  own  and  main- 
tain a  hunting  park,  may  authorize 
assessments  on  the  stock  to  pay  any 
annual  deficiency,  and  such  by-law  is 
binding  on  stockholders  who  accept 
the  certificate  of  stock,  which  on  its 
face  refers  to  the  by-law.  The  by-law 
is  valid  as  a  contract,  even  though 
it    is    not    valid    as    a    by-law.     Blue 


1543 


§  526.] 


LIEN    OF   THE   CORPORATION   ON   STOCK. 


a  lien  on  stock  for  a  stockholder's  debt,  even  though  notice  of  such  lien 
is  printed  on  the  face  of  the  certificates  of  stock. ^  Under  the  New  York 
statute  a  corporation  cannot  claim  a  lien  on  the  stock  unless  the  pro- 
visions of  the  statute  are  written  or  printed  on  the  certificate  of  stock.^ 
The  New  York  statute  does  not  give  a  corporation  a  lien  on  the  stock 
for  a  debt  due  to  it  from  a  stockholder,  but  only  gives  the  company 
the  right  to  refuse  a  transfer  so  long  as  he  is  indebted.^  A  tax  on 
national  bank  stock  follows  the  stock  into  a  transferee's  hands  until 
barred  by  the  statute  of  limitations.^ 

§  526.  The  lien,  when  established,  covers  all  the  stockholder's  shares 
and  dividends.  —  A  valid  lien  in  favor  of  the  corporation,  when  regu- 
larly established,  attaches  to  all  the  stock  and  dividends  of  the  in- 
debted stockholder.  Thus,  it  attaches  to  all  the  stock  the  stockholder 
owns,  although  the  debt  be  for  calls  due  and  unpaid  upon  only  a  part 
of  them.^  It  may,  moreover,  hold  the  whole  amount  of  the  stock- 
holder's stock,  although  the  amount  of  the  debt  be  less  than  the  value 
of  the  stock.  It  cannot  be  compelled  to  transfer  so  much  of  the  stock 
as  is  in  excess  of  the  amount  of  the  debt.®  The  lien  attaches  not  only 
to  the  stock  itself,  but  to  dividends  declared  on  the  stock. ^     It  is  ac- 


Mountain,  etc.  Assoc,  v.  Borrowe,  71 
N.  H.  69  (1901).  A  lien  created  by 
a  by-law  when  printed  on  the  face  of 
the  certificate  of  stock  is  legal  as  a 
contract.  Morrison,  etc.  Bank  v.  Ker- 
dolff,  75  Mo.  App.  297  (1898). 

1  Buffalo,  etc.  Co.  v.  Third,  etc. 
Bank,  162  N.  Y.  163  (1900) ;  aff'd,  193 
U.  S.  581.  Conklin  v.  Second  Nat. 
Bank,  45  N.  Y.  655  (1871). 

2  Union  Bank  v.  United  States, 
etc.  Bank,  143  N.  Y.  App.  Div.  128 
(1911). 

^  Strahmann  v.  Yorkville  Bank,  148 
N.  Y.  App.  DiV.  8  (1911). 

*  Citizens',  etc.  Bank  v.  Kentucky, 
217  U.  S.  443  (1910). 

■  *  Stebbins  v.  Phoenix  F.  Ins.  Co.,  3 
Paige,  350  (1832).  Cf.  Brent  v.  Bank 
of  Washington,  2  Cranch,  C.  C.  517 
(1824) ;  s.  c,  4  Fed.  Cas.  61.  In  Vir- 
ginia, however,  it  seems  that  there 
can  be  no  lien  on  wholly  paid-up  stock 
to  secure  the  payment  of  an  unpaid 
subscription  to  other  stock.  Shen- 
andoah Valley  R.  R.  v.  GrifBth,  76 
Va.  913  (1882).  Cf.  Va.  Code,  1887, 
§§  1127,  1128,  1130;  Petersburg  Sav., 
etc.  Co.  V.  Lumsden,  75  Va.  327  (1881). 
And  in  England  a  lien  on  stock  for 
unpaid  calls  is  a  lien  only  on   those 


particular  shares  upon  which  the  call 
is  made  and  not  on  other  shares.  Hub- 
bersty  v.  Manchester,  etc.  Ry.,  L.  R.  2 
Q.  B.  471  (1867). 

^  Sewall  V.  Lancaster  Bank,  17 
Serg.  &  R.  (Pa.)  285  (1828);  Pierson 
V.  Bank  of  Washington,  3  Cranch, 
C.  C.  363  (1828) ;  s.  c,  19  Fed.  Cas. 
671. 

^  Thus,  it  attaches  to  the  dividends, 
even  though  only  "shares  and  stock" 
be  specifically  named  in  the  statute 
or  charter  as  subject  to  the  lien 
(Hague  V.  Dandeson,  2  Exch.  741  — 
1848),  and  though,  in  the  absence  of 
express  provision,  it  is  held  that  no 
such  lien  impliedly  exists.  Sargent 
V.  Franklin  Ins.  Co.,  25  Mass.  90 
(1829) ;  Bates  v.  New  York  Ins.  Co.,  3 
Johns.  Cas.  238  (1802).  So,  in  Hagar 
V.  Union  Nat.  Bank,  63  Me.  509 
(1874),  it  was  held  that  the  terms  of 
the  act  of  1864  which  are  inconsistent 
with  the  existence  of  a  stock  lien  do 
not  preclude  a  lien  on  dividends.  A 
lien  on  the  stock  attaches  also  to 
dividends.  Dempster  Mfg.  Co.  v. 
Downs,  126  Iowa,  80  (1904).  A 
corporate  lien  on  stock  which  has 
been  reduced  to  a  judgment  may  be 
offset    against     a    dividend.      United, 


1544 


CH.  XXXI.] 


LIEN   OF   THE   CORPORATION   ON   STOCK. 


[§  527. 


cordingly  held  that  a  corporation  may  lawfully  retain  dividends,  and 
apply  them  to  the  payment  of  a  debt  due  to  it  from  the  stockholder, 
since  in  an  action  by  the  stockholder  to  enforce  payment  of  his  divi- 
dends the  corporation  may  plead  the  debt  by  way  of  set-off.^  But 
dividends  declared  after  the  death  of  the  stockholder  are  not  subject 
to  a  lien  for  his  debts."  The  lien  attaches  to  the  shares  even  after  the 
liquidation  or  dissolution  of  the  company.^  It  attaches  not  only  to 
valid  stock,  but  to  spurious  stock  obtained  by  forgery.^ 

§  527.  The  lien  protects  the  corporation  as  to  all  the  debts  due  to 
it  from  the  stockholder.  —  It  is  a  general  rule  that  a  lien  upon  stock 
is  a  lien  for  all  debts  of  the  stockholder  due  to  the  corporation ;  ^  and 
it  is  not  necessary  that  the  debt  be  due  and  payable  at  the  time  when 
the  lien  is  sought  to  be  enforced.  It  covers  debts  which  are  not  due  as 
well  as  those  that  are  due,  and  all  indebtedness  to  the  corporation, 
whether  payable  presently  or  at  a  future  time.^     The  lien  will  continue 


etc.  Co.  V.  Winston,  etc.  Co.,  194  Fed. 
Rep.  947  (1912). 

1  Hagar  v.  Union  Nat.  Bank,  63  Me. 
509  (1874) ;  Sargent  v.  Franklin  Ins. 
Co.,  25  Mass.  90  (1829) ;  Bates  v.  New 
York  Ins.  Co.,  3  Johns.  Cas.  238 
(1802).  Cf.  Merchants'  Bank  v. 
Shouse,  102  Pa.  St.  488  (1883) ;  Brent 
V.  Bank  of  Washington,  2  Cranch, 
C.  C.  517  (1824) ;  s.  c,  4  Fed.  Cas.  61. 
See  also  §  544,  infra. 

2  Brent  v.  Bank  of  Washington,  2 
Cranch,  C.  C.  517  (1824) ;  s.  c,  4  Fed. 
Cas.  61 ;  Merchants'  Bank  v.  Shouse, 
102  Pa.  St.  488  (1883). 

5  Re  General  Exchange  Bank,  L.  R. 
6  Ch.  App.  818  (1871). 

*  Mount  Holly  Paper  Co.'s  Appeal, 
99  Pa.  St.  513  (1882). 

5  Union  Bank  v.  Laird,  2  Wheat.  390 
(1817) ;  Mobile  Mut.  Ins.  Co.  v.  Cul- 
lom,  49  Ala.  558  (1873) ;  Cunningham 
V.  Alabama,  etc.  Co.,  4  Ala.  (N.  S.) 
652  (1843) ;  Rogers  v.  Huntingdon 
Bank,  12  Serg.  &  R.  (Pa.)  77  (1824) ; 
Ex  parte  Stringer,  L.  R.  9  Q.  B.  D. 
436  (1882) ;  Re  Peebles,  2  Hughes,  394 
(1875);  s.  c,  19  Fed.  Cas.  94;  Plant- 
ers', etc.  Co.  V.  Selma  Sav.  Bank,  63 
Ala.  585  (1879).  Quaere,  whether  the 
lien  attaches  for  funds  embezzled  by 
the  stockholder.  Hotchkiss,  etc.  Co. 
e;.  Union  Nat.  Bank,  68  Fed.  Rep.  76 
(1895). 

6  Pittsburgh,  etc.  R.  R.  v.  Clarke,  29 
Pa.  St.  146  (1857) ;    Re  Bachman,  12 


Nat.  Bankr.  Reg.  223  (1876) ;  s.  c,  2 
Fed.  Cas.  310;  Downer  v.  Zanesville 
Bank,  Wright  (Ohio),  477  (1833); 
Brent  v.  Bank  of  Washington,  10  Pet. 
596  (1836)  ;  Rogers  v.  Huntingdon 
Bank,  12  Serg.  &  R.  (Pa.)  77  (1824) ; 
Sewall  V.  Lancaster  Bank,  17  Serg.  & 
R.  (Pa.)  285  (1828);  McCready  i;. 
Rumsey,  6  Duer,  574  (1857);  St. 
Louis,  etc.  Co.  v.  Goodfellow,  9  Mo. 
149  (1845)  ;  Cunningham  v.  Alabama, 
etc.  Co.,  4  Ala.  (N.  S.)  652  (1843); 
Leggett  V.  Bank  of  Sing  Sing,  24 
N.  Y.  283  (1862).  Cf.  Re  Stockton, 
etc.  Co.,L.  R.2Ch.  D.  101  (1875).  In 
Grant  v.  Mechanics'  Bank,  15  Serg.  & 
R.  (Pa.)  140  (1826),  it  was  held  that 
a  bank  organized  under  the  Penn- 
sylvania law  of  March  21,  1814,  might 
lawfully  refuse  to  permit  the  transfer 
of  the  stock  of  a  stockholder  who  was 
the  drawer  of  a  bill  discounted  by  the 
bank,  but  not  payable  at  the  time  the 
transfer  was  demanded  —  both  the 
stockholder  and  his  indorser  having, 
since  the  discount  of  the  paper,  be- 
come insolvent.  So,  also.  Downer  v. 
Zanesville  Bank,  Wright  (Ohio),  477 
(1833).  But  where  the  lien  is  ex- 
pressly made  a  seciirity  for  debts 
"actually  due  and  payable,"  it  will 
be  held  to  cover  only  debts  due  and 
payable.  Reese  v.  Bank  of  Commerce, 
14  Md.  271  (1859).  Cf.  Downer  v. 
Zanesville  Bank,  Wright  (Ohio),  477 
(1833). 


1545 


§  527.] 


LIEN   OF   THE   CORPORATION   ON   STOCK, 


[CH.  XXXI. 


for  the  benefit  of  the  corporation,  although  the  debt  be  barred  by  the 
statute  of  Umitations.^  The  lien  attaches  whether  the  stockholder's 
debt  to  the  corporation  accrued  before  or  after  he  became  a  stockholder.^ 
A  lien  created  by  statute  applies  to  debts  due  from  the  stockholder  to 
the  corporation  prior  to  the  passage  of  the  statute.^  It  also  secures 
debts  for  which  the  stockholder  is  liable  only  as  indorser  or  surety,* 
and  debts  due  from  a  partnership  in  which  the  stockholder  is  a  partner.^ 
So,  also,  it  secures  the  corporation  for  unpaid  calls  upon  the  original 
subscription.^  But  the  lien  does  not  attach  until  a  call  is  made.^  The 
fact  that  the  corporation  has  other  security  does  not  prevent  it  from 
enforcing  its  charter  lien  on  the  stock.^    The  lien  also  attaches  to 


» Farmers'  Bank  v.  Iglehart,  6  Gill 
(Md.),  50  (1847);  Geyer  v.  Western 
Ins.  Co.,  3  Pittsb.  (Pa.)  41  (1867); 
Brent  v.  Bank  of  Washington,  10  Pet. 
596,  617  (1836).  See  also  §  530, 
infra. 

2  Schmidt  v.  Hennepin,  etc.  Co.,  35 
Minn.  511  (1886). 

3  Birmingham  Trust,  etc.  Co.  v. 
East  Lake  Land  Co.,  101  Ala.  304 
(1893). 

<  McLean  v.  Lafayette  Bank,  3  Mc- 
Lean, 587  (1846) ;  s.  c,  16  Fed.  Cas. 
264 ;  Leggett  v.  Bank  of  Sing  Sing,  24 
N.  Y.  283  (1862) ;  Union  Bank  v. 
Laird,  2  Wheat.  390  (1817);  Mc- 
Dowell V.  Bank  of  Wilmington,  1 
Harr.  (Del.)  27  (1832) ;  Bank  v.  Bon- 
nie, 102  Ky.  343  (1897);  Brent  v. 
Bank  of  Washington,  10  Pet.  596,  615 
(1836) ;  St.  Louis,  etc.  Ins.  Co.  v. 
Goodfellow,  9  Mo.  149  (1845).  C/. 
Miles  V.  New  Zealand,  etc.  Co.,  L.  R. 
32  Ch.  D.  266  (1886);  West  Branch 
Bank  v.  Armstrong,  40  Pa.  St.  278 
(1861).  A  corporation,  on  discount- 
ing a  bill  or  note,  may  take  security 
from  one  of  the  parties,  and  also  hold 
the  stock  of  another  party  as  security 
for  the  same  loan.  Union  Bank  v. 
Laird,  2  Wheat.  390  (1817).  Cf. 
Conant  v.  Seneca  County  Bank,  1  Ohio 
St.  298  (1853) ;  Helm  v.  Swiggett,  12 
Ind.  194  (1859);  Dunlop  v.  Dunlop, 
L.  R.  21  Ch.  D.  583  (1882). 

*  Citizens',  etc.  Bank  v.  Kalamazoo, 
etc.  Bank,  111  Mich.  313  (1896);  Re 
Bigelow,  2  Ben.  469  (1868) ;  s.  c,  3 
Fed.  Cas.  341 ;  Geyer  v.  Western  Ins. 
Co.,  3  Pittsb.  (Pa.)  41  (1867) ;  Arnold 
V.  Suffolk  Bank,  27  Barb.  424  (1857) ; 


Planters',  etc.  Ins.  Co.  v.  Selma  Sav. 
Bank,  63  Ala.  585  (1879). 

6  Spurlock  V.  Pacific  R.  R.,  61  Mo. 
319  (1875);  McCready  v.  Rumsey,  6 
Duer,  574  (1857) ;  Regina  v.  Wing,  33 
Eng.  L.  &  Eq.  80  (1855) ;  Re  Hoylake 
Ry.,  L.  R.  9  Ch.  257  (1874);  Com- 
panies Clauses  Consolidation  Act,  1845 
(8  &  9  Vict.,  Ch.  16,  §  16) ;  Shaw  v. 
Rowley,  16  M.  &  W.  810  (1847) ;  Ex 
-parte  Tooke,  6  Eng.  Ry.  &  Can.  Cas. 
1  (1849).  Cf.  Newry,  etc.  Ry.  v.  Ed- 
munds, 2  Exch.  118  (1848);  Amber- 
gate,  etc.  Ry.  V.  Mitchell,  4  Exch.  540 
(1849) ;  Great  North,  etc.  Ry.  v.  Bid- 
dulph,  7  M.  &  W.  243  (1840) ;  Pitts- 
burgh, etc.  R.  R.  V.  Clarke,  29  Pa.  St. 
146  (1857) ;  Rogers  v.  Huntingdon 
Bank,  12  Serg.  &  R.  (Pa.)  77  (1824) ; 
Petersburg  Sav.,  etc.  Co.  v.  Lumsden, 
75  Va.  327  (1881).  The  lien  secures 
general  debts  as  well  as  unpaid  calls. 
National  Bank,  etc.  v.  Rochester  Tum- 
bler Co.,  172  Pa.  St.  614  (1896). 

7  Hall  V.  U.  S.  Ins.  Co.,  5  Gill  (Md.) 
484  (1847).  Cf.  Re  Bachman,  12  Nat. 
Bankr.  Reg.  223  (1876) ;  s.  c,  2  Fed. 
Cas.  310;  Pittsburg,  etc.  R.  R.  v. 
Clarke,  29  Pa.  St.  146  (1857).  A 
director  transferring  his  shares  be- 
fore the  call  avoids  the  lien,  although 
he  knew  the  call  was  to  be  made.  The 
call  is  made  when  the  date  of  pay- 
ment is  fixed,  and  not  by  a  mere  gen- 
eral resolution.  Re  Cawley,  etc.  Co., 
L.  R.  42  Ch.  D.  209  (1889).  The  lien 
attaches  when  a  call  is  made,  and 
not  when  it  becomes  due.  Queen  v. 
Londonderry,  etc.  Ry.,  13  Q.  B.  998 
(1849). 

8  German  Nat.  Bank  v.  Kentucky  T. 


1546 


CH.  XXXI.]  LIEN   OF   THE   CORPORATION   ON   STOCK.  [§  528. 

the  stock  of  a  depositor  who  has  overdrawn  his  account.^  Where  a 
corporation  has  a  Hen  on  stock  for  debts  of  the  stockholder,  an  embezzle- 
ment by  the  stockholder  as  an  officer  is  such  a  debt.^  Where  by  charter 
the  amount  which  a  bank  may  loan  to  a  single  person  shall  not  exceed 
ten  per  cent,  of  its  capital  stock,  a  lien  which  it  has  by  charter  on  stock 
is  not  good  for  the  excess  of  a  loan  over  ten  per  cent.'' 

§  528.  Right  of  lien  as  against  miscellaneous  parties.  —  There  is 
no  lien  on  the  stock  as  to  debts  of  an  intervening  unrecorded  owner 
of  the  stock.''  Where,  however,  the  corporation  is  notified  of  the  sale 
and  transfer  of  the  certificates  of  stock,  without  a  return  of  the  certifi- 
cates to  the  corporation  and  the  taking  out  new  certificates  in  the  name 
of  the  purchaser,  and  the  corporation  notes  the  fact  in  its  certificate 
book,  the  corporation  has  a  lien  on  the  stock  for  a  debt  due  from  the 
purchaser,  and  not  even  a  bona  fide  purchaser  from  him  can  avoid  such 
lien.^  A  lien  of  a  corporation  on  stock  for  debts  due  it  from  its  stock- 
holders does  not  attach  to  stock  purchased  by  another  corporation,  the 
latter  having  no  power  to  purchase.^  The  lien  attaches  to  trust  stock 
for  debts  due  from  a  trustee  who  holds  stock  in  trust,  but  in  his  own 
name,  and  without  any  indication  of  the  trust.^  Where  a  cestui  que 
trust  owes  the  corporation  a  debt,  the  lien  attaches  to  his  stock  though 
held  for  him  in  the  name  of  a  trustee.^  And  stock  standing  on  the  corpo- 
rate books  in  the  name  of  a  fictitious  person  is  subject  to  a  lien  for  the 
indebtedness  of  the  real  owner.^  The  corporation,  in  transferring 
stock  to  the  trustee  in  bankruptcy  of  a  stockholder,  has  no  right  to 
write  on  the  face  of  the  certificate  that  it  is  subject  to  a  lien  belonging 
to  the  corporation,  even  though  such  lien  exists,  all  other  certificates 
of  stock  not  having  any  such  writing  on  them.^°  An  executor  is  entitled 
to  have  stock  belonging  to  the  estate  transferred  into  his  own  name  as 
executor,  and  the  corporation  is  liable  in  damages  for  refusal  to  make 

Co.,  40  S.  W.  Rep.  458  (Ky.   1897) ;  (1873) ;    Burns  v.  Lawrie,  2  Sc.  Ct.  of 

Dunlop  V.  Dunlop,  L.  R.  21  Ch.  D.  583  Sess.     Cas.     (2d    ser.)     1348     (1840), 

(1882).  otherwise  cited,  2  Dunlop,  1348. 

1  Reese  v.  Bank  of  Commerce,   14  »  Stebbins  v.  Phoenix  F.  Ins.  Co.,  3 
Md.  271  (1859).  Paige,  350  (1832). 

2  Commonwealth  v.   Standard,   etc.  '  Stebbins  v.  Phoemx  F.  Ins.  Co.,  3 
Co.,  201  Pa.  St.  103  (1902).  Paige,    350    (1832),    where    the    presi- 

3  People's  Bank  v.  Exchange  Bank,  dent  of  a  corporation  with  fraudulent 
116  Ga.  820  (1902).  intent  procured  shares  to  be  recorded 

*  Helm    V.    Swiggett,    12    Ind.    194  in  a  fictitious  name,  and,  having  him- 

(1859).  self  become  indebted   to  the  corpora- 

6  Bank   of   Commerce   v.    Bank    of  tion,   procured  an  assignment  of  the 

Newport,  63  Fed.  Rep.  898  (1894).  shares     to     another     creditor,      who 

6  Lanier  Lumber  Co.  v.   Rees,   103  sought  to  have  the  transfer  recorded. 

Ala.  622  (1894).  Held,  that  the  lien  still  attached  for 

'  New  London,  etc.  Bank  v.  Brockle-  the  debts  of  the  original  holder, 
bank,   L.   R.  21    Ch.   D.    302   (1882);  ^^  Re   W.   Key,   etc.,    [1902]    1    Ch. 

Young   I'.   Vough,   23   N.   J.   Eq.   325  467. 

1547 


§§  529,  530.]  LIEN    OF  THE   CORPORATION   ON   STOCK.  [cH.  XXXI. 

such  transfer,  even  though  the  corporation  has  a  Hen  on  the  stock  for 
a  debt  owed  it  by  the  decedent.^  A  pledgee  cannot  insist  on  a  transfer 
of  the  stock  to  himself  on  the  corporate  books  where  the  corporation 
has  a  lien  on  the  stock,  even  though  such  lien  is  subject  to  the  pledge.^ 

§  529.  The  lien  can  he  enforced  for  the  benefit  of  the  corporation 
only.  —  The  right  of  a  corporation  to  a  lien  on  the  stock  of  its  stock- 
holders as  security  for  the  payment  of  their  debts  to  the  corporation 
is  a  right  to  be  enforced  only  by  the  corporation  and  exclusively  for  its 
own  benefit.  Accordingly,  it  is  held  that  the  corporation  cannot  become 
the  assignee  of  the  claim  of  some  third  person  against  one  of  its  stock- 
holders in  order  to  enforce  payment  of  that  claim  for  the  benefit  of  the 
third  person  by  a  recourse  to  the  corporate  lien  on  the  stockholder's 
stock. ^  Neither  can  the  corporation  be  compelled,  for  the  benefit  of 
sureties  as  to  a  part  of  the  stockholder's  indebtedness,  to  apply  the 
proceeds  of  the  sale  of  the  stock  to  the  liquidation  of  that  part  of  their 
claim  which  is  secured.^  The  lien  does  not  extend  to  claims  against 
the  stockholder  on  paper  made  by  the  stockholder  and  purchased  by 
the  corporation.^  The  lien,  however,  is  for  the  benefit  of  the  corpora- 
tion, and  it  may  apply  the  proceeds  of  the  sale  of  the  stock  in  such  a 
way  as  best  to  subserve  its  own  interest.^ 

§  530.  Methods  of  enforcing  the  lien.  —  When  a  corporation  has 
a  lien  upon  the  stock  of  those  of  its  stockholders  who  are  indebted 

'  Under  the  statutes  of  California  the    benefit    of    the    corporation,    see 

this  rule  applies  to  an  alien  corpora-  Bank  of  Utica  v.  Smalley,  2  Cow.  770 

tion  doing  business  in  that  state,  the  (1824). 

statutes    of    the    state    requiring  such  *  Cross  v.  Phenix  Bank,  1  R.  I.   39 

corporations     to     make     transfers     in  (1840).     But  see  Kuhns  v.  Westmore- 

that  state.     It  applies  even  though  the  land  Bank,  2  Watts  (Pa.),  136  (1833), 

statutes  of  Great  Britain  forbid  trans-  where  it  is   said   that   "the  principle 

fers  of  stock  "without  administration  that  a  surety  is  entitled  to  the  benefit 

upon  such  property  under  the  laws  of  of   all    the   creditor's   securities   is   of 

England  and  Great  Britain,"  London,  such    universal     application     that     it 

etc.  Bank  v.  Aronstein,  117  Fed.  Rep.  would  require  strong  evidence  of  leg- 

601  (1902).  islative  intention  to  make  the  present 

2  White  River,  etc.  Bank  v.  Capital,  case    an    exception    to    it."     Cf.    also 

etc.  Co.,  77  Vt.  123  (1904).  Klopp  v.   Lebanon  Bank,   46  Pa.   St. 

'  A  bank  having  a  lien  by  statute  88  (1863) ;   Petersburg  Sav.,  etc.  Co.  ;'. 

for   any    debt    held    by    it    against    a  Lumsden,  75  Va.  327,  340  (1881). 

stockholder  cannot  purchase  notes  of  ^  Boyd    v.    Redd,    120    N.    C.    33.5 

the   stockholder  for   the   express  pur-  (1897). 

pose  of  acquiring  such  lien,  the  bank  ^  Planters',   etc.   Ins.   Co.   v.   Selma 

at  the  time  of  the  purchase  knowing  Sav.  Bank,  63  Ala.  585  (1879) ;  Mount 

that  the  stock  had  been  pledged  by  Holly  Paper  Co.'s  Appeal,  99  Pa.  St. 

the    stockholder    to    another    creditor.  513    (1882) ;     Anglo-Calif ornian   Bank 

Bank  v.  Bonnie,  102  Ky.  343  (1897) ;  v.  Grangers'  Bank,  63  Cal.  359  (1883) ; 

White's  Bank  v.  Toledo,  etc.  Ins.  Co.,  Bishop   v.   Globe  Co.,   135  Mass.    132 

12  Ohio  St.  601  (1861).     To  the  point  (1883). 
that   this   lien   is   one   exclusively   for 

1548 


CH.  XXXI.] 


LIEN   OF   THE    CORPORATION   ON   STOCK. 


[§  530. 


to  it,  it  may  refuse  to  allow  a  transfer  of  the  stock  until  the  debt  is 
paid  or  secured  to  its  satisfaction.^  And  the  corporation  may  insist 
upon  its  lien  and  hold  the  stock  even  against  a  bona  fide  purchaser, 
inasmuch  as  purchasers  of  stock  are  bound  to  take  notice  of  legal  liens.^ 
The  corporation  may  proceed  by  an  attachment  of  the  stock.^  So, 
also,  upon  non-payment  of  the  debt,  the  corporation  may  file  a  bill 
in  a  court  of  chancery  and  have  the  stock  sold  in  the  usual  way,  as  in 
other  cases  of  property  held  under  a  lien.'*  But  even  though  a  corpora- 
tion by  its  charter  has  a  lien  on  the  stock  of  a  stockholder  for  a  liability 
from  him  to  it,  this  does  not  sustain  a  suit  in  equity  to  enforce  such  a  lien 
for  breach  of  a  contract  where  the  damages  have  not  been  ascertained 
at  law.^     In  Michigan  it  is  held  that  a  suit  in  equity  will  not  lie  to  en- 


1  Reese  v.  Bank  of  Commerce,  14 
Md.  271  (1859);  First  Nat.  Bank 
V.  Hartford,  etc.  Ins.  Co.,  45  Conn. 
22  (1877) ;  Vansands  v.  Middlesex 
County  Bank,  26  Conn.  144  (1857) ; 
Farmers'  Bank  i'.  Iglehart,  6  Gill 
(Md.),  50  (1847) ;  McCready  v.  Rum- 
sey,  6  Duer,  574  (1857);  Tuttle  v. 
Walton,  1  Ga.  43  (1846);  Sewall  v. 
Lancaster  Bank,  17  Serg.  &  R.  (Pa.) 
285  (1828) ;  Rogers  v.  Huntingdon 
Bank,  12  Serg.  &  R.  (Pa.)  77  (1824); 
Grant  v.  Mechanics'  Bank,  15  Serg.  & 
R.  (Pa.)  140  (1826).  Cf.  Sabin  v. 
Bank  of  Woodstock,  21  Vt.  353 
(1849) ;  West  Branch  Bank  v.  Arm- 
strong, 40  Pa.  St.  278  (1861).  The 
corporation  need  not  foreclose  but 
may  refuse  to  transfer  the  stock  until 
the  debt  secured  by  the  lien  is  paid. 
Moore  v.  Royal  Oak,  etc.  Co.,  137 
N.  W.  Rep.  270  (Mich.  1912).  In 
Bishop  V.  Globe  Co.,  135  Mass.  132 
(1883),  the  rule  is  declared  that  if  by 
the  law  of  the  state  under  which  a 
corporation  is  organized  the  corpora- 
tion has  a  lien  on  the  stock  of  any 
stockholder  for  a  debt  due  from  him 
to  the  corporation,  the  lien  is  a  good 
defense  to  an  action  in  another  state 
against  the  corporation  by  a  person 
to  whom  the  stockholder  has  trans- 
ferred his  stock,  but  in  whose  name, 
by  reason  of  the  lien,  the  corporation 
has  refused  to  register  the  transfer. 
In  Farmers'  Bank's  Case,  2  Bland, 
Ch.  (Md.)  394  (1830),  and  Brent  v. 
Bank  of  Washington,  10  Pet.  596 
(1836),  bills  were  filed  by  the  owners 
of  the  stock  to  compel  a  transfer,  and 


the     corporation     defended     on     the 
ground  of  its  lien. 
'  See  §  523,  supra. 

3  Sabin  v.  Bank  of  Woodstock,  21 
Vt.  353  (1849). 

4  A  lien  may  be  foreclosed  by  a 
suit  in  equity.  United  States,  etc. 
Co.  V.  Sullivan,  113  Minn.  27  (1910). 
A  court  of  equity  has  jurisdiction  to 
enforce  a  statutory  lien  by  a  bank  for 
stock  owned  by  its  cashier.  Wynn  v. 
Tallapoosa  County  Bank,  168  Ala.  469 
(1910).  A  lien  of  a  corporation  may 
be  enforced  by  a  suit  in  equity. 
Wright,  etc.  Co.  v.  Hixon,  105  Wis.  153 
(1899) ;  Re  Morrison,  10  Nat.  Bankr. 
Reg.  105  (1873);  s.  c,  17  Fed.  Cas. 
831.  Under  the  California  code  a  cor- 
poration may  by  suit  foreclose  a  lien 
which  it  has  on  its  stock.  Mechanics', 
etc.  Assoc.  V.  King,  83  Cal.  440  (1890). 
To  enforce  a  lien  upon  stock  under  the 
Alabama  statute  no  action  on  the  part 
of  the  board  of  directors  is  necessary. 
Elliott  V.  Sibley,  101  Ala.  344  (1893). 
A  suit  to  enforce  a  statutory  lien  of  a 
bank  on  shares  of  its  own  capital  stock 
held  by  one  of  its  debtors  was  sus- 
tained in  Mcllroy,  etc.  Co.  v.  Dickson, 
66  Ark.  327  (1899). 

^  Even  though  a  corporation  has 
issued  stock  for  a  contract  giving  it 
the  exclusive  right  to  sell  patented 
machinery  in  a  certain  district,  and 
even  though  the  party  receiving  the 
stock  violates  the  contract  and  the 
corporation  has  a  lien  by  its  charter 
on  the  stock,  yet  the  damages  must  be 
ascertained  at  law  before  a  suit  can 
be   maintained   in    equity    to    enforce 


1549 


§  530.]  LIEN   OF   THE   CORPORATION   ON    STOCK.  [cH.  XXXI. 

force  a  statutory  lien  which  a  corporation  has  on  stock  of  its  stockholders 
for  debts  due  from  them  to  it.^  It  was  on  very  much  the  same  theory 
as  this  that  the  New  England  and  Pennsylvania  courts  originally  held 
that  a  chancery  court  had  no  inherent  jurisdiction  to  foreclose  a  mort- 
gage lien  —  decisions  which  for  half  a  century  embarrassed  those  states 
until  the  legislature  created  the  jurisdiction  which  ought  never  to  have 
been  denied.^  In  a  suit  to  foreclose  a  lien  the  transferrer  of  the  stock 
is  not  a  necessary  party .^  A  lien  may  be  enforced,  even  though  the 
debt  is  barred  by  the  statute  of  limitations.^  A  decree  authorizing  the 
sale  of  stock  for  the  payment  of  the  debt  need  not  give  the  stockholder 
the  right  of  redemption.  An  absolute  and  valid  title  may  pass  to  the 
purchaser  immediately  upon  the  sale.^  A  valid  lien  in  favor  of  a  bank 
upon  shares  of  stock  in  the  bank  belonging  to  the  estate  of  a  deceased 
person  does  not  yield  to  a  prior  claim  against  the  estate  in  favor  of  the 
government.^  Where  the  stockliolder  has  died,  and  his  estate  is  being 
distributed,  the  portion  going  to  the  corporation,  by  reason  of  its  claim, 
will  not  be  decreased  by  reason  of  such  distribution  except  as  a 
credit.^  In  order  to  put  the  corporation  in  the  wrong  for  a  refusal  to 
transfer  where  it  claims  more  than  is  due,  the  stockholder  must  tender 
what  he  admits  to  be  due.^  The  fact  that  a  stockholder  claims  that 
the  corporation  owes  him  more  money  than  he  owes  it  is  not  sufficient 

the  lien.     United,  etc.  Co.  v.  Winston,  subject  to  the  lien  of  the  corporation 

etc.  Co.,  194  Fed.  Rep.  947  (1912).  itself  by  statute  on  the  stock  for  debts 

1  Aldine  Mfg.   Co.   v.  Phillips,   118  due  to  it  from  the  judgment  debtor, 
Mich.  162  (1898).  and  a  further  statutory  provision  that 

2  See  §§  823,  824,  834,  infra.  the  enforcement  of  the  corporation's 

3  Citizens',  etc.  Bank  v.  Kalamazoo,  lien    shall    not    affect    attachment    or 
etc.  Bank,  111  Mich.  313  (1896).  execution    liens    goes    merely    to    the 

<  Commonwealth  v.   Standard,   etc.  remedy  and  does  not  affect  the  pri- 

Co.,  201  Pa.  St.  103  (1902).     See  also  ority.     Springfield,  etc.  Co.-  v.  Bank  of 

§  527,  supra.  Batesville,  68  Ark.  234  (1900). 

'  Reese  v.  Bank  of  Commerce,   14  ^  In  re  Hovey's  Estate,  198  Pa.  St. 

Md.  271,  284  (1859).     In  one  case  the  385  (1901).     See  also  §  473,  supra. 

lien  was  held   to  be  equivalent  to  a  *  Pierson  v.  Bank  of  Washington,  3 

pledge ;   and   it   was   held   that,   after  Cranch,   C.   C.  363   (1828) ;   s.   c,   19 

giving   due   notice   to   the   delinquent  Fed.   Cas.  671.     In  German  Security 

stockholder,     the    corporation    might  Bank  v.  Jefferson,  10  Bush  (Ky.),  326 

sell  at  public  auction  without  filing  a  (1874),   it   was  held   that,   where   the 

bill     to     foreclose.     Farmers'     Bank's  stock  sold   under  the  lien  realized   a 

Case,  2  Bland,  Ch.  (Md.)  394  (1830).  sum  insufficient  to  satisfy  the  corporate 

In  this  case  it  is  also  held  that,  where  debt,  the  unpaid  balance  of  the  claim 

the  corporation  neglects  or  refuses  to  of  the  corporation  could  not  be  paid 

sell  the  stock  of  a  deceased  stockholder  until  there  had  been  a  proportionate 

who   is   in  arrears,  the   administrator  payment  of  the  claims  of  other  cred- 

may  file  a  bill  and  obtain  an  order  of  itors    of    the    stockholder    out    of    his 

sale  directed  to  the  corporation.  general    assets.     Cf.     Re    Peebles,     2 

«  Brent  v.  Bank  of  Washington,  10  Hughes,  394    (1875) ;   s.   c,   19    Fed. 

Pet.    596    (1836).     A   judgment   cred-  Cas.  94,  and  §§  473,  476,  supra. 
itor's  execution  lien  on  bank  stock  is 

1550 


CH.   XXXI.] 


LIEN   OF   THE   CORPORATION   ON   STOCK. 


[§  531. 


to  sustain  a  bill  in  equity  to  enjoin  the  corporation  from  selling  the 
stock  in  order  to  pay  the  amount  due  the  corporation.  Some  other 
ground  of  equitable  jurisdiction  must  be  set  forth.^  Where  a  corpora- 
tion has  other  security  also,  a  court  of  equity  may  compel  it  to  resort 
to  that  first.^  A  corporation  is  liable  in  damages  for  selling  the  stock 
of  a  stockholder  for  non-payment  of  dues,  where  such  sale  was  irregular 
and  illegal.^  Where  by  statute  bank  stock  may  be  sold  for  non-pay- 
ment of  assessments  levied  upon  it  to  restore  the  capital  stock,  the 
money  for  which  it  is  sold  belongs  to  the  stockholder  and  not  to  the 
bank.^  The  pledgee  may  maintain  a  bill  to  foreclose  the  pledge  where 
the  corporation  claims  a  lien  prior  to  the  pledge.^ 

§  531.  The  corporation  may  waive  its  lien.  —  A  corporation  which 
has  a  lien  upon  its  stockholders'  stock  for  debts  due  to  it  from  them 
need  not  necessarily  depend  upon  or  insist  upon  its  lien  for  the  collec- 
tion of  the  debt.     It  may  collect  the  debt  as  though  there  was  no  lien.® 


1  Elliott  V.  Sibley,  101  Ala.  344 
(1893).  This  case  holds,  also,  that  in 
a  suit  in  equity  by  a  stockholder  to 
enjoin  a  sale  of  his  stock  by  the  cor- 
poration for  a  debt  due  the  corpora- 
tion, the  corporation  is  a  necessary 
party  defendant,  and  that  the  com- 
plainant must  aver  a  readiness  to  pay 
whatever  may  be  found  due. 

^  Covington,  etc.  Bank  v.  Commer- 
cial Bank,  65  Fed.  Rep.  547  (1895). 
Where  the  company  has  a  lien  on  stock, 
and  the  stockholder  sells  a  part,  the 
purchaser  may  require  the  company  to 
first  have  recourse  to  the  unsold  part 
to  collect  its  debts.  A  subsequent  ex- 
ecution levied  on  the  unsold  part  does 
not  deprive  the  purchaser  of  the  other 
part  of  his  rights  stated  above.  Gray 
V.  Stone,  69  L.  T.  Rep.  282  (1893). 

'  The  sale  here  was  contrary  to  the 
requirements  of  the  by-laws.  The  cor- 
poration bought  the  stock  itself  at 
such  sale.  The  fact  that  a  surplus 
realized  at  the  sale  was  sent  to  the 
stockholder  by  check,  and  was  received 
by  him,  did  not  bar  his  remedy,  he 
being  in  ignorance  of  the  illegality. 
Allen  V.  American  Building,  etc.  Assoc, 
49  Minn.  544  (1892). 

*  Chicago  T.  &  T.  Co.  v.  State  Bank, 
86  Fed.  Rep.  863  (1898).  In  Tennes- 
see it  has  been  held  that  where  stock  is 
only  partly  paid,  and  the  corporation 
issues  a  certificate  reciting  on  its  face 
how  much  is  still  due,  and  the  holder 


pledges  it,  and  no  transfer  to  the 
pledgee  is  made  on  the  corporate 
books,  the  corporation  can  have  a  sale 
of  the  stock  for  non-payment  of  the 
balance  remaining  due,  but  such  pro- 
portion of  the  proceeds  will  be  paid 
to  the  pledgee  as  the  amount  already 
paid  on  the  stock  bears  to  the  par 
value  of  the  stock.  Ingles,  etc.  Co.  v. 
Knoxville,  etc.  Co.,  53  S.  W.  Rep.  1111 
(Tenn.    1899). 

5  White  River,  etc.  Bank  v.  Capital, 
etc.  Co.,  77  Vt.  123  (1904). 

^  A  subscriber  for  stock  cannot 
avoid  liability  to  the  corporation  by 
setting  up  that  the  corporation  has  a 
lien  on  the  stock  therefor  and  may 
enforce  it.  Lankershim,  etc.  Co.  v. 
Herberger,  82  Cal.  600  (1890).  Even 
though  by  the  statutes  under  which 
an  English  corporation  is  organized 
the  company  has  a  lien  on  the  stock 
for  unpaid  assessments  and  may  for- 
feit the  stock  for  non-payment,  yet 
this  does  not  prevent  a  suit  to  collect 
the  assessment.  Nashua,  etc.  Bank  v, 
Anglo-American,  etc.  Co.,  189  U.  S. 
221  (1903).  See  also  §  124,  supra. 
Where  the  statute  provides  that  stock 
shall  be  taxed,  and  that  the  corpora- 
tion shall  pay  the  tax  and  have  a  lien 
therefor  on  the  stock,  the  stockholder 
is  not  personally  liable  to  the  corpora- 
tion which  has  paid  such  tax.  Mer- 
cantile, etc.  Co.  V.  Mellon,  196  Pa.  St. 
176  (1900). 


1551 


§  531.]  LIEN    OF   THE   CORPORATION   ON   STOCK.  [cH.  XXXI. 

Hence  it  is  that  the  lien  of  a  corporation  on  stock  may  be  asserted  and 
enforced,  or,  in  the  discretion  of  the  corporation,  it  may  be  waived.^ 
By  allowing  a  transfer  the  corporation  waives  its  lien  as  against  a  bona 
fide  purchaser  from  the  transferee.^  Where  the  company  files  a  claim 
for  unpaid  calls  without  claiming  a  lien  on  the  stock,  it  thereby  waives 
such  lien  and  cannot  amend  its  claim  .^ 

Where  the  corporation  has  other  security  it  is  not  obliged  to  resort 
to  the  lien.'*  Cases  may  arise,  however,  where  the  intervening  rights 
of  other  creditors  of  the  stockholder  render  it  inequitable  for  the  cor- 
poration to  waive  its  lien  on  the  stock.^  Accordingly,  where  a  note 
discounted  for  a  stockholder  was  protested  for  non-payment,  it  was 
held  that  the  bank  might  proceed  directly  against  the  indorser  with- 
out resorting  to  its  lien.®  The  corporation,  by  waiving  its  lien,  does 
not  discharge  a  surety,  unless  the  surety  has  given  the  corporation  express 
notice  not  to  waive  the  lien.^  But  where  a  corporation  has  a  lien  on 
stock  and  at  the  same  time  owes  a  stockholder  a  certain  debt  which  is 
guaranteed  by  a  third  person,  and  the  stockholder  causes  the  corpora- 
tion to  waive  the  lien  without  the  consent  of  the  guarantor,  the  guar- 
antor is  thereby  discharged.^  The  corporation  will  not  be  held  to  have 
waived  its  lien  upon  the  stock  of  its  debtor  merely  because  it  has  taken 
other  or  additional  security  for  the  debts ;  ^  nor  because  it  assents  to  a 
general  assignment  by  the  stockholder  for  the  benefit  of  creditors.^" 
But  of  course  if  a  corporation,  having  a  statutory  lien  on  stock,  agrees 
to  take  other  security  in  place  thereof,  it  thereby  waives  its  lien.^^  The 
corporation  may  allow  the  transfer  of  a  portion  of  a  stockholder's  stock 
without  waiving  its  lien  on  the  rest.^^    The  fact  that  the  corporation 

1  National  Bank  v.  Watsontown  *  Dunlop  v.  Dunlop,  L.  R.  21  Ch.  D. 
Bank,  105  U.  S.  217  (1881) ;  Hodges    583  (1882). 

V.  Planters'  Bank,  7   Gill  &  J.  (Md.)  »  Re  Bachman,  12  Nat.  Bankr.  Reg. 

306  (1835) ;  Hall  v.  U.  S.  Ins.  Co.,  5  223  (1876) ;  s.  c,  2  Fed.  Cas.  310. 

Gill   (Md.),   484   (1847) ;   Re  Hoylake  «  Cross  v.  Phenix  Bank,  1  R.  I.  39 

Ry.,  L.  R.  9  Ch.  257,  259  (1874).  But  (1840). 

see  Conant  v.  Seneca  County  Bank,  1  ^  Perrine  v.  Fireman's  Ins.  Co.,  22 

Ohio   St.   298    (1853) ;    Re  Bigelow,   1  Ala.  575  (1853). 

Nat.  Bankr.  Reg.  667  (1868) ;  s.  c,  3  »  Robertson  v.  SuUy,  157  N.  Y.  624 

Fed.  Cas.  341.     A  waiver  is  the  inten-  (1899). 

tional  relinquishment  of  a  known  right.  ^  Union  Bank  v.  Laird,  2  Wheat.  390 

It  is  not  to  be  inferred  and  imputed  to  (1817). 

a  corporation  in  the  absence  of  proof  i°  Dobbins   v.    Walton,   37    Ga.    614 

of  it,  and  a  mere  failure  to  assert  the  (1868). 

lien  is  not  equivalent  to  a  relinquish-  ^^  St.  Paul  Nat.  Bank  v.  Life  Ins.,  etc. 

ment    or    waiver    of    it.     First    Nat.  Co.,  71  Minn.  123  (1898). 

Bank  v.   Hartford,   etc.   Ins.   Co.,   45  i-  First    Nat.  Bank   of    Hartford   v. 

Conn.  22,  44  (1877).  Hartford,  etc.  Ins.  Co.,  45  Conn.  22 

2  Farmers',  etc.  Bank  v.  Cherokee  (1877).  But  c/.  Presbyterian  Cong.  w. 
T.  Co.,  32  Okla.  700  (1912).  CarUsIe  Bank,  5  Pa.  St.  345   (1847). 

»  Re  Rowe,  [1904]  2  K.  B.  489. 

1552 


CH.   XXXI.] 


LIEN   OF   THE   CORPORATION   ON   STOCK. 


[§  531. 


transfers  other  stock  belonging  to  the  same  stockholder  is  no  waiver 
of  its  Hen  on  stock  as  against  a  pledgee  of  some  of  the  stock,  the  debt 
being  greater  than  the  value  of  all  the  stock.^  A  waiver  of  the  lien  for 
a  limited  time  is  fatal,  provided  the  stock  is  transferred  during  that 
time.- 

A  waiver  which  will  bind  the  corporation  may,  in  the  absence  of 
something  to  qualify  the  power,  be  made  by  the  cashier  of  a  bank,  acting 
by  virtue  of  an  express  or  implied  authority  for  the  board  of  directors ;  ^ 
or  the  secretary  of  an  insurance  company ;  ^  or  the  general  manager  or 
properly-qualified  general  agent  of  the  corporation,  especially  if  that  is 
a  general  custom  of  the  company.^  Accordingly,  where  one  buys  stock 
on  the  faith  of  a  representation  of  the  corporate  officers  that  the  stock 
is  unencumbered,  he  is  entitled  to  the  stock  free  from  any  corporate 
lien.®  But  a  purchaser  of  stock  wath  knowledge  that  the  corporation  has 
a  lien  on  it  cannot  claim  a  waiver  of  such  a  lien  on  the  corporation  except 
upon  proof  of  authorized  corporate  action.'^ 

Where  the  corporate  oflficers  allow  a  transfer  to  be  registered,  and  a 
new  certificate  to  be  issued,  there  is  a  waiver  of  the  corporate  lien  as  to 
the  debts  of  the  transferrer.^    If  the  corporation  sells  a  claim  it  has 

1  Commonwealth  v.  Standard,  etc.  Oak,  etc.  Co.,  137  N.  W.  Rep.  270 
™  "     "     -"" -^^  (Mich.    1912). 

»  See  Bishop  v.  Globe  Co.,  135  Mass. 
132  (1883) ;  Young  v.  Vough,  23  N.  J. 
Eq.  325  (1873). 

^  Moore  v.  Bank  of  Commerce,  52 
Mo.  377  (1873). 

'  Moore  v.  Royal  Oak,  etc.  Co.,  137 
N.  W.  Rep.  270  (Mich.  1912). 

3  Hill  V.  Pine  River  Bank,  45  N.  H. 
300  (1864) ;  Higgs  v.  Northern  Assam 
Tea  Co.,  L.  R.  4  Exeh.  387  (1869) ;  Re 
Northern  Assam  Tea  Co.,  L.  R.  10 
Eq.  458  (1870).  After  transfer  on  the 
books  the  transferrer  is  no  longer  liable 
for  the  subscription  price,  and  the 
transferee  is  liable  even  though  the 
corporation  has  a  lien  on  the  stock 
by  statute,  the  transfer  having  been 
allowed  by  the  officers  of  the  corpora- 
tion. Rochester,  etc.  Co.  v.  Ray- 
mond, 158  N.  Y.  576  (1899).  So, 
also,  a  by-law  requiring  the  consent  of 
the  board  of  directors  to  a  transfer  by 
one  indebted  to  the  corporation  is 
held  to  be  repealed  where  a  custom  of 
disregarding  it  has  been  shown,  it 
appearing  also  that  the  secretary  had 
been  allowed  to  exercise  his  own  dis- 
cretion about  such  transfers  without 
consulting   the   directors.     In   such   a 


Co.,  201  Pa.  St.  103  (1902) 

-  Thus,  if  within  such  time  the 
stock  is  pledged  for  a  debt,  the  right 
of  the  corporation,  after  the  expira- 
tion of  the  time  to  acquire  its  charter 
lien,  is  subordinate  to  the  right  of 
the  pledge  until  the  debt  is  paid  or 
the  pledge  is  released.  Bank  of 
America  r.  McNeil,  10  Bush  (Ky.), 
54  (1873). 

3  National  Bank  v.  Watsontown 
Bank,  105  U.  S.  217  (1881).  So,  also, 
the  refusal  of  the  cashier  to  permit  a 
transfer  is  the  act  of  the  bank,  for 
which  it  may  be  charged.  Case  v. 
Bank,  100  U.  S.  446  (1879).  Where 
the  cashier  of  a  bank  takes  part  in 
the  pledging  of  stock  by  one  of  the 
stockholders,  the  bank  cannot  subse- 
quently claim  a  lien  on  the  stock  for 
debts  incurred  by  the  stockholder 
after  such  pledge.  Birmingham  Trust, 
etc.  Co.  V.  Louisiana  Nat.  Bank,  99 
Ala.  379   (1893). 

^  Chambersburg  Ins.  Co.  v.  Smith, 
11  Pa.  St.  120  (1849).  Cf.  Kenton  Ins. 
Co.  V.  Bowman,  84  Ky.  430  (1886). 
The  secretary  cannot  waive  a  lien  of 
the  corporation  on  stock  unless  he 
actually  transfers  it.     Moore  v.  Royal 


(98) 


1553 


§  532.]  LIEN   OF   THE   CORPORATION    ON    STOCK.  [cH.  XXXI. 

against  a  stockholder  it  thereby  loses  its  lien.^  The  lien  is  not  waived 
by  a  by-law  that  stockholders  must  offer  their  stock  to  the  bank  before 
selling  elsewhere,  and  that  after  ten  days  they  may  sell  elsewhere.^ 
Where  a  party  about  to  take  stock  in  pledge  inquires  of  the  corporation 
as  to  its  value,  and  as  to  whether  there  was  any  lien  upon  the  stock, 
and  no  lien  is  claimed,  and  he  then  takes  the  stock  in  pledge,  and  causes 
an  indorsement  thereof  to  be  made  on  the  stub  of  the  stock-book  of  the 
corporation,  the  corporation  cannot  thereafter  claim  a  lien  as  against 
him ;  and,  moreover,  a  subsequent  transfer  of  the  stock  by  the  pledgor 
to  the  corporation  as  security  for  a  debt  due  from  him  to  it  does  not 
take  precedence  over  the  first  pledge,  the  certificates  themselves  having 
been  transferred  to  the  first  pledgee,  but  not  transferred  on  the  books.^ 
The  fact  that  the  debt  of  the  corporation  has  existed  several  years  and 
has  not  been  enforced  does  not  affect  the  company's  statutory  lien  upon 
stock  of  its  creditor.^ 

§  532.  The  lien  as  affected  by  transfers  and  notice.  —  A  purchaser 
of  stock  is  bound  to  take  notice  of  the  statute  giving  a  lien  upon  the 
stock.^  Nevertheless,  upon  a  transfer  of  stock,  the  title  thereto  passes 
absolutely  as  between  transferrer  and  transferee,  even  though  the  cor- 
poration, in  the  assertion  of  a  lien  upon  the  stock  for  the  indebtedness 
of  the  transferrer,  refuses  to  register  the  transfer  until  a  certain  debt  is 
paid  or  secured.^     But  of  course  the  assignee  or  transferee,  or  whoever 

case  the  consent  of  the  secretary  to  ^  See  §  523,  supra. 

the  transfer  is  a  waiver  of  the  lien.  « National    Bank    v.     Watsontown 

Chambersburg  Ins.   Co.   v.   Smith,   11  Bank,  105  U.  S.  217  (1881);  Johnston 

Pa.   St.   120   (1849).     Where  the  cor-  v.  Laflin,  103  U.  S.  800  (1880) ;  Fitz- 

poration  has  allowed  the  stockholder  hugh  v.  Bank  of  Shepherdsville,  3  T.  B. 

to   transfer  his   stock   to  his   wife,   it  Mon.    (Ky.)    126    (1825);    St.    Louis, 

cannot,  as  against  a  bona  fide  pledgee  etc.  Ins.  Co.  v.  Goodfellow,  9  Mo.  149 

from  the  wife,  claim  that  the  transfer  (1845) ;    Commercial    Bank    v.    Kort- 

was  colorable,  and  that  the  husband  right,  22  Wend.  348  (1839) ;  s.  c,  sub 

was  still  the  real  owner  and  that  the  nom.    Kortright    v.   Buffalo    Commer- 

corporation   has   a  lien   on    the  stock  cial  Bank,  20  Wend.  91  (1838) ;  Bank 

for  the  husband's  debts.     Just  v.  State  of  Utica  v.  Smalley,  2  Cow.  770  (1824) ; 

Sav.  Bank,  132  Mich.  600  (1903).  McNeil  v.  Tenth  Nat.  Bank,  46  N.  Y. 

1  Ralston  v.  Bank  of  California,  112  325  (1871) ;  People  v.  Miller,  39  Hun, 
Cal.   208  (1896).  557,  563  (1886) ;  aff'd,  114  N.  Y.  636. 

2  Citizens',  etc.  Bank  ?).  Kalamazoo,  Cf.  Dunn  v.  Commercial  Bank,  11 
etc.  Bank,  111  Mich.  313  (1896).  Barb.  580  (1852);  Merchants'  Bank  v. 

3  Des  Moines,  etc.  Co.  V.  Des  Moines,  Livingston,  74  N.  Y.  223  (1878); 
etc.  Bank,  97  Iowa,  668  (1896).  Where  Pittsburgh,  etc.  R.  R.  v.  Clarke,  29 
the  cashier  of  a  bank  tells  a  purchaser  Pa.  St.   146   (1857) ;  Sargent  v.  Essex 

^  of   stock  that   the  bank  has   no   lien  Marine    Ry.,    26    Mass.    202    (1829) ; 

upon  the  stock,  a  statutory  lien  of  the  Carroll    v.    MuUanphy    Sav.    Bank,    8 

bank  on  the  stock  is  waived  as  to  him.  Mo.    App.    249    (1880).     Corporations 

Oakland  C.  S.  Bank  v.  State  Bank,  113  having  a  statutory  lien  on  stock  for 

Mich.  284  (1897).  debts  nevertheless  must  allow  transfer 

*  Wright,    etc.    Co.    i;.    Hixon,    105  to  one  who  takes  subject  to  the  cor- 

Wis.   153  (1899).  porate  lien  for  part  of  the  unpaid  sub- 

1554 


CH.   XXXI. 


LIEN    OF   THE   CORPORATION   ON   STOCK. 


[§  532. 


succeeds  to  the  rights  of  the  stockholder  in  the  stock,  takes  it  subject 
to  the  hen  of  the  corporation.^  And  when  the  stock  is  sold  by  the  cor- 
poration to  pay  the  debts  of  the  transferrer,  the  transferee  is  entitled 
to  the  surplus,  if  any  there  be,  which  remains  after  the  claim  of  the  cor- 
poration is  satisfied.^ 

The  corporation  cannot,  after  it  has  been  regularly  notified  of  the 
transfer,  assert  a  lien  upon  the  stock  to  secure  an  indebtedness  of  the 
transferrer  contracted  subsequently  to  the  notice.^  A  mere  notice  to 
the  bank  is,  in  such  a  case,  sufficient  to  protect  the  transferee.  It  is 
immaterial  that  the  transfer  was  not  registered.''  Where  the  directors 
of  a  corporation  know  that  a  stockholder  of  record  has  transferred  his 
stock,  the  corporation  cannot  claim  a  lien  for  debts  incurred  subse- 
quently.^    But  where  there  is  neither  a  register  of  the  transfer  nor  notice 

scription.  Herdegen  v.  Cotzhausen, 
70  Wis.  589  (1888).  A  corporate  lien 
for  a  salary  paid  to  a  stockholder,  on 
Ms  agreement  to  repay  any  amount  in 
excess  of  dividends  on  his  stock,  has 
precedence  as  against  a  pledgee  of  the 
stock.  Russell,  etc.  Co.  v.  Hammond, 
etc.  Co.,  130  Mich.  7  (1902). 

1  Mobile  Mut.  Ins.  Co.  v.  Cullom, 
49  Ala.  558  (1873) ;  New  Orleans  Nat. 
Banking  Assoc,  v.  Wiltz,  10  Fed.  Rep. 
330  (1881). 

2  Tuttle  V.  Walton,  1  Ga.  43  (1846) ; 
Foster  v.  Potter,  37  Mo.  525  (1866) ; 
West  Branch  Bank  v.  Armstrong,  40 
Pa.  St.  278  (1861);  Weston  v.  Bear 
River,  etc.  Co.,  5  Cal.  186  (1855); 
s.  c,  6  Cal.  425. 

5  Conant  v.  Seneca  County  Bank,  1 
Ohio  St.  298  (1853);  Nesmith  v. 
Washington  Bank,  23  Mass.  324 
(1828).  The  same  rule  applies  where 
the  stock  is  pledged.  Bradford  Bank- 
ing Co.  V.  Briggs,  L.  R.  12  App.  Cas. 
29  (1886).  But  where  the  stock- 
holder transfers  his  stock,  and  subse- 
quently, without  notifying  the  corpora- 
tion of  the  transfer,  borrows  money 
from  the  corporation  in  regular 
course  of  business,  the  corporation 
may  refuse  to  register  the  transfer 
and  may  insist  upon  the  lien.  Piatt  v. 
Birmingham  Axle  Co.,  41  Conn.  255 
(1874).  Where  it  is  the  custom  to 
have  the  corporation,  upon  request, 
certify  that  it  has  no  lien,  such  a 
request  operates  as  notice  to  the  cor- 
poration. Covington,  etc.  Bank  v. 
Commercial  Bank,  65  Fed.  Rep.  547 


(1895).  This  case  holds  also  that 
notice  to  the  corporation  by  a  loaner 
of  money  to  the  stockholder  does  not 
inure  to  the  benefit  of  a  purchaser  who 
knew  nothing  thereof.  After  a  pledge 
of  the  certificate  and  notice  to  the 
corporation,  a  subsequent  debt  of  the 
corporation  is  not  protected  by  the 
company's  Uen  as  against  such  pledge. 
Just  V.  State  Sav.  Bank,  132  Mich. 
600  (1903).  A  statutory  lien  does 
not  take  precedence  over  a  pledge, 
notice  of  which  had  been  given  to  the 
corporation  before  the  debt  was  in- 
curred, even  though  the  transfer  was 
not  registered  on  the  corporate  books, 
but  the  lien  attaches  to  the  equity. 
White  River,  etc.  Bank  v.  Capital,  etc. 
Co.,  77  Vt.  123  (1904).  The  stat- 
utory lien  of  a  bank  on  its  stockholder's 
stock  is  subject  to  a  pledge  of  the  stock, 
known  to  the  bank  at  the  time  the 
stockholder  incurred  a  debt  to  it. 
Ardmore  State  Bank  v.  Mason,  30 
Okla.  568  (1911). 

*  Bank  of  America  v.  McNeil,  10 
Bush  (Ky.),  54  (1873).  See  also 
§§258,  382,  383,  490,  523,  supra.  A 
debt  incurred  after  notice  to  the  cor- 
poration of  a  transfer  of  stock  by  the 
stockholder  is  not  protected  by  the 
lien,  but  knowledge  acquired  by  the 
president  in  another  capacity  is  not 
such  a  notice.  People's  Bank  v. 
Exchange  Bank,  116  Ga.  820  (1902). 

5  Prince,  etc.  Co.  v.  St.  Paul,  etc.  Co., 
68  Minn.  121  (1897).  A  lien  of  a  bank 
on  stock  for  a  debt  due  from  a  stock- 
holder  to   the   bank   is   subject    to   a 


1555 


§  532.] 


LIEN   OF   THE   CORPORATION   ON   STOCK. 


CH.  XXXI. 


of  it  served  upon  the  corporation,  the  stock  may  properly  be  subjected 
to  a  corporate  hen  for  the  indebtedness  of  the  transferrer  incurred  sub- 
sequently to  the  transfer.^  A  pledgee  who  is  duly  registered  on  the 
corporate  books  as  a  stockliolder,  but  to  whom  no  certificate  has  been 
issued,  is  nevertheless  protected  against  liens  upon  his  stock  for  the 
indebtedness  of  the  pledgor.^  A  corporate  lien  will  not  attach  to  stock 
for  the  debts  of  a  legatee  unless  the  legatee  accepts  the  stock.^ 

Where  one  pays  a  debt  as  surety  for  a  stockholder,  he  is  entitled  to 
be  subrogated  to  the  rights  of  the  corporation  by  way  of  lien  on  the  stock- 
holder's stock.^  And  where  the  transferee  pays  the  transferrer's  debt 
to  the  corporation  in  order  to  obtain  a  registry  of  the  transfer,  he  of 


pledge  of  the  stock  where  such  pledge 
was  made  before  the  debt  was  incurred, 
and  the  bank  incurred  the  debt  with 
knowledge  of  the  pledge.  Knowledge 
of  the  facts  by  the  president  is  notice 
to  the  bank.  Curtice  v.  Crawford, 
etc.  Bank,  118  Fed.  Rep.  390  (1902). 
1  Faulkner  v.  Bank  of  Topeka,  94 
Pac.  Rep.  153  (Kan.  1908).  Piatt  v. 
Birmingham  Axle  Co.,  41  Conn.  255 
(1874) ;  Jennings  v.  Bank  of  Cali- 
fornia, 79  Cal.  323  (1889) ;  Gemmell  v. 
Davis,  75  Md.  546  .  (1892).  Even 
though  the  stockholder  has  trans- 
ferred his  certificate,  yet  if  the  cor- 
poration has  no  knowledge  of  the  fact, 
it  may  acquire  a  lien  thereafter,  and 
prior  to  the  time  of  its  having  knowl- 
edge, the  transfer  not  having  been 
made  within  sixty  days  as  required 
by  statute,  and  even  though  such 
stockholder  is  its  cashier,  it  is  not 
chargeable  with  notice  on  account  of 
that  fact.  Pueblo,  etc.  Bank  v.  Rich- 
ardson, 89  Pac.  Rep.  799  (Colo.  1907). 
Where  the  statute  gives  a  lien  for 
debts  due,  the  lien  applies  as  against 
a  transfer  of  the  certificate  made  before 
the  debt  became  due,  but  presented 
to  the  corporation  for  transfer  after 
the  debt  became  due.  Michigan, 
etc.  Co.  V.  State  Bank,  111  Mich.  306 
(1896).  As  to  the  rule  in  England, 
see  Miles  v.  New  Zealand,  etc.  Co., 
L.  R.  32  Ch.  D.  266  (1886) ;  Dunlop  v. 
Dunlop,  L.  R.  21  Ch.  D.  583  (1882) ; 
Societe  Generale  v.  Tramways  Union 
Co.,  L.  R.  14  Q.  B.  D.  424  (1884) ;  New 
London,  etc.  Bank  v.  Broeklebank, 
L.  R.  21  Ch.  D.  302  (1882).  In  Eng- 
land, however,  unrecorded  transferees 


of  stock  have  few,  if  any,  rights  as 
against  the  corporation.  It  is  held  in 
Ohio  that  where  the  certificates  of 
stock  issued  by  a  bank  contain  a  pro- 
vision on  their  face  that  the  bank 
shall  have  a  lien  on  the  stock  for  all 
debts  due  to  it  from  the  registered 
owner,  such  lien  is  valid  and  applies 
as  well  to  a  debt  contracted  after  the 
certificate  was  sold  but  before  it  was 
presented  for  transfer  on  the  books  of 
the  bank.  The  lien  exists  even  though 
neither  the  statutes  nor  the  by-laws, 
nor  the  resolution  of  the  board  of 
directors  provided  for  such  lien.  It  is 
sufficient  that  such  certificate  of 
stock  was  the  one  used  by  the  cor- 
poration. Stafford  v.  Produce,  etc. 
Co.,  61  Ohio  St.  160  (1899).  See  also 
§  522,  supra.  Until  the  corporation 
has  notice  of  a  sale  or  a  pledge  of  the 
certificate  of  stock  it  may  continue 
to  loan  money  to  the  stockholder  and 
have  a  lien  therefor.  People's  Bank 
V.  Exchange  Bank,  116  Ga.  820  (1902). 

2  Cecil  Nat.  Bank  v.  Watsontown 
Bank,  105  U.  S.  217  (1881). 

^  Farmers'  Bank  v.  Iglehart,  6  Gill 
(Md.),  50  (1847). 

*  Young  V.  Vough,  23  N.  J.  Eq.  325 
(1873);  Hodges  v.  Planters'  Bank,  7 
Gill  &  J.  (Md.)  306,  310  (1835) ;  West 
Branch  Bank  v.  Armstrong,  40  Pa.  St. 
278  (1861);  Klopp  v.  Lebanon  Bank, 
46  Pa.  St.  88  (1863).  Cf.  Higgs  v. 
Northern  Assam  Tea  Co.,  L.  R.  4 
Exeh.  387  (1869) ;  Re  Northern  Assam 
Tea  Co.,  L.  R.  10  Eq.  458  (1870); 
National  Exch.  Bank  v.  Silliman,  65 
N.  Y.  475  (1875). 


1556 


CH.  XXXI.] 


LIEN    OF   THE   CORPORATION   ON   STOCK. 


[§  533. 


course  may  have  his  action  to  recover  back  from  his  transferrer  the 
amount  so  paid.^ 

Where  the  company  has  a  Hen  upon  the  stock  of  a  stockholder, 
the  latter  may  compel  the  company  to  assign  their  lien  to  a  third  person 
who  will  advance  the  money,  and  to  whom  the  shares  are  at  the  same 
time  transferred.- 

§  533.  Liens  on  national-hank  stock.  —  National  banks  were  for- 
merly held  to  have  power  to  enact  by-laws  creating  a  lien  on  stock 
in  the  bank  for  debts  owed  by  its  owner  to  the  bank.^  But  the  supreme 
court  of  the  United  States,  when  the  question  came  before  it,  refused 
to  enforce  such  a  by-law%  and  decided  that  its  enactment  was  not  within 
the  spirit  of  those  provisions  of  the  National  Banking  Act  of  1864  which 
confer  power  upon  the  management  of  a  national  bank  to  regulate  the 
business  of  the  bank  and  to  conduct  its  affairs.^  In  the  present  state 
of  the  law,  therefore,  no  national  bank  can,  by  any  by-law,  create  any 
lien  upon  shares  of  stock  in  the  bank  to  secure  the  payment  of  any  in- 
debtedness which  the  owner  of  the  stock  may  contract  to  the  bank.^ 
A  national  bank  cannot  claim  a  lien  on  stock  for  a  stockholder's  debt, 
even  though  notice  of  such  lien  is  printed  on  the  face  of  the  certificates 
of  stock. ^ 


1  Bates  V.  New  York  Ins.  Co.,  3 
Johns.  Cas.  238  (1802).  See  also 
§  262,  supra. 

2  Everitt  v.  Automatic,  etc.  Co., 
[1892]  3  Ch.  506. 

'  The  leading  case  was  Knight  v. 
Old  Nat.  Bank,  3  Cliff.  429  (1871); 
s.  c,  14  Fed.  Cas.  772,  upholding  the 
lien.  To  the  same  effect,  see  Lock- 
wood  V.  Mechanics'  Nat.  Bank,  9  R.  I. 
308  (1869);  Re  Dunkerson,  4  Biss. 
227  (1868);  s.  c,  8  Fed.  Cas.  48; 
Young  V.  Vough,  23  N.  J.  Eq.  325 
(1873). 

^Bullard  v.  Bank,  18  Wall.  589 
(1873).  See  also  Bank  v.  Lanier,  11 
WaU.  369  (1870);  Case  v.  Bank,  100 
U.  S.  446  (1879).  Bridges  v.  National 
Bank,  185  N.  Y.  146  (1906).  One 
reason  for  denying  this  power  to 
national  banks  is  that  they  are  pro- 
hibited from  loaning  money  to  stock- 
holders on  the  security  of  their  stock. 

5  Delaware,  etc.  R.  R.  v.  Oxford 
Iron  Co.,  38  N.  J.  Eq.  340  (1884); 
Meyers  v.  Valley  Nat.  Bank,  18  Nat. 
Bankr.  Reg.  34  (1879) ;  s.  c,  17  Fed. 
Cas.  250 ;  Hagar  v.  Union  Nat.  Bank, 
63  Me.  509  (1874) ;  New  Orleans  Nat. 
Bank    v.    Wiltz,    10    Fed.    Rep.    330 


(1881) ;  Goodbar  v.  City  Nat.  Bank,  78 
Tex.  461  (1890) ;  Second  Nat.  Bank  v. 
National  State  Bank,  10  Bush  (Ky.), 
367  (1874);  Lee  v.  Citizens'  Nat. 
Bank,  2  Cin.  Super.  Ct.  (Ohio)  298, 
306  (1872) ;  Evansville  Nat.  Bank  v. 
Metropolitan  Nat.  Bank,  2  Biss.  527 
(1871) ;  s.  c,  8  Fed.  Cas.  891.  In  the 
ease  last  cited,  which  upon  appeal 
was  affirmed  by  the  supreme  court  of 
the  United  States,  it  was  held  that 
such  a  by-law  was  in  its  operation  the 
same  thing  as  though  a  loan  were 
made  by  the  bank  upon  the  security 
of  the  stock  —  a  transaction  forbidden 
by  the  thirty-fifth  section  of  the 
National  Banking  Act.  Conklin  v. 
Second  Nat.  Bank,  45  N.  Y.  655  (1871). 
Cf.  Xenia  Nat.  Bank  v.  Stewart,  107 
U.  S.  676  (1882);  Rosenback  v.  Salt 
Springs  Nat.  Bank,  53  Barb.  495 
(1868).  A  bank,  however,  may  attach 
the  stock  of  one  of  its  stockholders 
for  debts  due  from  him  to  it.  Hagar 
V.  Union  Nat.  Bank,  63  Me.  509 
(1874). 

« Buffalo,  etc.  Co.  v.  Third,  etc. 
Bank,  162  N.  Y.  163  (1900) ;  aff'd,  193 
U.  S.  581. 


1557 


CHAPTER   XXXII. 


DIVIDENDS. 


§  534.  Definition  of  a  dividend  and  the 
four  kinds  of  dividends. 

535.  Scrip  dividends,  property  divi- 

dends, and  bond  dividends. 

536.  Stock  dividends. 

537.  Interest-bearing  stock. 

538.  To  whom  the  corporation  is  to 

pay  the  dividend. 

539.  To  whom  the  dividend  belongs. 

540.  Dividends  must  be  equal  and 

without  preferences. 

541.  A  dividend  declared  and  specif- 

ically set  apart  as  a  distinct 
fund  belongs  absolutely  to 
the  stockholders. 

542.  543.  It  is  a  debt  which  may  be 

collected  by  legal  proceed- 
ings. 
544.  Right  of  the  corporation  to  ap- 
ply dividends  to  the  pay- 
ment of  debts  due  to  it  by 
the  stockholder  —  Dividends 
in  payment  of  subscription 
price  of  stock. 


§  545.  The  courts  very  rarely  compel 
the  directors  to  declare  a 
dividend. 

546.  Dividends  can  usually  be  made 

only  from  profits  —  Excep- 
tions to  this  rule  —  What  are 
profits  which  may  be  used 
for  dividends. 

547.  A    stockholder    may  enjoin    an 

illegal  dividend. 

548.  Dividends    which    impair    the 

capital  stock  may  be  illegal 
and  may  be  recovered  back 
from  the  stockholders  — 
Dividends  on  dissolution. 

549.  Proceedings     to    recover    back 

such  a  dividend. 

550.  The  liability  herein  of  the  cor- 

porate officers. 

551.  Guarantee  of  dividends  by  con- 

tract. 


§  534.  Definition  of  a  dividend  and  the  four  kinds  of  dividends.  — 
A  dividend  is  a  corporate  profit  set  aside,  declared,  and  ordered  by  the 
directors  to  be  paid  to  the  stockliolders  on  demand  or  at  a  fixed  time.^ 
Until  the  dividend  is  declared  these  corporate  profits  belong  to  the  cor- 
poration, not  to  the  stockholders,  and  are  liable  for  corporate  indebted- 
ness.^    But  the  board  of  directors  of  a  bank  has  no  power  to  pledge 


1  Quoted  and  approved  in  McLaren 
V.  Crescent,  etc.  Co.,  117  Mo.  App.  40 
(1906);  and  People  v.  Glvnn,  130 
N.  Y.  App.  Div.  332  (1909);  aff'd, 
198  N.  Y.  605.  Lockhart  v.  Van 
Alstyne,  31  Mich.  76  (1875);  Chafee 
V.  Rutland  R.  R.,55  Vt.  110, 129  (1882) : 
Hyatt  V.  Allen,  .56  N.  Y.  5.53  (1874). 
,"The  term  'dividend,'  in  its  technical 
as  well  as  in  its  ordinary  acceptation, 
means  that  portion  of  its  profits  which 
the  corporation,  by  its  directory,  sets 
apart  for  ratable  division  among  its 
shareholders."  Mobile,  etc.  R.  R.  v. 
Tennessee,  153  U.  S.  486,  496  (1894). 


A  contract  that  certain  dividends 
on  mining  stock  shall  be  applied  to  a 
certain  purpose,  refers  not  to  gross 
proceeds  from  the  sale  of  ore,  but  to 
profits  after  paying  expenses  of  opera- 
tion. Farrell  v.  Garfield,  etc.  Co.,  49 
Colo.  159  (1910). 

-  Quoted  and  approved  in  DeKoven 
V.  Alsop,  205  III.  309  (1903).  See  also 
Robertson  v.  Brulatour,  188  N.  Y.  301 
(1907).  Goodwin  v.  Hardy,  57  Me. 
143,  145  (1869) ;  Rand  v.  Hubbell,  115 
Mass.  461,  474  (1874)  ;  Minot  v.  Paine, 
99  Mass.  101  (1868);  Hyatt  v.  Allen, 
56  N.  Y.  553  (1874) ;  Mickles  v.   Roch- 


1558 


CH.  XXXII. 


DIVIDENDS. 


[§  534. 


its  future  profits,  unless  the  stockholders  assent  thereto.^  The  board 
of  directors  may  agree  to  pay  an  employee  a  certain  per  cent,  of  the  net 
profits  over  and  above  a  certain  dividend.^  An  agreement  of  stock- 
holders that  dividends  shall  be  applied  to  the  payment  of  a  certain 
debt  takes  precedence  over  an  assignment  by  one  of  them  of  his  stock 
to  a  third  person.^ 

A  corporation  may,  in  general,  make  four  different  kinds  of  dividends  : 
namely,  a  dividend  payable  in  cash,  in  stock,  in  bonds  or  scrip,  or  in 
property. 

Dividends  are  declared  by  the  directors  and  not  bv  the  stockholders.'* 


ester  City,  etc.  Bank,  11  Paige,  118 
(1844),  holding  that  stockholders  are 
neither  tenants  in  common  nor  copart- 
ners of  corporate  property.  A  sur- 
plus is  not  a  debt  due  to  the  stock- 
holders and  hence  on  corporate  insol- 
vency stockholders  cannot  claim  it. 
Wedemeyer  v.  Hindelang,  161  Mich. 
600  (1910).  A  stockholder  cannot  sue 
for  his  share  of  the  profits  until  a  divi- 
dend has  been  declared.  Corgan  v. 
George,  etc.  Co.,  218  Pa.  St.  386 
(1907). 

1  Brown  v.  Bradford,  103  Iowa,  378 
(1897). 

2  Fraker  v.  Hyde  &  Sons,  135  N.  Y. 
App.  Div.  64  (1909).  A  by-law  that 
employees  shall  participate  in  surplus 
earnings  may  constitute  a  contract 
with  them  if  they  have  performed. 
Zwolanek  v.  Baker  Mfg.  Co.,  150 
Wis.  517  (1912).  A  contract  by 
which  an  employee  is  entitled  to  a 
part  of  the  profit  applies  to  a  profit 
realized  during  the  final  winding  up. 
Re  Spanish,  etc.  Co.  Ltd.,  103  L.  T. 
Rep.  609  (1910).  Where  the  salary 
of  a  salesman  is  a  proportion  of  the 
profits,  salaries  paid  to  directors  are 
to  be  deducted  from  the  receipts 
before  arriving  at  the  profits.  Gaul 
V.  Kiel,  etc.  Co.,  199  N.  Y.  472  (1910). 
A  percentage  of  the  net  profits  going 
to  an  employee  for  his  services  is  a 
part  of  the  expenses  of  the  business, 
and  not  a  part  of  the  accumulated 
profits.  Bennett  v.  Millville  Imp. 
Co.,  67  N.  J.  L.  320  (1902).  A  con- 
tract with  an  insurance  agent  whereby 
he  has  an  interest  in  all  policies  placed 
by  him  is  not  an  interference  with  the 
discretion  of  future  boards  of  direc- 
tors.    Schrimplin     v.     Farmers',     etc. 


Assoc,  123  Iowa,  102  (1904).  The 
agreement  of  a  corporation  to  pay  an 
employee  half  of  its  profits  does  not 
create  a  partnership.  Belch  v.  Big 
Store  Co.,  46  Wash.  1  (1907).  A 
corporation  by  the  action  of  its  board 
of  directors  and  consent  of  all  its 
stockholders  may  agree  that  a  certain 
percentage  of  its  profits  shall  be  paid 
annually  to  a  person  for  services 
already  rendered  by  him.  In  a  suit 
by  him  to  enforce  such  agreement, 
and  asking  an  injunction  against  any 
sales  of  stock,  except  with  notice  of 
such  agreement,  stockholders  are  neces- 
sary parties  defendant.  Such  an 
agreement  is  not  an  exclusion  of 
future  boards  of  directors  from  the 
management  of  the  company.  Dupig- 
nac  V.  Bernstrom,  76  N.  Y.  App.  Div. 
105  (1902).  C/.  §678,  iJifra.  The 
president  and  general  manager  of  an 
insurance  company  who  controls  it 
by  proxies  and  who  has  a  contract 
giving  him  a  percentage  of  the  insur- 
ance premium  for  twenty-five  years, 
and  who  four  years  before  its  expira- 
tion becomes  incapacitated  and  sells 
the  contract  to  another  party,  and 
causes  the  corporation  to  ratify  it, 
may  be  compelled  to  pay  over  such 
price  to  the  company.  Moulton  v. 
Field,  179  Fed.  Rep.  673  (1910). 
A  director  may  by  contract  be  given 
a  salary  and  an  interest  in  the  profits 
for  a  term  of  vears.  WainwTight  v. 
Roots  Co.,  97  N.'E.  Rep.  8  (Ind.  1912). 

^  Farquhar  v.  Canada,  etc.  Co., 
212  Mass.  278  (1912) ;  cf.  Campbell 
V.  American  Zylonite  Co.,  122  N.  Y. 
455. 

^  See  §  545,  infra. 


1559 


§534. 


DIVIDENDS. 


[CH.  XXXII. 


A  division  of  profits  without  the  formahty  of  declaring  a  dividend  is 
equivalent  to  a  dividend.^    A  division  of  the  profits  is  a  dividend  even 

1  "A  division  of  profits  without  the  the  present  ease  we  apply  this  doctrine 
formality  of  declaring  a  dividend  is  to  the  non-observance  of  legal  forms 
the  equivalent  of  declaring  a  divi-  respecting  the  creation  of  preferred 
dend."  Hartley  v.  Pioneer  Iron  stock,  the  abandonment  by  preferred 
Works,  181  N.  Y.  73  (1905).  Rorke  stockholders  of  voting  powers,  the 
v.  Thomas,  56  N.  Y.  559  (1874) ;  Read-  resignation  of  directors,  the  reduction 
ing  Trust  Co.  v.  Reading  Ironworks,  of  the  number  of  directors  from  six  to 
137  Pa.  St.  282  (1890) ;  McKusick  v.  three,  and  the  apportionment  of  divi- 
Seymour,  etc.  Co.,  48Minn.  172  (1892).  dends  as  between  the  stockholders 
See  also  §  572a,  i?ifra.  Even  though  entitled  thereto.  In  respect  to  these 
two  persons  own  all  the  stock  of  a  matters  the  jury  was  fully  justified 
company  and  one  of  them  converts  in  finding  that  unanimous  consent  of 
its  funds,  yet  a  settlement  by  which  the  stockholders  of  the  defendant 
he  pays  a  certain  amount  to  the  other  company  had  been  given,  and  had  been 
stockholder  is  not  enforceable.  Rein-  acted  on  in  good  faith  by  the  plain- 
ecke  V.  Bailey,  112  S.  W.  Rep.  569  tiff  and  others  concerned  during  a 
(Ky.  1908).  One  corporation  owning  course  of  years,  and  that  plaintiff 
all  the  stock  of  another  corporation  could  not  be  restored  to  the  stahis 
may  take  the  profits  of  the  latter  quo  ante,  were  the  assent  of  his 
without  a  formal  dividend  if  other  fellow  stockholders  and  of  the 
parties  are  not  prejudiced.  Central,  company  to  be  now  withdrawn." 
etc.  Ry.  V.  Central  Trust  Co.,  135  Where  the  directors  turn  over  the 
Ga.  472  (1910).  A  resolution  of  a  assets  to  a  stockholder  this  is  the 
stockholders'  meeting  at  which  the  same  as  a  declaration  and  payment  of 
directors  are  present,  that  it  will  a  dividend,  and  if  it  renders  the  com- 
divide  certain  assets,  is  valid  if  carried  pany  insolvent  the  directors  are  lia- 
out,  even  though  there  is  no  formal  ble  under  the  Massachusetts  statute. 
declaration.  Spencer  v.  Lowe,  198  Pennsylvania  Iron  Works  v.  Mae- 
Fed.  Rep.  961  (1912).  A  dividend  is  kenzie,  190  Mass.  61  (1906).  A  reso- 
a  dividend  although  informally  de-  lution  will  be  construed  as  equivalent 
clared  and  paid,  especially  where  one  to  a  dividend  where  any  other  con- 
person  is  practically  the  corporation,  struetion  would  amount  to  an  illegal 
Smith  V.  Moore,  199  Fed.  Rep.  689  preference  among  the  stockholders. 
(1912).  Even  though  dividends  are  Redhead  v.  Iowa  Nat.  Bank,  127  Iowa, 
declared  and  paid  by  the  president  572  (1905).  A  dividend  paid  by  the 
and  treasurer  without  any  action  treasurer  without  authority  of  the- 
of  the  directors,  yet  they  are  legal  board  of  directors  may  be  recovered 
dividends.  Childs  v.  Adams,  43  Pa.  back,  even  though  there  were  only 
Sup.  Ct.  239  (1910).  Where  there  are  about  three  stockholders  and  they  all 
but  a  few  stockholders  in  a  corpora-  participated.  The  corporation  having 
tion  and  without  any  formal  corporate  passed  into  other  hands,  a  suit  may 
action  they  turn  a  part  of  the  capital  be  maintained.  Cheat  Valley  R.  R.  v. 
into  preferred  stock  and  thereafter  Humes,  211  Pa.  St.  287  (1905).  Even 
divide  the  profits  among  themselves  though  the  same  people  own  the  stock 
without  declaring  technical  dividends  of  two  gas  companies  and  cause  one 
with  the  knowledge  and  consent  of  all  to  turn  its  profits  over  to  the  other, 
the  stockholders,  no  one  of  them  nor  this  does  not  extinguish  the  separate 
the  corporation  itself  can  subse-  corporate  existence.  Punxsutawney 
quently  complain  and  defeat  a  suit  Borough  v.  Philips,  etc.  Co.,  85  Atl. 
by  one  of  them  for  the  amount  so  Rep.  1003  (Penn.  1913).  A  dividend 
credited  to  him  on  the  books,  cor-  may  be  legal,  even  though  not  form- 
porate  creditors  not  being  injured,  ally  declared,  it  being  paid  by  common 
Breslin  v.  Fries-Breslin  Co.,  70  N.  J.  L.  consent,  and  hence  cannot  be  recovered 
274    (1904).      The   court   said:      ."In  back  on  that  ground  after  being  actu- 

1.500 


CH.  XXXII.] 


DIVIDENDS. 


[§  534. 


though  not  called  such  and  not  considered  such  by  the  directors  and 
stockholders.^  It  is  legal  for  a  corporation  to  distribute  its  profits 
by  the  payment  of  salaries,  pro\'ided  all  the  stockliolders  assent  thereto.^ 
A  stockholder  cannot  prove  by  parol  that  a  dividend  was  declared,  the 
records  not  showing  the  same.  His  remedy  is  by  proceedings  to  correct 
the  corporate  record.^ 

Numerous  cases  on  the  definition  of  the  word  "  dividend  "  have 
arisen  in  connection  with  the  taxation  of  corporations.^     Corporations 


ally  paid.  Berrvman  v.  Bankers',  etc. 
Co.,  117  N.  Y.  App.  Div.  730  (1907). 
Where  a  fixed  per  cent,  is  paid  annually 
to  stockholders  instead  of  dividends 
and  charged  to  them,  and  the  stock 
held  in  pledge  for  the  same,  such  a 
payment  to  the  life  tenant  does  not 
create  a  valid  lien  on  the  stock  as 
against  the  remainderman.  Reading 
Trust  Co.  V.  Reading  Ironworks,  137 
Pa.  St.  282  (1890).  The  stockholders 
may  agree  among  themselves  inform- 
ally to  distribute  a  certain  sum  as 
dividends  without  going  through  the 
form  of  corporate  action.  No 
formal  declaration  is  necessary,  either 
by  the  stockholders  or  board  of  direc- 
tors, and  a  distribution  of  profits  by  a 
unanimous  consent  without  corporate 
action  is  legal.  Groh's  Sons  v.  Groh, 
80  N.  Y.  App.  Div.  85  (1903) ;  rev'd 
on  another  point  in  177  N.  Y.  8. 

1  Quoted  and  approved  in  Barnes 
V.  Spencer  &  Barnes  Co.,  162  Mich. 
509  (1910).  Commonwealth  v.  Pitts- 
burg, etc.  Ry.,  74  Pa.  St.  83,  90  (1873), 
holding  that  a  stock  dividend  was  not 
such  a  dividend  as  entered  into  a  rate 
of  taxation.  Lehigh  Crane  Iron  Co. 
V.  Commonwealth,  55  Pa.  St.  448 
(1867),  where  the  capital  stock  was 
$100,000,  but  dividends  were  declared 
on  an  assumed  capital  of  $1,000,000, 
the  property  being  worth  the  latter 
figure  by  reason  of  profits  invested  in  it. 
The  same  device  was  resorted  to  in 
Citizens',  etc.  Ry.  v.  Philadelphia,  49 
Pa.  St.  251  (1865).  "Dividends 
declared,"  as  used  in  an  employee's 
contract  of  payment  for  services,  the 
rate  of  payment  being  according  to 
such  "dividend,'!  were  construed  to 
mean  profits,  even  though  not  dis- 
tributed by  dividends,  the  intent  being 
clear.     Acceptance  of  part  payment  is 


no  bar  to  an  action  to  collect.  Scase 
V.  Gillette-Herzog  Mfg.  Co.,  55  Minn. 
349  (1893).  Where  large  salaries  are 
paid,  instead  of  declaring  dividends, 
the  object  being  "concealment  and 
delusion,"  the  court  wall  not  hold  that 
such  "salaries"  are  a  part  of  the  man- 
ufacturing expense  of  a  defendant 
guilty  of  infringing  a  patent.  Rubber 
Co.  V.  Goodyear,  9  Wall.  788  (1869) ; 
Seabury  v.  Am  Ende,  152  U.  S.  561 
(1894).  A  stockholder  cannot  main- 
tain a  suit  for  a  dividend  which  the 
stockholders  informally  agreed  should 
be  declared,  but  which  never  was 
declared.  American  Wire  Nail  Co. 
V.  Gedge,  96  Ky.  513  (1895).  A  dis- 
tribution of  bonds  among  the  stock- 
holders is  a  bond  dividend.  "The 
form  of  the  distribution  is  immaterial 
so  long  as  there  is  a  distribution  of 
profits."  Thayer  v.  Burr,  134  N.  Y. 
App.  Div.  889  (1909) ;  modified,  201 
N.  Y.  155. 

2  Fitchett  V.  Murphy,  46  N.  Y.  App. 
Div.  181  (1899).  Where  all  the  stock- 
holders consent  to  the  payment  of 
large  salaries  leaving  the  corporation 
solvent,  creditors  cannot  subsequently 
complain.  Watts  v.  Gordon,  153  S.  W. 
Rep.  483  (Tenn.  1913).  Where  all 
the  stockholders  are  officers,  and, 
instead  of  dividends,  the  corporation 
distributes  its  profits  by  large  salaries, 
there  is  danger  that  upon  the  death 
of  one  of  them  others  may  continue 
the  payment  of  such  salaries  to  them- 
selves, even  though  they  are  executors 
of  the  deceased  officer's  estate.  Matter 
of  Schaefer,  65  N.  Y.  App.  Div.  378 
(1901);afE'd,  171  N.  Y.  686. 

3  Dennis  v.  Joslin  Mfg.  Co.,  19  R.  I. 
666  (1896). 

*  A  tax  upon  the  receipts  of  u  rail- 
road   is    not    a    tax    upon    dividends. 


1561 


§  535. 


DIVIDENDS. 


[CH.   XXXII. 


have  inherent  power  to  declare  and  pay  dividends,  even  though  they 
have  no  capital  stock.^ 

§  535.  Scrip  dividends,  property  dividends,  and  bond  dividends. 
—  A  scrip  dividend  is  a  dividend  of  certificates  giving  the  holder  cer- 
tain rights  which  are  specified  in  the  certificate  itself.  These  dividends 
are  usually  declared  when  the  company  has  profits  which  are  not  in 
the  shape  of  money,  but  are  in  other  forms  of  property,  and  the  com- 
pany wishes  to  anticipate  the  time  when  the  property  may  be  sold  for 
cash,  and  the  cash  distributed  by  a  money  dividend.^  The  certificate 
sometimes  entitles  the  holder  to  a  sum  of  money  payable  with  interest 
at  a  certain  time  after  date,  or  at  the  option  of  the  company,  or  when  the 
company  shall  have  accumulated  sufficient  surplus  to  pay  the  certificates 
in  full.  Sometimes  the  certificates  are  certificates  of  indebtedness,  and 
are  made  convertible,  at  the  option  of  the  holder,  into  bonds  or  stock ;  ^ 


Comm'rs,  etc.  v.  Buekner,  48  Fed.  Rep. 
533  (1891).  Profits  applied  to  better- 
ments are  not  "dividends  earned" 
within  the  meaning  of  a  statute  impos- 
ing taxation.  State  v.  Comptroller, 
54  N.  J.  L.  135  (1891).  Where  all 
the  shares  are  reduced  in  par  value 
from  $50  to  $38,  and  the  $12  differ- 
ence is  paid  to  the  stockholders  in 
cash,  this  is  a  reduction  of  capital 
stock,  and  not  a  dividend,  and  can- 
not be  taxed  as  a  dividend.  Com- 
monwealth V.  Central  Transp.  Co.,  145 
Pa.  St.  89  (1891).  Where  a  tax  is 
levied  on  dividends  the  officers  can- 
not defend  on  the  ground  that  the 
dividend  was  illegal.  Central  Nat. 
Bank  v.  U.  S.,  137  U.  S.  355  (1890). 
In  Commonwealth  v.  Pittsburg,  etc. 
Ry.,  74  Pa.  St.  83  (1873),  a  lessor 
company  having  twelve  per  cent,  div- 
idends guaranteed  on  its  stock  declared 
a  stock  dividend  so  that  the  guarantee 
should  be  seven  per  cent,  on  the  stock 
thus  increased.  The  court  held  that 
such  a  dividend  did  not  subject  the 
company  to  a  tax  based  on  dividends. 
In  Louisiana  taxes  are  assessed  on 
franchises,  the  value  of  which  is 
ascertained  from  the  earning  capacity 
of  the  corporation.  Crescent  City  R. 
Co.  V.  New  Orleans,  44  La.  Ann.  1057 
(1892);  New  Orleans,  etc.  R.  Co.  v. 
New  Orleans,  44  La.  Ann.  1053  (1892) ; 
New  Orleans,  etc.  R.  Co.  v.  New 
Orleans,  44  La.  Ann.  1055  (1892). 
1  In  McKean  v.  Biddle,  181  Pa.  St. 


361  (1897),  where  a  mutual  insurance 
company  for  one  hundred  and  thirty- 
two  years  had  not  paid  dividends, 
but  had  accumulated  a  surplus  of 
over  four  million  dollars,  the  court 
held  that  the  company  might  resume 
the  payment  of  dividends.  The  court 
also  held  that  every  corporation  has 
the  inherent  right  to  declare  divi- 
dends. 

2  Quoted  and  approved  in  re  Robin- 
son's Trust,  218  Pa.  St.  481  (1907). 
A  scrip  dividend  is  resorted  to  where 
the  company  has  profits  but  not  the 
cash.  Barnes  v.  Spencer  &  Barnes 
Co.,  162  Mich.  509  (1910). 

3  Quoted  and  approved  in  re  Robin- 
son's Trust,  218  Pa.  St.  481  (1907). 
Chafifee  v.  Rutland  R.  R.,  55  Vt.  110 
(1882) ;  State  v.  Baltimore,  etc.  R.  R., 
6  Gill  (Md.),  363  (1848).  In  Rogers 
V.  New  York,  etc.  Land  Co.,  134  N.  Y. 
197  (1892),  land  had  been  sold  to  the 
company  for  a  certain  amount  of  pre- 
ferred stock,  and  also  a  certain  amount 
of  "land  scrip,"  such  scrip  entitling 
the  holder  to  exchange  them  for  land  so 
conveyed  at  a  price  to  be  thereafter 
determined.  The  company  had  the 
right  to  pay  off  the  scrip  and  retire  it. 
The  company  sold  part  of  the  land, 
and  then  proceeded  to  make  a  scrip 
dividend  of  the  scrip  so  taken  up  by  it. 
A  dissenting  scripholder  brought  suit 
to  undo  the  transaction  on  the  ground 
that  the  scrip  taken  up  by  the  company 
should  be   canceled.     The  court  sus- 


1562 


CH.  xxxn.] 


DIVIDENDS. 


[§  535. 


and  sometimes  the  certificate  entitles  the  holder  to  exchange  the  cer- 
tificate for  lands  of  the  corporation  to  an  amount  equivalent  in  value 
to  the  face  value  of  the  certificate ;  or  to  receive  from  the  corporation 
any  other  benefit  or  advantage  which  the  corporation  may  lawfully 
confer.^  Sometimes  the  certificate  so  far  partakes  of  the  character 
of  a  certificate  of  stock  as  to  entitle  the  holder  to  dividends.-    Where 


tained  his  action,  and  held  that  from 
the  original  contract  it  was  clear  that 
the  land  was  received  as  a  trust  fund 
to  ultimately  pay  off  the  scrip. 
Reversing  Rogers  v.  Phelps,  9  N.  Y. 
Supp.  886  (1890).  In  Brown  v. 
Lehigh,  etc.  Co.,  49  Pa.  St.  270  (1865), 
a  dividend  of  scrip  had  been  declared. 

The  form  of  this  scrip  dividend  is 
given  in  Vol.  V,  infra.  Several  years 
after  the  issue,  the  mortgage  being 
paid  off,  the  scripholders  claimed 
that  they  were  entitled  to  back  div- 
idends equal  to  past  dividends  paid 
on  the  stock.  The  court  held,  how- 
ever, that  the  terms  of  the  contract 
did  not  give  any  such  right,  and 
that  dividends  commenced  only  from 
the  time  the  scrip  was  converted  into 
stock. 

The  holder  of  a  certificate  of  indebt- 
edness convertible  into  stock  cannot 
claim  an  interest  in  a  stock  dividend 
until  he  has  converted  the  scrip  into 
stock.  Miller  v.  Illinois  Central  R.  R., 
24  Barb.  312  (18.57);  Brundage  v. 
Brundage,  65  Barb.  397  (1873) ;  aff'd, 
60  N.  Y.  544  (1875),  holding  that 
assignable  "interest  certificates"  repre- 
senting earnings  spent  for  improve- 
ments, and  payable  out  of  future 
earnings  with  dividends,  or  convert- 
ible into  stock  at  the  company's 
option,  did  not  pass  with  a  bequest  of 
a  life  interest  in  certain  shares  of  the 
stock.  See  also,  in  general,  Butler  v. 
Glen  Cove,  etc.  Co.,  18  Hun,  47  (1879). 
Also  §  283,  supra.  Cf.  Bailey  v.  Cit- 
izens' Gas  Light  Co.,  27  N.  J.  Eq.  196 
(1876).  The  court  in  this  case,  speak- 
ing of  a  dividend  of  interest-bearing 
securities,  said:  "That  the  company 
had  no  lav/ful  authority  for  issuing  the 
certificates  cannot  be  doubted."  In 
Merz  V.  Interior  Conduit,  etc.,  87 
Hun,  430  (1895),  the  issue  of  bonds  to 
pay  certificates  of  indebtedness  which 
had   been   issued   as   a   dividend   was 


enjoined.  The  dissenting  opinion  in 
this  ease  seems  the  better  view.  A 
scrip  entitling  a  person  named  to 
bonds  may  be  assigned,  even  though 
by  its  terms  it  can  be  assigned  only 
with  the  assent  of  the  corporation 
issuing  the  same.  Hubbard  v.  Man- 
hattan Trust  Co.,  87  Fed.  Rep.  51 
(1898). 

1  Where  a  scrip  dividend  is  issued 
representing  the  surplus,  such  scrip 
is  collectible  within  a  reasonable  time, 
even  though  by  its  terms  it  is  payable 
at  the  pleasure  of  the  company,  and 
especially  is  it  collectible  where  some 
of  the  holders  of  the  scrip  dividend 
have  been  paid  and  others  not.  Bil- 
lingham  v.  Gleason  Mfg.  Co.,  101 
N.  Y.  App.  Div.  476  (1905) ;  aff'd,  185 
N.  Y.  571.  A  dividend  by  a  railroad 
company  of  participation  certificates 
in  the  corporate  assets  set  aside  for 
that  purpose  is  not  a  dividend  going 
to  a  life  tenant.  Matter  of  Bunker, 
77  N.  Y.  Misc.  Rep.  320  (1912). 

2  Bailey  v.  Railroad  Co.,  22  Wall. 
604  (1874).  Cf.  Brundage  v.  Brun- 
dage, 60  N.  Y.  544  (1875). 

For  form  of  resolution  authorizing 
scrip  dividend,  see  Vol.  V,   infra. 

This  was  the  famous  scrip  dividend 
made  by  the  New  York  Central  R.  R. 
Co.  under  the  management  of  Com- 
modore Vanderbilt.  The  form  is  given 
in  Vol.  V,  infra. 

See  Bailey  v.  Railroad  Co.,  22  Wall. 
604,  608  (1874).  This  dividend  was 
declared  although  the  company  by  its 
charter  was  limited  to  ten  per  cent, 
dividends. 

A  di\'idend  of  scrip  —  i.e.,  a  paper 
entitling  the  holder  to  di\ddends  equal 
to  dividends  thereafter  declared  on 
the  capital  stock  —  is  practically  a 
stock  di\ddend,  except  that  the  scrip 
cannot  vote,  and  provision  is  gen- 
erally made  for  taking  it  up  in  some 
manner.     Such    a    dividend    was    in- 


1563 


§  535.] 


DIVIDENDS. 


CH.  XXXII. 


the  corporation,  having  a  large  surplus,  issues  such  certificates,  they  are 
held  not  to  transfer  the  title  to  that  surplus  from  the  corporation  to 
holders  of  the  certificates.^  In  general  the  issue  of  scrip  dividends  may 
be  entirely  lawful,  and  they  are  upheld  by  the  courts.  But  when  they 
are  declared  in  fraud  of  the  rights  of  third  parties  they  may  be  set  aside. ^ 
The  public  service  commission  of  New  York  in  1908  held  that  under 
the  New  York  statute  of  1907  a  New  York  railroad  company  could  not 
issue  a  dividend  of  interest-bearing  warrants  or  notes. 

Scrip  may  be  practically  the  same  thing  as  shares  of  stock,  except 
that  it  has  no  voting  power.  It  is  issued  sometimes  because  the  com- 
pany cannot  issue  any  more  capital  stock,  the  whole  capital  stock  being 
already  out ;  sometimes  to  avoid  taxes,  and  sometimes  to  increase  the 
transferable  shares  without  giving  to  the  new  shares  a  voting  power.^ 
If  the  interest  or  dividends  are  payable  only  from  the  profits,  the  issue 
of  the  scrip  is  legal  whenever  a  stock  dividend  would  be  legal,  that  is, 
whenever  the  property  of  the  company  is  equal  in  value  to  the  capital 
stock  plus  the  scrip  dividend. 

A  property  dividend  is  where  property  is  divided  instead  of  that 
property  being  sold  for  cash  and  the  cash  then  used  to  pay  a  dividend."^ 


volved  in  Gordon  v.  Richmond,  etc. 
R.  R.,  78  Va.  501  (1884).  Quoted  and 
approved  in  re  Robinson's  Trust,  218 
Pa.  St.  441  (1907). 

1  People  V.  Board  of  Assessors,  76 
N.  Y.  202  (1879),  affirming  s.  c,  16 
Hun,  196.  In  this  case  it  was  held 
that  the  issue  of  these  certificates 
could  not  operate  to  relieve  the  cor- 
poration from  their  obligations  to 
pay  their  tax  upon  the  surplus,  because 
the  surplus  remained  in  the  hands  of 
the  company,  and  as  such  was  liable 
to  assessment  and  taxation.  See  also 
Bailey  v.  Raih-oad  Co.,  22  Wall.  604 
(1874).  See  also  Gordon  v.  Richmond, 
etc.  R.  R.,  78  Va.  501  (1884). 

2  While  negotiations  were  pending 
between  two  gas  companies  for  their 
consolidation  by  one  company  buying 
the  stock  of  the  other,  upon  a  certain 
basis  of  capital  and  indebtedness,  one 
of  them,  without  the  knowledge  of  the 
other,  passed  a  resolution  declaring 
a  scrip  dividend  of  ten  per  cent,  on 
its  capital  stock,  thus  increasing  its 
indebtedness  by  that  amount.  The 
certificates  were  accordingly  issued ; 
but  after  the  consolidation,  upon  a 
bill  filed  for  that  purpose,  the  scrip 
was  declared  void.     Bailey  v.  Citizens' 


Gas  Light  Co.,  27  N.  J.  Eq.  196 
(1876). 

5  Where  one  street  railway  com- 
pany takes  a  lease  of  the  street  railways 
of  three  other  companies  on  an  agree- 
ment whereby  the  stock  of  the  latter 
companies  is  deposited  with  a  trustee, 
and  the  lessee  issues  "stock  trust  cer- 
tificates" therefor,  being  its  obliga- 
tion to  pay  a  fixed  rate  of  interest  per 
year,  with  an  option  on  its  part  to 
pay  the  principal  sum  or  not  at  its 
option  at  a  specified  time,  the  stock 
being  security  therefor  to  be  sold  by 
the  trustee  in  ease  the  principal  and 
interest  are  not  paid,  this  form  of 
financing  does  not  create  a  debt,  and 
hence  such  certificates  are  not  subject 
to  taxation  as  a  bond  and  mortgage, 
the  transaction  being  really  a  guaran- 
teed dividend  or  rental.  Common- 
wealth V.  Union,  etc.  Co.,  192  Pa.  St. 
507  (1899). 

*  An  amendment  to  the  charter  may 
prescribe  that  unnecessary  corporate 
real  estate  shall  be  divided  or  parti- 
tioned among  the  stockholders.  Mer- 
chant V.  Western  Land  Assoc,  56 
Minn.  327  (1894).  Where  a  com- 
pany has  in  its  treasury  stock  in 
another  company,   and   distributes  it 


1564 


CH.   XXXII.] 


DIVIDENDS. 


[§  535. 


A  property  dividend  occurs  where  a  corporation  sells  all  its  property 
to  another  corporation  and  takes  in  payment  therefor  the  stock  and 
the  bonds  of  the  purchasing  corporation  and  then  makes  a  distribution 
of  the  same  among  its  stockholders.  It  has  been  held  that  any  one  of 
its  stockholders  may  object  and  insist  on  payment  for  his  stock  in  cash.^ 
This,  however,  is  practically  a  dissolution  of  the  company  and  a  dis- 
tribution of  its  assets,  a  subject  which  is  considered  elsewhere.^  A 
dividend  of  stock  which  a  corporation  owns  in  another  corporation  is 
not  a  stock  dividend.^ 

A  dividend  or  distribution  of  the  company's  bonds  among  its  stock- 
holders is  legal,  if  the  capital  stock  is  not  thereby  impaired.*     Unless 


among  its  stockholders,  this  is  a  div- 
idend. Allegheny  v.  Pittsburg,  etc. 
Ry.,  179  Pa.  St.  414  (1897).  Where 
corporate  land  is  deeded  by  way  of 
dividend  or  distribution  among  stock- 
holders, there  is  no  warranty  of  title. 
Olsen  V.  Homestead,  etc.  Co.,  87  Tex. 
368  (1894). 

»  See  §  671,  infra. 

2  See  §  548,  infra. 

3  Inasmuch  as  such  a  dividend  must 
leave  the  capital  stock  intact  it  may  be- 
long to  a  life  tenant.  Gray  v.  Hemen- 
way,  212  Mass.  239  (1912).  A  divi- 
dend of  property,  namely,  stock  in 
another  corporation,  is  the  same  as  a 
cash  dividend  and  belongs  to  a  life 
tenant.  Union,  etc.  T.  Co.  v.  Taintor, 
85  Conn.  452  (1912). 

^  See  §  766,  infra.  Where  a  joint- 
stock  association  having  $12,000,000 
surplus  invested  in  securities  issues 
its  bonds  to  the  amount  of  $12,000,000 
to  its  stockholders  as  a  dividend  in 
place  of  distributing  such  securities 
or  the  proceeds  thereof,  the  interest 
on  the  bonds  to  be  paid  only  from  the 
income  from  the  securities  after  pay- 
ing the  debts,  such  bonds  do  not  be- 
long to  a  life  tenant,  but  belong  to  the 
remaindermen.  D'Ooge  v.  Leeds,  176 
Mass.  558  (1900),  the  court  saying: 
"If  this  company  had  been  a  corpora- 
tion, and  had  wished  to  make  a  divi- 
dend of  preferred  stock  to  its  share- 
holders, it  would  have  done  it  in  just 
this  way.  There  has  been  no  divi- 
dend of  any  money  or  property  among 
the  shareholders.  There  has  been 
merely  a  change  of  the  form  of  the 
ownership  in  the  property  by  dividing 
it  into  two  classes,  and  by  making  a 


different  provision  in  regard  to  divi- 
dends foi;  each  class,  and  by  giving 
one  class  a  preference  over  the  other 
in  its  right  to  the  assets  on  final  liqui- 
dation. Not  a  dollar's  worth  of  the 
property  of  the  company  is  taken  out 
of  the  business,  or  changed  in  its 
relation  to  the  business.  ...  It  is 
plain  that  the  action  of  the  company 
was  like  making  a  dividend  of  pre- 
ferred stock.  It  was  a  more  formal 
capitalization  of  earnings  which  pre- 
viously had  been  capitalized  in 
substance  and  effect."  Where  an  ex- 
press company,  being  an  unincorpo- 
rated stock  association,  has  $12,- 
000,000  sm-plus  and  invests  it  in 
outside  securities,  and  then  deposits 
the  securities  with  a  trust  company 
in  New  York,  and  then  makes  a 
bond  dividend,  the  bonds  to  be  pay- 
able only  out  of  such  securities,  and 
the  creditors  of  the  company  to  have 
recourse  to  such  securities,  a  tax  can- 
not be  le-vded  thereon  in  Kentucky. 
Coulter  V.  Weir,  127  Fed.  Rep.  897 
(1904),  modified  in  128  Fed.  Rep. 
1019.  It  is  proper  for  a  corporation 
to  issue  stock  or  bonds  to  represent 
profits  which  have  been  used  in  chang- 
ing the  location  of  its  plant,  or  enlarg- 
ing the  plant,  even  though  a  part  of  the 
old  plant  is  dismantled  and  abandoned. 
Matter  of  Watertown,  etc.  Co.,  127 
N.  Y.  App.  Div.  462  (1908).  A  dis- 
tribution of  bonds  among  the  stock- 
holders is  a  bond  dividend.  "The 
form  of  the  distribution  is  immaterial 
so  long  as  there  is  a  distribution  of  prof- 
its." Thayer  ■?'.  Burr,  134  N.  Y.  App. 
Div.  889  (1909) ;  modified  201  N.  Y. 
155.     A     bond     and     scrip     dividend 


1565 


§  536. 


DIVIDENDS. 


[CH.   XXXII. 


some  statute  prohibits  it,  or  some  one  objects,  a  corporation  may  de- 
clare a  dividend  out  of  its  capital  stock,  subject  to  the  common-law 
hability  for  so  doing.^ 

In  the  absence  of  a  special  provision  to  the  contrary,  dividends  will 
be  presumed  to  be  payable  in  cash,  and  in  lawful  or  current  money .^ 
But  where  the  dividend  is  paid  in  depreciated  currency,  a  stockholder 
cannot  insist  that  he  shall  be  paid  any  more  than  what  the  depreciated 
currency  is  worth  in  regular  currency.^ 

§  536.  Stock  dividends.  —  A  stock  dividend,  as  the  name  imports, 
is  a  dividend  of  the  stock  of  the  corporation.  Such  a  dividend  is  lawful 
when  an  amount  of  money  or  property  equivalent  in  value  to  the  full 
par  value  of  the  stock  distributed  as  a  dividend  has  been  accumulated 
and  is  permanently  added  to  the  capital  stock  of  the  corporation." 
Corporations  frequently  make  a  dividend  of  this  character  when  im- 
provements of  the  corporate  property  or  extensions  of  the  business 
have  been  made  out  of  the  profits  earned.  It  is  also  made  when  the 
corporate  plant  has  increased  in  value,  and  it  seems  better  to  issue  new 


representing  earnings  in  part  and  part 
in  increased  value  of  investments,  be- 
longs to  the  life  tenant  as  to  the  earn- 
ings, and  to  the  remainderman  as  to 
the  increased  value  of  the  investments. 
Thayer  v.  Burr,  201  N.  Y.  155  (1911). 

1  A  statutory  liability  for  dividends 
paid  out  of  the  capital  stock  abro- 
gates all  common-law  liability,  and  if 
such  statute  does  not  prohibit  such 
dividends  they  may  be  declared  and 
paid  subject  to  such  liability.  People 
V.  Barker,  141  N.  Y.  251  (1894).  See 
also  §§  546,  548,  671,  infra.  A  stock- 
holder may  enjoin  the  company  from 
issuing  .S50,000  of  bonds  to  the  stock- 
holders as  a  bonus,  the  same  being 
in  violation  of  the  constitution,  there 
being  no  proof  of  undivided  profits  to 
that  amount.  American,  etc.  Co.  v. 
Crane,  142  Ala.  620  (1905). 

2  Ehle  V.  Chittenango  Bank,  24 
N.  Y.  548  (1862). 

3  Back  dividends  may  be  recovered 
on  stock  which  has  been  illegally  con- 
fiscated; but  where  the  dividends  to 
other  stockholders  were  paid  in  Con- 
federate currency,  the  back  dividends 
paid  after  the  war  to  a  northern 
stockholder  should  be  a  sum  equal  in 
value  to  the  Confederate  currency 
when  the  dividends  were  declared. 
Keppel   V.  Petersburg   R.  R.,  Chase's 

1566 


Dec.  167  (1868) ;  s.  c,  14  Fed.  Cas. 
357 ;  Scott  v.  Central  R.  R.,  etc.  Co., 
52  Barb.  45  (1868).  In  this  case  two 
of  the  three  judges  held  that  though 
the  dividends  were  declared  without 
specifying  how  they  should  be  paid, 
yet  where  they  were  paid  as  a  matter 
of  fact  in  depreciated  Confederate  cur- 
rency, a  northern  stockholder  could 
not,  after  the  war,  claim  the  same 
dividends  payable  in  United  States 
currency. 

^  Quoted  and  approved  in  Alsop  v. 
De  Koven,  107  111.  App.  Rep.  190, 
209  (1903);  aff'd,  205  111.  309.  A 
stock  dividend  is  legal  if  an  equivalent 
amount  of  profits  are  permanently 
added  to  the  corporate  property. 
Bryan  v.  Aikin,  82  Atl.  Rep.  817  (Del. 
1912).  Where  preferred  shares  in  an 
unincorporated  trusteeship  to  hold 
stock  in  corporations  are  issued  by 
the  trusteeship  to  the  preferred  share- 
holders to  pay  arrears  of  preferred 
dividends,  a  life  tenant  of  an  estate 
owning  preferred  shares  is  entitled 
only  to  the  income  from  such  newly 
issued  shares,  there  not  having  been 
any  profits  added  to  the  capital  as 
representing  such  increased  preferred 
shares.  Gardiner  v.  Gardiner,  212 
Mass.  508  (1912). 


CH.  XXXlI.] 


DIVIDENDS. 


[§  536. 


stock  to  represent  the  excess  of  value  than  to  sell  the  increase  and  de- 
clare a  cash  dividend.  In  this  country  these  dividends  are  frequently 
made,  and  are  sustained  by  the  courts.^     Even  though  a  stock  dividend 


1  Quoted  and  approved  in  De  Koven 
V.  Alsop,  205  111.  309  (1903) ;  Williams 
V.  Western  Union  Tel.  Co.,  93  N.  Y. 
162,  188  et  seq.  (1883);  Dock  v. 
Schliehter,  etc.  Co.,  167  Pa.  St.  370 
(1895) ;  Farwell  v.  Great  Western 
Tel.  Co.,  161  111.  522  (1896),  a  dictum; 
City  of  Ohio  v.  Cleveland,  etc.  R.  R., 
6  Ohio  St.  489  (1856);  Howell  v. 
Chicago,  etc.  Ry.,  51  Barb.  378 
(1868) ;  Clarkson  v.  Clarkson,  18 
Barb.  646  (1855) ;  Simpson  v.  Moore, 
30  Barb.  637  (1859) ;  Gordon  v.  Rich- 
mond, etc.  R.  R.,  78  Va.  501,  521 
(1884) ;  Minot  v.  Paine,  99  Mass.  101 
(1868) ;  Boston,  etc.  R.  R.  v.  Common- 
wealth, 100  Mass.  399  (1868) ;  Daland 
i;.  Williams,  101  Mass.  571  (1869); 
Rand  v.  Hubbell,  115  Mass.  461,  474 
(1874) ;  Gibbons  v.  Mahon,  4  Mackey, 
130  (1885) ;  aff'd,  136  U.  S.  549 ;  Jones 
V.  Morrison,  31  Minn.  140  (1883); 
Earp's  Appeal,  28  Pa.  St.  368  (1857) ; 
Wiltbank's  Appeal,  64  Pa.  St.  256 
(1870) ;  Commonwealth  v.  Pittsburgh, 
etc.  R.  R.,  74  Pa.  St.  83  (1873); 
Brown  v.  Lehigh  Coal,  etc.  Co.,  49  Pa. 
St.  270  (1865) ;  Commonwealth  v. 
Cleveland,  etc.  R.  R.,  29  Pa.  St.  370 
(1857) ;  Parker  v.  Mason,  8  R.  I.  427 
(1867) ;  State  v.  Baltimore,  etc.  R.  R., 
6  Gill  (Md.),  363  (1848).  A  stock 
dividend  was  involved  in  Great  West- 
ern, etc.  Co.  V.  Harris,  128  Fed.  Rep. 
321  (1903) ;  aff'd,  198  U.  S.  561.  The 
court  in  this  last  case  said  such  a 
dividend  was  not  a  withdrawal  of  the 
assets  of  the  corporation,  and  the 
court  adopted  the  language  of  the 
brief  as  follows :  "After  the  issue  they 
(the  stockholders)  owned  the  same 
thing.  They  gained  nothing  and  the 
corporation  parted  with  nothing  by 
the  issue  of  additional  stock.  It  mere- 
ly placed  in  the  hands  of  the  stock- 
holders an  instrument  whereby  they 
could  conveniently  detract  from  the 
value  of  the  shares  of  stock  which 
they  formerly  held,  in  order  to  vest 
new  and  equal  rights  in  the  persons 
to  whom  they  might  transfer  the  new 
shares.     Whatever  of  value  passed  to 


the  purchasers  of  those  shares  was 
withdrawn,  not  from  the  assets  of  the 
company,  but  from  the  antecedent 
equity  or  interest  which  was  vested 
in  the  stockholders  making  the  sale. 
Taking  the  stock  transaction  by  it- 
self, it  did  not  affect  the  company  in 
any  way.  It  merely  diminished  the 
relative  interest  in  the  corporation  of 
those  stockholders  who  engaged  in  it." 
Where  the  assets  have  increased  a  stock 
dividend  representing  such  increase 
may  be  distributed.  McGinnis  v. 
O'Connor,  72  Atl.  Rep.  614  (Md. 
1909) ;  111  Md.  695.  A  stock  dividend 
is  legal.  Stamford  Trust  Co.  v.  Yale, 
etc.  Co.,  83  Conn.  43  (1910).  Stock 
dividends  are  legal  where  a  corre- 
sponding amount  of  profits  are  per- 
manently added  to  the  capital  stock, 
and  such  stock  dividend  may  be  com- 
mon or  preferred  or  both.  Soehnlein 
V.  Soehnlein,  146  Wis.  330  (1911). 
It  is  proper  for  a  corporation  to  issue 
stock  or  bonds  to  represent  profits 
which  have  been  used  in  changing  the 
location  of  its  plant,  or  enlarging  the 
plant,  even  though  a  part  of  the  old 
plant  is  dismantled  and  abandoned. 
Matter  of  Watertown,  etc.  Co.,  127 
N.Y.App.Div.  462(1908).  In  the  case 
Appeal  of  Boyer,  224  Pa.  St.  144  (1909), 
stock  dividends  of  one  hundred  per  cent, 
were  declared  by  railroad  corporations. 
Harris!;.  San  Francisco  Sugar,  etc.  Co., 
41  Cal.  393  (1871),  holds  that  one 
who  is  entitled  to  and  receives  a  stock 
dividend  cannot  claim  also  a  part  of 
the  cash  profits  which  are  used  for 
improvements,  even  though  a  contract 
calls  for  cash.  See  also  §  51,  supra, 
and  ch.  XXXIII,  infra.  In  the  case 
Chester  v.  Buffalo,  etc.  Mfg.  Co.,  183 
N.  Y.  425  (1906),  there  was  involved 
incidentally  a  five  hundred  per  cent, 
stock  dividend.  A  stock  dividend 
provided  for  in  a  certificate  of  stock 
passes  to  the  transferee  of  the  stock. 
Louisville,  etc.  R.  R.  v.  Hart  County, 
116  Ky.  186  (1903).  A  stock  divi- 
dend need  not  be  delivered  forthwith 
to    a    stockholder    who    paid    for    his 


1567 


§536. 


DIVIDENDS. 


CH.  XXXII. 


is  declared  without  a  proper  basis  therefor,  yet  the  stockholders  receiving 
the  same  are  not  liable  thereon  to  corporate  creditors  except  to  subse- 
quent creditors.^  A  stock  dividend  declared  when  the  company  had 
no  profits  cannot  be  returned  after  corporate  insolvency  for  the  purpose 


original  stock  by  a  note  to  the  cor- 
poration secured  by  the  original  cer- 
tificate of  stock.  Alford  v.  Laurel 
Imp.  Co.,  86  Miss.  375  (1905).  As  to 
the  taxation  of  stock  dividends,  see 
§  572a,  infra.  In  England  a  stock 
dividend  has  been  declared  to  be  ultra 
vires  so  far  as  dissenting  stockholders 
are  concerned.  It  cannot  be  forced 
upon  a  stockholder.  Hoole  v.  Great 
Western  Ry.,  L.  R.  3  Ch.  262  (1867). 
In  re  Eastern,  etc.  Co.,  68  L.  T.  Rep. 
321  (1893),  a  stock  dividend  was  in- 
volved, but  its  legality  was  not  passed 
upon.  Where  a  consolidation  of  three 
corporations  is  made  by  increasing  the 
capital  stock  of  one  and  issuing  the 
increased  stock  to  the  stockholders  of 
all  three  corporations  in  the  propor- 
tion agreed  upon,  this  is  not  a  stock 
dividend,  even  though  the  aggregate 
capital  stock  was  $400,000,  but  by  the 
consolidation  is  $1 ,000,000.  Allegheny 
V.  Federal,  etc.  Ry.,  179  Pa.  St.  424 
(1897).  Where  a  company  leases  its 
property  to  another  company  at  a 
nominal  rental,  and  the  stockholders 
of  the  first  company  transfer  their 
stock  to  the  second  company  in  ex- 
change for  stock  of  the  latter,  no  div- 
idend is  involved,  and  a  tax  on  divi- 
dends of  the  first  corporation  does 
not  attach.  Allegheny  v.  Pittsburgh, 
etc.  R.  R.,  179  Pa.  St.  414  (1897).  In 
the  case  Rose  v.  Barclay,  191  Pa. 
St.  594  (1899),  the  validity  of  a  stock 
dividend  whereby  a  gas  company  hav- 
ing $300,000  capital  stock  distributed 
$300,000  additional  capital  stock 
among  its  stockholders  as  a  stock 
dividend  to  represent  the  enhanced 
value  of  the  property  was  not  ques- 
tioned. A  stock  dividend  is  to  be 
counted  as  a  part  of  the  capital  stock 
to  sustain  a  debt  of  the  corporation 
under  a  charter  which  limits  the 
debts  to  one  half  of  the  capital  stock. 
Cunningham  v.  German,  etc.  Bank, 
101  Fed.  Rep.  977  (1900).  A  stock 
dividend  was  sustained  in  Cole  v. 
Adams,  19  Tex.  Civ.  App.  507  (1898), 


to  the  extent  that  such  dividend  rep- 
resented profits  which  had  been  used 
in  the  property,  but  not  to  the  extent 
that  such  dividends  represented  a 
rise  in  the  value  of  the  property  of 
the  company.  In  the  case  Shaw  v. 
Gilbert,  111  Wis.  165  (1901),  where  a 
so-called  "dividend  stock"  had  been 
issued,  it  was  assumed,  under  the 
circumstances  of  the  issue,  that  the 
stockholders  receiving  the  same  were 
liable  thereon  to  corporate  creditors 
with  interest  from  the  date  of  issue. 
Where  the  life  tenant  refuses  to  pay 
for  increased  capital  stock  which  is 
issued  at  fifty  cents  on  a  dollar,  the 
remaining  fifty  cents  being  a  stock 
dividend,  and  the  trustee  takes  the 
stock  for  himself,  and  ten  years  have 
elapsed  since  the  life  tenant  claimed 
the  stock,  the  statute  of  limitations  is 
a  bar  to  his  suit  to  compel  the  trustee 
to  account  for  the  stock.  Matter  of 
Smith,  66  N.  Y.  App.  Div.  340  (1901) ; 
aff'd,  179  N.  Y.  563.  A  stock  dividend 
will,  as  a  basis  of  taxation,  be  consid- 
ered as  from  capital  or  profits  accord- 
ing to  the  circumstances  of  the  partic- 
ular case.  People  v.  Glynn,  130  N.  Y. 
App.  Div.  332  (1909)  ;  aff'd,  198  N.  Y. 
605.  A  sale  of  stock,  the  seller  reserv- 
ing the  next  dividend,  does  not  carry 
a  stock  dividend  which  neither  party 
expected.  Lancaster  Trust  Co.  v. 
Mason,  152  N.  C.  660  (1910).  The 
oral  agreement  of  the  vendor  of  stock  to 
buy  it  back  at  the  same  price  is  not 
void  by  the  statute  of  frauds,  even 
though  a  stock  dividend  has  been  re- 
ceived in  the  meantime,  but  this  is 
returned  with  the  stock.  Trenholm  v. 
Kloepper,  88  Neb.  236  (1911). 

1  Anglo-American,  etc.  Co.  v.  Lom- 
bard, 132  Fed.  Rep.  721  (1904).  Stock- 
holders receiving  a  stock  dividend  can- 
not be  held  liable  thereon  by  corporate 
creditors  existing  at  the  time  of  its 
declaration,  but  the  rule  is  different  as 
to  subsequent  creditors  where  actual 
fraud  was  involved.  Whitlock  v.  Alex- 
ander, 76  S.  E.  Rep.  538  (N.  C.  1912). 


I56S 


CH.   XXXII. I 


DIVIDENDS. 


[§  536. 


of  avoiding  the  statutory  liability.^  The  declaration  of  a  stock  dividend 
is  within  the  discretion  of  the  directors  the  same  as  a  money  dividend, 
and  the  courts  will  not  interfere.-  The  stockholders,  having  voted  to 
declare  such  a  dividend,  may,  at  any  time  before  the  certificates  are 
issued,  reconsider  the  matter  and  revoke  the  dividend.^  Preferred 
stockholders  may  be  entitled  to  share  in  the  distribution  of  stock  by  a 
stock  dividend  according  to  the  terms  of  their  preferred  stock.^  In 
some  of  the  states  a  stock  dividend  is  prohibited  by  statute  or  con- 
stitutional provision.^  This,  however,  does  not  prevent  a  cash  dividend 
and  the  issue  of  new  stock  for  cash  at  the  same  time.^  Stock  dividends 
have  frequently  given  rise  to  difficult  questions  as  to  whether  the  life 
tenant  or  remainderman  is  entitled  to  them,  where  the  original  stock 
is  held  in  trust." 


J  First  Nat.  Bank  v.  Patton  Co.,  32 
Ohio  Ct.  627  (1910). 

2  Schell  V.  Alston  Mfg.  Co.,  149  Fed. 
Rep.  439  (1906).  It  is  discretionary 
with  the  directors  as  to  whether  they 
will  declare  a  stock  or  a  cash  divi- 
dend. Howell  V.  Chicago,  etc.  Ry.,  51 
Barb.  378  (1868). 

3  Terry  v.  Eagle  Lock  Co.,  47  Conn. 
141  (1879).  After  cancellation  there 
is  no  statutory  liability  on  such  stock. 
HoUingshead  v.  Woodward,  35  Hun, 
410  (1885) ;  aff'd,  107  N.  Y.  96  (1887). 
A  stock  dividend  after  declaration 
cannot  be  revoked,  except  possibly  for 
some  extraordinary  cause.  Dock  v. 
Schlichter,  etc.  Co.,  167  Pa.  St.  370 
(1895).     Cf.  §  541,  infra. 

*  Gordon  v.  Richmond,  etc.  R.  R., 
78  Va.  501  (1884).  See  also  eh.  XVI, 
supra. 

*  See  §§51,  287,  supra.  In  Massa- 
chusetts, by  statute,  telegraph,  tele- 
phone, gas,  electric  light,  steam  rail- 
road, street  railway,  aqueduct  and 
water  companies  are  prohibited  from 
declaring  stock  dividends  or  scrip 
dividends,  or  dividends  of  cash  de- 
rived from  the  sale  of  stock  or  scrip. 
Laws  1894,  p.  374,  ch.  350. 

8  In  Massachusetts  a  stock  dividend 
is  practically  declared  by  a  large  cash 
dividend  and  simultaneously  the  is- 
sue of  new  stock  at  par.  Jones  v. 
Brown,  171  Mass.  318  (1898).  Even 
though  a  cash  dividend  is  paid  on  the 
same  date  that  new  stock  is  offered, 
and  the  cash  dividend  is  equal  to  the 
amount  to  be  paid  for  the  new  stock. 


this  is  not  a  stock  dividend,  and 
hence  such  cash  dividend  belongs  to 
a  life  tenant  and  not  to  the  remainder- 
men. Lyman  v.  Pratt,  183  Mass.  58 
(1903).  Where  the  corporation  de- 
clares a  large  cash  dividend  and  at 
the  same  time  offers  increased  stock 
to  the  stockholders  for  subscription 
at  par,  this  is  not  a  stock  dividend, 
even  though  the  aggregate  amount  of 
the  cash  dividend  equals  the  par  value 
of  the  new  stock  so  offered.  Holbrook 
V.  Holbrook,  74  N.  H.  201  (1907). 
Even  though  a  large  cash  dividend  is 
exactly  equivalent  to  the  amount  of 
new  stock  which  is  offered  to  the  stock- 
holders for  subscription,  yet  the  trans- 
action is  not  considered  as  a  stock 
dividend,  there  being  no  obligation  on 
the  part  of  the  stockholders  to  take 
the  new  stock.  Hyde  v.  Holmes,  198 
Mass.  287  (1908).  Where  a  corpora- 
tion declares  a  two  hundred  per  cent, 
cash  dividend  and  at  the  same  time 
offers  new  stock  to  the  stockholders 
at  par,  this  is  a  cash  dividend  and 
not  a  stock  dividend,  but  as  between 
life  tenant  and  remainderman  it  should 
be  apportioned  according  to  that  part 
of  it  which  was  earned  before  the  testa- 
tor's death.  Ballantine  v.  Young,  79 
N.  J.  Eq.  70  (1911). 

7  See  eh.  XXXIII,  infra.  "  A  stock 
dividend  is  presumed  to  be  income, 
but  may  be  shown  to  represent  the 
enhanced  value  of  the  propertj'  of  the 
company,  and  then  it  does  not  repre- 
sent profits,  but  does  represent  capi- 
tal.    Kalbaeh  v.  Clark,  133  Iowa,  215 


(99) 


1569 


§§  537,  538.]  DIVIDENDS.  [CH.  XXXII. 

§  537.  Interest-hearing  stock.  —  It  has  already  been  shown  that  a 
corporation  may  issue  stock  and  may  make  a  contract  with  the  sub- 
scriber that  the  company  will  pay  interest  upon  the  sums  paid  in  by 
the  subscriber.^  Such  a  contract  is  legal,  however,  only  when  the 
interest  is  to  be  paid  from  the  net  profits  of  the  enterprise,  and  not 
from  the  capital  stock.  Unless  net  profits  have  been  earned  the  stipu- 
lated interest  cannot  legally  be  paid.  Consequently  there  is  little 
difference  between  interest-bearing  stock  and  preferred  stock. 

§  538.  To  whom  the  corporation  is  to  pay  the  dividend.  —  The 
question  as  to  whom  a  dividend  shall  be  paid  after  it  has  been  regularly 
declared  is  one  which  sometimes  involves  the  corporation  in  considerable 
difficulty.  It  is  not  always  easy  to  decide  which  one  of  two  or  more 
claimants  is  entitled  to  the  dividend. 

The  general  rule  is  that  the  corporation  may  pay  the  dividend  to 
the  person  in  whose  name  the  stock  stands  registered  upon  the  cor- 
porate stock  book  at  the  time  the  dividend  is  declared.-  It  may  do 
so  without  inquiring  whether  he  has  transferred  the  stock,  and  without 
requiring  the  production  of  the  certificate.^  In  fact,  it  is  a  well-settled 
rule  that  the  corporation  is  protected  in  paying  dividends  to  a  recorded 
stockholder,  although  he  may  have  transferred  his  stock,  no  notice  of 
the  transfer  having  been  given  to  the  company ."*    But  after  notice  of 

(1907).  While  as  a  rule  stock  divi-  principle  belong  to  the  stockholders 
dends  are  capital,  and  not  income,  and  not  to  the  policy-holders.  Trad- 
yet  where  the  company  owns  its  own  ers',  etc.  Ins.  Co.  v.  Brown,  142  Mass. 
stock,  which  it  has  acquired  in  liqui-  403  (1886).  As  to  dividends  on  a 
dation  of  a  debt  owing  to  it  and  de-  tontine  insurance  policy,  see  Pierce  v. 
Clares  a  dividend  on  such  stock,  it  Equitable  Life  Ass.  Soc,  145  Mass. 
belongs  to  the  life  tenant.  Green  v.  56  (1887).  In  a  few  instances  there 
Bissell,  79  Conn.  547  (1907).  A  have  been  attached  to  certificates  of 
legacy  of  one  million  dollars  book  stock  what  are  called  "dividend  war- 
value  of  stock  carries  a  stock  dividend  rants,"  the  object  being  to  enable  such 
thereafter  declared  from  stock  then  in  warrants  to  be  cut  off  like  coupons 
the  treasury.  Pabst  v.  Goodrich,  133  and  sold  and  collected  like  coupons. 
Wis.  43  (1907).  For  form  of  dividend  warrant,  see 

^  See  eh.  XVI,  supra.  Vol.  V,  infra. 

2  Brisbane  v.  Delaware,  etc.   R.  R.,  "  Brisbane  v.  Delaware,  etc.  R.  R., 

94  N.  Y.  204  (1883),  affirming  25  Hun,  94  N.  Y.  204  (1883),  aff'g  25  Hun,  438  ; 

438    (1881);     Donnally   v.    Hearndon,  Cleveland,  etc.   R.  R.  v.  Robbins,  35 

41  W.  Va.  519  (1895) ;   Jones  v.  Terre  Ohio  St.  483  (1880). 

Haute,  etc.  R.  R.,  29  Barb.  353  (1869) ;  ^  Bank  of  Commerce's  Appeal,   73 

affirmed,  57  N.  Y.  196;    Northrop  v.  Pa.   St.  59   (1873),   where  a  distribu- 

Newtown,  etc.  Co.,  3  Conn.  544  (1821).  tion  of  assets  was  made  ;    Bell  v.  Laf- 

See  also  Manning  v.  Quicksilver  Min.  ferty,    1    Pa.    Supr.    Ct.    454    (1881), 

Co.,  24  Hun,  360   (1881),  .Jermain  v.  where  the  assignee  of  a  dividend  with- 

Lake   Shore,   etc.   Ry.,  91   N.   Y.  483  out    a    certificate    obtained    payment, 

(1883),  in  regard  to  the  assignment  of  and  the  court  held  the  company  not 

dividends.     The    guaranty    accumula-  liable  to  an  unrecorded  pledgee ;   Bank 

tions   of   an   insurance   company   con-  of    Utica    v.     Smalley,    2    Cow.     770 

ducted  both  on  the  mutual  and  stock  (1824) ;    Smith  v.  American  Coal  Co., 

1570 


CH.  XXXII.]  DIVIDENDS.  [§  538. 

a  transfer  the  corporation  must  pay  the  dividend  to  the  transferee, 
although  no  registry  has  been  made.^  As  between  two  claimants  of 
the  dividend,  one  being  the  cestui  que  trust  and  the  other  a  boiia  fide 
transferee,  the  corporation  may  interplead.- 

The  right  to  dividends  does  not,  however,  depend  upon  the  issue 
of  the  certificate,  and  the  owner  of  shares  may  claim  his  dividends 
though  no  certificate  has  ever  been  issued  by  the  corporation.^  Stock 
purchased  by  the  corporation  itself  and  then  reissued  is  entitled  to 
all  dividends  subsequently  declared  and  this  result  cannot  be  avoided 
by  the  dividend  being  declared  as  payable  to  stockliolders  at  a  pre- 
ceding date.^  The  corporation  is  protected  if  it  pays  dividends  to  the 
administrator  without  notice  of  a  transfer  by  him.^     Under  the  stat- 

7  Lans.   317    (1873) ;    Cleveland,   etc.  Stone  v.  Reed,  152  Mass.  179  (1890), 

R.    R.    V.    Robbins,    35    Ohio    St.    483  where   a   corporate   creditor   sued   the 

(1880),    the    corporation    not    having  treasurer     for     distributing     property 

been  notified.  among     stockholders.       Where    stock 

1  See  same  cases  as  in  preceding  stands  in  the  name  of  a  person  as 
note.  The  corporation  is  liable  to  trustee,  and  another  person  claims 
a  transferee  for  dividends  declared  that  the  trustee  is  holding  it  for  him 
after  a  registry  has  been  requested  as  pledgee,  and  both  parties  claim  the 
and  improperly  refused.  Robinson  v.  dividend,  the  corporation  may  in- 
New  Berne  Nat.  Bank,  95  N.  Y.  637  terplead.  Page,  etc.  Co.  v.  I*rince  & 
(1884).  Where  the  transferee  and  Co.,  74  N.  H.  262  (1907).  A  cor- 
holder  of  the  certificate  notifies  the  poration  cannot  interplead  as  between 
corporation  of  his  purchase  after  a  stockholders  for  the  purpose  of  deter- 
dividend  has  been  declared,  but  before  mining  the  ownership  of  stock,  there 
it  is  paid,  he  is  entitled  to  the  divi-  having  been  no  claim  made  upon 
dend,  and  may  sue  the  corporation  it  in  regard  to  registry  or  in  regard 
for  it.  Timberlake  v.  Shippers'  Com-  to  dividends.  It  must  be  shown 
press  Co.,  72  Miss.  323  (1894).  A  bill  also  that  the  company  has  not  acted 
in  equity  lies  to  compel  a  corporation  in  a  partisan  manner  as  between  the 
which  has  declared  a  stock  dividend  different  claimants.  Hinckley  v.  Pfis- 
to  stockholders  of  record  July  1st  to  ter,  83  Wis.  64  (1892).  The  corpora- 
deliver  such  stock  dividend  to  a  pur-  tion  interpleaded  between  claimants 
chaser  on  July  6th  whose  purchase  to  a  di\adend  on  stock  in  Amberson  v. 
included  such  di^^dend.  Rose  v.  Bar-  Johnson,  127  Ala.  490  (1900).  Where 
clay,  191  Pa.  St.  594  (1899).  Where  a  stockholder  assigns  the  future  divi- 
after  a  dividend  has  been  declared,  dends,  and  afterwards  sells  his  stock, 
but  before  it  is  paid,  the  corporation  is  the  corporation  may  interplead  to  as- 
notified  of  a  transfer  of  stock,  the  certain  to  whom  to  pay  the  dividends, 
books  not  being  closed,  it  is  liable  to  Price  r.  Morning,  etc.  Co.,  83  Mo.  App. 
the  purchaser  of  the  stock  if  it  pays  470  (1899). 

the    dividend    to    the    vendor,    even         '  South  Dakota  v.  North  Carolina, 

though  the  latter  appears  on  the  books  192  U.  S.  286  (1904).     Ellis  v.  Essex 

as     being     a     stockholder.     Steel     v.  ISIerrimack     Bridge,     19     Mass.     243 

Island    City,  etc.    Co.,  47    Oreg.    293  (1824). 
(1906).  *  Hartlev    v.    Pioneer    Iron    Works, 

2  Salisbury  Mills  v.  Townsend,  109  181  N.  Y.  73  (1905). 

Mass.    115   (1871);    Cross  v.   Eureka,  *  Brisbane  v.  Delaware,  etc.  R.  R., 

etc.  Co.,  73  Cal.  302  (1887),  a  case  94  N.  Y.  204  (1883).  The  heirs  of  a 
between  pledgor  and  pledgee.  See  stockholder  must,  in  order  to  entitle 
also  §  387,  supra,  and  §  543,  infra.     Cf.    themselves    to    di\idends,    procure    a 

1571 


§  538.]  DIVIDENDS.  [CH.  XXXII. 

utes  of  California,  even  though  stock  is  distributed  by  executors  in 
accordance  with  a  decree  of  distribution,  and  the  distributees  sell  the 
stock  and  it  is  transferred  on  the  books  of  the  company,  nevertheless, 
if  the  decree  is  reversed  on  appeal,  the  transfers  are  void  and  the  com- 
pany is  liable  for  dividends  paid  in  the  meantime  to  such  purchasers. 
In  a  suit  by  the  executors  to  recover  such  dividends  the  purchasers  need 
not  be  made  parties.^  Where  stock  in  a  bank  stands  in  the  name  of  a 
person  for  sixty-five  years  without  the  identity  of  the  stockholder  being 
known  and  without  dividends  being  claimed  by  him,  although  the  bank 
annually  advertised  the  unclaimed  dividends,  clear  proof  of  the  identity 
of  such  stockholder  must  be  given  by  his  alleged  descendants  who  do  not 
produce  the  certificate  of  stock.^  The  question  of  whether  the  pledgor 
or  pledgee  of  stock  is  entitled  to  the  dividends  is  considered  elsewhere.^ 

With  respect  to  the  dividends  on  the  stock  of  a  married  woman, 
the  corporation  must  pay  them  to  the  husband  or  not,  according  to 
the  law  of  the  domicile  of  the  corporation,  and  not  according  to  the 
law  of  the  domicile  of  the  married  woman.^  The  husband,  by  collecting 
dividends  on  his  wife's  shares,  does  not  thereby  reduce  the  stock  to 
possession.^  Even  though  by  law  the  husband  is  entitled  to  dividends 
on  the  wife's  stock  and  he  becomes  bankrupt,  yet  dividends  paid  after 
his  discharge  cannot  be  collected  by  his  trustees  in  bankruptcy.^ 

Even  though  the  corporation  closes  its  transfer  book  several  days 
before  a  dividend  is  declared,  nevertheless  those  are  entitled  to  the 
dividend  who  apply  for  registry  on  or  before  the  day  of  the  declaration 
of  the  dividend.' 

If  the  holder  of  a  certificate  of  stock  has  applied  for  transfer  and  been 
refused,  he  may  sue  for  the  dividend  before  bringing  a  suit  in  equity  to 
obtain  a  transfer  of  his  stock.^    A  dividend  may  of  course  be  assigned.^ 

transfer    of     their    ancestor's     shares  Surr.)  85  (1854).     C/.  Harcum  v.  Hud- 

into  their  own  names  on  the  corpo-  nail,  14  Gratt.  (Va.)  369,  382  (1858) ; 

rate  books,  where  the  certificates  have  Searing     v.     Searing,     9     Paige,     283 

been  pledged  and  the  company  noti-  (1841).     A  receipt  of  dividends  by  the 

fled.     State  v.  New  Orleans,  etc.  R.  R.,  husband   only   reduces   the   dividends 

30  La.  Ann.  308  (1878).  into  possession  and  not  the  stock.     See 

1  Ashton  V.  Zelia  Min.  Co.,  134  Cal.     §  319,  supra. 

408  (1901).     See  also  §330,  supra.  «  Bryan   v.   Sturgis  Nat.   Bank,   40 

2  Moss  V.  Manhattan  Co.,  48  N.  Y.     Tex.  Civ.  App.  307  (1905). 

App  Div  561  (1900).  '  Jones  v.  Terre  Haute,  etc.  R.  R., 

3  See  §  468,  supra.  57  N.  Y.  196,  205  (1874) ;   Robinson  v. 
*  Graham  v.  First  Nat.  Bank  of  Nor-    New  Berne  Nat.  Bank,  95  N.  Y.  637 

folk,  84  N.   Y.   393   (1881),  afarming  (1884).       Frequently,     however,     the 

s.  c,  20  Hun,  326.     As  to  the  rule  in  charter  or  statutes  provide  otherwise. 

California,  see  Dow  v.  Gould,  etc.  Co.,  »  Hill  v.  Atoka,  etc.  Co.,  21  S.  W. 

31  Cal.  629  (1867).  Rep.  508  (Mo.  1893).     See  subsequent 
5  Burr  V.  Sherwood,  3  Bradf .  (N.  Y.  decision  in  124  Mo.  153 ;    Robinson  v. 

9  Steel  V.  Island  City,  etc.,  47  Oreg.  293  (1906).     See  also  §  539,  infra. 

1572 


CH.  xxxn.] 


DIVIDENDS. 


[§  539. 


§  539.  To  whom  the  dividend  belongs.  —  As  between  the  vendor 
and  vendee  of  shares  of  stock,  it  is  a  settled  rule  that  the  vendee  is  en- 
titled to  all  the  dividends  on  the  stock  which  are  declared  after  the  sale 
of  the  stock.  Even  though  the  transfer  has  not  been  recorded,  the 
transferee  has  a  right  to  the  dividends  as  against  the  transferrer.^ 
The  law,  moreover,  refuses  to  investigate  the  question  when  the  divi- 
dend was  earned.  In  contemplation  of  law  the  net  profits  are  earned 
at  the  instant  the  dividend  is  declared.  This  rule  is  just,  inasmuch  as 
the  accrued  profits  and  expected  dividends  enter  into  the  value  and  price 
at  which  the  stock  is  sold.^ 


New  Berne  Nat.  Bank,  95  N.  Y.  637 
(1884).  But  not  if  the  transferee  has 
treated  the  refusal  to  transfer  as  a 
conversion.  Hughes  v.  Vermont  Cop- 
per Min.  Co.,  72  N.  Y.  207  (1878). 
Where  the  purchaser  of  the  certificate 
of  stock  applies  for  transfer  on  the 
corporate  books,  which  is  refused,  he 
can  hold  the  corporation  liable  for 
dividends  subsequently  paid  on  such 
stock.  Blooming  Grove,  etc.  Co.  v. 
First  Nat.  Bank,  etc.,  56  S.  W.  Rep. 
552  (Tex.  1900). 

'  Quoted  and  approved  in  Corgan  v. 
George,  etc.  Co.,  218  Pa.  St.  386 
(1907).  A  broker  who  has  been 
authorized  to  sell  stock  at  a  fixed 
price  may  give  the  seller  the  right  to 
a  dividend  declared  after  the  broker 
had  received  the  order,  if  that  is  cus- 
tomary. Cronan  v.  Hornblower,  211 
Mass.  538  (1912). 

2  Quoted  and  approved  in  Corgan  v. 
George,    etc.    Co.,    218    Pa.    St.    386 
(1907).     Jermain  v.   Lake  Shore,   etc. 
R.  R.,  91  N.  Y.  483  (1883);    March 
V.  Eastern  R.  R.,  43  N.  H.  515,  520 
(1862);    s.   c,  40  N.  H.  548;    Ryan 
V.  Leavenworth,  etc.  Ry.,  21  Kan.  365, 
403  (1879) ;    Foote  v.  Worthington,  39 
Mass.    299.   (1839);     Jones    v.    Terre 
Haute,  etc.  R.  R.,  57  N.  Y.  196  (1874) 
Currie  v.  White,  45  N.  Y.  822  (1871) 
Brundage  v.  Brundage,  65  Barb.  397 
408  (1873) ;    afarmed,  60  N.  Y.  544 
Goodwin  v.  Hardy,  57  Me.  143  (1869) 
Hill   V.   Newichawanick   Co.,   8   Hun 
459  (1876) ;  aff'd,  71  N.  Y.  593  (1877) 
Bates  V.  Mackinley,  31  L.  J.  (Ch.)  389 
(1862);     King   v.    FoUett,    3   Vt.    385 
(1831) ;   Abercrombie  v.  Riddle,  3  Md. 
Ch.  320  (1850).     See  also  ch.  XXXIII, 
injra.     Cf.  Kane  v.  Bloodgood,  7  Johns. 


Ch.  90  (1823).  A  person  who  guaran- 
tees to  another  a  dividend,  and  is 
obliged  to  pay  it  himself,  cannot 
claim  a  subsequent  dividend  by  way 
of  reimbursement.  Parks  v.  Auto- 
matic, etc.  Co.,  14  Daly,  424  (1888) ; 
s.  c,  14  N.  Y.  St.  Rep.  710.  A  divi- 
dend declared  after  the  certificates 
have  been  sold  belongs  to  the  trans- 
feree as  against  the  transferrer.  Gem- 
mell  V.  Davis,  75  Md.  546  (1892),  ap- 
proving the  text  herein.  A  transfer 
of  stock  does  not  carry  a  dividend  al- 
ready declared  and  due.  Redhead  v. 
Iowa  Nat.  Bank,  127  Iowa,  572  (1905). 
Where  a  stockholder  assigns  by  con- 
tract the  stock  and  all  dividends  to 
another,  he  must  pay  to  the  latter  any 
subsequent  dividends  which  he  re- 
ceives. Cook  V.  Monroe,  45  Neb.  349 
(1895).  A  purchaser  of  stock  is  en- 
titled to  subsequently  declared  divi- 
dends from  the  vendor  irrespective  of 
whether  a  transfer  has  been  made  on 
the  books.  Farmers',  etc.  Bank  v. 
Mosher,  63  Neb.  130  (1901).  Even 
though  a  transfer  has  not  been  re- 
corded, yet  the  transferee  is  entitled 
to  the  dividends  as  against  the  trans- 
ferrer, and  may  recover  them  from 
him.  Houser  v.  Richardson,  90  Mo. 
App.  134  (1901).  Where  stock  is  sold 
at  auction  on  August  1st  and  a  de- 
posit paid,  the  balance  to  be  paid  Au- 
gust 29th,  a  dividend  declared  on 
August  24th  belongs  to  the  purchaser. 
Black  V.  Homersham,  L.  R.  4  Exch.  D. 
24  (1878).  Where  a  company  pur- 
chases shares  of  its  own  stock  and 
subsequently  uses  it  to  declare  a  stock 
dividend,  a  stockholder  who  sold  part 
of  his  stock  in  the  interim  is  entitled 
to  the  dividend  on  only  such  stock  as 


1573 


§  539.] 


DIVIDENDS. 


[CH.  XXXII. 


A  transfer  of  stock  passes,  of  course,  all  dividends  declared  subse- 
quently to  the  transfer,  although  the  dividend  was  earned  before  the 
transfer  was  made.^ 

A  dividend  is  something  distinct  and  separable  from  the  fund  upon 
which  it  is  declared,  and  it  may  be  the  subject  of  assignment  by  a  stock- 
holder before  it  is  received  from  or  declared  by  the  corporation.- 

A  pledgee  is  entitled  to  dividends  on  the  stock  held  in  pledge,  but 
must  account  for  them  when  the  pledge  is  redeemed.^ 

Where  on  the  reduction  of  the  capital  stock  the  surplus  resulting 
therefrom  is  disposed  of  by  charging  off  certain  bad  debts  which  are 
then  placed  to  a  fund  for  the  benefit  of  the  stockliolders,  it  belongs  to 
the  stockholders  then  of  record  and  not  to  their  transferees,  unless 
specifically  transferred."* 

When  a  dividend  is  made  payable  on  a  day  subsequent  to  the  day  on 
which  it  is  formally  declared,  it  belongs  to  the  stockholder  who  owns 
the  shares  on  the  day  the  dividend  is  declared,  and  not  to  the  owner  at 
the  time  it  is  payable,  unless,^  of  course,  the  resolution  declaring  the 


he  owned  when  the  dividend  was  de- 
clared. Coleman  v.  Columbia  Oil  Co., 
51  Pa.  St.  74  (1865).  Where  defend- 
ant purchased  stock  for  the  plaintiff 
and  accounted  therefor,  but  refused  to 
account  for  dividends  received  while 
he  held  the  stock,  the  defendant  is 
guilty  of  conversion.  Shaughnessy  v. 
Chase,  7  N.  Y.  St.  Rep.  293  (1887). 
Although  the  purchaser  of  stock  is 
entitled  to  a  dividend  declared  after 
the  contract  of  sale  is  made,  even 
though  the  contract  has  not  yet  been 
carried  out,  yet  the  purchaser  cannot 
insist  on  the  vendor's  giving  an  order 
on  the  corporation  for  such  dividends. 
The  purchaser  should  collect  without 
such  order.  He  rescinds  the  sale  by 
insisting  on  such  order.  Phinizy  v. 
Murray,  83  Ga.  747  (1889).  An 
alleged  vendee's  suit  for  a  dividend 
is  res  judicata  as  to  a  suit  for  the 
stock.  Shepard  v.  Stockham,  45  Kan. 
244  (1891).  Where  an  agent  to  sell 
was  to  have  all  that  he  sold  for  above 
a  certain  price,  a  sum  in  excess  there- 
of belongs  to  him,  although  it  was 
for  dividends  not  yet  declared.  Blakes- 
lee  V.  Ervin,  40  Neb.  130  (1894). 

1  Kane  v.  Bloodgood,  7  Johns.  Ch. 
90  (1823),  by  Chancellor  Kent ;  Good- 
win V.  Hardy,  57  Me.  143  (1869)  ; 
March  v.  Eastern  R.  R.,  43  N.  H.  515 


(1862) ;  s.  c,  40  N.  H.  548;  Phelps  v. 
Farmers',  etc.  Bank,  26  Conn.  269 
(1857) ;  Brundage  v.  Brundage,  1 
Thomp.  &  C.  82 ;  aff'd,  60  N.  Y.  544 
(1875) ;  Jones  v.  Terre  Haute,  etc. 
R.  R.,  57  N.  Y.  196  (1874) ;  Currie  v. 
White,  45  N.  Y.  822  (1871).  And  a 
purchaser  of  stock  at  a  tax  sale,  if  the 
proceedings  are  legal  and  regular,  is  en- 
titled to  a  certificate  and  to  dividends 
subsequently  declared.  Smith  v.  North- 
ampton Bank,  58  Mass.  1  (1849). 

2  Marten  v.  Gibbon,  33  L.  T.  Rep. 
561  (1875).  Cf.  Jermain  v.  Lake 
Shore,  etc.  R.  R.,  91  N.  Y.  483  (1883). 
Bargains  in  prospective  dividends  are 
transactions  which,  by  rule  61  of  the 
Stock  Exchange,  the  committee  will 
not  recognize  or  enforce.  The  con- 
tract is,  however,  one  which  is  not 
contrary  to  law,  and  it  is  good  be- 
tween the  parties.  Marten  v.  Gibbon, 
33  L.  T.  Rep.  561  (1875).  Cf.  §§  536, 
538,  supra. 

^  See  §  468,  supra. 

*  Cogswell  V.  Second  Nat.  Bank,  78 
Conn.  75 ;  aff'd,  sub  nom.  Jerome  v. 
Cogswell,  204  U.  S.  1  (1907). 

^  Wheeler  v.  Northwestern  Sleigh 
Co.,  39  Fed.  Rep.  347  (1889) ;  Wright 
V.  Tuckett,  1  Johns.  &  H.  266  (1860) ; 
De  Gendre  v.  Kent,  L.  R.  4  Eq.  283 
(1867) ;   Hill  v.  Newichawanick  Co.,  71 


1574 


CH.   XXXII. 


DIVIDENDS. 


[§  539. 


dividend  makes  it  payable  to  stockliolders  of  record  of  a  later  date  than 
the  date  of  declaration.^ 

Where  stock  is  bought  deliverable  at  the  seller's  option,  the  dividends 
declared  between  the  day  of  the  purchase  and  the  delivery  belong  to 
the  purchaser.-  But  a  contract  to  sell  on  demand  entitles  the  vendor 
to  dividends  declared  before  the  demand  is  made.^  Nevertheless  any 
agreement  between  vendor  and  vendee,  modifying  or  changing  the 
above  rules,  will  be  upheld.  Dividends  are  a  proper  subject  for  a  con- 
tract, and  a  valid  contract  may  be  made  in  reference  to  them.^     The 


N.  Y.  593  (1877),  affirming  s.  c,  8 
Hun,  459;  48  How.  Pr.  427  (1874); 
Spear  v.  Hart,  3  Rob.  (N.  Y.)  420 
(1865);  Tepfer  v.  Ideal,  etc.  Co.,  58 
N.  Y.  Misc.  Rep.  396  (1908) ;  Bright 
V.  Lord,  51  Ind.  272  (1875),  where  an 
option  had  been  given.  Cf.  Hopper  v. 
Sage,  112  N.  Y.  530  (1889) ;  Manning 
V.  Quicksilver  Min.  Co.,  24  Hun,  360 
(1881) ;  Boardman  v.  Lake  Shore, 
etc.  R.  R.,  84  N.  Y.  157,  178  (1881) ; 
Re  Kernochan,  104  N.  Y.  618  (1887) ; 
Clive  V.  Clive,  Kay,  600  (1854).  Con- 
tra, Burroughs  v.  North  Carolina  R.  R., 
67  N.  C.  376  (1872).  A  dividend 
belongs  to  those  who  own  the  stock 
when  it  is  declared,  it  by  its  terms 
being  payable  to  those  who  were 
members  on  that  day.  Zinn  v.  Ger- 
mantown,  etc.  Co.,  132  Wis.  86  (1907). 
The  transfer  of  stock  does  not  trans- 
fer past  stock  dividends  which  have 
been  declared,  even  though  the  stock 
dividend  has  not  actually  been  deliv- 
ered. City  of  Ohio  v.  Cleveland,  etc. 
R.  R.,  6  Ohio  St.  489  (1856).  See 
also  ch.  XVI,  supra. 

1  A  sale  of  stock  July  6th,  "includ- 
ing all  dividends  due  or  to  become 
due  thereon,"  carries  a  stock  dividend 
declared  June  5th  and  payable  to 
stockholders  of  record  July  1st,  and 
the  sale  is  not  fraudulent  although 
the  seller  did  not  know  of  such  stock 
dividend  and  the  buyer  did  know. 
Rose  V.  Barclay,  191  Pa.  St.  594 
(1899).  Where  a  person  sells  his  stock 
after  a  di-\ddend  is  declared,  but  before 
the  day  when  it  takes  effect,  and  by  the 
terms  of  sale  he  is  to  have  the  "Jan- 
uary dividend,"  this  carries  the  cash 
dividend,  but  not  a  stock  dividend 
payable  at  that  time.  Lancaster  T. 
Co.  V.  Mason,  151  N.  C.  264  (1909). 


2Currie  v.  White,  45  N.  Y.  822 
(1871) ;  Black  v.  Homersham,  L.  R.  4 
Exch.  D.  24  (1878).  Under  a  contract 
of  a  person  to  buy  certain  stock 
within  a  certain  time  if  the  other 
party  desired  to  seU  (a  "put"),  the 
first  person  reserving  all  dividends 
"declared  during  the  time,"  a  divi- 
dend declared  before  but  payable  dur- 
ing the  time  of  the  option  belongs  to 
the  seller.  Hopper  v.  Sage,  112  N.  Y. 
530  (1889).  Contra,  Harris  v.  Stevens, 
7  N.  H.  454  (1835). 

3  Bright  V.  Lord,  51  Ind.  272  (1875). 
A  promoter  who  has  merely  an  option 
to  purchase  stock  which  he  then  sells 
to  a  new  corporation  is  merely  an 
agent  of  the  vendor  and  a  dividend 
declared  on  the  stock  of  the  new  cor- 
poration before  the  option  is  exer- 
cised belongs  to  the  vendor.  Rowe  v. 
White,  112  N.  Y.  App.  Div.  688 
(1906) ;   aflf'd,  189  N.  Y.  523. 

*Cook  V.  Monroe,  45  Neb.  349 
(1895) ;  Brewster  v.  Lathrop,  15  Cal. 
2J^  (1860)  ;  Hyatt  v.  Allen,  56  N.  Y. 
553  (1874);  Union  Screw  Co.  v. 
American  Screw  Co.,  11  R.  I.  569 
(1877) ;  affirmed,  13  R.  I.  673  (1882), 
in  which  it  was  held  that  where  per- 
formance of  a  contract  between  two 
corporations  for  the  purchase  of  the 
stock  of  one  of  them  on  a  certain  day 
was  by  agreement  postponed  to  a 
later  day,  a  dividend  declared  in  the 
interval  belonged  to  the  purchaser. 
Where  the  vendor  of  stock  reserves 
"one  half  of  whatever  price  the  same 
should  be  sold  for,  when  sold,  over 
and  above  that  sum,"  he  is  not  en- 
titled to  an  account  of  dividends,  or 
other  income  received  by  the  vendee 
from  or  on  account  of  the  stock. 
Jones  V.  Kent,  80  N.  Y.  585   (1880). 


1575 


§  539.] 


DIVIDENDS. 


CH.  XXXII. 


vendor  may  provide  by  contract  that  he  should  have  the  dividends  in 
lieu  of  interest  on  the  purchase  price  until  such  purchase  price  is  paid.^ 

A  legatee  of  shares  takes  the  stock  as  it  was  at  the  time  of  the  testator's 
death.  All  dividends  declared  previous  to  that  event  go  to  the  adminis- 
trator.^ Dividends  during  the  year  when  an  estate  is  being  wound 
up  go  with  a  specific  legacy,  but  not  with  a  general  legacy.^  A  gift 
of  stock  on  condition  that  the  dividends  should  all  go  to  the  owner  and 
that  he  should  vote  it  is  a  gift  of  a  remainder  vdth  a  life  interest  in  the 
donor.^ 


Where  there  are  but  two  stockholders 
in  a  corporation  one  may  contract 
Avith  the  other  that  certain  profits 
shall  belong  to  the  latter.  Giveen  v. 
Gans,  91  N.  Y.  App.  Div.  37  (1904) ; 
aff'd,  181  N.  Y.  538.  A  person  who 
sells  stock  reserving  a  dividend  that 
may  be  declared  at  a  certain  date  can- 
not claim  a  stock  dividend  which  is 
declared  at  the  specified  date.  He  can 
only  claim  the  cash  dividend.  Kauf- 
man V.  Charlottesville  Woolen  Mills, 
93  Va.  673  (1896).  A  contract  by 
which  the  "surplus  fund"  on  stock  in 
a  corporation  up  to  a  certain  time 
shall  belong  to  a  certain  party  was 
construed  in  Thompson  v.  Hudgins, 
116  Ala.  93  (1897).  Where  an  em- 
ployee is  paid  according  to  the  per- 
centage of  dividends,  it  is  for  the  jury 
to  say  whether  dividends  on  an  in- 
creased capital  stock  are  the  proper 
gauge  of  such  salary.  Bradburn  v. 
Solvay  Process  Co.,  18  N.  Y.  App.  Div. 
542  (1897).  In  the  case  Bigbee,  etc. 
Co.  V.  Moore,  121  Ala.  379  (1899), 
the  court  sustained  a  by-law  whereby 
stockholders  in  a  steamboat  company 
each  put  a  boat  into  the  service  of 
the  company  and  each  was  to  draw 
dividends  on  his  stock  only  so  long 
as  his  boat  remained  fit  for  service, 
such  dividend  to  cease  upon  the  boat 
becoming  unfit  for  service,  until  it 
was  repaired  by  the  owner.  In  the 
case  Rivers  v.  Oak,  etc.  Co.,  52  La. 
Ann.  762  (1899),  the  court  upheld  an 
oral  agreement  that  the  vendor  of 
stock  should  be  entitled  to  his  pro- 
portion of  the  profits  of  the  company 
for  the  ensuing  year. 

1  Hancock  v.  Clark,  68  Vt.  302 
(1896). 

^  Quoted  and  approved  in  Missouri, 


etc.  V.  McCune,  112  Mo.  App.  332 
(1905) ;  Brundage  v.  Brundage,  60 
N.  Y.  544  (1875) ;  Re  Kernochan,  104 
N.  Y.  618  (1887),  where  it  was  payable 
after  the  testator's  death.  Cf.  John- 
son II.  Bridge  water  Iron  Mfg.  Co.,  80 
Mass.  274  (1859) ;  §  301,  supra.  The 
profits  and  surplus  funds  of  a  corpora- 
tion, whenever  they  may  have  ac- 
crued, are,  until  separated  from  the 
capital  by  the  declaring  of  a  dividend, 
a  part  of  the  stock  itself,  and  wiU 
pass  under  that  name  in  a  transfer 
or  bequest.  Phelps  v.  Farmers',  etc. 
Bank,  26  Conn.  269  (1857).  Cf.  Clapp 
V.  Astor,  2  Edw.  Ch.  379  (1834).  In 
regard  to  the  rights  of  a  life  tenant  of 
stock  as  against  a  remainderman,  see 
ch.  XXXIII,  infra. 

3  Thayer  v.  Paulding.  200  Mass  98 
(1908).     See  also  §  301,  infra. 

*  Matter  of  Brandreth,  169  N.  Y. 
437  (1902).  A  stockholder  may  trans- 
fer his  certificate  to  his  children,  who 
at  the  same  time  may  give  him  an 
irrevocable  power  to  vote  the  stock 
dixring  his  life  and  to  receive  and 
keep  the  dividends  on  the  stock.  Such 
an  agreement  is  enforceable,  even 
though  the  stock  is  transferred  into 
the  name  of  the  children,  the  certifi- 
cates, however,  not  being  actually 
delivered  to  them.  Matter  of  Brand- 
reth, 58  N.  Y.  App.  Div.  575  (1901) ; 
rev'd  on  another  point  in  169  N.  Y. 
437.  A  gift  of  stock,  the  donee  to 
have  the  possession  and  management 
of  the  same,  but  the  donor  to  have  the 
income  during  his  life,  makes  the 
donee  trustee,  until  the  death  of  the 
donor,  and  hence  such  gift  is  taxable 
under  the  New  York  statutes  as  a  trans- 
fer to  take  effect  on  his  death.  Matter 
of  Cornell,  170  N.  Y.  423  (1902). 


1576 


CH.  XXXII.]  DIVIDENDS.  [§  540. 

The  question  of  whether  a  dividend  is  apportionable  is  considered 
elsewhere.^ 

A  person  who  claims  to  be  the  owner  of  stock  cannot  establish  his 
rights  in  a  court  by  suing  the  party  in  possession  of  the  stock  for  the 
dividends  declared  and  paid.^  Where  a  claimant  of  stock  has  instituted 
suit  against  the  stockholder  of  record  and  also  the  corporation  to  obtain 
the  stock,  it  is  the  duty  of  the  corporation  not  to  pay  any  further  divi- 
dends to  the  stockholder  of  record  until  the  suit  is  decided,  and  it  is 
liable  if  it  does  pay.^ 

It  seems  that  a  stockholder  may  lease  his  stock.  He  may  for  a 
certain  sum  assign  to  another  all  dividends  during  the  specified  time 
and  give  to  the  lessee  the  right  to  vote  the  stock  during  that  time.'* 

§  540.  Dividends  must  be  equal  and  without  preferences.  —  Divi- 
dends among  stockholders  of  the  same  class  must  be  always  pro  rata, 
equal,  and  without  preference.  If  the  company  has  issued  preferred 
stock,  the  holders  thereof  constitute  a  class  by  themselves,  and  stock- 
holders of  that  class  will  be  entitled,  as  a  class,  to  dividends  in  prefer- 
ence to  holders  of  the  common  stock.  But  as  between  stockholders 
of  the  same  class  there  can  be  no  discrimination,  and  profits  set  aside 
for  dividends  must  be  evenh^  divided  among  the  stockholders  accord- 
ing to  the  amount  of  stock  each  one  owns.^     Accordingly  there  can  be 

1  See  §  558,  infra.  Ins.   Co.,  50  Barb.  520   (1868),  rev'g 

2  Peekham  v.  Van  Wagenen,  83  45  Barb.  510  (1865),  where  part  were 
N.  Y.  40  (1880).  Conversion  lies  for  paid  in  gold;  Jones  v.  Terre  Haute, 
an  unauthorized  sale  of  stock  and  etc.  R.  R.,  57  N.  Y.  196  (1874),  aff'g 
also  for  dividends  received  thereon.  29  Barb.  353  (1859) ;  Morgan  v.  Great 
Shaughnessy  v.  Chase,  7  N.  Y.  St.  Eastern  Ry.,  1  Hem.  &  M.  560  (1863) ; 
Rep.  293  (1887).  Ryder  v.  Alton,  etc.  R.  R.,  13  lU.  516 

^  McCord  V.  Nabours,  101  Tex.  494  (1851),    a    case    of    preferred    stock; 

(1908).  State  v.  Baltimore,  etc.  R.  R.,  6  Gill. 

*  Zachry  v.  Nolan,  66  Fed.  Rep.  467  (Md.),  363  (1848),  where  some  were 
(1895).  In  the  case  State  v.  Probate  paid  in  cash  and  others  were  offered 
Court,  etc.  County,-  102  Minn.  268  part  cash  and  part  stock ;  Atlantic, 
(1907),  a  stockholder  transferred  title  etc.  Tel.  Co.  v.  Commonwealth,  3 
to  his  children  and  the  children  then  Brewst.  (Pa.)  366  (1870),  where  a 
leased  to  him  the  use  of  the  stock  tax  was  levied  on  the  assumption  of 
during  his  life  and  the  transaction  was  an  equal  dividend  to  aU ;  Hale  v. 
upheld  by  the  court.  The  majority  Republican  River  Bridge  Co.,  8  Kan. 
stockholders  may  contract  with  the  466  (1871),  where  by  mistake  a  stock- 
remaining  stockholders  that  the  latter  holder  got  more  land  scrip  than  was 
should  vote  all  the  stock,  and  collect  his  share ;  Jackson  v.  Newark  Plank 
the  dividends,  and  pay  the  former  a  Road  Co.,  31  N.  J.  L.'277  (1865).  Cf. 
specified  sum  monthly,  and  also  pay  Chase  v.  Vanderbilt,  62  N.  Y.  307 
all  assessments  on  the  stock,  and  debts  (1875).  A  holder  of  a  receipt  under 
incurred  during  the  duration  of  the  a  reorganization,  entitling  him  to  pre- 
contract. White  V.  SneU,  35  Utah,  ferred  stock  in  the  new  company,  is 
434  (1909).  entitled  to  dividends  declared  before 

^  Cratty  v.  Peoria,  etc.  Ass'n,  219  111.  he  obtains  the  certificates.     Elsworth 

516   (1906).     Luling  v.  Atlantic  Mut.  v.  New  York,  etc.  R.  R.,  19  Week.  Dig. 

1577 


§540. 


DIVIDENDS. 


[CH.  XXXII. 


no  lawful  discrimination  in  the  division  of  dividends,  although  the  sub- 
scription price  of  part  of  the  stock  is  due  and  unpaid ;  ^  or  because  the 
contract  work  has  not  been  done  ;  ^  nor  on  the  ground  that  no  certificates 
of  stock  have  been  issued ;  ^  nor  on  the  ground  that  the  stocldiolder 
has  no  legal  right  to  purchase  the  stock  ;  "*  nor  can  there  be  a  discrimina- 
tion between  the  large  and  small  stockholders  of  a  company  as  to  the 
manner  of  payment  of  dividends.^    Stock  purchased  by  the  corpora- 


211 ;  aff'd,  98  N.  Y.  648  (1885).  See 
also  Coey  v.  Belfast,  etc.  Ry.,  Ir.  Rep. 
2  C.  L.  112  (1866);  Harrison  v.  Mex- 
ican Ry.,  L.  R.  19  Eq.  358  (1875),  pre- 
ferred stock  eases.  As  to  preferred 
stock,  see  ch.  XVI,  supra.  Although 
dividends  are  guaranteed  to  a  certain 
date,  and  are  paid,  the  stock  is  en- 
titled to  participate  in  all  subsequent 
dividends.  Parks  v.  Automatic,  etc. 
Co.,  14  N.  Y.  St.  Rep.  710  (1888); 
s.  c,  14  Daly,  424.  If  a  stockholder 
by  accepting  the  benefits  assents  to  a 
change  in  the  privileges  which  per- 
tain to  his  stock,  he  cannot  after- 
wards object  thereto.  Compton  v.  The 
Chelsea,  59  Hun,  624  (1891);  aff'd, 
128  N.  Y.  537. 

1  Oakbank  Oil  Co.  v.  Crum,  L.  R.  8 
App.  Cas.  65  (1882).  It  has  been  held 
in  Maryland  that  a  subscriber  to  the 
increased  capital  stock  of  a  company  is 
not  entitled  to  a  certificate  until  he 
has  paid  for  the  stock  in  full,  and 
such  subscriber  is  not  entitled  to  the 
rights  of  a  stockholder  until  he  has 
paid  in  full.  The  court  stated  that 
such  stockholders  are  not  entitled  to 
dividends  equally  with  other  stock- 
holders. The  basis  of  the  decision 
was  the  difference  between  original 
stock  and  increased  stock.  The  court 
refused  to  compel  the  corporation  to 
issue  a  certificate.  Baltimore,  etc. 
Ry.  V.  Hambleton,  77  Md.  341  (1893). 
A  subscriber  for  stock  is  a  stockholder 
even  though  he  has  not  paid  for  it. 
Mountain,  etc.  Co.  v.  Holme,  49  Colo. 
412  (1911). 

2  Although  stock  is  issued  to  eon- 
tractors  before  they  are  entitled  to  it, 
yet  they  are  entitled  to  the  dividends 
on  such  stock  unless  there  was  some 
agreement  to  the  contrary.  Central 
R.  R.,  etc.  Co.  V.  Papot,  59  Ga.  342 
(1877) ;  8.  c,  sub  nom.  Southwestern 
R.  R.  V.  Papot,  67  Ga.  675,  690  (1881). 


3  Even  though  no  certificates  of 
stock  are  issued  the  subscriber  is  a 
stockholder  and  entitled  to  dividends. 
South  Dakota  i'.  North  Carolina,  192 
U.  S.  286  (1904),  the  court  saying  (p. 
309) :  "There  was  no  formal  issue  of 
certificates  by  the  company  to  the 
state,  but  that  was  a  matter  of  ar- 
rangement between  the  parties  to  the 
subscription.  The  state's  right  as  a 
stockholder  was  not  abridged  by  lack 
of  the  certificates,  and  in  fact  it  has 
been  receiving  dividends  on  the  stock 
exactly  as  though  certificates  had 
been  issued." 

*  Where  one  corporation  subscribes 
for  stock  in  another  corporation  and 
pays  for  such  stock,  and  dividends  are 
declared  by  the  latter,  it  cannot  re-, 
fuse  to  pay  the  dividends  to  the 
former  on  the  ground  that  the  former 
had  no  power  to  subscribe  for  the 
stock.  Bigbee,  etc.  Co.  v.  Moore,  121 
Ala.  379  (1899). 

^  Accordingly  where  a  dividend  was 
declared,  viz.,  to  all  stockholders  own- 
ing less  than  fifty  shares,  cash,  but  to 
all  of  fifty  shares  and  over,  part  cash 
and  part  in  interest-bearing  bonds  of 
the  corporation,  the  discrimination 
was  held  invalid  and  unlawful.  State 
V.  Baltimore,  etc.  R.  R.,  6  Gill  (Md.), 
363  (1848) ;  Jones  v.  Terre  Haute,  etc. 
R.  R.,  57  N.  Y.  196  (1874).  So  also 
where  a  part  of  the  authorized  capital 
stock  remained  untaken,  and  a  resolu- 
tion of  the  directors  was  carried  into 
effect,  by  which  the  untaken  portion 
of  the  stock  was  issued  to  those  share- 
holders not  in  arrears  upon  shares 
previously  taken,  to  the  exclusion,  as 
to  the  new  shares,  of  those  in  arrears 
upon  the  original  issue,  it  was  held 
an  invalid  discrimination  and  an  un- 
lawful imposition  of  a  penalty  upon 
those  in  arrears.  Reese  v.  Montgom- 
ery   County    Bank,    31    Pa.    St.    78 


1578 


CH.  XXXII.] 


DIVIDENDS. 


[§  541. 


tion  itself  and  then  reissued  is  entitled  to  all  dividends  subsequently 
declared  and  this  result  cannot  be  avoided  by  the  dividend  being  de- 
clare'd  as  payable  to  stockholders  at  a  preceding  date.^  It  has  been  held 
in  Connecticut  that  after  paying  a  dividend  to  a  part  of  the  stockholders 
the  corporation  cannot  refuse  to  pay  the  rest  upon  the  ground  that  by 
so  doing  the  capital  stock  will  be  impaired,-  or  that  all  the  surplus  earn- 
ings have  been  either  paid  out  as  dividends  or  invested  in  permanent 
improvements.^  Under  the  New  York  statutes  a  contrary  rule  prevails 
as  to  dividends  paid  from  the  capital  stock.^ 

A  bill  in  equity  may  be  maintained  by  a  stockholder  to  prevent  an 
unequal  or  unfair  distribution  of  the  profits  of  the  company,^  and 
for  an  injunction  to  restrain  a  dividend  when  stock  has  been  fraudulently 
overissued,  until  a  true  list  of  the  holders  of  genuine  stock  can  be  ob- 
tained.^ 

§  541.  A  dividend  declared  and  specifically  set  apart  as  a  distinct 
fund  belongs  absolutely  to  the  stockholders.  —  When  a  dividend  out 
of  the  earnings  of  a  company  has  been  regularly  declared  and  is  due, 
it  becomes  immediately  the  individual  property  of  the  stockholder. 
There  is  at  once  a  severance,  for  the  use  and  benefit  of  the  members 
of  the  corporation,  of  so  much  of  the  accumulated  earnings  as  are  de- 
clared ;   and  the  dividend  thereafter  exists  as  a  separate  fund,  distinct 


(1855).  Where  a  scrip  dividend  is 
issued  representing  the  surplus,  such 
scrip  is  collectible  within  a  reason- 
able time,  even  though  by  its  terms 
it  is  payable  at  the  pleasure  of  the 
company,  and  especially  is  it  collect- 
ible where  some  of  the  holders  of  the 
scrip  dividend  have  been  paid  and 
others  not.  Billingham  v.  Gleason 
Mfg.  Co.,  101  N.  Y.  App.  Div.  476 
(1905);  aff'd,  185  N.  Y.  571.  A 
stockholder  by  agreement  may  take 
the  company's  note  in  payment  of  a 
dividend  although  other  stockholders 
were  paid  in  cash.  Barnes  v.  Spencer 
&  Barnes  Co.,  162  Mich.  509  (1910). 

1  Hartley  v.  Pioneer  Iron  Works, 
181  N.  Y.  73  (1905). 

2  Stoddard  v.  Shetucket  Foundry 
Co.,  34  Conn.  542  (1868).  The 
validity  of  a  dividend  cannot  be  called 
into  question  by  a  bank  in  a  suit  to 
collect  taxes  on  such  dividend.  Cen- 
tral Nat.  Bank  v.  U.  S.,  137  U.  S.  355 
(1890).  Even  though  an  illegal  divi- 
dend has  been  paid  on  some  of  the 
preferred  stock,  the  other  preferred 
stockholders    cannot    claim    a    similar 


dividend,  there  being  no  profits. 
Hambloek  v.  Clipper,  etc.  Co.,  148 
111.  App.  618  (1909). 

3  Beers  v.  Bridgeport  Spring  Co.,  42 
Conn.  17  (1875). 

*  A  stockholder  cannot  collect  a 
dividend  which,  if  paid,  will  be  paid 
out  of  capital,  even  though  other 
stockholders  have  been  paid  such  divi- 
dend. Berryman  v.  Bankers',  etc.  Co., 
117  N.  Y.  App.  Div.  730  (1907).  A 
dividend  by  a  bank  cannot  be  col- 
lected by  the  stockholder  where  the 
bank  has  not  set  aside  ten  per  cent, 
of  its  net  profits  for  a  surplus  fund, 
as  required  by  statute.  Lapsley  v. 
March.  Bank,  105  Mo.  App.  98  (1904). 

s  The  minority  may  bring  the  offi- 
cers to  an  accounting  for  an  unfair 
distribution  of  the  bonds,  etc.,  owned 
by  a  construction  company.  Meyers 
;;.  Scott,  2  N.  Y.  Supp.  753  (1888).  Or 
the  stockholder  may  sue  at  law  for 
an  equal  dividend.     See   §  542,  infra. 

^  Underwood  v.  New  York,  etc. 
R.  R.,  17  How.  Pr.  537  (1859),  a  case 
growing  out  of  the  Schuyler  frauds 
in  New  York.     See  also  §  297,  supra. 


1579 


§  541.] 


DIVIDENDS. 


[CH.  XXXII. 


from  the  capital  stock  or  surplus  profits.  It  then  becomes  the  absolute 
property  of  the  stockholders.^ 

Accordingly,  whenever  a  dividend  is  regularly  declared  and  credited 
to  a  depositor  it  becomes  his  property,  to  which  he  is  entitled  in  prefer- 
ence to  the  creditors  of  the  corporation.^  If  the  funds  to  pay  a  dividend 
are  placed  by  the  corporation,  on  deposit  at  a  bank  or  elsewhere,  the 
deposit  is  made  and  remains  at  the  risk  of  tiie  corporation  and  not  of 
the  stockholders,  until  a  reasonable  time  after  actual  notice  is  given  to 
the  latter.^  And  it  cannot  be  withdrawn  and  reclaimed  either  by  the 
corporation  or  a  receiver  of  the  corporation,  since  the  stockholders 
acquire,  by  virtue  of  the  declaration  of  the  dividend,  a  lien  in  equity 
upon  the  deposit.^ 

But  where  the  fact  that  a  dividend  has  been  voted  by  directors  is 
not  made  public,  or  communicated  to  the  stockholders,  and  no  fund 
is  set  apart  for  payment,  the  vote  may  be  rescinded.^ 


1  Van  Dyck  v.  McQuade,  86  N.  Y. 
38  (1881) ;  Jermain  v.  Lake  Shore, 
etc.  R.  R.,  91  N.  Y.  483  (1883) ;  Kep- 
pel  V.  Petersburg  R.  R.,  Chase's  Dee. 
167  (1868);  8.  c,  14  Fed.  Cas.  357; 
King?;.  Paterson,  etc.  R.  R.,  29 N.  J.  L. 
82,  504  (1860);  HUl  v.  Newicha- 
wanick  Co.,  71  N.  Y.  593  (1877),  af- 
firming 8.  c,  8  Hun,  459  (1876); 
Brundage  v.  Brundage,  60  N.  Y.  544 
(1875),  affirming  8.  c,  65  Barb.  397 
(1873) ;  Spear  v.  Hart,  3  Rob.  (N.  Y.) 
420    (1865);    Manning   v.   Quicksilver 


Min.  Co.,  24  Hun,  360  (1881);  Kane 
V.  Bloodgood,  7  Johns.  Ch.  90  (1823) ; 
Beers  v.  Bridgeport  Spring  Co.,  42 
Conn.  17  (1875) ;  Faweett  v.  Laurie,  1 
Dr.  &  Sm.  192  (1860) ;  Re  Le  Blanc,  14 
Hun,  8  (1878).  Upon  the  latter  point 
compare  People  v.  Merchants',  etc. 
Bank,  78  N.  Y.  269  (1879).  Dividends 
on  life-insurance  policies,  when  once  de- 
clared, cannot  be  varied  by  the  com- 
pany subsequently.  Heusser  v.  Conti- 
nental Life  Ins.  Co.,  20  Fed.  Rep.  222 
(1884).     Execution  or    garnishee   pro- 


2  Van  Dyck  v.  McQuade,  86  N.  Y.  38 
(1881) ;  Peckham  v.  Van  Wagenen,  83 
N.  Y.  40  (1880).  A  dividend  declared 
and  ordered  deposited  to  the  order  of 
the  stockholders  and  so  held  until  the 
fiirther  order  of  the  court  is  legal,  and 
the  amount  cannot  be  taxed  as  belong- 
ing to  the  bank.  Pollard  v.  First  Nat. 
Bank,  47  Kan.  406  (1891). 

^  King  V.  Paterson,  etc.  R.  R.,  29 
N.  J.  L.  82,  504  (1860). 

*  Re  Le  Blanc,  14  Hun,  8  (1878); 
aff'd,  75  N.  Y.  598  ;  Beers  v.  Bridgeport 
Spring  Co.,  42  Conn.  17  (1875).  A 
six  per  cent,  dividend  declared  by  the 
board  of  directors,  payable  in  four 
payments,  is  legal  and  binding  if  the 
company  has  profits  to  that  amount, 
even  though  no  specific  moneys  are 
set  apart  with  which  to  pay  it,  and 
the  board  of  directors  have  no  power, 
after  the  payment  of  the  first  quarter. 


to  rescind  the  remaining  payments, 
even  though  they  discovered  that  they 
had  overvalued  the  assets,  it  still  ap- 
pearing that  there  were  sufficient 
profits  to  pay  the  dividend.  McLaren 
V.  Crescent,  etc.  Co.,  117  Mo.  App.  40 
(1906). 

*  Ford  V.  Easthampton,  etc.  Co.,  158 
Mass.  84  (1893).  A  stockholder  who 
accepts  a  dividend  which  has  been  de- 
clared in  lieu  of  one  already  declared 
and  thus  revoked,  cannot  claim  both 
dividends.  Albany,  etc.  Co.  v.  Arnold, 
103  Ga.  145  (1897).  Where  the  char- 
ter allows  the  directors  to  pay  "In- 
terim dividends,"  in  other  words, 
dividends  to  apply  on  the  next  regu- 
lar dividend,  an  interim  dividend  may 
be  revoked  after  it  has  been  declared 
and  before  it  has  been  paid.  Lagunas, 
etc.  Co.  V.  Schroeder  &  Co.,  85  L.  T. 
Rep.  22  (1901). 


1580 


CH.  XXXII.]  DIVIDENDS.  [§  542. 

The  stockholders'  right  to  a  dividend  regularly  declared,  and  to 
the  fund  set  apart  by  the  corporation  to  pay  the  dividend,  is  not  affected 
by  the  subsequent  insolvency  of  the  corporation.^  But  where  there 
is  doubt  as  to  whether  a  dividend  was  declared,  the  mere  fact  that  it 
was  credited  to  the  stockliolders  ten  months  later  does  not  entitle  them 
to  payment  of  it  upon  the  corporation  becoming  insolvent.^  And  where 
no  specific  fund  has  been  set  aside,  a  stockholder  not  having  claimed  or 
received  his  dividend  has,  upon  the  insolvency  of  the  corporation,  merely 
a  claim  of  debt  against  the  corporation,  and  must  come  in  and  fare  as 
the  other  creditors  do.^ 

Not  only  must  the  time  of  payment  be  reasonable,  but  a  reasonable 
place  of  payment  must  be  designated,  and  the  entire  transaction  must 
be  in  good  faith.* 

§  542.  It  is  a  debt  which  may  he  collected  hy  legal  proceedings.  — 
The  debt  which  the  corporation  owes  its  stockholders,  when  a  divi- 
dend is  declared  and  the  day  of  payment  arrives,  is  one  which  may 
be  collected  by  the  usual  action  at  law.  A  suit  to  compel  the  declaration 
of  a  dividend  must  be  in  equity;  but  when  the  dividend  is  not  paid 
after  it  has  been  regularly  declared  the  stockholder's  action  is  at  law, 
and  he  may  sue  in  assumpsit  for  the  amount  due  him  by  the  resolution 
declaring  the  dividend ;  ^  under  certain  circumstances,  he  may  file  a  bill 

cess  cannot  be  levied  on  stock  held  by  insolvency,  such  dividends  not  having 

an   individual    as    trustee,    where    the  been  actually  paid.     Spencer  v.  Lowe, 

debt  is  his  individual  debt.     Nor  can  198  Fed.  Rep.  961  (1912). 
it  be  levied  on  the  dividend  from  such         ^  Allen- West,  etc.  Co.  v.  Gwaltney, 

stock.     So     held     where     stock     was  119  S.  W.  Rep.  292  (Ark.  1909)   and 

owned  by  a  city  in  trust  for  the  citi-  90  Ark.  608. 

zens.  Hitchcock  v.  Galveston  Wharf  ^  Lowne  v.  American  Fire  Ins.  Co., 
Co.,  50  Fed.  Rep.  263  (1880).  A  divi-  6  Paige,  482  (1837) ;  Curry  v.  Wood- 
dend  of  notes  which,  however,  the  ward,  44  Ala.  305  (1870) ;  s.  c,  53  Ala. 
stockholders  agree  to  hold  and  the  371.  Where  a  dividend  is  declared  in 
corporation  agrees  to  pay  if  the  notes  1894,  but  is  not  called  for  by  one 
are  not  paid  by  the  maker,  is  not  stockholder  until  1897,  after  the  corn- 
such  a  setting  apart  of  the  notes  as  to  pany  has  passed  into  an  assignee's 
prevent  their  being  taxed  as  corpo-  hands,  he  is  a  general  creditor  to  that 
rate  property.  Adams  v.  Delta,  etc.  amount,  but  is  not  entitled  to  be  paid 
Co.,  89  Miss.  817  (1906).  in  full  unless  a  specific  sum  was  de- 
1  Le  Roy  v.  Globe  Ins.  Co.,  2  Edw.  posited  for  the  purpose  of  paying  this 
Ch.  657  (1836).  A  dividend  credited  dividend.  Hunt  u.  O'Shea,  69  N.  H. 
on    the    books    to    a    stockholder    in  600  (1899). 

1895  is  a  debt,  even  though  it  remains         ^  King  v.  Paterson,  etc.  R.   R.,   29 

on   the   books   until    1904,    when    the  N.  J.  L.  82  (1860). 

company  becomes  insolvent,  the  stock-  ^  Jackson   v.    Newark    Plank    Road 

holder   having   been   in   ignorance   of  Co.,  31   N.  J.   L.   277   (1865) ;    West 

the  dividend  during  that   time.     Ball  Chester,  etc.  R.  R.  v.  Jackson,  77  Pa. 

V.  Pepper,  etc.  Co.,  141  Mo.  App.  26  St.  321   (1875);    Coey  v.  Belfast,  etc. 

(1909).     A    dividend    declared    when  Ry.,  Ir.  Rep.  2  C.  L.  112  (1866) ;   King 

the  company  is   solvent   may  partiei-  v.  Paterson,  etc.  R.  R.,  29  N.  J.  L.  504 

pate    in    the    assets    upon    corporate  (1860) ;    Stoddard  v.  Shetucket  Foun- 

1581 


§  543. 


DIVIDENDS. 


[CH.   XXXII. 


in  equity  for  an  accounting.^  But  mandamus  is  not  a  proper  remedy  in 
such  a  case.^  Where  a  corporation  sends  a  check  by  mail  in  payment 
of  a  dividend,  as  requested  by  a  stockholder,  and  the  check  is  lost,  the 
stockholder  cannot  maintain  a  suit  for  the  dividend  itself.^ 

§  543.  A  demand  is  necessary  before  the  action  at  law  by  the  stock- 
holder can  be  maintained.^ 

It  has  been  held,  however,  that  the  commencement  of  the  suit  con- 
stitutes in  itself  a  sufficient  demand.^  Under  ordinary  circumstances 
interest  is  not  recoverable  upon  dividends  which  have  been  declared, 
but  which  the  stockholder  has  not  claimed.  The  right  to  interest  arises 
only  upon  a  demand  and  a  refusal  to  pay.^    A  stockholder  is  not  entitled 


dry  Co.,  34  Conn.  542  (1868) ;  Hall  v. 
Rose  HiU,  etc.  Co.,  70  111.  673  (1873) ; 
City  of  Ohio  v.  Cleveland,  etc.  R.  R., 
6  Ohio  St.  489  (1856) ;  Marine  Bank 
V.  Biays,  4  Har.  &  J.  (Md.)  338 
(1818) ;  State  v.  Baltimore,  etc.  R.  R., 
6  GiU  (Md.),  363  (1848);  Kane  v. 
Bloodgood,  7  Johns.  Ch.  90,  132 
(1823) ;  Jones  v.  Terre  Haute,  etc. 
R.  R.,  57  N.  Y.  196  (1874) ;  Fawcett  v. 
Laurie,  1  Dr.  &  Sm.  192,  202  (1860) ; 
Dalton  V.  Midland  Counties  Ry.,  13 
C.  B.  474  (1853);  Scott  v.  Central 
R.  R.,  etc.  Co.,  52  Barb.  45  (1868).  See 
Beers  v.  Bridgeport  Spring  Co.,  42 
Conn.  17  (1875),  sustaining  a  remedy 
in  equity.  But  if  a  stockholder  is  not 
entitled  to  share  in  the  dividend  ac- 
cording to  the  terms  of  the  resolution 
declaring  it,  he  cannot  have  his  action 
of  assumpsit.  State  v.  Baltimore,  etc. 
R.  R.,  6  Gill  (Md.),  363  (1848).  In 
suing  for  a  dividend  the  plaintiff  must 
allege  that  the  dividend  has  been  de- 
clared. Hill  V.  Atoka,  etc.  Co.,  21 
S.  W.  Rep.  508  (Mo.  1893).  See  subse- 
quent decision  in  124  Mo.  153.  Where 
a  dividend  has  been  paid  to  all  stock- 
holders except  one,  he  may  collect  his 
by  a  suit.  Southwestern,  etc.  Ry.  v. 
Martin,  57  Ark.  355  (1893).  Suit  lies 
for  a  dividend.  Pease  v.  Chicago,  etc. 
Co.,  170  111.  App.  234  (1912). 

'  Keppel  V.  Petersburg  R.  R., 
Chase's  Dec.  167  (1868) ;  s.  c,  14  Fed. 
Cas.  357.  This  is  the  usual  remedy 
where  preferred  stockholders  sue  to 
have  a  dividend  declared.  See  §  272, 
supra.     204  Fed.  Rep.  204. 

2  Van  Norman  v.  Central  Car,  etc. 
Co.,   41   Mich.    166    (1879).     But   see 


dicta  in  King  v.  Paterson,  etc.  R.  R., 
29  N.  J.  L.  504  (1861),  and  Le  Roy  v. 
Globe  Ins.  Co.,  2  Edw.  Ch.  657  (1836). 
3  Thau-lwall  v.  Great  Northern  Ry., 
[1910]  2  K.  B.  509. 

*  Hagar  v.  Union  Nat.  Bank,  63  Me. 
509  (1874) ;  Scott  v.  Central  R.  R.,  etc. 
Co.,  52  Barb.  45  (1868) ;  State  v.  Bal- 
timore, etc.  R.  R.,  6  Gill  (Md.),  363 
(1848) ;  King  v.  Paterson,  etc.  R.  R., 
29  N.  J.  L.  504  (1860).  A  mere  letter 
of  inquiry  has  been  held  under  this 
rule  an  insufficient  demand.  Scott  v. 
Central  R.  R.,  etc.  Co.,  52  Barb.  45 
(1868).  A  demand  while  the  shares 
are  under  and  subject  to  an  attach- 
ment by  the  corporation  is  not  such  a 
demand  as  this  rule  contemplates. 
Hagar  v.  Union  Nat.  Bank,  63  Me.  509 
(1874).  No  demand  of  the  dividend 
is  necessary  before  suit  if  the  corpora- 
tion has  refused  to  pay  it.  Redhead 
V.  Iowa,  etc.  Bank,  127  Iowa,  572 
(1905). 

*  Robinson  v.  New  Berne  Nat.  Bank, 
95  N.  Y.  637   (1884) ;    Keppel  v.  Pe- 
tersburg   R.    R.,    Chase's    Dec.     167 
(1868)  ;   s.  c,  14  Fed.  Cas.  357.     This 
accords  with  the  settled  theory  of  the 
law   as   to   demand   in   similar   cases 
See    East   New   York,    etc.    R.    R.    v 
Elmore,    5    Hun,    214    (1875);     Dela- 
mater   v.   Miller,    1    Cow.    75    (1823) 
Everett  v.  Coffin,  6  Wend.  603  (1831) 
Walradt    v.    Maynard,    3    Barb.    584 
(1848);     Carroll    v.    Cone,    40    Barb 
220    (1862);     aff'd,    41    N.    Y.    216; 
Ayer  v.  Ayer,  33  Mass.  327  (18.35). 

«  Keppel  V.  Petersburg  R.  R.,  Chase's 
Dec.  167  (1868);  s.  c,  14  Fed.  Cas. 
357;    Boardman   v.    Lake   Shore,    etc. 


1582 


CH.   XXXII.] 


DIVIDENDS. 


[§  543. 


to  interest  on  dividends,  even  where  he  has  demanded  the  same  after 
they  have  been  declared,  where  an  attachment  is  pending  against  his 
stock,  ^  The  statute  of  Hmitations  begins  to  run  only  after  demand,^ 
unless  there  has  been  inexcusable  laches.^ 


R.  R.,  84  N.  Y.  157, 187  (1881) ;  State  ;;. 
Baltimore,  etc.  R.  R.,  6  Gill  (Md.), 
363,  387  (1848);  Philadelphia,  etc. 
R.  R.  V.  Cowell,  28  Pa.  St.  329  (1857) ; 
Bank  of  Louisville  v.  Gray,  84  Ky.  565 
(1886) ;  Cochran  v.  McGee,  53  S.  W. 
Rep.  519  (Ky.  1899).  As  to  interest 
on  preferred  dividends,  see  ch.  XVI, 
supra. 

1  Mustard  v.  Union  Nat.  Bank,  86 
Me.  177  (1893). 

'  The  statute  of  limitations  begins 
to  run  against  a  stockholder's  suit  to 
collect  dividends  only  after  a  demand 
and  refusal,  or  notice  to  a  shareholder 
that  his  right  to  dividends  is  denied. 
Philadelphia,  etc.  R.  R.  v.  Cowell,  28 
Pa.  St.  329  (1857) ;  Bank  of  Louisville 
V.  Gray,  84  Ky.  565  (1886).  Cf. 
Winchester,  etc.  Co.  v.  Wickliffe,  100 
Ky.  531  (1897).  Where  a  person 
subscribes  for  stock  in  1889  and  gives 
his  note  therefor,  and  a  certificate  is 
made  out  two  years  later,  but  is  re- 
tained by  the  company,  and  he  has 
voted  the  stock  at  a  stockholders' 
meeting,  but  did  not  receive  the 
regular  dividends  on  the  stock,  and 
thirteen  years  later  presented  a  state- 
ment of  account  charging  himself  with 
the  note  and  interest  and  crediting 
himself  with  the  dividends  showing  a 
balance  due  from  him  to  the  company, 
even  though  the  company  claims  that 
he  abandoned  the  subscription,  he 
may  insist  upon  it  and  may  maintain 
a  suit  in  equity  to  have  the  stock 
issued  to  him  upon  his  paying  there- 
for, credit  being  given  him  for  past 
dividends,  even  though  many  of  the 
entries  in  the  books  in  regard  to  the 
transaction  were  made  by  the  party 
himself  as  secretary  and  manager. 
Mountain,  etc.  Co.  v.  Holme,  49  Colo. 
412  (1911).  Where  a  subscription 
for  stock  is  paid  up,  the  stockholder 
is  entitled  to  his  stock  and  past  divi- 


dends, even  though  for  thirty  years 
he  has  slept  upon  his  rights.  Kobo- 
gum  V.  Jackson  Iron  Co.,  76  Mich. 
498  (1889) ;  Bedford  County  v.  Nash- 
ville, etc.  Ry.,  14  Lea  (Tenn.),  525 
(1884).  Where  stock  is  issued  in 
1838,  one  certificate  to  "Morris  Rob- 
inson" and  one  to  "Morris  Robinson, 
Agent"  and  after  his  death  the  com- 
pany declared  dividends  beginning 
in  1864  and  a  stock  dividend  of  one 
hundred  per  cent,  in  1903,  but  the 
estate  of  Morris  Robinson  never 
collected  or  demanded  the  dividends 
until  1909,  and  the  certificates  of 
stock  have  been  lost,  the  administra- 
tor is  entitled  to  a  new  certificate  for 
the  first-named  certificate  with  divi- 
dends thereon,  but  not  the  second. 
Tvson  V.  George's  Creek,  etc.  Co., 
115  Md.  564  (1911).  See  85  Atl. 
Rep.  949.  Although  a  demand  for 
dividend  is  necessary  before  commenc- 
ing suit,  yet  a  failure  to  make  de- 
mand does  not  suspend  the  opera- 
tion of  the  statute  of  limitations 
against  a  suit  to  collect  the  dividend. 
Stearns  v.  Dry  Goods  Co.,  31  Ohio 
Ct.  270  (1908).  Suit  for  a  dividend 
may  be  brought  at  any  time  within 
the  period  of  the  statute  of  limi- 
tations. Redhead  v.  Iowa  Nat.  Bank, 
127  Iowa,  572  (1905).  The  statute 
of  limitations  does  not  begin  to  run 
against  the  collection  of  a  dividend 
until  it  is  demanded.  A  provision  of 
a  new  charter  into  which  the  old  com- 
pany is  merged,  applying  a  three-year 
statute  of  limitations  to  dividends, 
does  not  affect  dividends  on  old  stock 
which  has  not  come  into  the  reorgani- 
zation. Armant  v.  New  Orleans,  etc. 
R.  R.,  41  La.  Ann.  1020  (1889).  In 
Bills  V.  Silver  King  Min.  Co.,  106  Cal. 
9  (1895),  it  is  held  that  the  statute 
of  limitations  begins  to  run  against 
the  right  of  a  stockholder  to  sue  for 


^  See  §§  61,  192,  supra,  and  cases  in  Fo?s  ik  Peoples'  Gas,  etc.  Co.,  145  111. 
preceding  note.  Laches  may  be  a  bar  App.  215  (1908).  Glover  v.  Natl.  Bk. 
to  a  stockholder  claiming  his  dividends,     of  Com.  — ^N.  Y.  App.  Div.  —  (1913). 

1583 


§  543.] 


DIVIDENDS. 


[CH.   XXXII. 


In  England,  however,  it  has  been  held  that  where  dividends  are 
credited  up  to  the  personal  accounts  of  the  stockholders,  and  for  nearly 
twenty  years  certain  stockholders  do  not  claim  dividends  so  credited 
to  them,  the  statute  of  limitations  is  a  bar,  and,  the  company  having 
been  sold  out  by  authority  of  a  statute,  the  proceeds  are  to  be  divided 
among  the  stockholders  without  regard  to  such  past-due  and  unpaid 
dividends.  The  statute  of  limitations  began  to  run  from  the  time  the 
dividends  became  payable,  and  the  company  is  not  to  be  considered 
as  a  trustee  in  that  respect.^  Where  property  is  sold  on  foreclosure 
and  distribution  ordered,  and  some  of  the  money  is  unclaimed  for  over 
ten  years,  the  court  may  order  that  money  distributed  among  the  other 
bondholders  who  have  not  been  paid  in  full ;  otherwise  to  the  general 
creditors  ;  otherwise  to  the  stockholders.^ 

The  action  at  law  for  the  payment  of  a  dividend  which  has  been 
declared  should  be  against  the  corporation,  and  not  against  the  cor- 
porate officers.^  But  where  the  treasurer  of  an  incorporated  company 
withheld  a  dividend  belonging  to  one  of  the  stockholders  on  the  ground 
that  he  himself  owned  the  stock,  an  action  of  assumpsit  against  him 
individually  was  sustained."*     In  a  case  where  the  stockholder  had  been 


his  dividends  from  the  time  when  his 
administrator  inquires  at  the  cor- 
porate office  as  to  whether  all  divi- 
dends had  been  paid  to  decedent,  even 
though  a  false  answer  in  the  affirm- 
ative was  made  by  the  corporation. 
Even  though  a  person  subscribes  for 
stock  in  a  turnpike  company  in  1857 
and  he  does  not  claim  the  stock  or 
dividends,  and  after  seven  years  does 
not  attend  meetings  or  pay  any  atten- 
tion to  his  interest,  and  dies  in  1868, 
nevertheless  his  representatives  may 
collect  the  dividends  due  on  the  stock 
and  may  claim  the  stock.  The  statute 
of  limitations  is  no  bar  if  the  com- 
pany has  never  notified  him  that  his 
right  to  the  stock  is  disputed.  Owings- 
ville,  etc.  Co.  v.  Bondurant's  Adm'r, 
107  Ky.  505  (1900).  Even  though  a 
claimant  of  stock  brings  suit  to  have 
it  issued  to  him,  and  succeeds,  yet  if 
he  does  not  claim  the  past  dividends 
he  cannot  maintain  a  second  suit  for 
them,  more  than  ten  years  having 
elapsed  since  the  dividends  were  de- 
clared. Citizens',  etc.  Co.  v.  Belle\"iUe, 
etc.  R.  R.  1.57  Fed.  Rep.  73  (1907).  A 
provision  in  a  railroad  charter  that 
the   city   may   regidate   tolls   so   that 


only  a  certain  amount  of  profits  shall 
go  to  the  stockholders,  and  the  sur- 
plus shall  be  paid  to  the  city,  does  not 
give  the  state  the  right  to  the  surplus, 
unless  the  state  demanded  the  same, 
and  where  the  company  surrendered 
the  charter  and  accepted  a  new  one 
without  such  provision,  the  state  has 
no  cause  of  action  for  past  profits. 
Terre  Haute,  etc.  R.  R.  v.  Indiana,  194  U. 
8.579(1904).  See  156N.Y.App.Div.247. 

1  Re  Severn,  etc.  Ry.,  [1896]  1  Ch. 
559. 

2  American  Loan  &  T.  Co.  v.  Grand 
Rivers  Co.,  159  Fed.  Rep.  775  (1908). 

3  French  v.  Fuller,  40  Mass.  108 
(1839);  Smith  v.  Poor,  40  Me.  415 
(1855);  s.  c,  3  Ware,  148  (1858); 
s.  c,  22  Fed.  Cas.  627.  A  stockholder's 
remedy  for  a  dividend  which  has  been 
declared  is  an  action  at  law  against 
the  company,  and  not  against  the  di- 
rectors personally,  unless  they  have 
converted  the  dividend  or  have  set  it 
aside  and  refused  to  use  it  for  that 
purpose.  Searles  v.  Gebbie,  115  N.  Y. 
App.  Div.  778  (1906) ;  aff'd,  190  N.  Y. 
533. 

*  Williams  v.  Fullerton,  20  Vt.  346 
(1848). 


1584 


CH.   XXXII. 


DIVIDENDS. 


[§  544. 


unjustly  deprived  of  his  stock,  it  was  held  that  he  could  not  sue  an  in- 
dividual stockholder  to  recover  a  dividend  which  should  have  been  paid 
to  him,  but  that  his  action  was  properly  against  the  corporation.^ 
In  a  stockholder's  suit  at  law  for  a  dividend  which  has  been  declared, 
he  cannot  include  a  cause  of  action  in  equity  against  the  directors  for 
a  conspiracy  to  illegally  increase  the  capital  stock  and  to  enjoin  them 
from  doing  so.^  In  actions  on  the  part  of  stockholders  to  enforce  the 
payment  of  dividends,  the  validity  or  legality  of  the  dividend  cannot  be 
questioned  by  the  corporation.^  When  a  corporation  is  sued  for  a 
dividend  by  two  claimants  therefor,  it  may  support  a  bill  of  interpleader 
between  them.^ 

§  544.  Right  of  the  corporation  to  apply  dividends  to  the  payment 
of  debts  due  to  it  hy  the  stockholder  —  Dividends  in  payment  of  sub- 
scription price  of  stock.  —  It  is  well  settled  that  if,  at  the  time  a 
dividend  becomes  payable,  the  stockholder  owes  the  corporation  any 
debt,  the  dividend  due  that  stockholder  may  be  applied  in  liquidation 
of  the  indebtedness;  and  if  the  corporation  is  sued  for  the  dividend 
it  may  set  up  the  debt  by  way  of  set-off  or  counterclaim.^  This,  how- 
ever, is  not  upheld  where  the  registered  stockholder  has  sold  and  trans- 
ferred his  certificate  of  stock  before  the  dividend  is  payable.^    The 


1  Peckham  v.  Van  Wagenen,  83 
N.  Y.  40  (1880). 

2Searles  v.  Gebbie,  115  N.  Y.  App. 
Div.  778  (1906) ;  aff'd,  190  N.  Y.  533. 
See  also  §  739,  infra. 

^  See  §  540,  supra. 

*  Salisbury  Mills  v.  Townsend,  109 
Mass.  115  (1871).  See  also  §§387, 
538,  supra.  In  England  the  rule  was 
formerly  otherwise.  Dalton  v.  Mid- 
land Ry.,  12  C.  B.  458  (1852). 

^  Hagar  v.  Union  Nat.  Bank,  63  Me. 
509  (1874)  ;  Philadelphia,  etc.  R.  R. 
V.  CoweU,  28  Pa.  St.  329  (1857)  ;  King 
V.  Paterson,  etc.  R.  R.,  29  N.  J.  L.  504 
(1860) ;  Sargent  v.  Franklin  Ins.  Co., 
25  Mass.  90  (1829)  ;  Bates  v.  New 
York  Ins.  Co.,  3  Johns.  Cas.  238 
(1802) ;  Donnally  v.  Hearndon,  41 
W.Va.519  (1895).  See  also  §526,  supra. 
But  a  contrary  rule  prevails  as  to  a 
deceased  stockholder,  upon  a  winding 
up  of  the  company  and  a  distribution 
of  its  assets.  See  Mechants'  Bank, 
etc.  V.  Shouse,  102  Pa.  St.  488  (1883)  ; 
Brent  v.  Bank  of  Washington,  2 
Cranch,  C.  C.  517  (1824) ;  s.  c,  4  Fed. 
Cas.  61.  See  also,  contra,  in  general. 
Ex  parte  Winsor,  3  Story,  C.  C.  411 


(1844) ;  s.  c,  30  Fed.  Cas.  312.  By 
agreement  a  dividend  may  be  applied 
to  an  unpaid  call.  Kenton,  etc.  Co.  v. 
McAlpin,  5  Fed.  Rep.  737  (1880).  For 
a  contract  of  a  corporation  to  sell  to 
its  superintendent  shares  of  its  stock 
at  his  option,  and  to  aUow  him  to  pay 
for  the  stock  by  the  dividends,  see 
Goodwin,  etc.  Co's  Appeal,  117  Pa.  St. 
514  (1888).  The  only  right  that  a 
corporation  has  to  retain  a  dividend 
from  a  stockholder  who  owes  it  money 
is  based  on  set-off.  Gemmell  v.  Davis, 
75  Md.  546  (1892).  A  corporate  lien 
on  stock  which  has  been  reduced  to  a 
judgment  may  be  offset  against  a 
dividend.  United,  etc.  Co.  v.  Winston, 
etc.  Co.,  194  Fed.  Rep.  947  (1912). 
6  Where  a  stockholder  of  record 
pledges  his  certificates  of  stock,  and 
no  transfer  is  made  on  the  books,  and 
subsequently  a  dividend  is  declared, 
and  after  such  dividend  is  payable, 
but  before  it  is  actually  paid,  the 
pledgee  presents  to  the  company  the 
stock  for  transfer  with  a  written  re- 
quest of  the  pledgor  to  the  same  effect, 
together  with  an  assignment  by  the 
pledgor   to    the   pledgee   of   the   divi- 


(100) 


1585 


§544. 


DIVIDENDS. 


[CH.   XXXII, 


company  cannot  retain  the  dividend  to  secure  a  debt  for  which  the  stock- 
holder is  only  surety  or  guarantor,  the  debt  not  yet  being  due/  nor  can 
it  set  off  a  claim  which  it  has  against  the  plaintiff  and  another  person 
jointly." 

Where  a  corporation  has  made  profits  it  may  declare  a  dividend 
thereof,  and  apply  such  dividend  to  the  unpaid  subscription  price  of 
subscribers  to  its  capital  stock.^  But  a  payment  of  the  subscription 
price  by  what  purports  to  be  a  dividend  or  distribution  of  profits  is 
invalid  as  against  creditors,  where  such  profits  did  not  exist.'*    At  com- 


dend,  it  is  no  defense  to  the  company 
that  it  has  a  claim  against  the  pledgor 
for  a  personal  debt  or  for  a  debt  of  a 
firm  in  which  he  is  interested.  Amer- 
ican Nat.  Bank  v.  Nashville,  etc.  Co., 
36  S.  W.  Rep.  960  (Tenn.  1896).  This 
set-off  is  not  good  on  a  debt  against 
the  transferrer  where  the  certificates 
were  sold,  although  not  transferred 
on  the  books,  before  the  dividend  was 
declared.  A  pledgee  of  stock,  even 
though  not  recorded  as  a  stockholder, 
is  entitled  to  dividends  declared  after 
the  pledge  was  made,  as  against  a 
claim  of  the  corporation  against  the 
pledgor  as  an  offset.  Gemmell  v. 
Davis,  75  Md.  546  (1892).  Where  the 
corporation  retains  dividends  as  an 
offset  to  a  debt  due  from  the  stock- 
holder to  the  corporation,  and  the  latter 
brings  suit  in  equity  for  an  accounting 
and  the  court  decides  in  the  stock- 
holder's favor,  he  may  have  judgment 
for  the  dividends,  even  though  he  did 
not  ask  for  any  affirmative  relief.  Con- 
sohdated,  etc.  Co.  v.  Wisner,  110  N.  Y. 
App.  Div.  99  (1905) ;  aff'd,  188  N.  Y. 
624. 

1  Solomon  v.  First  Nat.  Bank,  72 
Miss.  854  (1895) ;  First  Nat.  Bank  v. 
De  Morse,  26  S.  W.  Rep.  417  (Tex. 
1894). 

2  Rumney  v.  Detroit,  etc.  Co.,  129 
Mich.  644  (1902). 

^  Where  the  corporation  has  an 
accumulated  profit,  and  that  profit  is 
by  agreement  with  the  stockholders 
applied  to  unpaid  subscriptions,  such 
stock  is  then  paid-up.  Kenton,  etc. 
Co.  V.  McAlpin,  5  Fed.  Rep.  737 
(1880).  See  also  §  168,  supra.  It  is 
a  question  for  the  jury  whether  fraud 
exists  in  the  sale  of  stock,  represented 
to  be  paid-up,  when  part  of  the  pay- 


ments had  been  by  dividends  from 
the  corporation.  Kryger  v.  Andrews, 
65  Mich.  405  (1887).  Where  a  by-law 
provides  that  dividends  on  stock  not 
paid  up  shall  be  credited  on  the 
amount  unpaid,  the  company  cannot 
deprive  such  stock  of  the  dividends 
altogether.  Gellermann  v.  Atlas,  etc. 
Co.,  45  Wash.  114  (1906).  A  corpora- 
tion having  charter  power  to  purchase 
the  stock  of  other  corporations  may 
give  its  certificates  of  indebtedness  in 
payment  therefor,  and  may  also  issue 
with  such  certificates  its  preferred 
stock,  the  dividends  to  be  used  to 
pay  the  principal  and  interest  of  such 
certificates,  the  preferred  stock  then  to 
belong  to  the  vendors.  Ingraham  v. 
National  Salt  Co.,  130  Fed.  Rep.  676 
(1904),  overruling  122  Fed.  Rep.  40; 
8.  c,  139  Fed.  Rep.  684 ;  aff'd,  143 
Fed.  Rep.  805. 

*Gager  v.  Paul,  111  Wis.  638 
1901.  A  dividend  by  an  insolvent 
Missouri  corporation  which  is  immedi- 
ately applied  to  unpaid  subscriptions 
may  be  set  aside  by  an  Illinois  court  at 
the  instance  of  its  trustee  in  bank- 
ruptcy, and  the  Illinois  stockholders 
may  be  held  liable  for  such  unpaid 
part  of  their  subscriptions,  there 
having  been  an  express  promise  on 
their  part  to  pay  the  subscription. 
The  corporation  need  not  be  brought 
in  as  a  party  defendant.  Edwards  v. 
Shillinger,  245  111.  231  (1910).  On 
corporate  insolvency  an  unpaid  illegal 
dividend  applied  to  a  subscription 
price  may  be  disregarded  and  the 
subscription  collected.  Roney  v.  Craw- 
ford, 135  Ga.  1  (1910).  An  illegal 
dividend  applied  to  the  payment  of 
the  subscription  price  does  not  prevent 
a  suit  in  behalf  of  corporate  creditors 


1586 


CH.  XXXII.] 


DIVIDENDS. 


[§  545. 


mon  law  a  company  cannot  divide  any  part  of  its  assets  among  its  share- 
holders, as  a  reduction  of  the  amount  already  paid  on  the  subscription 
price  of  the  stock.  In  England  the  statutes  expressly  authorize  that 
mode  of  distributing  assets.^  An  insurance  company  has  no  power  to 
agree  with  a  subscriber  to  stock  that  the  price  shall  be  paid  from  divi- 
dends only  and  hence  such  subscriber  may  maintain  a  suit  to  cancel 
the  agreement.^  Where  a  corporation  has  sold  certain  shares  of  its 
stock  to  an  employee,  the  price  to  be  paid  out  of  his  share  of  the  earnings 
of  the  business,  he  may  maintain  a  bill  in  equity  to  compel  the  corpora- 
tion to  render  an  accounting  of  its  profits  and  to  have  the  stock  delivered 
to  him  if  the  profits  have  been  sufficient  to  pay  for  the  stock  according 
to  the  contract.^  Even  though  subscribers  claim  that  their  stock  was 
to  be  paid  for  by  dividends,  yet  such  an  agreement  is  no  defense  as  against 
creditors."*  An  agreement  of  the  corporation  with  a  stockholder  to  pay 
to  him  in  dividends  the  amount  he  pays  for  the  stock  cannot  be  enforced 
as  an  obligation  of  the  corporation.^  A  bonus  paid  by  citizens  may  be 
used  by  subscribers  for  stock  in  partial  payment  for  their  stock,  unless 
the  bonus  was  made  directly  to  the  corporation.^ 

§  545.  The  courts  very  rarely  compel  the  directors  to  declare  a 
dividend.  —  The  board  of  directors  declare  the  dividends,  and  it  is 
for  the  directors,  and  not  the  stockliolders,  to  determine  whether  or 
not  a  dividend  shall  be  declared.^ 


to  collect  the  subscription  price. 
Crawford  v.  Roney,  130  Ga.  515 
(1908). 

ii2e  Piercy,  [1907]  1  Ch.  289. 
The  common  law  rule  is  of  course 
different,  if  the  capital  stock  is  reduced. 
See  §  289,  supra- 

2  Lancaster  v.  Southern  Life  Ins. 
Co.,  89  S.  C.  179  (1911).  A  cor- 
poration may  sell  $1,000  par  value  of 
its  stock  and  also  an  automobile  worth 
$2,670  to  a  person  in  consideration  of 
$1,500  cash,  and  the  remaining  $2,170 
to  be  paid  only  in  dividends  on  the 
stock  within  four  years,  otherwise  the 
automobile  to  belong  to  the  party. 
Hathaway  v.  Vaughan,  162  Mich.  269 
(1910). 

'  Johnston  v.  Stearns  &  Co.,  160 
Mich.  247  (1910). 

4  Hawkins  v.  Citizens',  etc.  Co.,  38 
Oreg.  544  (1901),  holding  also  that 
the  cancellation  of  such  portion  of 
subscriptions  as  is  in  excess  of  a  cer- 
tain dividend  declared  is  illegal  as 
against  creditors  existing  at  the  time 
of  such  cancellation.     See  also  §  170, 


supra.  The  receiver  of  an  insolvent 
bank  may  collect  a  subscription,  even 
though  the  bank  had  agreed  with  the 
subscriber  that  payments  should  be 
from  dividends  only.  Meholin  v.  Carl- 
son, 17  Idaho,  742  (1910). 

5  Smith  V.  Alabama,  etc.  Assoc,  123 
Ala.  538  (1899). 

6  McDermott  v.  Squier,  124  Mich. 
523  (1900). 

^  Quoted  and  approved  in  ScheU  v. 
Alston  Mfg.  Co.,  149  Fed.  Rep.  439 
(1906).  "The  directors  of  a  corpora- 
tion, and  they  alone,  have  the  power 
to  declare  a  dividend  of  the  earnings 
of  the  corporation  and  to  determine 
its  amount."  Hunter  v.  Roberts,  etc. 
Co.,  83  Mich.  63  (1890).  The  board  of 
directors  and  not  the  stockholders  de- 
clare dividends.  Grant  v.  Ross,  100 
Ky.  44  (1896).  See  also  the  various 
cases  in  this  and  succeeding  sections. ' 
Under  the  New  Jersey  statutes  divi- 
dends must  be  paid  in  January,  unless 
the  charter  or  by-laws  fix  some  other 
date  therefor.  Marquand  v.  Federal 
Steel  Co.,  95  Fed.   Rep.   725   (1899), 


1587 


§  545.] 


DIVIDENDS. 


[CH.  XXXII. 


When,  therefore,  the  directors  have  exercised  this  discretion  and 
refused  to  declare  a  dividend,  there  will  be  no  interference  by  the  courts 
with  their  decision,  unless  they  are  guilty  of  a  wilful  abuse  of  their  dis- 
cretionary powers,  or  of  bad  faith  or  of  a  neglect  of  duty.  It  requires 
a  very  strong  case  to  induce  a  court  of  equity  to  order  the  directors  to 
declare  a  dividend,  inasmuch  as  equity  has  no  jurisdiction,  unless  fraud 
or  a  breach  of  trust  is  involved.^  There  have  been  many  attempts  to 
sustain  such  a  suit,  yet,  although  the  courts  do  not  disclaim  jurisdiction, 
they  have  quite  uniformly  refused  to  interfere.^    The  discretion  of  the 


holding  also  that  where  the  charter 
provides  that  dividends  on  the  com- 
mon stock  shall  be  declared  after  the 
close  of  any  fiscal  year,  the  corporation 
has  no  power  to  pay  any  dividends 
on  the  common  stock  prior  to  the  close 
of  the  fiscal  year,  and  hence  cannot 
pay  quarterly  dividends  on  the  com- 
mon stock.  Even  though  the  general 
manager  pays  out  a  dividend  without 
its  being  authorized,  the  payment 
being  in  goods,  the  company  must 
demand  back  the  goods  before  bring- 
ing suit.  Anderson  Mercantile  Co.  v. 
Anderson,  134  N.  W.  Rep.  36  (N.  Dak. 
1912).  Dividends  are  declared  by  the 
directors  and  not  by  the  stockholders 
at  common  law.  Hambloek  v.  Clipper, 
etc.  Co.,  148  111.  App.  618  (1909).  A 
dividend  may  be  declared  by  the  stock- 
holders by  unanimous  consent,  even 
though  the  by-laws  provide  that  the 
directors  shall  declare  the  dividends. 
Spencer  v.  Lowe,  198  Fed.  Rep.  961 
(1912). 

1  Quoted  and  approved  in  Schell  v. 
Alston  Mfg.  Co.,  149  Fed.  Rep.  439 
(1906),  and  Gehrt  v.  Collins  Plow  Co., 
156  111.  App.  98,  102  (1910). 

2  New  York,  etc.  R.  R.  v.  Nickals, 
119  U.  S.  296  (1886),  rev'g  15  Fed. 
Rep.  575 ;  Ely  v.  Sprague,  Clarke,  Ch. 
351  (1840);  Williams  v.  Western 
Union  Tel.  Co.,  93  N.  Y.  162  (1883) ; 
Reynolds  v.  Bank  of  Mt.  Vernon,  6 
N.  Y.  App.  Div.  62  (1896) ;  aff'd,  158 
N.  Y.  740 ;  Park  v.  Grant  Locomotive 
Works,  40  N.  J.  Eq.  114  (1885) ;  Bar- 
nard V.  Vermont,  etc.  R.  R.,  89  Mass. 
512  (1863) ;  Chaffee  v.  Rutland  R.  R., 
55  Vt.  110,  133  (1882) ;  Barry  v.  Mer- 
chants' Exchange  Co.,  1  Sandf.  Ch. 
280  (1844) ;  Rex  v.  Bank  of  England, 
2   B.   &   Aid.   620    (1819),   where   the 


court  refused  to  grant  a  mandamus 
for  an  examination  of  the  accounts 
with  a  view  to  compelling  a  dividend. 
In  the  case  Burden  v.  Burden,  1.59 
N.  Y.  287,  308  (1899),  the  court  held 
that  so  long  as  the  directors  are  act- 
ing honestly  and  within  their  discre- 
tionary powers  in  accumulating  a 
surplus  in  an  iron  manufacturing  cor- 
poration, a  stockholder  must  submit, 
but  "if  it  can  be  shown  that  trustees 
of  a  corporation  are  guilty  of  fraud 
and  bad  faith  in  accumulating  a  large 
surplus  to  the  injury  of  the  stockholders, 
a  court  of  equity  would  doubtless 
interfere."  The  court  in  this  case 
refused  to  interfere,  although  the 
capital  was  $2,000,000  and  the  surplus 
$1,100,000,  $500,000  of  which  was  in 
the  bank  and  $600,000  invested  in 
stocks  which  were  not  in  a  legal 
sense  a  surplus,  but  were  capital 
whose  income  alone  would  go  to  swell 
the  regular  dividends  of  the  corpora- 
tion, and  it  appearing  also  that  the 
corporation  had  paid  very  large  divi- 
dends. The  discretion  of  the  direc- 
tors in  regard  to  declaring  dividends 
will  not  be  interfered  with  in  the 
absence  of  fraud  or  an  abuse  of  dis- 
cretion. Knapp  V.  Jarvis  Adams  Co., 
135  Fed.  Rep.  1008  (1905).  Even 
though  an  insurance  company  has  set 
aside  as  a  stockholder's  fund  about 
$2,500,000,  yet  the  court,  in  view  of  the 
nature  of  the  business,  will  not  compel 
the  directors  to  declare  a  dividend, 
inasmuch  as  the  money  may  be  needed 
in  the  business.  Blanchard  v.  Pru- 
dential Ins.  Co.  etc.,  83  Atl.  Rep.  220 
(N.  J.  1912).  The  court  will  not 
order  a  dividend  of  past  profits  where 
the  current  dividends  are  consuming 
most  of  the  current  profits,  even  though 


1588 


CH.   XXXII. 


DIVIDENDS. 


[§  545. 


directors  will  not  be  interfered  with  by  the  courts,  unless  there  has  been 
bad  faith,  wilful  neglect,  or  abuse  of  discretion.^ 


the  accumulated  profits  are  verj'  large. 
Murray  v.  Beattie  Mfg.  Co.,  82  Atl. 
Rep.  1038  (N.  J.  1912).  The  direc- 
tors are  not  bound  to  declare  a  divi- 
dend on  the  common  stock,  even 
though  there  are  profits  sufficient  for 
that  purpose  after  paying  the  divi- 
dend on  the  preferred  stock,  and  even 
though  the  profits  available  for  the 
common  dividend  may  otherwise  be 
absorbed  in  subsequent  years  to  pay 
the  preferred  di\'idend.  Stevens  v. 
United  States,  etc.  Corp.,  68  N.  J.  Eq. 
373  (190.5),  holding  also  that  even 
though  the  accumulated  profits  are 
millions  of  dollars,  yet  where  they 
amount  to  only  six  per  cent,  of  the 
capital  stock  and  are  largely  invested 
in  the  property,  the  court  will  not 
order  the  declaration  of  a  di\adend. 
Directors  may  apply  the  profits  to 
strengthening  the  capital,  if  they  act 
in  good  faith.  Roberston  v.  Bucklen 
&  Co.,  107  111.  App.  Rep.  369  (1903). 
Even  though  a  bremng  company  has 
a  very  large  surplus,  yet  if  large  divi- 
dends have  already  been  paid,  a  stock- 
holder cannot  compel  the  company  to 
divide  the  surplus,  especially  where  it 
is  shown  that  the  corporation  may  use 
it  to  advantage  in  its  business.  "The 
amount  of  surplus  is  due  to  the  judi- 
cious management  of  the  directors." 
Marks  v.  American,  etc.  Co.,  126  La. 
666  (1910).  Where  the  profits  are 
properly  used  to  pay  debts,  a  guarantor 
of  di\ndends  cannot  question  the 
propriety  of  such  use  of  the  profits. 
Pratte  v.  Enslow,  46  W.  Va.  527  (1899). 
The  directors  are  bound  to  distribute 
as  profits  only  such  part  of  the  net  in- 
come as  they  think  proper ;  and  their 
judgment  of  what  is  proper  is  con- 
clusive upon  the  stockholders.  State 
V.  Baltimore,  etc.  R.  R.,  6  GUI  (Md.), 
363  (1847).  Cf.  Dent  v.  London  Tram- 
ways Co.,  L.  R.  16  Ch.  D.  344  (1880). 
See  also  §  272,  supra.  In  Park  v. 
Grant  Locomotive  Works,  40  N.  J.  Eq. 
114  (1885),  the  court  said:  "In  cases 
where  the  power  of  the  directors  of  a 
corporation  is  without  limitation  and 
free  from  restraint,  they  are  at  lib- 
erty to  exercise  a  very  liberal  discre- 


tion as  to  what  disposition  shall  be 
made  of  the  gains  of  the  business  of 
the  corporation.  Their  power  over 
them  is  absolute  so  long  as  they  act 
in  the  exercise  of  an  honest  judgment. 
They  may  reserve  of  them  whatever 
their  judgment  approves  as  necesary 
or  judicious  for  repairs  and  improve- 
ments, and  to  meet  contingencies, 
both  present  and  prospective." 

In  State  v.  Bank  of  Louisiana,  6  La. 
745  (1834),  the  court  refused  to  order 
a  bank  to  declare  a  dividend  although 
it  had  profits  on  hand  of  about  one 
tenth  of  its  capital.  The  court  said : 
"If  the  board  honestly  err  in  these 
matters,  we  are  not  ready  to  say  the 
courts  possess  the  power  to  rectify  its 
mistakes."  The  remedy  is  in  the  elec- 
tions. Courts  will  not  order  a  divi- 
dend to  be  declared  unless  the  direc- 
tors "refuse  to  declare  a  dividend 
when  the  corporation  has  a  surplus  of 
net  profits  which  it  can,  without  det- 
riment to  its  business,  divide  among 
its  stockholders,  and  when  a  refusal 
to  do  so  would  amount  to  such  an 
abuse  of  discretion  as  would  consti- 
tute a  fraud,  or  breach  of  that  good 
faith  which  they  are  bound  to  exercise 
towards  the  stockholders."  A  divi- 
dend will  not  be  ordered  when  the 
profits  are  invested  in  the  plant  and 
in  long-time  notes.  Hunter  v.  Roberts, 
etc.  Co.,  83  Mich.  63  (1890).  In  Smith 
V.  Prattville,  etc.  Co.,  29  Ala.  503 
(1857),  the  court  refused  to  order  a 
dividend,  inasmuch  as  the  charter 
expressly  vested  discretion  as  to  that 
matter  in  the  board  of  directors.  A 
stockholder  cannot  have  a  receiver  ap- 
pointed merely  because  the  directors 
reserved  the  profits  for  a  surplus  in- 
stead of  distributing  them  by  way  of 
di\'idends.  Marcuse  v.  Gullett,  etc. 
Co.,  52  La.  Ann.  1383  (1900). 

1  Greeff  v.  Equitable,  etc.  Soc,  160 
N.  Y.  19,  32  (1899). 

Where  large  dividends  are  made  by 
a  manufacturing  company,  it  is  en- 
tirely within  the  fair  and  honest  dis- 
cretion of  the  directors  whether  the 
remaining  profits  shall  be  passed  to 
surplus  or  used  for  dividends.     McNab 


1589 


§  545.] 


DIVIDENDS. 


[CH.  XXXII. 


Accordingly,  the  directors  may,  in  the  fair  exercise  of  their  discretion, 
invest  profits  to  extend  and  develop  the  business,  and  a  reasonable 
use  of  the  profits  to  provide  additional  facilities  for  the  business  cannot 
be  objected  to  or  enjoined  by  the  stockholders.^ 

V.  McNab,  etc.  Co.,  62  Hun,  18  (1891) ;    and     contingencies     incident     to     the 


aff'd,  133  N.  Y.  687,  the  court  holding 
also  that  the  fact  that  a  manufactur- 
ing company  extended  its  business  so 
as  to  include  iron  pipe  as  well  as 
brass,  and  loaned  money,  which  loans, 
however,  the  president  was  willing  to 
take  up,  and  had  owned  government 
bonds,  is  not  sufficient  to  entitle 
a  stockholder  who  has  acquiesced 
therein  to  demand  that  all  profits  be 
paid  out  in  dividends.  Although  the 
road  was  leased  and  the  floating  debt 
was  only  $1,000,  and  the  bonded  debt, 
$70,000,  was  due  in  seventeen  years 
and  the  other  expenses  only  $6,000, 
while  the  company  had  $36,000  on 
hand  and  the  regular  rental  for  its 
road  coming  in,  yet  the  court  refused 
to  order  a  dividend,  in  Karnes  v.  Roch- 
ester, etc.  R.  R.,  4  Abb.  Pr.  (N.  S.) 
107  (1867),  the  court  holding  also 
that  a  demand  must  first  be  made, 
and  that  the  directors,  instead  of  the 
company,  are  the  proper  parties  de- 
fendant. In  Barnard  v.  Vermont,  etc. 
R.  R.,  89  Mass.  512  (1863),  there  was 
a  contract  to  pay  dividends,  and  it 
was  upon  this  contract  that  the  court 
based  its  right  to  pass  upon  the  abil- 
ity of  the  company  to  declare  a  divi- 
dend. The  court  refused  to  order  a 
dividend.  In  Richardson  v.  Vermont, 
etc.  R.  R.,  44  Vt.  613  (1872),  the  court 
decreed  the  payment  of  what  was  sub- 
stantially a  dividend  to  the  stock- 
holders, but  stated  that  an  accounting 
must  first  be  had  to  ascertain  whether 
there  was  available  for  that  purpose 
''a  fund  adequate  not  only  for  the 
payment  of  the  claims  of  the  plaintiffs 
in  the  cause,  but  for  the  payment  of 
all  other  stockholders  having  hke 
claims";  and  there  "must  be  a  sur- 
plus fund  over  and  above  what  is 
requisite  for  the  payment  of  the  cur- 
rent expenses  of  the  business,  for  dis- 
charging its  duties  to  creditors,  and 
over  and  above  what  reasonable  pru- 
dence would  require  to  be  kept  in  the 
treasury  to  meet  the  accidents,  risks. 


business  of  operating  the  railroad."  In 
Dent  V.  London  Tramways  Co.,  L.  R. 
16  Ch.  D.  344  (1880),  the  court  com- 
pelled the  company  to  pay  a  dividend 
on  the  preferred  stock,  where  there 
were  profits  available,  and  the  com- 
mon stockholders  proposed  to  use  all 
the  profits  for  long-neglected  repairs, 
the  real  reason  being  that  there  were 
profits  sufficient  for  a  dividend  on  the 
preferred,  but  not  on  both  the  com- 
mon and  preferred.  The  court  said 
that  profits  meant  the  "surplus  in  re- 
ceipts, after  paying  expenses  and  re- 
storing the  capital  to  the  position  it 
was  in  on  the  first  of  January  in  that 
year."  Where  a  bill  in  equity,  filed 
for  the  purpose  of  obtaining  an 
accounting  and  the  declaration  of  a 
dividend,  does  not  clearly  make  out 
the  existence  of  a  surplus  which  the 
directors  ought  to  distribute,  the  suit 
will  fail.  A  discovery  will  not  be 
granted  where  there  is  no  allegation 
that  information  is  refused,  or  that 
the  party  cannot  examine  the  books, 
or  that  a  mandamus  was  inadequate. 
Wolfe  V.  Underwood,  96  Ala.  329 
(1892).  Where  the  licensor  of  a 
patent  is  to  have  from  a  corporation 
as  licensee  a  certain  payment  from  the 
net  profits,  such  payment  not  to  be 
cumulative  and  to  be  subject  to  pro- 
vision for  a  reserve  fund,  it  is  legal 
for  the  company  to  pass  a  sum  to  the 
reserve  fund,  and  also  a  further  sum 
for  depreciation  and  the  cost  of 
licenses.  Bagot,  etc.  Co.  v.  Clipper, 
etc.  Co.,  [1902]  1  Ch.  146. 

1  Where  a  corporation  having  a 
large  surplus  proposed,  with  the  con- 
currence of  a  majority  of  the  stock- 
holders, to  employ  the  surplus  in  ex- 
tending the  business,  although  such 
extension  was  opposed  by  a  minority 
of  the  stockholders,  it  appearing  that 
the  proposed  enlargement  of  the  cor- 
porate enterprise  was  clearly  intra 
vires,  it  was  held  on  a  bill  brought 
by  the  dissenting  minority  for  an  in- 


1590 


CH.  XXXII.]  DIVIDENDS.  [§  545. 

Profits  may  also  be  set  aside  for  the  pa\Taent  of  indebtedness,  though 
it  is  not  yet  due.^  Where  stock  is  pledged  and  the  pledgee  is  in  control 
of  the  company,  and,  instead  of  declaring  dividends,  he  honestly  and 
intelligently  applies  the  profits  to  improvements,  the  pledgor  cannot 
hold  him  liable  for  not  declaring  dividends,  and  for  not  thus  decreasing 
the  debt  for  which  the  stock  was  given  in  pledge.-  The  free  exercise 
of  the  directors'  discretion  cannot  be  interfered  with  by  the  contracts 
of  promoters  or  original  incorporators  as  to  the  disposition  of  corporate 
profits.^  A  court  will  not  compel  a  foreign  corporation  to  declare  a 
dividend.'*  Under  the  New  Jersey  statute  a  stockholder  may  file  a  bill 
to  compel  the  declaration  of  a  dividend  out  of  accumulated  profits 
not  reserved  for  working  capital  by  vote  of  the  stockholders,  as  provided 
in  the  statute.^  Where  the  stockholders  are  given  power  by  statute 
to  fix  the  amount  of  the  reserve  for  working  capital,  their  discretion 
cannot  be  questioned  by  a  minorit}'  stockholder.^  A  stockholder's 
bill  to  compel  the  directors  to  declare  a  dividend  under  the  New  Jersey 
statute  must  allege  that  the  accumulated  profits  are  larger  than  the 
reserve  as  fixed  by  the  stockholders.^  Under  the  New  Jersey  statute 
a  certificate  of  incorporation  may  authorize  the  directors  to  fix  the 
amount  of  the  working  capital.^  But  even  though  the  charter  gives 
the  directors  power  to  fix  the  amount  reserved  for  working  capital,  yet 

junction  against  the  proposed  use  of  Ruble,    8    Oreg.    284    (1880).     But    if 

the  surplus,   and   praying  a  distribu-  expressly  ratified  by  the  company  it  is 

tion    of    it    among    the    stockholders,  binding.     Richardson  v.  Vermont,  etc. 

that   the  facts   were   not   such  as    to  R.   R.,  44  Vt.   613   (1872),  where  an 

require  the  interposition  of  the  court  agreement  to  pay  annual  interest  to 

on  behalf  of  the  minority.     Pratt  v.  the  stockholders  out  of  the  net  profits 

Pratt,  33  Conn.  446  (1866),  the  court  was  considered. 

saying:    "On  a  question  of  this  sort  *  Berford  v.  New  York  Iron  Mine, 

much  must  necessarily  be  left  to  the  4  N.  Y.  Supp.  836  (1888).     See  also 

discretion  of  the   managing   directors ;  §  734,   infra. 

and  so  long  as  they  keep  within  the  ^  Griflfing  v.  A.  A.  Griffing,  etc.  Co., 

objects  contemplated  by  the  articles  of  61  N.  J.  Eq.  269  (1901).     The  court 

association,    and    the    expenditure    is  refused    to   order   a   dividend    in    the 

not  unreasonable  in  reference  to  the  case  Raynolds  v.  Diamond,  etc.  Co.,  69 

amount   of   their   capital,   a   court   of  N.  J.  Eq.  299  (1905),  although  profits 

equity  ought  very  seldom  to  interfere  to  the  amount  of  the  capital  stock  had 

with  them."  been   invested   in   the   plant,   and   no 

1  Karnes  v.  Rochester,  etc.  R.  R.,  4  dividends  paid,  it  appearing  that  all 

Abb.  Pr.  (N.  S.)  107  (1867).  the    stockholders    had    assented    to    a 

'  Zellerbach  v.  AUenberg,  99  Cal.  57  resolution  lea\'ing  it   with   the   board 

(1893).  of    directors    to    declare    or    withhold 

'  The  agreement  of  the  promoters  di\ddends. 

and    preliminary    subscribers    to    the  ^  Lillard  v.  Oil,  etc.  Co.,   70  N.  J. 

stock  of  the  proposed  company  as  to  Eq.  197  (1903). 

the    division    and    disposition    of    the  '  Trimble   v.    American,    etc.    Co., 

net  profits  does  not  bind  the  company  61  N.  J.  Eq.  340  (1901). 

unless  it  has  expressly  acquiesced  in  *  Bassett  v.  United  States  etc.,  Co., 

such  agreement.     Coyote,  etc.   Co.  v.  74  N.  J.  Eq.  668  (1908). 

1591 


§  545.]  DIVIDENDS.  [CH.  xxxir. 

if  there  are  but  three  stockholders  and  directors  and  two  of  them  deprive 
the  third  of  any  participation  in  the  business,  and  instead  of  paying 
dividends  set  aside  $10,000  as  a  working  capital  which  was  not  required 
for  the  business,  the  court  will  order  a  dividend  declared.^  Stockholders 
by  a  by-law  which  has  been  lived  up  to  for  many  years  may  waive  the 
benefit  of  a  statute  that  the  profits  reserved  for  working  capital  shall 
not  exceed  one  half  of  the  capital  stock.-  Where,  by  a  by-law,  the 
board  of  directors  has  power  to  set  aside  from  the  profits  such  sum  as 
they  think  proper  as  a  reserve  fund  to  meet  contingencies,  they  have 
power,  after  paying  dividends  on  the  preferred  stock,  to  carry  the  bal- 
ance to  a  reserve  fund,  although  the  common  stock  is  thereby  deprived 
of  any  dividend.^  A  by-law,  however,  that  directors  shall  establish 
a  secret  reserve  fund  which  the  shareholders  shall  know  nothing  about 
and  which  the  auditors  shall  not  report  to  the  shareholders,  is  contrary 
to  the  English  statute  requiring  the  auditors  to  report  fully  to  the  share- 
holders.^ The  discretion  of  the  directors  in  accumulating  a  reserve  for 
a  banking  corporation  will  not  be  interfered  with  unless  the  directors 
act  unfairly  or  in  bad  faith.^  A  surplus  of  a  company  may  be  invested 
in  such  securities  as  the  board  of  directors  may  deem  best,  and  the  board 
is  not  confined  to  securities  in  which  a  trustee  may  invest.® 

Nevertheless  the  discretion  of  the  directors  in  the  matter  of  declaring 
or  refusing  to  declare  a  dividend  is  not  absolute,  and  where  there  is  a 
clear  abuse  of  power  in  refusing  to  declare  the  dividend,  a  court  of  equity 
will,  at  the  instance  of  any  stockholder,  compel  the  proper  authorities 
to  declare  and  pay  the  dividend.^    A  stockholder's  suit  to  compel  the 

1  Lawton  v.  Bedell,  71  Atl.  Rep.  *  Newton  v.  Birmingham,  etc.  Co., 
490  (N.  J.  1908).  Ltd.,  [1906]  2  Ch.  378. 

2  Murray  v.  Beattie  Mfg.  Co.,  82  »  jjenee  even  though  the  reserve 
Atl.  Rep.  1038  (N.  J.  1912).  amounts   to   $2,500,000   in   a   savings 

2  Fisher  v.  Black,  etc.  Co.,  [1901]   1  institution,   the   court   will   not   order 

Ch.    174.     In   the   important   case   of  the  distribution  of  any  part  thereof. 

Burland,  etc.  t;.  Earle,  etc.,  [1902]  A.  Muleahy   v.    Hibernia,   etc.   Soc,    144 

C.  83,  the  Privy  Council,  passing  on  Cal.  219  (1904). 

a    by-law    authorizing    the    directors,  «  Burland,  etc.  v.  Earle,  etc.,  [1902] 

subject  to  the  approval  of  a  meeting  A.  C.  83.     In  this  case  the  surplus  was 

of  the  stockholders,  to  set  apart  any  invested    in    bank    shares  and   mort- 

portion   of   the   profits   for   a   reserve  gages,  and  such  investment  was  made 

fund  of  a  corporation   that  had  paid  in  the  name  of  a  director.     The  court 

on  an  average  dividends  of  forty  per  further  stated  that  such  investments 

cent,    per   annum,    the    capital    stock  should  not  be  in  speculative  securities, 

being  $200,000,  and  had  accumulated,  '  A  bill  in  equity  lies  to  compel  the 

as  undivided  profits,  $264,000,   which  payment  of  preferred  dividends  where 

was  carried  in  profit  and  loss  account,  the  stockholder  has  repeatedly  sought 

held    that    a    stockholder    could    not  an  accounting  and  there  apparently  is 

maintain  a  suit  to  declare  the  aecumu-  money    available    to    pay    such    divi- 

lation  to  be  ultra  vires  and  to  obtain  dends.     Cratty  v.  Peoria,  etc.  Assoc, 

a     distribution     thereof     among     the  219  111.  516  (1906),    the   court  saying 

stockholders.  (p.  522) :     "Generally,  the  question  of 

1592 


CH.  XXXII.] 


DIVIDENDS. 


[§  545. 


declaration  of  a  dividend  does  not  lie  where  the  stockholder  has  not 
applied  to  the  directors  therefor  and  does  not  allege  that  the  directors 

is  payable  within  a  reasonable  time 
where  the  profits  amply  justify  it. 
Northwestern,  etc.  Co.  r.  Carlson, 
116  Minn.  438  (1912).  Where  there 
are  only  five  stockholders  and  all  of 
them  are  directors,  three  of  them 
cannot,  either  at  a  stockholders'  or 
directors'  meeting,  vote  to  themselves 
exorbitant  salaries  nor  the  entire 
profits  made  by  the  company  on 
articles  manufactured  under  patents 
owned  by  them.  In  this  ease  the 
court  decreed  that  one  third  of  the 
profits  from  articles  manufactured 
under  such  patents  should  belong  to 
the  company.  The  minority  stock- 
holders in  a  suit  to  compel  the  declara- 
tion of  a  dividend  may  bring  into  the 
fund  moneys  so  illegally  paid  out. 
Crichton  v.  Webb  Press  Co.,  113  La. 
167  (1904).  Where  the  officers  of  a 
company,  which  has  paid  from  nine 
to  fourteen  per  cent.,  "freeze  out" 
minority  stockholders  by  reducing  the 
dividends  and  increasing  their  salaries 
and  misrepresenting  the  condition  of 
the  company,  and  then  after  buying 
the  minority  stock  increase  the  div- 
idend, the  minority  stockholders  may 
hold  them  liable  in  an  action  on  the 
case  for  damages,  even  though  they 
might  have  brought  suit  in  behalf  of 
the  corporation.  If  the  stock  has  no 
market  value,  the  value  may  be  proved 
by  estimating  the  good-will,  as  shown 
by  the  net  profits,  and  it  is  for  the 
jury  to  decide  how  many  years*  net 
profits  shall  be  considered  in  obtain- 
ing the  average.  The  balance  sheets 
are  also  admissible.  Von  Au  v.  Magen- 
heimer,  126  N.  Y.  App.  Div.  257 
(1908) ;  aff'd,  196  N.  Y.  510.  In  the 
case  Matter  of  Rogers,  161  N.  Y. 
108,  112  (1899),  the  court  of  appeals 
said:  "An  argument  is  made,  which 
has  the  sanction  of  some  of  the  author- 
ities, to  the  effect  that  all  of  the  assets 
of  a  corporation  are  deemed  capital 
until  a  dividend  is  declared.  We  may 
concede  that  assets  are  ordinarily  so 
treated  in  going  concerns,  but  the  rule 
has  its  limitations.  The  directors 
must  act  in  good  faith.  If  they  fail  to 
do  so,  and  it  clearly  appears  that  they 


declaring  a  dividend  is  intrusted  to 
the  sound  discretion  of  the  directors ; 
and,  as  to  common  stock,  such  dis- 
cretion will  not  be  interfered  with  by 
a  court  of  equity  in  the  absence  of 
bad  faith  or  arbitrary  or  unjustifiable 
conduct.  But  different  rules  apply 
with  respect  to  the  right  of  holders  of 
preferred  stock  to  invoke  the  aid  of 
a  court  to  order  the  declaration  and 
paj^ment  of  dividends  on  their  stock." 
Where  a  stockholder  who  has  pledged 
his  stock,  is  refused  permission  to 
examine  the  books  and  no  dividends 
have  been  declared,  although  large 
profits  have  been  made,  and  the 
majority  stockholders  are  planning  to 
deprive  him  of  his  stock,  he  may  file 
a  bill  to  compel  the  declaration  of  a 
dividend.  Anderson  t'.  W.  J.  Dyer  & 
Bro.,  94  Minn.  30  (1904).  Even 
though  a  prosperous  eight  hundred 
mile  railroad  (Chicago  &  Alton)  is 
consolidated  -wath  a  short  railroad 
heavily  in  debt,  yet  if  the  consolida- 
tion agreement  gives  to  minority 
stockholders  of  the  former  the  right  to 
retain  their  stock,  and  provides  for 
the  earnings  of  the  prosperous  road 
being  kept  separate,  a  minority  stock- 
holder may  compel  the  keeping  of  the 
books  in  that  way  and  the  payment  of 
the  dividends  from  the  profits.  Miller 
V.  Chicago,  etc.  R.  R.,  171  Fed.  Rep. 
253  (1909).  Where  a  majority  stock- 
holder who  also  controls  the  board  of 
directors  induces  subscription  on  rep- 
resentations that  the  corporate  expense 
would  not  exceed  a  certain  amount  a 
month,  and  he  then  votes  himself  a 
salary  in  excess  of  that  amount,  the 
court  may  compel  him  to  repay  the 
excess  and  may  order  a  dividend  to  be 
paid  therefrom.  Ritchie  v.  People's 
Tel.  Co.,  119  N.  W.  Rep.  990  (S.  Dak. 
1909).  Where  a  court  decrees  that 
salaries  are  illegal,  it  should  not  order 
distribution  among  the  stockholders, 
because  that  is  ordering  a  dividend 
at  the  instance  of  a  minority  stock- 
holder. Miller  v.  Crown,  etc.  Co.,  125 
N.  Y.  App.  Div.  881  (1908).  A  divi- 
dend declared  but  payable  when  the 
directors  think  the  finances  warrant  it, 


1593 


§545. 


DIVIDENDS. 


CH.   XXXII. 


would  refuse  to  give  such  application  proper  consideration.^  Laches 
on  the  part  of  the  stockholders  in  failing  to  commence  their  suit  to 
compel  the  payment  of  a  dividend  until  the  corporation  becomes 
insolvent  is  fatal.-  And  the  court  will  also  consider  that  the  aggrieved 
stockholders  may,  if  a  majority,  refuse  to  reelect  the  directors  at  the 
next  election,  or  may  sell  their  shares.^ 


have  accumulated  earnings  not 
required  in  the  prosecution  of  the 
business,  which  they  withhold  from 
the  stockholders  for  illegitimate  pur- 
poses, a  court  of  equity  may  interfere 
and  compel  a  distribution  of  such 
earnings."  Where  two  directors, 
forming  a  majority  of  the  board,  vote 
themselves  very  large  salaries,  and 
refuse  information  to  another  director 
who  is  the  only  other  stockholder,  and 
refuse  to  declare  dividends,  and  pro- 
ceed to  convey  the  property  of  the 
company  to  another  company  con- 
trolled by  themselves,  a  court  of 
equity  will  set  aside  the  illegal  con- 
veyances and  the  resolutions  author- 
izing the  salaries,  and  will  order  the 
books  to  be  opened  to  the  other 
director,  and  will  order  dividends  to 
be  declared.  The  court,  however, 
will  not  appoint  a  receiver  and  enjoin 
the  continuance  of  the  business,  and 
will  not  order  a  distribution  of  the 
assets  of  the  company.  Laurel 
Springs  Land  Co.  v.  Fougeray ;  50 
N.  J.  Eq.  756  (1893),  rev'g  Fouge- 
ray V.  Cord,  50  N.  J.  Eq.  185 ;  rev'd  on 
another  point  in  57  N.  J.  Eq.  318. 
Where  for  seven  years  a  stockholder 
who  owned  a  majority  of  the  stock 
elected  himself  and  two  of  his  dum- 
mies as  directors  of  the  company,  and 
caused  the  board  to  vote  a  large 
salary  to  himself  as  president  and 
manager,  and  had  leased  to  the  com- 
pany his  property  at  a  large  rental, 
the  salary  and  rental  are  illegal  and 
void ;  and  inasmuch  as  the  company 
had  failed  to  pay  its  dividends  by 
reason  of  such  acts,  a  court  of  equity, 
upon  the  suit  of  another  stockholder, 
ordered  the  president  to  account,  and 
appointed  a  receiver  of  the  company 
and  directed  that  its  affairs  be  wound 
up.  The  court  ordered  a  repayment 
of  the  dividends  and  a  distribution 
thereof  among  the  stockholders. 
Miner  v.  Belle  Isle  Ice  Co.,  93  Mich.  97 


(1892)  ;  Brown  v.  Buffalo,  etc.  R.  R., 
27  Hun,  342  (1882).  See  also  Park  v. 
Grant  Locomotive  Works,  40  N.  J.  Eq. 
114  (1885).  In  this  ease  there  was  a 
contract  that  the  net  profits  should  be 
divided  annually.  Scott  v.  Eagle  Fire 
Co.,  7  Paige,  198  (1838);  Pratt  v. 
Pratt,  33  Conn.  446  (1866)  ;  Beers  v. 
Bridgeport  Spring  Co.,  42  Conn.  17 
(1875).  Upon  a  sale  of  all  the  prop- 
erty of  the  corporation  the  directors 
may  be  compelled  to  declare  a  divi- 
dend. Cramer  v.  Bird,  L.  R.  6  Eq.  143 
(1868).  A  stockholder  cannot  sue  for 
profits  until  a  dividend  is  declared. 
Beveridge  v.  New  York,  etc.  R.  R., 
112  N.  Y.  1  (1889).  Where  an  employee 
gives  his  note  in  payment  for  sub- 
scription for  stock,  such  note  to  be 
paid  out  of  future  dividends,  the  court 
will  hold  that  the  note  has  been  paid 
when  the  dividends  were  earned,  but, 
for  the  purpose  of  defrauding  the 
subscriber,  were  not  declared.  Morey 
V.  Fish,  etc.  Co.,  108  Wis.  520  (1901). 
A  lawyer  having  a  contract  with  a 
corporation  that  he  should  receive 
five  per  cent,  of  its  net  earnings  may 
enforce  the  agreement  by  a  suit  in 
equity  where  net  earnings  exist  and 
the  directors  ignore  the  contract. 
Dupignac  v.  Bernstrom,  37  N.  Y. 
Misc.  Rep.  678  (1902) ;  aff'd,  76  N.  Y. 
App.  Div.  105.  Where,  pending  a 
suit  by  a  stockholder  to  have  a  divi- 
dend declared,  the  corporation  is 
sold  out  after  he  has  sold  his  stock 
retaining  the  right  to  such  dividend,  if 
ordered  by  the  court,  he  may  main- 
tain a  bill  in  equity  for  an  accounting. 
Phillips  V.  Jacobs,  108  N.  W.  Rep. 
899  (Mich.  1906). 

1  Maeder    v.  Buffalo,    etc.  Co.    132 
Fed.  Rep.  280  (1904). 

2  Scott  V.  Eagle  Fire  Co.,  7  Paige, 
198  (1838). 

3  Barry     v.     Merchants'     Exchange 
Co.,  1  Sandf.  Ch.  280  (1844). 


1594 


CH.   XXXII.] 


DIVIDENDS. 


[§  546. 


§  546.  Dividends  can  usually  he  made  only  from  profits  —  Excep- 
tions to  this  rule  —  What  are  profits  which  may  be  used  for  divi- 
dends.—  As  against  the  dissent  of  stockholders  or  creditors,  a  divi- 
dend can  lawfully  be  made  only  out  of  profits.^  The  payment  of  it 
must  leave  the  capital  stock  of  the  company  intact  and  unimpaired, 
or  the  dividend  itself  will  be  held  illegal.-  A  statement  in  a  prospectus 
that  dividends  have  been  paid  may  be  fraudulent  if  the  dividends  were 
not  paid  out  of  profits.^  Where,  however,  a  corporation  is  formed  by  a 
partnership  to  sell  its  property  and  divide  the  profits  it  may  do  so  not- 
withstanding a  statute  prohibiting  dividends  from  capital  stock."* 
A  contract  of  directors  to  pay  a  dividend  as  a  debt  at  fixed  intervals, 
being  in  reality  a  preferred  dividend,  cannot  be  enforced  either  at  law 
or  in  equity,  except  out  of  net  profits  like  other  dividends.^  An  agree- 
ment of  the  corporation  with  a  stockliolder  to  pay  to  him  in  dividends 
the  amount  he  pays  for  the  stock  cannot  be  enforced  as  an  obligation  of 
the  corporation.^  A  company  may,  however,  legally  pay  interest  on 
such  part  of  the  subscription  as  is  paid  in  before  required  by  calls.  Such 
interest  may  be  paid  although  there  are  no  profits.^ 

An  agreement  by  which  some  of  the  directors  of  a  company  sell  their 


1  Quoted  and  approved  in  Van 
Vleet  V.  Evangeline  Oil  Co.,  129  La. 
406    (1911). 

2  Loekhart  i;.  VanAlstyne,  31  Mich. 
76  (1875) ;  Hughes  v.  Vermont  Copper 
Min.  Co.,  72  N.  Y.  207,  210  (1878). 
See  also  §  272,  supra,  and  eases  in 
notes  to  this  section.  As  to  whether 
the  corporation  may  defend  on  this 
ground  against  a  suit  for  dividends, 
see  §  540,  supra.  As  to  what  consti- 
tutes a  payment  of  dividends  out  of 
capital,  see  3  Ry.  &  Corp.  L.  J.  409, 
reviewing  English  decisions.  Where 
the  assets  are  distributed  by  way  of 
a  dividend  a  dissenting  stockholder 
may  have  a  receiver  appointed  under 
the  Louisiana  statute.  Van  Vleet 
t'.  Evangeline  Oil  Co.,  129  La.  406 
(1911).  So  far  as  dissenting  minor- 
ity stockholdei's  are  concerned  "a 
corporation,  in  the  absence  of  consti- 
tutional or  statutory  prohibition,  has 
in  general  an  inherent  right,  for  a 
bona  fide  purpose,  to  retire  by  pur- 
chase its  capital  stock,"  and  may 
issue  its  mortgage  bonds  in  exchange 
for  its  own  capital  stock  so  purchased. 
Allen  V.  Francisco  etc.  Co.,  193  Fed. 
Rep.  825,  831  (1912). 


*  Downey  v.  Finucane,  205  N.  Y. 
251  (1912).  In  this  case  the  members 
of  a  syndicate  including  directors  were 
held  liable  to  a  purchaser  of  stock  who 
relied  on  the  representations  of  an 
agent  of  the  syndicate  that  dividends 
had  been  paid,  the  fact  being  that  such 
dividends  had  not  been  earned. 

*Bald^\^n  v.  Miller  &  Lux,  152 
Cal.  454  (1907). 

*  Painesville,  etc.  R.  R.  v.  Kang,  17 
Ohio  St.  534  (1867).  See  also  ch. 
XVI,  supra.  A  loan  from  stockholders 
to  be  repaid  from  the  first  profits  is 
payable  absolutely  within  a  reason- 
able time  if  no  profits  are  made.  Busby 
V.  Century,  etc.  Co.,  27  Utah,  231 
(1904).  An  agreement  to  pay  divi- 
dends, whether  earned  or  not,  is  ille- 
gal, and  hence  certificates  of  indebt- 
edness issued  in  advance  of  such 
dividends  cannot  be  enforced.  Strick- 
land V.  National  Salt  Co.,  79  N.  J.  Eq. 
182  (1911). 

Alabama,    etc.    Assoc, 
See  also  §  544, 


6  Smith 
123  Ala.  538  (1899) 
supra. 

'  Lock  V 
[1896]  A.  C 
1  Ch.  397. 


Queensland,     etc.     Co., 
461.     H.  L.  aff'g  [1896] 


1595 


§  546. 


DIVIDENDS. 


[CH.  XXXII. 


stock  to  the  remaining  stockholders,  and  take  pay  therefor  from  the 
assets  ^of  the  corporation,  is  not  illegal  if  all  the  stockholders  assent 
and  the  corporation  is  not  injured.^     For  instance  it  is  legal  for  the 


1  Raymond  i>.  Colton,  104  Fed.  Rep. 
219  (1900),  holding  also  that  the 
assent  of  a  few  minor  stockholders 
whose  stock  was  given  to  them  may 
be  presumed,  in  case  they  have  not 
objected  to  an  agreement  whereby 
some  of  the  stockholders  sell  their 
stock  to  the  others  and  take  their 
pay  from  the  corporation  itself  and 
resign  their  offices  and  substitute  new 
parties  as  directors.  See  also  §§  548, 
671,  infra,  and  §  535,  supra.  In  New 
York,  however,  the  Penal  Code  pro- 
hibits such  a  dividend.  Penal  Code, 
§  594.  Even  though  a  corporation 
borrows  money  to  pay  the  obligations 
of  an  insolvent  debtor  of  such  corpora- 
tion without  consideration,  yet  if 
thereafter  all  of  the  former's  stock  is 
sold  on  the  basis  of  such  loan  being 
legal,  the  corporation  cannot  thereafter 
repudiate  it.  Remington,  etc.  Co. 
V.  Caswell,  126  N.  Y.  App.  Div.  142 
(1908).  Even  though  a  person  selling 
all  the  stock  of  a  brick  manufacturing 
company  takes  his  pay  partly  by  a 
note  of  the  company  itself,  yet  he 
cannot  sue  the  vendee  for  the  amount 
of  such  note.  Hess  v.  Riech,  78 
N.  J.  L.  645  (1910).  While  generally  a 
person  owning  the  entire  capital 
stock  may  use  his  assets  as  he  sees  fit, 
subject  to  creditors'  rights,  j-et  if  he 
causes  to  be  issued  a  fictitious  debt 
to  himself  and  then  sells  his  stock,  he 
may  be  compelled  to  account  to  the 
corporation,  especially  where  the  act 
was  not  properly  authorized  by  the 
corporate  meeting  and  an  outsider 
held  one  share  of  stock.  Central 
Mfg.  Co.  V.  Montgomery,  144  Mo. 
App.  494  (1910).  Persons  sued  at  law 
by  a  corporation  for  accepting  its 
money  from  its  president  and  using  it 
to  pay  the  president's  debt,  may  file 
a  bill  in  equity  to  enjoin  the  suit  at 
law  on  the  ground  that  the  president 
owned  or  controlled  all  the  stock  and 
used  the  corporation  for  his  private 
purposes,  and  that  the  money  was  so 
paid  with  the  consent  of  all  the  stock- 
holders and  officers.    Leigh  v.  Kewanee, 


etc.  Co.,  127  Fed.  Rep.  990  (1904). 
Where  two  parties  own  all  the  stock, 
and  by  agreement  one  of  them  takes 
some  of  the  corporate  assets  and 
thereafter  the  matter  is  settled  satis- 
factorily and  the  stock  sold,  the  pur- 
chasers knowing  of  the  facts  cannot 
complain.  Peterson  v.  Elholm,  130 
Wis.  1  (1906).  A  business  corporation 
cannot  defeat  an  accommodation  note 
if  all  the  stockholders  assented  thereto 
and  there  are  no  creditors.  Perkins 
V.  Trinity,  etc.  Co.,  69  N.  J.  Eq. 
723  (1905),  the  court  saying:  "To 
permit  stockholders  of  corporations  to 
unanimously  make  a  disposition  of 
the  corporate  property  where  no  one 
else's  rights  are  in,  any  way  preju- 
diced, and  afterwards  to  repudiate 
their  action  upon  the  ground  that  it 
was  beyond  the  power  of  the  fictional 
body  to  do  the  act,  could  serve  no 
useful  purpose,  and  would  be  merely 
available  in  aid  of  fraud."  Even 
though  a  dividend  has  been  paid  par- 
tially out  of  capital  stock,  yet  if  the 
error  is  about  to  be  corrected  by 
profits  during  a  subsequent  year,  a 
stockholder's  suit  to  compel  the  direc- 
tors to  replace  the  amount  wiU  not 
lie.  Towers  v.  African,  etc.  Co.,  Ltd., 
[1904]  1  Ch.  558.  A  creditor  of  a  cor- 
poration may  object  to  a  mortgage 
given  to  secure  the  individual  debts 
of  its  stockholders  incurred  in  pur- 
chasing stock  in  the  corporation,  even 
though  the  creditor  became  such  after 
the  transaction.  In  re  Haas  Co.,  131 
Fed.  Rep.  232  (1904).  The  presump- 
tion is  that  the  dividend  was  not  paid 
from  the  capital  stock.  Redhead  v. 
Iowa  Nat.  Bank,  127  Iowa,  572  (1905). 
Notes  of  the  corporation  issued  by 
way  of  an  illegal  dividend  cannot  be 
offset  against  liability  on  the  unpaid 
subscription  price  of  the  stock. 
Shields  ;;.  Hobart,  172  Mo.  491  (1903). 
In  a  suit  at  law  by  a  corporation 
against  its  treasurer  for  corporate 
funds,  he  cannot  set  up  that  he  and 
another  person  were  the  sole  stock- 
holders  at   the   time   the   funds   were 


1596 


CH.  XXXII.] 


DIVIDENDS. 


546. 


stockholders  to  agree  to  sell  all  the  stock  and  pay  the  corporate  debts 
and  to  receive  from  the  purchasers  the  value  of  the  property  owned  by 

divided  between  them  and  that  their  action.  Goss  &  Co.  v.  Goss,  147  N.  Y. 
accounts  had  been  settled.  Leigh  v. 
National,  etc.  Co.,  223  111.  407  (1906). 
In  the  case  Home,  etc.  Co.  v.  Barber, 
67  Neb.  644  (1903),  where  the  pur- 
chaser of  stock  sued  to  hold  former 
stockholders  liable  for  corporate  assets 
appropriated  by  them,  the  court 
found  that  such  use  of  assets  had  been 
taken  into  consideration  in  fixing  the 
price  at  which  the  stock  had  been 
sold,  and  hence  refused  to  hold  the 
parties  liable.  Where  all  the  stock 
has  been  issued  for  property  the  cor- 
poration cannot  then  give  notes  in 
addition  as  against  corporate  cred- 
itors. Haines,  etc.  Co.  v.  Highland, 
etc.  Co.,  49  Greg.  71  (1907).  In  the 
case  First  National  Bank,  etc.  v. 
Winchester,  119  Ala.  168  (1898), 
where  a  private  corporation  had  but 
four  stockholders  and  two  of  them 
bought  the  stock  of  the  other  two  and 
paid  therefor  by  notes  signed  by  them 
and  the  corporation  and  secured  by 
mortgage  on  the  corporate  property, 
the  court  held  that  the  note  was  not 
enforceable  against  the  corporation, 
but  held  that  the  mortgage  was  legal 
as  against  subsequent  creditors,  mort- 
gagees, and  purchasers  from  the  cor- 
poration who  took  with  notice  of  the 
facts.  Approving  Swift  v.  Smith,  65 
Md.  428   (1886). 

Where  three  persons  have  formed  a 
corporation  and  transferred  a  patent 
to  it  for  all  its  capital  stock,  and  are 
the  sole  stockholders,  there  being  no 
creditors,  they  may  purchase  the  pat- 
ent back  and  give  the  corporation 
their  note  for  the  par  value  of  the 
whole  capital  stock.  Although  the 
corporation  subsequently  becomes  in- 
solvent the  transaction  cannot  be 
impeached.  Skinner  v.  Smith,  56 
Hun,  437  (1890) ;  aff'd,  134  N.  Y.  240 
(1892).  Although  the  president  makes 
a  contract  with  the  corporation  by 
which  he  gets  certain  of  the  assets, 
yet  if  the  stockholders  ratify  the  con- 
tract on  condition  that  all  the  other 
stockholders  be  offered  a  similar 
amount  of  assets,  the  corporation  can- 
not subsequently  repudiate  the  trans- 


App.  Div.  698  (1911).  It  is  legal  for 
a  coal  corporation,  with  the  assent  of 
all  its  stockholders,  to  seU  all  its 
property  to  its  president,  and  for  him 
to  pay  therefor  in  cash  and  by  a  mort- 
gage on  the  property  so  purchased,  he 
also  agreeing  to  pay  aU  the  debts  of 
the  company.  Payment  was  made 
directly  to  the  stockholders,  and  they 
transferred  their  stock  to  him  in  addi- 
tion to  the  transfer  of  the  property. 
A  subsequent  creditor  of  the  company 
who  knew  all  the  facts  cannot  com- 
plain. Parke,  etc.  Co.  v.  Terre  Haute, 
etc.  Co.,  129  Ind.  73  (1891). 

Practically  there  was  a  division  of 
the  corporate  assets  among  the  stock- 
holders in  Boston,  etc.  Co.  v.  Bankers', 
etc.  Co.,  36  Fed.  Rep.  288;  aff'd  sub 
nom.  United,  etc.  Co.  v.  Boston,  etc. 
Co.,  147  U.  S.  431  (1893).  In  this  case 
the  usual  and  simple  process  of  one 
company  selling  all  its  property  to 
the  other  company  and  taking  pur- 
chase-money mortgage  bonds  in  pay- 
ment, and  then  distributing  the  bonds 
among  its  stockholders,  was  not 
adopted,  but  the  mortgage  was  given 
by  the  vendor  company,  the  object 
being  not  to  have  the  mortgage  cover 
existing  property  of  the  vendee  com- 
pany. The  vendee  company  at  the 
same  time  agreed  to  construct  new 
lines  and  place  them  under  the  mort- 
gage. The  whole  scheme  was  awk- 
ward, and  was  sustained  by  the  courts 
only  after  prolonged  litigation. 

Although  a  corporation  sells  all  its 
property  to  an  individual  for  pur- 
chase-money mortgage  bonds,  and  dis- 
tributes these  bonds  among  its  stock- 
holders, without  paying  the  creditors, 
nevertheless  a  bona  fide  purchaser  of 
such  bonds  is  protected  as  against 
the  corporate  creditors.  A  former 
decree  in  a  court  of  equity  against  the 
trustee  of  the  mortgage  in  regard  to 
the  matter  does  not  bind  the  bond- 
holders, although  a  suit  at  law  against 
the  trustee  would  have  bound  them. 
Lebeek  v.  Ft.  Payne  Bank,  115  Ala. 
447  (1897).  Where  a  corporation  dis- 
tributes all  its  assets  among  its  stoek- 


1597 


§546. 


DIVIDENDS. 


[CH.  XXXII. 


the  company.^  Where  the  sole  owner  of  the  stock  of  a  corporation 
executes  the  note  of  the  corporation  for  his  individual  indebtedness,  no 
one  but  the  creditors  of  the  corporation  can  complain.-  A  mortgage 
given  by  a  corporation  to  secure  the  debts  of  its  principal  stockholder 
and  manager  is  void  as  against  corporate  creditors.^  Even  though 
the  president  and  secretary-treasurer  of  a  manufacturing  company  own 
all  the  stock,  yet  if  the  president  uses  a  check  of  the  corporation,  pay- 
able to  its  own  order  and  indorsed  by  it,  to  pay  his  personal  debt, 
corporate  creditors,  upon  the  insolvency  of  the  corporation,  may  com- 
pel the  trust  company  that  cashed  the  check  to  refund  the  money.* 
And  even  though  the  same  people  own  the  stock  of  two  gas  companies  and 
cause  one  to  turn  its  profits  over  to  the  other,  this  does  not  extinguish 
the  separate  corporate  existence.^  Where  a  few  persons  own  all  the 
stock  of  a  company,  and  use  the  profits  for  personal  expenses  and  mis- 


holders  without  paying  the  debts, 
a  corporate  creditor  may  hold  them 
liable,  but  he  must  first  obtain  a  judg- 
ment against  the  corporation,  and 
execution  must  be  returned  unsatis- 
fied. Lamar  v.  Allison,  101  Ga.  270 
(1897). 

Even  though  two  persons  own  the 
entire  capital  stock  of  a  railroad  com- 
pany, yet  if  they  use  a  part  of  its 
assets  for  their  own  individual  pur- 
poses and  make  false  entries  on  the 
books,  some  of  the  entries  showing 
cash  on  hand,  but  which  is  not  on 
hand,  they  are  liable  to  the  company 
later  when  it  has  passed  into  other 
hands.  Saranac,  etc.  R.  R.  v.  Arnold, 
167  N.  Y.  368  (1901). 

Where  the  directors,  with  the  con- 
sent and  knowledge  of  all  the  stock- 
holders, there  being  no  creditors,  pay 
a  part  of  the  capital  stock  to  the 
stockholders  by  way  of  dividends,  and 
afterwards  the  directors  are  compelled 
to  pay  back  such  sums  in  order  to 
liquidate  subsequent  debts,  the  direc- 
tors may  recover  from  the  stock- 
holders the  sums  so  paid  to  the  latter. 
Moxham  v.  Grant,  [1899]  1  Q.  B.  480 ; 
aff'd,  [1900]  1  Q.  B.  88. 

Under  the  New  Hampshire  statute 
of  1844  to  the  effect  that  the  state 
should  be  entitled  to  the  net  profits  of 
railroads  in  excess  of  ten  per  cent, 
per  annum  on  the  money  invested  by 
the  stockholders,  the  state  must  do 
more  than  prove  that  more  than  ten 


per  cent,  dividends  have  been  paid 
to  the  stockholders.  The  state  must 
prove  that  the  excess  came  from  the 
earnings  of  the  road  and  was  not  a 
division  of  the  capital  or  derived  from 
some  source  other  than  tolls  paid  by 
the  public.  State  v.  Manchester,  etc. 
R.  R.,  70  N.  H.  421  (1901).  Where 
preferred  shares  in  an  unincorporated 
trusteeship  to  hold  stock  in  corpora- 
tions are  issued  by  the  trusteeship  to 
the  preferred  shareholders  to  pay 
arrears  of  preferred  dividends,  a  life 
tenant  of  an  estate  owning  preferred 
shares  is  entitled  only  to  the  income 
from  such  newly  issued  shares,  there 
not  having  been  any  profits  added 
to  the  capital  as  representing  such 
increased  preferred  shares.  Gardiner 
V.    Gardiner,    212   Mass.    508    (1912). 

1  Goodman  v.  Purnell,  187  Fed. 
Rep.  90  (1911). 

2  Millsaps  V.  Merchants',  etc.  Bank, 
71  Miss.  361  (1893).  See  also  §548, 
infra. 

3  American,  etc.  Co.  v.  Norment, 
157  Fed.  Rep.  801  (1907). 

4  Ward  V.  City  Trust  Co.,  192  N.  Y. 
61  (1908),  rev'g  117  N.  Y.  App.  Div. 
130,  the  court  intimating  that  the 
trust  company  would  have  been  pro- 
tected if  inquiry  by  it  would  not  have 
resulted  in  developing  the  actual 
facts. 

*  Punxsutawney  Borough  v.  Phil- 
lips, etc.  Co.,  85  Atl.  Rep.  1003  (Penn. 
1913). 


1598 


CH.  XXXII.]  DIVIDENDS.  [§  546. 

cellaneous  purposes,  irrespective  of  the  corporation,  all  the  stockholders 
knowing  thereof  and  assenting  thereto,  a  policy  of  insurance  issued  to 
one  of  them  is  his,  even  though  the  premiums  were  paid  out  of  the  cor- 
porate profits,  it  being  shown  that  all  this  was  done  while  the  corpora- 
tion was  solvent,  and  that  no  rights  of  creditors  then  intervened,  and 
that  all  the  debts  represented  by  the  receiver  arose  subsequently.^ 
Even  though  a  bond  dividend  results  in  the  impairing  of  the  capital 
stock,  the  court  will  not  interfere  if  no  harm  can  come  from  it.-  A 
statutory  liability  for  dividends  paid  out  of  the  capital  stock  abrogates 
all  common-law  liability,  and  if  such  statute  does  not  prohibit  such 
dividends  they  may  be  declared  and  paid  subject  to  such  liability.^ 

In  view  of  the  rule  that  dividends  can  be  made  only  from  profits, 
if  any  one  objects,  it  becomes  important  to  ascertain  what  part  of  the 
income  of  a  corporation  constitutes  "  profits  "  which  may  be  used  for 
a  dividend.  This  question  has  caused  the  courts  considerable  difficulty. 
There  have  been  various  definitions,  explanations,  and  different  states 
of  facts  involved  in  the  cases  which  have  come  before  the  courts.  The 
supreme  court  of  the  United  States  has  said  that  "  the  term  '  profits/ 
out  of  which  dividends  alone  can  properly  be  declared,  denotes  what 
remains  after  defraying  every  expense,  including  loans  falling  due,  as 
well  as  the  interest  on  such  loans."  ^  An  English  court  says  that  profits 
are  "  the  excess  of  the  current  gains  over  the  working  expenses  as  shown 
by  revenue  accounts  as  distinguished  from  capital  accounts."  ^     A  clear 

^  Little  V.  Garabrant,  90  Hun,  404  may    raise    questions    of    the    utmost 

(1895) ;  aff'd,  153  N.  Y.  661.  difficulty  in  their  solution.     I   desire, 

2  Chaffee  v.  Rutland  R.  R.,  55  Vt.  as    I   have    said,    not    to    express   any 

110  (1882).  opinion,     but    as    an    illustration    of 

'  People  V.  Barker,   141  N.  Y.  251  what  difficulties  may  arise,  the  example 

(1894).     203  Fed.  Rep.  726.  given  bj^  the  learned  counsel  of  one 

^  Mobile,   etc.   R.   R.   v.   Tennessee,  ship  being  lost  out  of  a  considerable 

153  U.  S.  486  (1894).  number,  and  the  question  whether  all 

^  Quoted     and     approved     in     Van  dividends  must  be  stopped  until  the 

Vleet  V.  Evangeline  Oil  Co.,   129  La.  value  of  that  lost  ship  is  made  good 

406     (1911).     Re     London     &     Gen.  out  of  the  further  earnings  of  the  com- 

Bank,  72  L.  T.  Rep.  227,  229  (1894)  ;  pany  or  partnership,  is  one  which  one 

aff'd,    [1895]    2    Ch.    166,    673.     The  would  have  to  deal  with.     On  the  one 

House    of    Lords    in    Dovey,    etc.    v.  hand,  people  put  their  money  into  a 

Cory,  [1901]  A.  C.  477,  said:     "Even  trading     concern     to     give     them    an 

the     distinction     between     fixed     and  income,   and   the   sudden   stoppage  of 

floating  capital  which  in  an  abstract  all    dividends   would    send    down   the 

treatise    like    Adam    Smith's    Wealth  value    of    their    shares    to    zero    and 

of    Nations    is     appropriate    enough,  possibly   involve   their  ruin.     On   the 

may,    with    reference    to    a    concrete  other  hand,  companies  cannot  at  their 

case,    be    quite    inappropriate.     It    is  will     and     A\-ithout     the     precautions 

easy  to  lay  down  as  an  abstract  prop-  enforced   by  the  statute  reduce  their 

osition    that  you    must    not  pay  di\'i-  capital ;  but  what  are  profits  and  what 

dends  out  of  capital,  but  the  appliea-  is  capital  may  be  difficult  and  some- 

tion   of    that    very    plain    proposition  times   an   almost   impossible   problem 

1599 


§  546.] 


DIVIDENDS. 


[CH.  XXXII. 


idea  of  what  constitutes  profits  available  for  dividends  can  be  obtained 
only  by  a  study  of  the  cases  themselves.^ 


to  solve."  "There  is  no  hard-and-fast 
rule  by  which  the  company  can  deter- 
mine what  is  capital  and  what  profit. 
It  may  be  safely  said  that  what  losses 
can  be  properly  charged  to  capital 
and  what  to  income  is  a  matter  for 
business  men  to  determine,  and  it  is 
often  a  matter  on  which  the  opinion 
of  honest  and  competent  men  will 
differ.  .  .  .  There  is  no  single  defi- 
nition of  the  word  '  profits '  which  will 
fit  all  cases."  Bond  v.  Barrow,  etc. 
Co.,  [1902]  1  Ch.  353. 

1  "Net  earnings  are,  properly,  the 
gross  receipts,  less  the  expenses  of 
operating  the  road  to  earn  such 
receipts.  Interest  on  debts  is  paid  out 
of  what  thus  remains ;  that  is,  out  of 
the  net  earnings.  Many  other  liabili- 
ties are  paid  out  of  the  net  earnings. 
When  all  liabilities  are  paid,  either 
out  of  the  gross  receipts  or  out  of  the 
net  earnings,  the  remainder  is  the 
profit  of  the  shareholders  to  go  towards 
dividends,  which  in  that  way  are  paid 
out  of  the  net  earnings."  St.  John 
V.  Erie  Ry.,  10  Blatchf.  271,  279 
(1872);  s.  c,  21  Fed.  Cas.  167;  s.  c, 
aff'd,  22  Wall.  136  (1874) ;  Warren  v. 
King,  108  U.  S.  389  (1883) ;  Van  Dyck 
V.  McQuade,  86  N.  Y.  38,  47  (1881). 
"Popularly  speaking,  the  net  receipts 
of  a  business  are  its  profits."  Eyster 
V.  Centennial  Board,  94  U.  S.  500 
(1876).  "Surplus  earnings"  are  said 
to  be  the  moneys  available  for  divi- 
dends. Williams  v.  Western  Union 
Tel.  Co.,  93  N.  Y.  162,  191  (1883). 
"Net  earnings"  is  a  term  synonymous 
with  "net  income,"  and  also  "net 
income"  as  used  in  the  statute  under 
consideration.  Phillips  v.  Eastern 
R.  R.,  138  Mass.  122  (1884).  In  Belfast, 
etc.  R.  R.  V.  Belfast,  77  Me.  445  (1885), 
it  is  said  that  the  term  "net- earnings" 
does  not  imply  that  the  company  is 
wholly  out  of  debt.  In  Park  v.  Grant 
Locomotive  Works,  40  N.  J.  Eq.  114 
(1885),  it  is  said  that  profits  mean 
"the  clear  gains  of  any  business  ven- 
ture, after  deducting  the  capital 
invested  in  the  business,  the  expenses 
incurred  in  its  conduct,  and  the  losses 
sustained    in    its   prosecution '.' ;    and 


further,  that  bills  receivable  consti- 
tute a  part  of  the  assets  or  net  profits, 
but  are  not  to  be  considered  as  the 
basis  of  a  dividend,  unless  they  can 
be  sold  without  material  loss.  In  the 
following  cases  the  term  "net  profits," 
or  an  equivalent  phrase,  is  defined : 
Coltness  Iron  Co.  v.  Black,  L.  R.  6 
App.  Cas.  315  (1881) ;  New  York,  etc. 
R.  R.  V.  Nichals,  119  U.  S.  296  (1886). 
In  Richardson  v.  Buhl,  77  Mich.  632 
(1889),  the  court  approved  of  the  fol- 
lowing statement:  "That  the  first 
thing  to  be  done  by  any  manufacturer 
who  would  ascertain  his  net  earnings 
during  the  preceding  year  is  to  take 
a  careful  inventory  of  what  he  has 
left,  including  his  plant  and  machinery, 
and  then  make  just  and  full  allowances 
for  all  losses  and  shrinkages  of  every  i 
kind  that  he  has  suffered  in  his  prop-  ( 
erty  during  the  year,  and  for  all  ■ 
expenses  of  every  kind,  ordinary  or  \ 
extraordinary,  that  have  occurred 
during  the  year ;  and,  having  made 
such  inventory,  and  deducted  such 
losses  and  shrinkage  of  every  kind,  his 
net  earnings  will  be  the  difference 
between  all  his  investments  in  his 
business  and  all  his  expenses  of  every 
kind  on  the  one  hand,  and  this  new 
inventory,  with  the  reductions  prop- 
erly made,  and  all  that  he  has  received 
of  every  kind,  on  the  other  hand ; 
and  if  his  books  are  properly  kept 
and  proper  deductions  made,  these 
net  earnings  will  finally  appear  on  the 
balance  sheet  to  the  credit  of  the 
profit-and-loss  account."  In  Gratz 
V.  Redd,  4  B.  Mon.  (Ky.)  178,  187 
(1843),  it  is  held  that  capital  paid  in 
on  stock  which  is  afterwards  for- 
feited does  not  thereby  become  prof- 
its and  liable  to  be  distributed  as  a 
dividend  ;  also  that  money  paid  in  as 
capital  must  remain  and  be  treated 
and  expended  as  capital,  whether  the 
stock  that  represents  it  is  forfeited 
or  not.  To  distribute  such  money 
as  profits  is  to  squander  and  dissipate 
the  capital  stock.  "Gross  earnings" 
include  earnings  of  the  railroad  through 
a  transfer  company  operated  by  it. 
Dardanelle,  etc.  Ry.  v.  Shinn,  52  Ark. 


IGOO 


CH.  XXXII.] 


DIVIDENDS. 


[§  546. 


There  are  some  general  principles  connected  with  this  subject  which 
have  been  established  by  the  adjudications.  It  is  not  necessary  for  a 
railroad  or  other  corporation  to  use  its  profits  to  pay  its  funded  or  bonded 
debt  instead  of  using  those  profits  for  a  dividend.^     But  it  is  necessary 

and  properties,  including  rentals  or 
franchise  payments ;  also  all  losses 
during  the  year  not  to  be  paid  by  insur- 
ance or  otherwise ;  also  a  reasonable 
allowance  for  depreciation ;  also  inter- 
est actually  paid  on  debts  not  exceeding 
paid-up  capital  stock  ;  also  taxes  ;  also 
dividends  on  stock  in  companies  sub- 
ject to  this  same  federal  tax.  Good 
book  accounts  may  be  included  as 
assets  in  determining  whether  there 
is  a  net  profit.  Spencer  v.  Lowe,  198 
Fed.  Rep.  961  (1912). 

1  A  company  has  power  to  and  does 
raise  its  capital  both  by  stock  and  by 
borrowing.  "They  expend  that  money 
in  executing  the  works,  and,  the  works 
having  been  executed,  the  capital 
of  the  company  remains  in  the  shape 
of  the  station-houses,  the  permanent 
way,  the  warehouses,  and  everything 
else  which  requires  expenditure  of 
capital.  The  shareholders  .  .  .  are 
not  to  be  told  that  all  these  things  are 
to  be  paid  for  before  they  are  to  have 
any  dividends  out  of  the  income." 
Mills  V.  Northern  Ry.,  L.  R.  5  Ch.  621, 
631  (1870).  For  a  learned  and  very 
satisfactory  discussion  of  when  net 
earnings  are  to  be  retained  for  the  pur- 
pose of  accumulating  a  fund  to  pay  a 
corporate  debt  not  yet  due,  see  Hazel- 
tine  V.  Belfast,  etc.  R.  R.,  79  Me.,  411 
(1887).  In  Gratz  v.  Redd,  4  B.  Mon. 
(Ky.)  178,  188  (1843),  the  court  said 
that  all  interest  must  be  paid  out  of 
profits,  and  should  not  be  charged  to 
construction  account ;  also  that  a  sink- 
ing fund  should  be  provided  and  an 
annual  contribution  made  to  it  out  of 
the  profits.  Even  though  earnings 
received  on  a  lease  of  the  corporate 
property  are  used  to  pay  dividends, 
the  lessee  agreeing  to  pay  the  interest 
on  the  mortgage  debt  for  a  certain 
time,  yet  such  dividends  are  not 
illegal,  unless  the  corporation  was 
insolvent  at  the  time  of  the  payment 
of  the  di\'idends  or  there  was  fraud. 
New  Hampshire  Sav.  Bank  v.  Richey, 
121  Fed.  Rep.  956  (1903).     A  corpo- 


93  (1889).  "The  assets,  resources,  and 
funds  of  the  corporation  must  consist 
of  cash  on  hand  and  other  property, 
and,  if  such  assets  exceed  the  liabili- 
ties, a  dividend  can  be  lawfully 
declared :  in  other  words,  a  profit 
exists."  Hubbard  v.  Weare,  79  Iowa, 
678  (1890) ;  Miller  v.  Bradish,  69  Iowa, 
278  (1886).  See  also  McDougall  v. 
Jersey,  etc.  Co.,  2  Hem.  &  M.  528 
(1864).  Where  the  stockholders  pay 
all  the  debts  and  in  connection  there- 
with some  unnecessary  real  estate 
is  sold,  a  subsequent  creditor  oannot 
complain  that  the  sale  impaired  the 
capital  stock.  Beardslee  v.  Shickler, 
219  Pa.  St.  165  (1907).  Where  by 
statute  a  city  is  entitled  to  a  per- 
centage of  a  railroad  company's  net 
income  from  passenger  traffic,  the 
railroad  cannot  deduct  its  general 
expenses  and  damages  to  property  nor 
interest  on  money  used  in  construc- 
tion in  arriving  at  the  net  income. 
City  of  New  York  i;.  Manhattan  Ry. 
Co.,  119  N.  Y.  App.  Div.  240  (1907). 
Where  a  city  is  entitled  to  a  per- 
centage of  the  "net  income"  from 
a  street  railway,  this  means  the  gross 
receipts,  less  general  expenses,  such 
as  station,  train  and  maintenance 
expense,  but  without  deduction  for 
taxes,  damages  to  property  and  interest 
on  debts.  City  of  New  York  v.  Man- 
hattan Ry.  Co.,  192  N.  Y.  90  (1908). 
A  sale  of  all  its  assets  by  one  bank  to 
another  excepting  "earnings,"  does 
not  except  judgments,  even  though 
they  have  been  considered  worthless. 
Livingston,  etc.  Bk.  v.  First,  etc.  Bk., 
136  Ky.  546  (1909).  "Net  income" 
was  defined  as  follows  in  the  act  of 
Congress  of  August  5,  1909,  to  collect 
"a  special  excise  tax"  of  one  per  cent. 
on  the  "net  income"  (in  excess  of 
$5,000)  of  all  corporations  and  associa- 
tions doing  business  in  the  United 
States.  From  the  gross  income  there 
are  to  be  deducted  ordinary  and  neces- 
sary expenses  paid  out  of  income  in 
maintaining  and  operating  the  business 


(101) 


1601 


546.] 


DIVIDENDS. 


CH.   XXXII. 


to  pay  the  interest  on  such  bonded  debt  before  any  dividend  is  de- 
clared.^ 

A  past-due  floating  debt  should  be  paid  or  funded  before  a  dividend 
is  declared.-  A  corporation  often  owes  large  debts  and  still  has  its 
capital  stock  intact,  and  hence  outstanding  and  disputed  claims  need 
not  be  first  paid.^ 


ration  may  pay  dividends  even  though 
it  has  debts.  O'Shields  v.  Union 
Iron  Foundry,  76  S.  E.  Rep.  1098 
(S.  C.  1913). 

1  Mobile,  etc.  R.  R.  v.  Tennessee, 
153  U.  S.  486,  498  (1894);  Gratz  v.. 
Redd,  4  B.  Mon.  (Ky.)  178,  188 
(1843).  A  dividend  cannot  properly 
be  based  on  a  statement  which  includes 
accrued  interest  with  no  allowance 
for  interest  on  liabilities ;  outstandng 
accounts  with  no  allowance  for  bad 
debts ;  and  expense  for  perfecting  a 
machine,  it  not  being  a  success.  Hub- 
bard V.  Weare,  79  Iowa,  678  (1890). 
Whether  the  interest  on  debentures 
can  be  legally  charged  upon  the  capital 
account  of  the  company,  the  revenue 
available  for  dividend  being  thereby 
increased,  was  not  decided  in  Bloxam 
V.  Metropolitan  Ry.,  L.  R.  3  Ch.  337, 
344,  350  (1868),  but  a  preliminary 
injunction  against  the  dividend  was 
granted.  Interest  on  money  borrowed 
which  accrues  during  process  of  con- 
struction and  before  the  enterprise 
commences  to  earn  money,  may  be 
charged  to  capital  stock  and  need  not 
be  paid  out  of  revenue.  Hinds  v. 
Buenos  Ayres,  etc.  Co.,  [1906]  2  Ch.  654. 

2  The  funded  debt  need  not  be  paid 
before  dividends  are  declared,  but 
."any  debts  which  have  been  incurred 
and  which  are  due  from  the  directors 
or  the  company,  either  for  steam- 
engines,  for  rails,  for  completing  sta- 
tions, or  the  like,  which  ought  to  have 
been  and  would  have  been  paid  at  the 
time,  had  the  defendants  possessed 
the  necessary  funds  for  that  purpose, 
those  are  so  many  deductions  from 
the  profits,  which,  in  my  opinion,  are 
not  ascertained  till  the  whole  of  them 
are  paid."  Corry  v.  Londonderry,  etc. 
Ry.,  29  Beav.  263,  273  (1860).  How- 
ever, in  Stevens  v.  South  Devon  Ry., 
9  Hare,  313,  326  (1851),  a  stockholder 
failed  in  his  suit  to  enjoin  dividends 


until  the  floating  debt  was  paid.  The 
court  said :  "I  am  of  opinion  that  the 
court  ought  not,  upon  this  ground, 
to  interfere  by  injunction.  ...  I 
think  also  that  the  question  upon  this 
third  point  is  one  of  internal  man- 
agement, with  which  the  court  can- 
not interfere."  In  Belfast,  etc.  R.  R. 
V.  Belfast,  77  Me.  445  (1885),  the 
court  said :  ' '  Net  earnings  are  the 
gross  receipts  less  the  expenses  of 
operating  the  road  to  earn  such  re- 
ceipts ;  also  less  the  interest  on  the 
bonded,  funded,  permanent,  or  stand- 
ing debt ;  also  floating  debts  'which  it 
is  not  wise  and  prudent  to  place  in 
the  form  of  a  funded  debt  or  to  post- 
pone for  later  payment ' ;  also  an  an- 
nual contribution  to  a  sinking  fund 
to  pay  the  funded  debt,  when  the  con- 
dition of  the  company  renders  it  ex- 
pedient, as  where  the  company  will 
at  some  future  time  earn  only  its 
operating  expenses.  The  court  also 
said  that  whether  the  floating  debt 
should  be  paid  and  a  contribution  be 
made  to  a  sinking  fund  'depends  upon 
the  financial  resources  and  abilities  of 
the  corporation  and  the  prospects  of 
its  road,'  and  further,  that  the  cost  of 
construction  may  be  charged  to  the 
capital-stock  account."  A  dividend 
declared  by  a  debenture  company  with- 
out provision  being  made  for  payment 
of  its  contingent  liabilities  may  be 
illegal  as  against  creditors.  Crawford 
V.  Roney,  130  Ga.  515  (1908). 

3  The  court  will  not  enjoin  a  divi- 
dend where  the  company  shows  that 
it  has  the  necessary  profits,  even 
though  there  are  outstanding  claims 
on  illegally  issued  stock.  Carpenter 
V.  New  York,  etc.  R.  R.,  5  Abb.  Pr.  277 
(1857).  Where  the  company  denies 
that  the  complainant  is  a  stockholder, 
a  preliminary  injunction  falls.  Blatch- 
ford  V.  New  York,  etc.  R.  R.,  5  Abb. 
Pr.    276    (1857).     Directors    are    not 


1602 


CH.   XXXII. 


DIVIDENDS. 


[§  546. 


A  proper  sum  must  first  be  expended  or  set  aside  for  repairs  and 
reconstruction  to  replace  depreciation  due  to  wear  and  tear.^  In  other 
words,  the  fund  available  for  dividends  is  ascertained  by  taking  into 
account  the  cost  of  repairs  and  a  reasonable  allowance  for  depreciation, 
giving  credit  for  all  actual  permanent  improvements.-     Depreciation 

or  may  not  be  desirable  to  do  the 
repairs  all  at  once ;  but  if  at  the  end 
of  the  first  year  the  line  of  tramway 
is  still  in  so  good  a  state  of  repair 
that  it  requires  nothing  to  be  laid  out 
on  it  for  repairs  in  that  year,  still, 
before  you  can  ascertain  the  net 
profits,  a  sum  of  money  ought  to  be 
set  aside  as  representing  the  amount 
in  which  the  wear  and  tear  of  the 
line  has,  I  may  say,  so  far  depre- 
ciated in  it  value  as  that  that  sum 
will  be  required  for  the  next  year  or 
next  two  years.  ...  I  should 
think  no  commercial  man  would 
doubt  that  this  is  the  right  course  — ■ 
that  he  must  not  calculate  net  profits 
until  he  has  provided  for  all  the  or- 
dinary repairs  and  wear  and  tear 
occasioned  by  his  business.  .  .  . 
That  being  so,  it  appears  to  me  that 
you  can  have  no  net  profits  unless  this 
sum  has  been  set  aside.  When  you 
come  to  the  next  year,  or  the  third  or 
fourth  year,  what  happens  is  this :  as 
the  line  gets  older  the  amount  re- 
quired for  repairs  increases.  If  you 
had  done  what  you  ought  to  have 
done,  that  is,  set  aside  every  year 
the  sum  necessary  to  make  good  the 
wear  and  tear  in  that  year,  then  in 
the  following  years  you  would  have 
a  fund  sufficient  to  meet  the  extra 
cost."  See  also,  as  to  construction 
account.  Mackintosh  v.  Flint,  etc, 
R.  R.,  34  Fed.  Rep.  583  (1888).  In 
determining  whether  a  railroad  rate 
is  reasonable  the  cost  of  construction 
and  equipment  in  a  particular  year 
may  be  distributed  over  a  series  of 
years.  Illinois,  etc.  R.  R.  v.  Inter- 
state Commerce  Commission,  206 
U.  S.  441  (1907).  Where  a  corporation 
agi'ees  to  pay  over  a  part  of  its  profits 
during  the  year  it  cannot  decrease 
them  by  charging  off  a  large  sum  to 
depreciation.  Miller  v.  Car  Trust 
Co.,  120  N.  Y.  App.  Div.  442  (1907). 
-  Quoted  and  approved  in  Boothe 
V.   Summit,   etc.    Co.,   55   Wash.    167, 


liable  to  replace  dividends  declared 
(by  reason  of  a  statute  making  them 
so  liable  if  the  dividends  are  not 
"from  the  surplus  profits"),  although 
dividends  were  declared  while  the 
company,  being  engaged  in  mining, 
assumed  a  mortgage  debt  in  buying 
additional  property,  a  sinking  fund 
being  begun  to  meet  that  liability 
graduallj%  and  although  the  money  to 
pay  the  dividend  was  borrowed, 
money  to  that  amount  having  been 
put  into  improvements,  and  although 
losses  due  to  an  injunction  against 
using  a  stream  of  water  were  not  at 
once  charged  up  to  operating  expense. 
Excelsior,  etc.  Co.  v.  Pierce,  90  Cal. 
131  (1891). 

1  That  a  corporation  should  provide 
for  some  part  of  the  expenses  of 
renewing  machinery  and  plant  from 
year  to  year  is  self-evident.  People 
V.  Stevens,  203  N.  Y.  7,  22  (1911). 
Where  by  a  contract  between  a  city 
and  a  gas  company,  the  city  turns 
over  cei'tain  property  of  the  city  to 
the  gas  company  and  is  to  have  one 
fifth  of  the  profits,  the  cost  of  the 
plant  cannot  be  first  deducted  in 
arriving  at  the  profits,  but  necessary 
repairs  are  deducted.  City  of  Erie 
V.  Erie,  etc.  Co.,  78  Kan.  348  (1908). 
In  Davison  v.  Gillies,  L.  R.  16  Ch.  D. 
347,  note  (1879),  the  court,  at  the 
instance  of  a  stockholder,  enjoined 
the  declaration  of  a  dividend  on  the 
ground  that  the  street-railway  tracks 
of  the  company  had  become  worn  out, 
and  needed  very  expensive  repairs,  for 
which  no  provision  had  been  made  by 
the  company,  and  that  this  capital  so 
used  up  must  be  restored  before  a 
dividend  was  declared.  The  by-laws 
prohibited  dividends  except  from 
profits.  The  court  said  :  "A  tramway 
company  lay  down  a  new  tramway. 
Of  course  the  ordinary  wear  and  tear 
of  the  rails  and  sleepers,  and  so  on, 
causes  a  sum  of  money  to  be  required 
from  year  to  year  in  repairs.     It  may 


1603 


§  546. 


DIVIDENDS. 


[CH.  XXXII. 


is  the  loss  in  value  of  some  destructible  property  over  and  above  current 
repairs.^    Obsolescence  as  well  as  depreciation  are  to  be  considered  in 


(1909).  Depreciation  at  the  rate  of 
two  per  cent,  a  year  was  charged  off 
in  one  case,  but  the  directors  were 
held  liable  under  the  New  Jersey 
statute  for  illegally  declaring  dividends. 
Whittaker  v.  Anwell  Nat.  Bank,  52 
N.  J.  Eq.  400  (1894).  "The  following 
quotation  from  Greene  on  "Corpora- 
tion Finance"  (1897,  pp.  83,  114) 
will  show  how  an  auditor  would  treat 
depreciation.     He  says : 

"One  of  the  perplexing  things  in  the 
financial  management  of  a  large  manufac- 
turing or  trading  company  is  the  treatment 
of  the  expenditures  for  the  care  of  the 
plant.  A  depreciation  account  in  some 
shape  must  be  kept  by  every  company  or 
firm  in  business.  The  real  estate  may  de- 
cline in  value  and  in  any  case,  in  any 
progressing  concern,  money  will  be  required 
to  be  spent  each  year  to  adjust  the  build- 
ings more  perfectly  to  the  requirements  of 
the  business,  and  yet  these  adjustments  may 
not  add  anything  to  the  salable  value  of  the 
property,  and  should  not,  therefore,  be 
added  in  the  accounts  to  the  company's  in- 
vestment in  real  estate.  In  like  manner, 
machinery  will  wear  out,  and  is  always 
subject  to  the  danger  of  new  inventions, 
which  may  render  the  old  machinery  prac- 
tically worthless.  It  is  not  easy  to  foresee 
when  a  new  outfit  will  be  in  part  or  in 
whole  required,  though  experience  soon 
places  a  limit  to  the  number  of  years  in 
which  a  given  set  of  machinery  may  be 
useful.  The  proper  course  in  these  cases 
is  always  the  conservative  one.  The  cor- 
poration should  estimate  the  probabilities 
of  depreciation  always  against  itself,  and 
set  aside  yearly  such  sums  from  its  profits 
as  will  suffice  to  renew  so  much  of  the  plant 
as  may  be  expected  to  wear  out  or  to  be- 
come useless  in  a  given  time.  Unless  this 
depreciation  fund  is  carefully  thought  out 
and  its  separation  from  profits  rigidly  in- 
sisted upon,  the  shareholders  of  the  cor- 
poration and  perhaps  the  bondholders  may 
in  the  course  of  years  find  that  their  securi- 
ties cover  a  property  of  little  or  no  busi- 
ness value.  If  certain  sums  are  not  set 
aside  to  meet  this  depreciation,  and  if 
for  this  reason  dividends  are  paid  larger 
than  would  otherwise  be  the  case,  to  the 
extent  to  which  this  is  carried,  the  returns 
received  by  the  shareholders  are  not  divi- 
dends, but  their  capital  returned  to  them  in 
piecemeal.  These  depreciation  sums  should 
be  real  and  not  merely  book-keeping  liabil- 
ities of  the  company  to  itself. 

"Modern  corporation  accounting  requires 
that  in  theory  a  sharp  line  of  distinction 
should  be  drawn  between  outlays  which  may 


be  considered  a  part  of  the  regular  work- 
ing expenses,  and  those  which'  are  charge- 
able to  an  increased  investment  in  the  busi- 
ness. In  theory  the  former  should  be 
deducted  from  the  gross  earnings  before  the 
net  revenue  is  determined,  while  the  lat- 
ter may  be  met  by  an  increased  issue  of 
bonds  or  shares.  There  is  no  doubt  of  the 
correctness  of  this  principle  in  general,  but 
in  its  practical  application  it  is  subject  to 
great  modification.  English  shareholders  in 
American  corporations  usually  insist  upon 
such  a  system  of  accounting  as  divides  the 
expenditures  strictly  according  to  this  rule ; 
and  such  indeed  is  the  general  practice  in 
Great  Britain.  By  charging  to  capital  every 
item  small  and  large  which  could  by  any 
possibility  be  construed  to  be  a  betterment, 
the  British  railways  have  increased  their 
capitalization  until  they  are  dependent  for 
a  continuance  of  interest  payments  on  good 
traffics  year  by  year.  Thus  far  no  harm 
has  come  to  these  railways  from  this  pol- 
icy, because  the  fluctuations  in  the  volume 
of  their  traffics  have  been  comparatively 
slight. 

"But  in  the  United  States  more  caution 
must  be  observed  in  this  matter.  From  the 
very  nature  of  the  case,  business  of  all 
kinds  in  a  developing  country  must  be  more 
subject  to  changes  in  profitableness  than 
in  older  countries.  The  very  character  of 
the  American  people,  energetic  _ and  pro- 
gressive, makes  business  all  the  rnore  liable 
to  such  fluctuations.  Bad  years  follow  good 
years  in  every  line  of  American  industry, 
although  differences  are  less  violent  in 
those  trades  which  are  the  longest  estab- 
lished, and  among  those  companies  which 
have  been  in  operation  long  enough  to  ren- 
der their  business  comparatively  stable. 
The  principle,  therefore,  of  charging  all 
so-called  betterments  to  capital  and  meet- 
ing the  cost  from  the  sale  of  bonds  or 
shares,  requires  modification  according  to 
the  circumstances  of  each  particular  com- 
pany. The  more  fluctuating  the  volume  of 
business  has  been  or  is  likely  to  be,  the 
more  important  is  it  that  in  one  form  or 
another  a  part  of  the  profits  in  prosperous 
years  should  be  withheld  from  the  share- 
holders and  put  into  the  property  or  set 
aside  for  its  renewal.  To  those  who  wish 
a  working  principle  to  distinguish  the 
proper  items  to  be  charged  to  capital  ac- 
count in  the  actual  management  of  Ameri- 
can corporations,  railway  and  other,  the  fol- 
lowing definition  is  suggested-:  No  addi- 
tions to  the  property,  either  to  the  real 
estate  or  to  the  machinery  (if  a  manufac- 
turing company),  or  to  the  road-bed  and 
track  (if  a  railway  company),  should  be 
considered  betterments  and  charged  to  cap- 
ital, unless  they  increase  the  productivity  or 
earning  capacity  of  the  plant.  Under  this 
rule  the  purchase  of  additional  equipment 


1  Cumberland  Tel.  &  Tel.  Co.  v.  City  of  Louisville,  187  Fed.  Rep.  637  (1911). 

1604 


CH.  XXXII. 


DIVIDENDS. 


[§  54G. 


valuing  property  for  taxation.^  But  in  the  case  of  a  company  owning 
patent  rights,  or  of  a  mining  company  whose  product  when  once  used 
can  never  be  replaced,  it  is  not  necessary  to  set  aside  funds  for  the  pur- 
pose of  purchasing  new  patents  or  a  nev>'  mine.'-    Preferred  stockholders 


for  a  railway  would  be  an  expenditure  which 
could  conservatively  be  met  by  the  issue  of 
bonds  or  equipment  notes,  because  such 
purchases  would  enable  a  larger  volume  of 
traffic  to  be  handled  ;  on  the  other  hand,  the 
replacement  of  a  wooden  bridge  by  an  iron 
one  would  not  be  a  proper  charge  to  cap- 
ital, under  our  definition,  unless  it  was  one 
of  a  series  of  expenditures  deliberately  re- 
solved upon  in  order  that  heavier  trains 
could  be  run  and  a  larger  volume  of  traffic 
handled,  thus  increasing  the  revenues  of 
the  company  —  an  increase  which  our 
theory  demands  should  be  clearly  seen  to  be 
possible  after  the  various  amounts  of  capital 
set  aside  for  this  purpose  had  been  spent. 
The  same  rule  might  be  applied  to  corpora- 
tions other  than  railways ;  the  safe  course  is 
to  charge  against  revenues  (possibly  through 
the  profit  and  loss  account)  the  cost  of  all 
additions  to  the  property  which  do  not  in- 
crease the  output  or  decrease  the  cost  of 
production.  Yet  any  rule  or  any  principle 
in  so  delicate  a  matter  can  properly  be 
applied  in  each  case  only  after  a  careful 
study  of  all  the  circumstances,  including 
the  business  of  past  years  and  the  prospect 
for  the  future.   ... 

"Every  active  concern  must  in  sonie 
shape  keep  a  depreciation  account,  to  which 
shall  be  charged  certain  sums  for  renewal 
of  machinery,  etc.,  before  profits  are  di- 
vided. If  this  is  not  done,  the  company  will 
at  the  end  find  itself  without  plant  and 
without  money." 

C/.  Re  Assessment  of  W.  U.  T.  Co., 
130  Pae.  Rep.  565  (Okla.  1913). 

1  People,  etc.  v.  Tax  Commissioners, 
69  N.  Y.  Misc.  Rep.,  646,  656,  657 
(1910) ;  aff'd,  146  N.  Y.  App.  Div.  373. 

2  Quoted  and  approved  in  Boothe 
t;.  Summit,  etc.  Co.,  55  Wash.  167 
(1909).  A  mining  or  patent-right 
company  may  make  dividends  without 
setting  aside  sinking  funds  to  meet  the 
gradual  consumption  of  capital  stock. 
The  argument  to  the  contrary  "leads 
to  the  conclusion  that  the  most  pros- 
perous mining  corporation,  doing  the 
heaviest  business  and  paying  the 
largest  dividends,  is  suffering  from 
the  greatest  impairment  of  capital  and 
has  drifted  furthest  towards  final  and 
hopeless  insolvency."  People,  etc.  t'. 
Roberts,  156  N.  Y.  585  (1898).  In  the 
case  Bond  v.  Barrow,  etc.  Co.,  [1902] 
1  Ch.  353,  the  court  said  that  it 
had  not  been  decided  that  every  com 


pany   owning   wasting   property   need 
create  a  depreciation  fund,  but  it  had 
been    decided    only    that    some    com- 
panies with  wasting  assets   need   not 
have  a  depreciation  fund.     The  rule 
that  dividends  may  be  paid  from  the 
product  of  mines  and   oil   wells   does 
not  apply  to  oil  on  hand  when  the  cor- 
poration was  organized.     Van  Vleet  v. 
Evangeline  Oil  Co.,  129  La.  406  (1911). 
A  company  owning  a  mine,  lease, 
or  patent  may  declare  dividends  out 
of  its  net  proceeds,  although  the  nec- 
essary result  is  that  that  much  is  per- 
manently taken  away  from  the  sub- 
stance of  the  estate.     Excelsior,   etc. 
Co.    V.    Pierce,    90    Cal.    131    (1891). 
Judge  Lindley,  in  Verner  v.  General, 
etc.  Trust,  [1894]  2  Ch.  239,  266,  said  : 
"But  the  word  'profits'  is  by  no  means 
free    from    ambiguity.     The    law    is 
much    more   accurately   expressed   by 
saying  that  dividends  cannot  be  paid 
out   of   capital   than   by    saying   that 
they  can  only  be  paid  out  of  profits. 
The  last  expression  leads  to  the  infer- 
ence that  the  capital  must  always  be 
kept  up  and  be  represented  by  assets 
which,  if  sold,  would  produce  it ;    and 
this  is  more  than  is  required  by  law. 
Perhaps  the  shortest  way  of  express- 
ing   the    distinction    which    I    am    en- 
deavoring  to   explain   is   to   say   that 
fixed  capital  may   be  sunk  and  lost, 
and  yet  that  the  excess  of  current  re- 
ceipts over  current  payments  may  be 
divided,  but  that  floating  or  circulat- 
ing capital  must  be  kept  up,  as  other- 
wise  it   will   enter   into,   and   form   a 
part  of,  such  excess,  in  which  ease  to 
divide  such  excess  without  deducting 
the    capital    which    forms    part    of   it 
will   be   contrary   to   law."     In   Lam- 
bert  V.   Neuchatel    Asphalte    Co.,    51 
L.  J.  (Ch.)  882  (1882),  a  stockholder 
sought   to   enjoin   a   dividend   on   the 
ground  that    the  beds  of    asphalt  be- 
longing  to   the   company   were   being 
consumed  by  the  company,  and  that 
funds   sufficient   to   replace  _  this   con- 
sumption  should   be   set   aside  before 


1605 


§  546. 


DIVIDENDS. 


[CH.  XXXII. 


entitled  to  a  preference  on  dissolution  cannot  insist  on  a  sinking  fund 
being  established  to  pay  their  stock  on  dissolution,  on  the  ground  that 
the  corporate  property  consists  of  patents  which  will  expire,  leaving 
nothing  to  pay  for  the  stock. ^ 


any  dividend  was  declared.  Other- 
wise the  capital  would  gradually  be 
entirely  used  up.  The  court  refused 
the  injunction,  inasmuch  as  the  by- 
laws of  the  company  gave  absolute 
discretion  to  the  stockholders  to  de- 
termine the  net  profits.  No  creditor's 
rights  were  involved  in  the  case. 

A  very  full  and  careful  discussion  of 
the  right  to  declare  dividends  out  of  a 
mining  property  is  to  be  found  in  Lee 
V.  Neuchatel  Asphalte  Co.,  L.  R.  41  Ch. 
D.  1,  20,  22,  24  (1889).  In  that  case, 
however,  the  mines  were  at  the  time  of 
the  litigation  more  valuable  than  at  the 
time  when  the  company  was  formed, 
and  it  is  to  be  noticed  that  the 
rules  laid  down  expressly  assumed  that 
enough  property  existed  to  pay  all 
creditors  after  declaring  the  dividend. 
The  court  said,  per  Lindley,  J. : 

"It  is  obvious  with  respect  to  such 
property,  as  with  respect  to  various 
other  properties  of  a  like  kind,  mines 
and  quarries  and  so  on,  every  ton  of 
stuff  which  you  get  out  of  that  which 
you  have  bought  with  your  capital 
may,  from  one  point  of  view,  be  con- 
sidered as  embodying  and  containing 
a  small  portion  of  your  capital,  and 
that  if  you  sell  it  and  divide  the  pro- 
ceeds you  divide  some  portion  of  that 
which  you  have  spent  your  capital  in 
acquiring.  It  may  be  represented  that 
that  is  a  return  of  capital.  All  I  can 
say  is,  if  that  is  a  return  of  capital,  it 
appears  to  me  not  to  be  such  a  return 
of  capital  as  is  prohibited  by  law.  .  .  . 

!'As  I  pointed  out  in  the  course  of 
the  argument,  and  I  repeat  now,  sup- 
pose a  company  is  formed  to  start  a 
daUy  newspaper;  supposing  it  sinks 
£250,000  before  the  receipts  from 
sales  and  advertisements  equal  the 
current  expenses,  and  supposing  it 
then  goes  on,  is  it  to  be  said  that  the 
company  must  come  to  a  stop,  or  that 
it  cannot  di\"ide  profits  until  it  has 
replaced  its  £250,000,  which  has  been 
sunk  in  building  up  a  property  which 
if  put  up  for  sale  would  perhaps  not 


yield  £10,000?  That  is  a  business 
matter  left  to  business  men.  If  they 
think  their  prospects  of  success  are 
considerable,  so  long  as  they  pay  their 
creditors  there  is  no  reason  why  they 
should  not  go  on  and  divide  profits, 
so  far  as  I  can  see,  although  every 
shilling  of  the  capital  may  be  lost. 
It  may  be  a  perfectly  flourishing  con- 
cern, and  the  contrary  view,  I  think, 
is  to  be  traced  to  this  that  there  is  a 
sort  of  notion  that  the  company  is 
debtor  to  capital.  In  an  accountant's 
point  of  view  it  is  quite  right,  in 
order  to  see  how  you  stand,  to  put 
down  company  debtor  to  capital.  But 
the  company  do  not  owe  the  capital. 
What  it  means  is  simply  this :  that 
if  you  want  to  find  out  how  you  stand, 
whether  you  have  lost  your  money  or 
not,  you  must  bring  your  capital  into 
account  somehow  or  other.  .  .  . 

"If  a  company  is  formed  to  acquire 
and  work  a  property  of  a  wasting 
nature,  for  example,  a  mine,  a  quarry, 
or  a  patent,  the  capital  expended  in 
acquiring  the  property  may  be  re- 
garded as  sunk  and  gone,  and  if  the 
company  retains  assets  sufficient  to 
pay  its  debts,  it  appears  to  me  that 
there  is  nothing  whatever  in  the  act  to 
prevent  any  excess  of  money  obtained 
by  working  the  property  over  the  cost  of 
working  it  from  being  divided  amongst 
the  shareholders  ;  and  this,  in  my  opin- 
ion, is  true  although  some  portion  of  the 
property  itself  is  sold,  and  in  some  sense 
the  capital  is  thereby  diminished.  .  .  . 

"But  it  is,  I  think,  a  misapprehen- 
sion to  say  that  dividing  the  surplus 
after  payment  of  expenses  of  the  prod- 
uce of  your  wasting  property  is  a 
return  of  capital  in  any  such  sense  as 
is  forbidden  by  the  act." 

The  court  held  consequently  that 
the  stockholder's  suit  to  enjoin  the 
dividend  must  fail.  See  also  United 
States  V.  Nipissing  Mines  Co.,  202  Fed. 
Rep.  803  (1912). 

'  Mellon  V.  Mississippi,  etc,  Co., 
77  N.  J.  Eq.  498  (1910). 


1606 


CH.  XXXII.] 


DIVIDENDS, 


[§  546. 


In  estimating  the  profits  for  a  year  for  the  purpose  of  declaring  a 
dividend,  it  is  not  necessary  to  take  into  account  the  decrease  in  the 
vahie  of  the  assets  and  the  impairment  of  the  capital  stock  of  the  com- 
pany prior  to  that  year.  The  fact  that  in  a  year  prior  to  the  declara- 
tion of  the  dividend  some  portion  of  the  capital  has  been  lost  and  has 
not  since  been  made  good  affords  no  ground  for  restraining  the  paNTnent 
of  a  dividend  out  of  profits  subsequently  earned.^  A  corporation  "  which 
has  lost  part  of  its  capital  can  lawfully  declare  or  pay  a  dividend  with- 
out first  making  good  the  capital  which  has  been  lost."  ^    Thus,  al- 


1  Hence  where,  in  1882,  £72,000  was 
charged  off  for  bad  debts,  but  this 
was  offset  by  credit  for  £69,000  for 
increase  in  the  value  of  land  owned 
by  the  company,  this  transaction  was 
not  to  be  considered  in  1885  in  ascer- 
taining the  profits  of  1885.  It  is  im- 
material whether  the  alleged  increase 
in  the  value  of  the  land  was  correct 
or  not.  Bolton  v.  Natal  Land,  etc. 
Co.,  [1892]  2  Ch.  124.  Though  the 
capital  stock  has  been  impaired  in 
time  past,  it  has  been  held  that  divi- 
dends may  be  declared  out  of  profits 
subsequently  earned  without  setting 
them  aside  to  restore  the  lost  capital. 
Healey,  Company  Law  &  Pr.  (3d  ed. 
1894),  138.  Where  a  bank  seUs  its 
business  for  a  certain  sum,  and  sub- 
sequently buys  back  a  portion  of  it 
for  another  sum,  it  may  declare  a 
dividend  of  the  surplus  that  remains 
after  deducting  from  the  first-men- 
tioned sum  the  second-mentioned  sum, 
and  also  the  capital  stock.  Lubbock 
V.  British  Bank,  etc.,  [1892]  2  Ch.  198. 
At  common  law  a  company  may 
pay  a  dividend,  even  though  its  capi- 
tal stock  has  been  impaired  in  past 
years.  Where  losses  incurred  by  a 
banking  company  during  the  year  are 
written  off,  and  the  balance  of  the 
receipts  in  each  year  over  the  out- 
goings in  the  same  year,  after  making 
some  allowance  for  bad  debts  and 
deductions  for  sums  carried  over  to  a 
reserve  fund,  is  treated  as  the  profit 
of  that  year,  and  is  divided  as  divi- 
dends without  making  any  further 
provision  for  the  losses  of  pre\ious 
years,  the  directors  are  not  liable  on 
the  ground  that  the  dividends  were 
paid  out  of  capital,  although  this 
method  of  procedure  would  ultimately 


exhaust  the  paid-up  capital  of  the  com- 
pany. The  discretion  of  the  managers 
in  fixing  the  losses  to  be  charged  to 
capital  and  those  to  be  charged  to 
income  is  not  inquired  into  by  the 
courts,  unless  obviously  improper 
charges  to  capital  have  been  made,  in 
order  to  increase  apparent  profits. 
The  directors  are  not  personally  lia- 
ble unless  they  were  culpably  or 
grossly  negligent  in  the  matter. 
Even  though  a  director  knew  his 
name  was  signed  to  a  report  to  the 
stockholders  after  he  has  resigned, 
yet  he  is  not  liable,  where  he  took  no 
part  in  drawing  the  report  or  in  rec- 
ommending the  dividend  based  there- 
on. It  seems  that  an  improper  divi- 
dend may  be  recovered  from  the 
directors,  even  though  the  creditors 
have  aU  been  paid  and  the  stock- 
holders will  have  the  benefit  of  the 
recovery,  they  having  been  ignorant 
of  the  fact  that  the  di\'idends  were 
paid  from  capital  stock.  Re  National 
Bank  of  Wales,  [1899]  2  Ch.  629. 
rev'g  79  L.  T.  Rep.  667.  The  House 
of  Lords  in  Dovey,  etc.  v.  Cory,  [1901] 
A.  C.  477,  declined  to  discuss  the 
question  as  to  whether  the  losses  in 
one  year  must  be  made  up  out  of  the 
foUowdng  year's  profits,  that  question 
not  being  directly  involved  in  the 
case. 

2  Verner  v.  General,  etc.  Trust, 
[1894]  2  Ch.  239.  "However  much 
capital  you  have  lost  at  any  given  date, 
if  yoiu-  profit  and  loss  account  shows 
a  profit  balance,  then  to  the  extent  of 
that  profit  balance  you  are  entitled 
to  distribute  that  money  as  dividend, 
notwithstanding  the  fact  that  you 
have  lost  capital  which  you  have  not 
replaced."     Re    Hoare    &    Co.,    Ltd., 


1607 


§  546.]  DIVIDENDS.  [CH.  xxxir. 

though  a  mining  company  for  several  years  is  obliged  to  pay  the  interest 
on  its  debts  out  of  the  capital  stock,  nevertheless  in  subsequent  years, 
when  large  profits  are  earned,  it  may  use  such  profits  for  dividends  in 
any  year  after  paying  the  interest  on  the  debt  for  that  year.  The  com- 
pany need  not  first  restore  the  capital  stock.^  Neither  need  it  accumu- 
late profits  to  offset  the  "  water  "  in  its  stock.^ 

In  Connecticut  it  is  held  that  dividends  may  be  declared  on  pre- 
ferred stock  where  the  net  earnings  since  the  issue  of  the  stock  are 
sufficient,  even  though  prior  to  such  issue  the  capital  stock  had  been 
impaired,^  but  that  ordinarily,  in  declaring  dividends,  the  directors 
are  not  justified  in  assuming  that  the  value  of  property  which  was 
originally  received  in  payment  for  stock  is  still  worth  that  value,  and 
if  such  property  at  the  time  of  the  dividend  was  not  actually  worth  the 
par  value  of  the  stock  which  was  issued  for  it,  the  dividend  is  illegal, 
and  a  director  receiving  such  dividend  as  a  stockholder  may  be  compelled 
to  pay  it  back  at  the  instance  of  a  receiver  of  the  corporation.^  '■■  In  New 
Jersey,  on  the  other  hand,  it  is  held  that  the  statute  against  declaring 
dividends  from  capital  stock  does  not  prevent  a  dividend,  even  though 
the  actual  assets  are  not  equal  in  value  to  the  nominal  capital  stock 
where  the  assets  are  the  same  as  when  the  company  was  organized ;  in 
other  words,  the  capital  stock  in  such  a  statute  means  the  actual  assets 
received  for  the  capital  stock,  and  the  "  water  "  in  the  stock  need  not 
be  first  eliminated  from  the  profits,^  In  New  York  state  there  is  a 
statute  that  dividends  can  be  made  only  from   "  surplus  profits."  ^ 

[1904]  2  Ch.  208.     Where  the  value  of  for   stock   and   bonds,    the   par   value 

the  assets  of  a  solvent  company  has  of   which   is    much   greater    than    the 

fallen  below   the  nominal  amount  of  actual  value  of  the  property,  yet  a  divi- 

the    capital    stock,    the    company,    in  dend  on  the  stock  cannot  be  enjoined 

the  absence  of  any  special  provisions  by  a  stockholder  on  the  ground  that 

in -its  articles  or  of  a  contract  binding  the  profits  should  be  used  to  add  to 

the  company,  is  under  no  obligation  the  actual   value   of   the  assets   suffi- 

to  make  good  such  depreciation  in  the  cient  to  make  them  equal  to  the  par 

value  of  the  assets  before  declaring  a  value  of  the  stock  and  bonds  so  is- 

dividend  out  of  the  profits.     Deprecia-  sued,    even    though    the    amount    of 

tion   in    the   value   of   the   lease   and  "water"  is  $11,000,000,  it  appearing 

good-will  of  a  company  is  a  loss  of  that  there  were  no  floating  debts  and 

''fixed"  as  distinguished  from  "float-  it   not   appearing    that   any   one   was 

ing"  capital.     The  balance  sheet  of  a  defrauded.     Goodnowt;.  American,  etc. 

company     cannot     therefore     be     im-  Co.,  72  N.  J.  Eq.  645 ;    aff'd,  73  N.  J. 

peached  on  the  ground   that  it  does  Eq.  692  (1908). 

not  charge  anything  against  revenue         ^  Cotting  v.  New  York,  etc.  R.  R., 

in   respect    of    depreciation    of   good-  54  Conn.  156  (1886). 
will.     Wilmer   v.    McNamara   &    Co.,  ^Davenport  v.  Lines,  72  Conn.  118 

[1895]  2  Ch.  245.  (1899).  ■ 

1  Bosanquet  v.  St.  John,  etc.,  Ltd.,  ^  Qoodnow  v.  American,  etc.  Co., 
77  L.  T.  Rep.  206  (1897).  73   N.   J.   Eq.   692    (1908) ;    aff'g,   72 

2  Even  though  it  is  clear  that  prop-  N.  J.  Eq.  645. 

erty  was  transferred  to  a  corporation         « See  Stock  Corporation  Law,  §  28 

1608 


CH.  XXXII. 


DIVIDENDS. 


[§  546. 


A  dividend  may  be  declared  although  the  company  has  not  yet  completed 
its  works. ^  In  the  case  of  railroads,  the  cost  of  additional  rolling-stock 
and  improvements  may  be  charged  to  capital  account,  and  need  not  be 
paid  before  a  dividend  is  declared."  Where  one  company  buys  out 
another  and  agrees  to  pay  a  certain  salary  to  an  officer  of  the  latter,  or 
a  lump  sum  in  lieu  thereof,  such  lump  sum,  if  paid,  is  a  part  of  the  capital 
stock,  and  need  not  be  considered  as  expenses.^ 

Insurance  companies  cannot  declare  dividends  out  of  unearned  pre- 
miums.^ Banks  cannot  declare  dividends  out  of  interest  not  yet  re- 
ceived.^ The  question  of  what  constitutes  profits  applicable  to  divi- 
dends arises  often  in  connection  with  preferred  stock. ^ 


and  Penal  Law,  §  664.  Where  a 
person  purchases  property  for  cash  and 
transfers  the  property  to  a  corpora- 
tion for  its  capital  stock,  he  cannot 
legally  — under  the  New  York  statute — 
take  part  of  the  gross  receipts  of  the 
corporation  from  sales  in  order  to 
apply  the  same  to  the  price  he  paid 
originally  for  the  property  as  against 
corporate  creditors.  Hazard  v.  Wight, 
201  N.  Y.  399  (1911).  A  statute 
prohibiting  a  division  of  the  capital 
stock  refers  to  property  contributed 
by  the  stockholders.  Tapscott  v.  Mex- 
ican, etc.  Co.,  153  Cal.  664  (1908). 

^  In  Browne  v.  Monmouthshire  Ry., 
13  Beav.  32  (1851),  the  court  refused 
to  enjoin  a  company  from  declaring 
a  dividend,  the  only  ground  of  com- 
plaint being  that  the  company'  had 
not  yet  completed  its  works.  Penal- 
ties due  by  reason  of  a  contractor  not 
completing  his  contract  within  a 
specified  time  may  be  used  for  divi- 
dends. Such  penalties,  however,  may 
be  released.  Alcoy,  etc.  Co.  v.  Green- 
hill,  79  L.  T.  Rep.  257  (1898). 

2  Rolling-stock  may  be  carried  to 
capital  account  instead  of  being 
charged  to  operating  expense.  Mills 
V.  Northern  Ry.,  L.  R.  5  Ch.  App.  621 
(1870).  For  a  definition  of  "net  earn- 
ings" as  used  in  the  federal  statutes 
in  regard  to  the  government's  claims 
on  the  Pacific  railroads,  see  Union 
Pacific  R.  R.  V.  U.  S.,  99  U.  S.  402 
(1878);  U.  S.  V.  Central  Pac.  R.  R., 
99  U.  S.  449  (1878) ;  U.  S.  v.  Kansas 
Pac.  Ry.,  99  U.  S.  455  (1878) ;    U.  S. 


V.  Sioux  City,  etc.  R.  R.,  99  U.  S.  491 
(1878).  Although  ordinarily  from 
the  gross  earnings  there  should  be 
deducted  "a  reasonable  amount  for 
betterments  and  improvements, 
rendered  necessary  by  the  gradual  in- 
crease of  traffic,  the  better  discharge 
of  business,  and  the  public  accommo- 
dation," in  arriving  at  the  net  earn- 
ings under  the  Thurman  act  relative 
to  the  Pacific  railroads,  no  such  deduc- 
tions are  to  be  made.  U.  S.  v.  Cen- 
tral Pac.  R.  R.,  138  U.  S.  84  (1891). 

3  Royal  Ins.  Co.  v.  Watson,  [1897] 
A.  C.  1. 

*  Unearned  premiums  received  by 
an  insurance  company,  on  which  the 
risks  are  still  running,  are  not  sur- 
plus profits  out  of  which  dividends 
can  legally  be  made,  there  not  being 
a  sufficient  surplus  on  hand  in  excess 
of  the  capital  stock  to  meet  the  prob- 
able losses  on  risks  not  yet  termi- 
nated. De  Peyster  v.  American  Fire 
Ins.  Co.,  6  Paige,  486  (1837).  See 
also  Scott  V.  Eagle  Fire  Co.,  7  Paige, 
198  (1838) ;  Lexington,  etc.  Ins.  Co.  v. 
Page,  17  B.  Mon.  (Ky.)  412  (1856). 

^  "Money  earned  as  interest,  how- 
ever well  secured,  or  certain  to  be 
eventually  paid,  cannot  in  fact  be  dis- 
tributed as  dividends  to  stockhold- 
ers, and  does  not  constitute  surplus 
profits."  People  v.  San  Francisco  Sav. 
Union,  72  Cal.  199  (1887).  In  Iowa  it 
has  been  held  that  where  a  bank  with 
a  capital  of  $106,860 ;  assets  of 
S156,904;  Uabilities  of  $56,065,  de- 
clares and  pays  a  dividend  of  ten  per 


^  See  ch.  XVI,  supra. 
1609 


§  546.] 


DIVIDENDS. 


[CH.  xxxir. 


.'Profits  earned  and  invested  in  times  of  prosperity  may  properly 
/  be  paid  out  as  dividends  subsequently  and  at  a  time  when  no  dividends 
have  been  earned.^  The  by-laws  may  provide  that  any  surplus  carried 
to  the  reserve  may  subsequently  be  used  for  dividends,  or  to  make  good 
lost  capital,  or  to  apply  to  any  other  purpose  within  the  charter  powers 
of  the  company .2  A  bonus  paid  by  the  stockholders  to  the  corporation 
for  their  stock  may  be  used  to  pay  dividends.^    When  the  company  has 


cent.,  i.e.  $10,686,  the  corporate  credi- 
tors could  not  compel  the  stockholders 
to  return  the  dividend.  Miller  v. 
Bradish,  69  Iowa,  287  (1886).  In  Re 
London  &  Gen.  Bank,  72  L.  T.  Rep. 
227,  230  (1894) ;  aff'd,  [1895]  2  Ch.  166, 
673,  the  court  intimates  "that  nothing 
ought  to  be  included  as  annual  profit 
which  could  not  be  realized  as  a  profit 
if  need  should  be,"  the  court  having 
before  it  the  question  of  interest 
earned  but  not  collected.  Where  the 
directors  in  declaring  dividends  in- 
clude as  good  assets  renewed  notes, 
it  may  be  for  the  jury  to  decide 
whether  such  renewed  notes  were  in 
the  due  course  of  business  or  were 
taken  merely  to  cover  defaulted  and 
bad  debts.  Dykman  v.  Keeney,  34 
N.  Y.  App.  Div.  45  (1898). 

1  Mills  V.  Northern  Ry.  etc.  Co., 
L.  R.  5  Ch.  621  (1870) ;  Hoole  i;.  Great 
Western  Ry.,  L.  R.  3  Ch.  262  (1867) ; 
Beers  v.  Bridgeport  Spring  Co.,  42 
Conn.  17  (1875) ;  Re  Mercantile  Trad- 
ing Co.,  L.  R.  4  Ch.  475  (1869). 
Surplus  profits  invested  in  securities 
may  be  used  to  pay  preferred  divi- 
dends, and  even  if  considered  as  work- 
ing capital  which  the  directors  are 
authorized  to  reserve,  they  may  be 
used  for  such  preferred  dividends. 
Bassett  v.  United  States,  etc.  Co.,  74 
N.  J.  Eq.  668  (1908). 

-  Such  reserve  need  not  be  repre- 
sented by  specific  property  set  apart, 
but  may  be  a  part  of  the  general 
assets.  In  case  of  a  loss,  a  part  of 
the  reserve  may  be  used  to  cancel  the 
loss,  and  part  may  be  canceled  by 
reducing  the  capital  stock,  although 
this  process  will  leave  a  reserve  avail- 
able at  once  for  dividends  after  the 
loss  has  been  charged  off.  A  reserve 
differs  from  a  reserve  fund  in  that 
the  latter  represents  specific  property 
set   apart   and    the   former   does   not. 


Re  Hoare  &  Co.,  Ltd.,  [1904]  2  Ch.  208. 
The  court  in  a  dictum  stated  that 
the  premium  paid  on  the  issue  of 
stock  at  a  price  greater  than  par 
might  be  used  for  a  dividend.  Funds 
accumulated  by  a  bank  and  carried 
on  the  books  under  the  head  of  profit 
and  loss  may  not  be  "surplus,"  yet 
may  be  subject  to  taxation  as  an  accre- 
tion to  capital.  Leather,  etc.  Bank 
V.  Treat,  128  Fed.  Rep.  262  (1904). 

3  Re  Hoare  &  Co.,  Ltd.,  [1904]  2 
Ch.  208.  A  premium  paid  to  a  cor- 
poration for  stock  cannot  be  offset 
against  the  statutory  liability. 
Robertson  v.  Conway,  188  Fed.  Rep. 
579  (1911).  Where  the  stockholders 
contribute  a  surplus  and  afterwards 
distribute  it  again,  this  is  not  a  divi- 
dend within  the  meaning  of  a  tax 
statute.  People  v.  Knight,  96  N.  Y. 
App.  Div.  120  (1904).  Where  the 
preferred  and  common  stockholders  of 
a  Kentucky  street  railway  company 
differ  as  to  who  shall  be  entitled  to 
subscribe  for  new  common  stock  which 
is  worth  more  than  par,  and  thereupon 
a  New  Jersey  holding  company  is 
formed  and  issues  one  share  of  its 
preferred  stock  and  one  fifth  of  a 
share  of  its  common  stock  for  each 
preferred  share  in  the  Kentucky  com- 
pany, and  issues  three  shares  of  its 
common  stock  for  $55  and  one  share 
of  common  stock  in  the  Kentucky 
company,  and  then  makes  a  donation 
to  the  Kentucky  company  of  $700,000, 
the  Kentucky  company  cannot  be 
taxed  on  this  donation  as  a  debt. 
Commonwealth  v.  Louisville,  etc.  Co., 
125  S.  W.  Rep.  711  (Ky.  1910). 
Where  the  stockholders  pay  to  the 
corporation  more  than  par  for  their 
stock  the  amount  above  par  may  be 
used  for  dividends.  Union  Pac.  etc. 
Co.  V.  Ferguson,  129  Pac.  Rep.  529 
(Oreg.  1913). 


1610 


CH.  XXXII.] 


DIVIDENDS. 


[§  54G. 


used  profits  for  improvements,  it  may  lawfully  borrow  an  equivalent 
sum  of  money  for  the  purpose  of  a  dividend.^  And  it  may  properly 
borrow  money  to  pay  a  dividend  if,  upon  a  fair  estimate  of  its  assets 
and  liabilities,  it  has  assets  in  excess  of  its  liabilities  and  capital  stock 
equal  to  the  amount  of  the  proposed  dividend.^  The  subsequent  in- 
solvency of  the  corporation  does  not  invalidate  a  dividend  declared 
when  there  were  net  profits.^  The  English  authorities  go  further  and 
hold  that  where  profits  have  been  earned  and  properly  entered  as  profits 
on  the  corporation  books  they  belong  to  the  stockholders,  even  though 
thereafter  the  corporation  becomes  insolvent  and  is  wound  up  before 
such  profits  are  declared  to  be  and  set  apart  as  dividends.'*  And  even 
though  the  business  is  a  hazardous  one,  money  need  not  be  set  aside  for 
possible  disasters.^ 

Upon  a  reduction  of  the  capital  stock  the  surplus  funds  over  and  above 
the  full  amount  of  the  capital  stock  as  reduced  may  be  divided  among 
the  stockholders,  the  only  restriction  being  that  such  a  distribution  must 
leave  the  reduced  capital  stock  entire  and  unimpaired.  A  stock- 
holder may  insist  upon  a  division  of  such  a  surplus.^    The  question  of 

1  Mills  V.  Northern  Ry.  etc.  Co.,  from  the  standpoint  of  that  time,  and 
L.  R.  5  Ch.  621  (1870) ;  Re  Mercan- 
tile Trading  Co.,  L.  R.  4  Ch.  475,  492 
(1869).  Money  may  be  borrowed  to 
pay  a  dividend  where  it  has  been 
previously  earned.  Alabama,  etc.  Co. 
V.  Baltimore  Trust  Co.,  197  Fed.  Rep. 
347  (1912).  A  dividend  may  be  de- 
clared if  the  revenue  account  shows 
profits,  even  though  such  profits  are 
not  on  hand  in  the  way  of  cash.  ,  Re 
London  &  Gen.  Bank,  72  L.  T.  Rep. 
227  (1894);  aff'd,  [1895]  2  Ch.  166, 
673. 

2  Re  Mercantile  Trading  Co.,  L.  R. 
4  Ch.  475  (1869).  "A  company  is 
quite  as  competent  to  declare  divi- 
dends out  of  property  which  is  in- 
vested for  the  time  being  in  buildings, 
or  anything  else,  as  it  is  out  of  cash 
in  hand,  and  it  is  not  at  all  necessary 
that  a  company,  any  more  than  an 
individual,  should  have  cash  at  the 
bank  on  which  he  can  draw  in  order 
to  declare  dividends."  Municipal,  etc. 
Land  Co.  v.  PoUington,  63  L.  T.  Rep. 
238  (1890). 

3  Reid  V.  Eatonton  Mfg.  Co.,  40  Ga. 
98  (1869) ;  Le  Roy  v.  Globe  Ins.  Co., 
2  Edw.  Ch.  637  (1836).  In  deciding 
whether  a  dividend  was  rightfully 
made,  the  transaction  must  be  viewed 


not  in  the  light  of  subsequent  events. 
Notes  or  overdrafts  by  persons  then 
considered  abundantly  good,  included 
among  the  corporate  assets  when  the 
dividend  was  declared  and  paid, 
should  not  be  regarded  as  losses  sus- 
tained by  the  corporation  because 
they  afterwards  proved  to  be  unavail- 
able. Main  v.  Mills,  6  Biss.  98  (1874)  ; 
s.  c,  16  Fed.  Cas.  506,  where  it  is 
stated  that  this  decision  was  after- 
wards partially  reversed.  Cf.  Flit- 
croft's  Case,  L.  R.  21  Ch.  D.  519 
(1882),  where  the  directors  figured 
in  what  they  knew  were  bad  debts. 

*  The  creditors  of  the  corporation 
are  entitled  to  the  corpus  of  the  es- 
tate, but  not  to  any  profits.  If  there 
is  preferred  stock,  such  profits  go  to 
that  stock.  Bishop  v.  Smyrna,  etc. 
Ry.,  [1895]  2  Ch.  265. 

^  A  balance  sheet  sustaining  a  divi- 
dend is  upheld  where  the  business 
is  extra-hazardous,  such  as  blockade- 
running,  and  such  dividend  need  not 
be  refunded,  even  though  the  block- 
ade runners  are  lost  and  other  assets 
turn  out  to  be  worthless.  Re  Mercan- 
tile Trading  Co.,  L.  R.  4  Ch.  App.  475 
(1869). 

« Seeley  v.  New  York,  etc.  Bank,  8 


1611 


§  547.] 


DIVIDENDS. 


ICH.   XXXII. 


dividends  where  one  road  is  consolidated  with  another  is  considered 
elsewhere.^ 

§  547.  A  stockholder  may  enjoin  an  illegal  dividend.  —  A  court  of 
equity  will,  upon  the  application  of  a  stockholder,  enjoin  an  attempt 
to  distribute  in  dividends  any  part  of  the  capital  stock.^  But  the 
courts  will  not  lightly  review  the  decision  of  the  board  of  directors  in 
regard  to  whether  the  necessary  profits  actually  exist.^    The  court 


Daly,  400  (1878);  s.  c,  Thompson 
Nat.  Bank,  Cas.,  804,  aff'd,  78  N.  Y. 
608  (1879) ;  Strong  v.  Brooklyn  Cross- 
Town  R.  R.,  93  N.  Y.  426,  435  (1883). 
See  also  §  548,  infra ;  Eyster  v.  Cen- 
tennial Board,  94  U.  S.  500  (1876); 
Parker  v.  Mason,  8  R.  I.  427  (1867). 
In  the  case  Re  Welsbaeh,  etc.  Co., 
Ltd.,  [1904]  1  Ch.  87,  the  court  said : 
"Broadly  speaking,  a  reduction  of  cap- 
ital by  writing  off  loss  is,  I  repeat, 
not  to  the  injury,  but  to  the  benefit 
of  the  shareholder.  The  persons 
whom  it  may  injure  are  the  creditors 
(if  any).  The  result  of  writing  off 
the  loss  is,  that  the  company  is  no 
longer  bound  to  keep  the  balance  of 
its  debit  in  respect  of  capital  as  large 
a  sum ;  but,  to  the  extent  to  which  it 
resumes  paying  dividends  at  an  ear- 
lier date,  of  course  the  creditors  lose 
assets  to  which  they  would  other- 
wise be  entitled."  See  also  Re  Hoare 
&  Co.,  Ltd.,  [1904]  2  Ch.  208,  supra. 
Where  the  capital  stock  is  reduced, 
and  the  corporate  property  over  and 
above  the  reduced  capital  stock  is  dis- 
tributed .among  the  stockholders,  this 
is  not  a  dividend  within  the  meaning 
of  the  New  York  tax  statute.  People, 
etc.  V.  Roberts,  41  N.  Y.  App.  Div.  21 
(1899). 

1  See  §  270,  supra. 

^  Macdougall  v.  Jersey  Imperial 
Hotel  Co.,  2  Hem.  &  M.  528  (1864) ; 
Bloxam  v.  Metropolitan  Ry.,  L.  R.  3 
Ch.  337  (1868);  Salisbury  v.  Metro- 
politan Ry.,  38  L.  J.  (Ch.)  249  (1869) ; 
s.  c,  on  further  hearing,  22  L.  J. 
Rep.  839 ;  Carlisle  v.  Southeastern 
Ry.,  1  Macn.  &  G.  689  (1850) ;  Ward 
V.  Sittingbourne,  etc.  Ry.,  L.  R.  9  Ch. 
488  (1874) ;  Davison  v.  Gillies,  L.  R. 
16  Ch.  D.  347,  n.  (1879).  "Dividends 
can  be  rightfully  paid  only  out  of 
profits.  Corporations  are  liable  to  be 
enjoined  by  shareholders  or  creditors 


from  making  a  distribution  in  divi- 
dends of  capital."  Mobile,  etc.  R.  R. 
V.  Tennessee,  153  U.  S.  486  (1894), 
a  dictum.  A  stockholder  has  the 
right  to  enjoin  the  payment  of  a 
dividend  from  the  capital  stock,  but 
the  bill  for  that  purpose  must  be  ex- 
plicit in  its  allegations.  Coquard  v. 
National,  etc.  Co.,  171  111.  480  (1898). 
See  also  cases  in  preceding  section. 
By  its  certificate  of  incorporation  -  a 
New  Jersey  corporation  may  have 
power  to  purchase  and  retire  part  or 
all  of  its  preferred  stock,  and  to  issue 
in  payment  therefor  its  bonds  or  to 
sell  its  bonds  and  use  the  proceeds  to 
retire  such  preferred  stock,  or  it  may 
purchase  and  hold  such  stock  for  re- 
issue. The  offer  to  purchase  must  be 
made  pro  rata  to  all  the  preferred 
stockholders.  Under  the  reserved 
rights  to  amend,  alter,  or  repeal  char- 
ters, the  rights  of  stockholders  among 
themselves  cannot  be  impaired,  except 
as  required  by  public  interest,  but, 
while  it  is  true  that  the  charter  con- 
stitutes a  contract  between  the  stock- 
holders, yet  under  this  reserved  power 
the  legislature  may  authorize  existing 
corporations  to  purchase  and  retire 
preferred  stock  and  issue  in  lieu 
thereof  mortgage  bonds,  such  amend- 
ment being  construed  to  be  in  behalf 
of  the  public  interest.  Where  a  cor- 
poration has  charter  authority  to  re- 
tire its  preferred  stock  and  issue 
mortgage  bonds  in  lieu  thereof,  on  a 
vote  of  the  directors  and  stockholders, 
a  minority  stockholder  cannot  enjoin 
such  action  on  the  ground  that  it 
would  be  disastrous  in  its  effect  on 
the  corporation.  Berger  v.  United 
States  Steel  Corp.,  63  N.  J.  Eq.  809 
(1902). 

^  Where  the  directors  declare  a  divi- 
dend after  a  proper  investigation  of 
the  financial  position  of  the  company, 


1612 


CH.  XXXII.] 


DIVIDENDS. 


[§  547. 


will  not  interfere  if  neither  the  stockholders  nor  the  corporate  creditors 
can  be  injured  by  the  dividend.^  The  payment  of  a  dividend  will  not 
be  enjoined  at  the  instance  of  a  stockholder  on  the  ground  that  there 
are  no  net  profits,  where  the  statute  gives  complete  remedy  at  law  against 
the  directors,  by  rendering  them  personally  liable  for  such  dividends, 
there  being  no  allegation  that  they  are  insolvent.^  Where,  public  notice 
is  given  on  the  first  day  of  a  month  that  a  dividend  on  the  preferred 
stock  will  be  paid  on  the  thirtieth  day  of  the  month,  a  bill  filed  on  the 
twenty-fifth  of  the  month  to  enjoin  such  dividend  is  too  late,  inasmuch 
as  there  is  not  time  for  the  corporation  to  properly  answer  before  the 
dividend  is  payable.^  It  has  been  held  that  if  the  dividend  has  been 
declared,  but  not  paid,  the  stockholders  must  be  joined  as  parties,^ 
but  this  is  hardly  sound  law.^  The  United  States  court  sitting  in  the 
New  York  district  has  power  to  enjoin  the  payment  of  a  dividend  by  a 
New  Jersey  corporation  where  such  dividend  is  illegal.®  A  court  can- 
not enjoin  the  payment  of  dividends  and  the  election  of  directors  and 
adoption  of  by-laws  on  account  of  the  fraud  of  individuals,  unless  the 
stockholders  are  brought  in  as  parties  defendant. '^ 

A  corporate  creditor  has  no  standing  in  court  to  enjoin  a  dividend, 
even  though  it  will  impair  the  capital  stock.^     But,  in  certain  cases, 


the  court  will  not  lightly  interfere 
with  the  payment  thereof ;  but  where 
they  declare  it  without  proper  investi- 
gation or  professional  assistance,  and 
it  is  called  in  question,  the  burden  of 
proof  is  upon  them  to  show  that  it  is 
to  be  fairly  paid  out  of  net  profits. 
Re  County  Marine  Ins.  Co.,  L.  R.  6 
Ch.  App.  104  (1870).  See  also  Hoole 
V.  Great  Western  Ry.,  L.  R.  3  Ch.  App. 
262  (1867). 

1  "Equity  would  not  interefere  with 
a  dividend  unless  it  appeared  that 
somebody  in  particular  was  hurt  or 
liable  to  be  injured.  It  would  not 
interfere  after  all  danger  had  passed, 
and  for  the  sake  of  vindicating  gen- 
eral principles."  Chaffee  v.  Rutland 
R.  R.,  55  Vt.  110,  133  (1882). 

2  Schoenfeld  v.  American  Can  Co., 
55  Atl.  Rep.  1044  (N.  J.  1903). 

'  Schoenfeld  v.  American  Can  Co., 
55  Atl.  Rep.  1044  (X.  J.  1903). 

*  A  stockholder  may  file  a  bill  in 
behalf  of  himself  and  other  stock- 
holders to  enjoin  the  declaration  of 
dividends  where  there  are  no  net 
profits ;  but  where  he  has  not  joined 
all    the    stockholders    as    parties,    he 


cannot  enjoin  the  payment  of  a  divi- 
dend already  declared,  even  though 
the  time  of  payment  has  not  yet 
arrived.  Fawcett  v.  Laurie,  1  Dr.  & 
Sm.  192  (1860).  To  same  effect,  Car- 
lisle V.  Southeastern  Ry.,  1  Macn.  & 
G.  689  (1850).  See  Browne  v.  Mon- 
mouthshire Ry.,  13  Beav.  32  (1851); 
Coates  V.  Nottingham  Water-works 
Co.,  30  Beav.  86  (1861). 

5  Even  though  a  dividend  has  been 
declared,  the  payment  of  it  may  be 
enjoined  at  the  instance  of  stock- 
holders, and  all  the  stockholders  need 
not  be  joined  as  parties  defendant. 
Marquand  v.  Federal,  etc.  Co.,  95  Fed. 
Rep.  725  (1899). 

^  Marquand  v.  Federal,  etc.  Co.,  95 
Fed.  Rep.  725  (1899).  The  decision 
in  Howell  v.  Chicago,  etc.  R.  R.,  51 
Barb.  378  (1868),  denying  jurisdic- 
tion, was  overruled  on  this  point  in 
Prouty  I'.  Michigan,  etc.  R.  R.,  1  Hun, 
655  (1874).  See  also  §§  546,  734, 
infra. 

'  Willis  V.  Laviridson,  161  Cal.  106 
(1911). 

8  Mills  V.  Northern  Ry.  etc.  Co., 
L.  R.  5Ch.  App.  621  (1870).     See  also 


1613 


§  548.] 


DIVIDENDS. 


[cH.  xxxn. 


owners  of  claims,  even  though  not  yet  due,  may  prevent  a  distribution 
of  capital  stock  upon  a  reduction  thereof,  unless  security  is  given. ^ 
A  bondholder  cannot  enjoin  the  payment  of  a  dividend,  even  though  his 
bonds  by  their  terms  may  be  converted  into  stock.^ 

§  548.  Dividends  which  impair  the  capital  stock  may  he  illegal, 
and  may  he  recovered  hack  from  the  stockholders  —  Dividends  on 
dissolution.  —  As  already  shown,  as  against  dissenting  stockholders 
and  as  against  corporate  creditors  a  dividend  can  be  lawfully  declared 
only  when  sufficient  net  profits  have  been  earned  to  pay  that  dividend. 
Accordingly,  a  dividend  paid  wholly  or  partly  from  the  capital  stock 
may  be  illegal,  and  may  subject  the  corporation  and  the  stockliolders 
to  serious  liability.  Hence  the  rule  has  been  firmly  established  that, 
where  dividends  are  paid  in  whole  or  in  part  out  of  the  capital  stock, 
corporate  creditors,  being  such  when  the  dividend  was  declared,  or 
becoming  such  at  any  subsequent  time,  may,  to  the  extent  of  their 
claims,  if  such  claims  are  not  otherwise  paid,  compel  the  stockholders 
to  whom  the  dividend  has  been  paid  to  refund  whatever  portion  of  the 
dividend  was  taken  out  of  the  capital  stock.^    The  supreme  court  of 


§  735,  infra.  In  Massachusetts  no 
equitable  relief  can  be  granted 
against  a  foreign  corporation,  which 
has  neither  offices  nor  place  of  busi- 
ness in  that  state,  to  compel  the  com- 
pany to  declare  and  pay  dividends 
according  to  the  stipulations  of  their 
certificates  of  preferred  stock.  Wil- 
liston  V.  Michigan  Southern,  etc.  R.  R., 
95  Mass.  400  (1866).  See  also  Ber- 
ford  V.  New  York  Iron  Mine,  4  N.  Y. 
Supp.  836  (1889). 

1  Re  Telegraph  Const.  Co.,  L.  R.  10 
Eq.  384  (1870). 

2  Gay  V.  Burgess  Mills,  30  R.  I.  231 
(1909). 

3  Quoted  and  approved  in  Cottrell 
V.  Albany,  etc.  Co.,  142  N.  Y.  App.  Div. 
148,  153  (1911)  and  101  N.  E.  Rep. 
329  (Ind.  1913).  Curran  v.  Arkansas, 
15  How.  (U.  S.)  304  (1853) ;  Railroad 
Co.  V.  Howard,  7  Wall.  392  (1868); 
Osgood  V.  Laytin,  48  Barb.  463  (1867) ; 
aff'd,  3  Keyes,  521 ;  Johnson  v.  Laflin, 
5  Dill.  65,  86,  note  (1878) ;  aff'd,  103 
U.  S.  800  (1880) ;  Hastings  v.  Drew,  76 
N.  Y.  9,  19  (1879) ;  Sagory  v.  Dubois,  3 
Sandf.  Ch.  466  (1846) ;  Wood  v.  Dum- 
mer,  3  Mason,  308  (1824);  s.  c,  30 
Fed.  Cas.  435;  Gratz  v.  Redd,  4 
B.  Mon.  (Ky.)  178  (1843) ;  Bank  of  St. 
Mary's  v.  St.  John,  25  Ala.  566  (1854) ; 


Bartlett  v.  Drew,  57  N.  Y.  587  (1874) ; 
Heman  v.  Britton,  88  Mo.  549  (1885) ; 
Story,  Eq.  Jur.  (13th  ed.,  1886), 
§  1252.  A  stockholder  who  receives 
an  illegal  dividend  is  liable  for  it, 
even  though  he  has  paid  it  over  to 
another  person  to  whom  the  stock 
belonged.  Finn  v.  Brown,  142  U.  S. 
56  (1891).  Where  a  lessor  railroad 
issues  mortgage  bonds  to  the  lessee  and 
the  lessee  uses  them  to  buy  a  majority 
of  the  stock  of  the  lessor,  the  creditors 
of  the  lessor,  if  it  becomes  insolvent, 
may  hold  liable  the  company  guar- 
anteeing the  bonds  to  the  extent  of  his 
debt  and  to  the  extent  of  the  value  of 
such  bonds,  even  though  a  larger  sum 
has  been  expended  on  the  leased  road. 
Northern  Pac.  Ry.  v.  Boyd,  177  Fed. 
Rep.  804  (1910) ;  aff'd,  228  U.  S.  482. 
Where  the  stockholders  take  all  the 
corporate  assets  which  are  worth 
more  than  the  debts,  they  are  liable 
for  the  debts.  McLean  v.  Moore, 
145  S.  W.  Rep.  1074  (Tex.  1912). 
Where  the  stockholders  distribute 
the  assets  among  themselves,  a  creditor 
may  follow  the  assets.  Panhandle 
Nat.  Bank  v.  Emery,  78  Tex.  498 
(1890).  The  stockholders  of  a  cor- 
poration have,  in  Louisiana,  no  right  to 
appropriate  any  part  of  its  assets  to 


1614 


CH.   XXXII.] 


DIVIDENDS. 


[§  548. 


the  United  States,  however,  has  held  that  the  receiver  of  a  national 
bank  cannot  recover  a  dividend  paid  to  a  stockholder,  even  though  it 
was  paid  entirely  out  of  capital,  where  the  stockholder  receiving  such 
dividend  acted  in  good  faith,  believing  the  same  to  be  paid  out  of  profits, 
and  where  the  bank,  at  the  time  such  dividend  was  declared  and  paid, 
was  not  insolvent.^  But  a  receiver  of  a  national  bank  may  recover 
back  dividends  paid  at  a  time  when  the  bank  was  insolvent,  even  though 
the  stockholders  did  not  know  of  such  insolvency,  and  it  seems  that  a 
suit  in  equity  lies  for  that  purpose.^ 


pay  large  salaries  to  themselves  as 
officers  of  the  company,  until  all 
creditors  who  are  not  stockholders 
have  been  paid.  Cochran  v.  Ocean 
Dry  Dock  Co.,  30  La.  Ann.  1365 
(1878).  In  Lexington,  etc.  Ins.  Co.  v. 
Page,  17  B.  Mon.  (Ky.)  412  (1856), 
it  is  held  that  the  action  to  recover  the 
dividend  in  such  a  ease  may  be  main- 
tained by  the  company  or  its  assigns 
where  the  dividend  had  been  paid  by 
mistake.  See  also,  in  general,  Skrain- 
ka  V.  Allen,  7  Mo.  App.  434  (1879); 
Ward  V.  Sittingbourne,  etc.  Ry.,  L.  R. 
9  Ch.  App.  488  (1874);  Clapp  v. 
Peterson,  104  111.  26  (1882),  holding 
that  the  property  so  withdrawn  was 
liable  for  the  creditor's  whole  debt 
and  not  merely  for  a  pro  rata  share 
thereof.  If  a  fixed  per  cent,  is  drawn 
out  by  stockholders  instead  of  a  divi- 
dend, and  this  per  cent,  exceeds  the 
profits,  a  stockholder,  upon  the  insol- 
vency of  the  corporation,  must  pay  back 
the  excess  received  by  him.  Reading 
Trust  Co.  V.  Reading  Iron  Works,  137 
Pa.  St.  282  (1890).  Creditors  may 
reach  shares  of  stock  which  the  cor- 
poration, which  becomes  insolvent,  has 
distributed  without  a  dividend.  Mc- 
Kusick  V.  Seymour,  etc.  Co.,  48  Minn. 
158  (1892).  Where  the  company  is 
insolvent  and  all  its  property  is  sold 
and  the  proceeds  divided  among  the 
stockholders  the  creditors  may  com- 
pel them  to  repay  the  same.  Mitchell 
V.  Jordan,  36  Wash.  645  (1905).  A 
receiver  may  recover  back  illegal  divi- 
dends. Reid  V.  Owensboro,  etc.  Co., 
141  Ky.  444  (1911).  An  employee's  con- 
tract that  he  shall  receive  a  certain  sum 
as  extra  compensation  for  dividends 
declared  does  not  sustain  a  suit  by  him 
against     stockholders      receiving     the 


dividends.  Green  v.  Wilbraham,  190 
Fed.  Rep.  274  (1909).  s.  c,  190  Fed. 
Rep.  736. 

A  payment  of  the  subscription  price 
by  what  purports  to  be  a  dividend  or 
distribution  of  profits  is  invalid  as 
against  creditors,  where  such  profits 
did  not  exist.  Gager  v.  Paul,  111  Wis. 
638  (1901).  A  preferred  stockholder 
is  liable  to  corporate  creditors  for 
illegal  dividends  paid  on  his  stock  the 
same  as  a  common  stockholder  is. 
American,  etc.  Co.  v.  Eddy,  130  Mich. 
266  (1902).  Stockholders  receiving  a 
stock  dividend  cannot  be  held  liable 
thereon  by  corporate  creditors  existing 
at  the  time  of  its  declaration,  but  the 
rule  is  different  as  to  subsequent 
creditors  where  actual  fraud  was 
involved.  Whitlock  v.  Alexander,  76 
S.  E.  Rep.  538  (N.  C.  1912). 

1  McDonald  v.  Williams,  174  U.  S. 
397  (1899).  The  court  held  also  that 
"the  theory  of  a  trust  fund  has  no  ap- 
plication to  a  case  of  this  kind."  A 
stockholder  is  not  liable  to  creditors 
of  the  corporation  for  dividends  re- 
ceived by  him  without  knowing  that 
they  were  not  paid  from  profits  while 
the  corporation  was  a  going  concern 
and  apparently  solvent.  Great  West- 
ern, etc.  Co.  V.  Harris,  128  Fed,  Rep. 
321  (1903) ;  aff' d,  198  U.  S.  561.  Un- 
der a  statu  te  allowing  corpora  tions  to  re-j 
cover  back  from  stockholders  dividends 
paid  to  the  latter  from  capital  stock,  it  ia 
no  defense  that  the  dividend  was  paid] 
and  received  in  good  faith.  American, 
etc.  Co.  V.  Eddy,  138  Mich.  403  (1904). 

2  Hayden  v.  Williams,  96  Fed.  Rep. 
279  (1899).  In  the  case  of  Hayden  v. 
Brown,  94  Fed.  Rep.  15  (1899),  in  a 
suit  by  a  receiver,  judgment  was  ren- 
dered against  various  Vermont  stock- 


1615 


§  548.] 


DIVIDENDS. 


[CH.  XXXII. 


A  stockholder  may  by  bill  in  equity  compel  a  return  of  a  dividend 
paid  out  of  the  capital  stock. ^  A  stockholder,  however,  who  receives 
dividends  wrongfully  declared  cannot  then,  as  a  corporate  creditor, 
hold  other  stockholders  liable  on  a  statutory  liability  for  wrongfully 
declaring  dividends.-  And  a  corporate  creditor  may  by  his  acts  be 
estopped  from  attacking  the  dividend.^  A  purchaser  of  stock  cannot 
complain  of  dividends  illegally  paid  prior  to  his  becoming  a  stocldiolder 
where  it  would  be  inequitable  to  allow  him  to  do  so.^  So  far  as  dissent- 
ing minority  stockliolders  are  concerned  "  a  corporation,  in  the  absence 
of  constitutional  or  statutory  prohibition,  has  in  general  an  inherent 
right,  for  a  bona  fide  purpose,  to  retire  by  purchase  its  capital  stock," 
and  may  issue  its  mortgage  bonds  in  exchange  for  its  own  capital  stock 
so  purchased.^  Notes  given  by  an  insolvent  corporation  for  unearned 
dividends  are  not  legal  except  in  bona  fide  hands. ^ 

A  corporate  creditor  may  compel  stockholders  to  refund  the  amount 
received  by  them  on  a  distribution  of  the  corporate  assets  upon  dissolu- 
tion or  a  sale  of  all  the  assets  of  the  company,  to  the  extent  that  his 
claim  has  not  been  paid  after  he  has  exhausted  his  remedy  against  the 
corporation  itself. '^     So  also  the  stockholders  are  not  allowed  to  defraud 


holders  in  a  national  bank  in  Ne- 
braska for  dividends  paid  from  the 
capital  stock,  except  so  far  as  re- 
covery was  barred  by  the  statute  of 
limitations.  See  also  Fort  Payne 
Bank  v.  Alabama  Sanitarium,  103  Ala. 
358  (1894);  Bingham  v.  Marion  T. 
Co.,  27  Ind.  App.  247  (1901) ;  Re  Den- 
ham,  L.  R.  25  Ch.  D.  752  (1883).  It 
has  been  held  in  England,  however, 
that  where  the  by-laws  provide  that 
the  directors,  for  salary,  shall  have 
ten  per  cent,  of  the  surplus  profits 
over  a  certain  dividend,  they  may  re- 
cover it,  although  they  sue  for  it 
many  years  afterwards,  when  it  turns 
out  that  the  assets  were  overesti- 
mated ;  but  in  good  faith.  Re  Peruvian 
Guano  Co.,  [1894]  3  Ch.  690.  As 
against  illegal  dividends  a  stockholder 
in  a  bank  may  offset  his  deposits  in  the 
bank.  Reid  v.  Owensboro,  etc.  Co., 
141  Ky.  444  (1911). 

1  Holmes  v.  Newcastle,  etc.  Co., 
L.  R.  1  Ch.  D.  682  (1875). 

2  Thompson  v.  Bemis  Paper  Co., 
127  Mass.  595  (1879). 

^  "A  corporate  creditor  may  by  his 
acts  estop  himself  from  his  right  to 
attack  a  dividend."  Lawrence  v. 
Greenup,   97   Fed.    Rep.   906    (1899). 


Thus,  where  a  company  is  insolvent, 
and  bondholders  have  agreed  to  sell 
their  bonds  to  a  certain  party  at 
seventy-five  cents  on  the  dollar,  and 
that  party  then  agrees  with  the  cor- 
poration to  acquire  and  cancel  the 
bonds  and  take  the  property  from  the 
corporation  for  a  nominal  consider- 
ation, and  after  he  has  made  such 
agreement  the  bondholders  decline  to 
and  proceed  to  foreclose  their  mort- 
gage and  realize  ninety  cents  on  the 
dollar,  the  court  will  not  compel  the 
stockholders  to  pay  to  the  bondholders 
the  corporate  assets  which  the  stock- 
holders have  distributed  among  them- 
selves. Brooks  V.  Brooks,  174  Pa. 
St.  519  (1896). 

*  Home  Fire  Ins.  Co.  v.  Barber,  67 
Neb.  644  (1903). 

*  Allen  V.  Francisco,  etc.  Co.,  193 
Fed.   Rep.  825,  831    (1912). 

^  Alabama,  etc.  Co.  v.  Chattanooga, 
etc.  Co.,  37  S.  W.  Rep.  1004  (Tenn. 
1896). 

^  See  §§  549,  672,  infra.  Where 
one  corporation  buys  the  assets  of  an- 
other, the  stock  of  the  former  being 
issued  to  the  stockholders  of  the  latter, 
a  new  stockholder  in  the  former  cannot 
complain   that   the  latter  corporation 


1616 


CH.  XXXII.] 


DIVIDENDS. 


[§  548. 


creditors  by  bringing  about  a  foreclosure  and  purchase  of  the  property 
by  themselves  at  a  low  price  which  will  not  pay  the  corporate  debts. ^ 

fieient  to  pay  all  liabilities,  no  bad 
faith  being  involved.  Lawrence  v. 
Greenup,  97  Fed.  Rep.  906  (1899). 
Where  a  construction  company  dis- 
tributes its  assets  among  its  stock- 
holders without  paying  its  creditors, 
the  stockholders  may  be  compelled  to 
disgorge  to  the  extent  of  the  debts 
so  remaining  unpaid.  Grant  v.  South- 
ern Contract  Co.,  etc.,  104  Ky.  781 
(1898).  A  debt  of  a  stockholder  to 
be  paid  from  "dividends"  must  be 
paid  from  the  dividends  of  assets,  if 
the  company  dissolves.  Cozad  v.  Mc- 
Kee,  130  Pa.  St.  406  (1889).  Distri- 
bution of  funds  of  incorporated  asso- 
ciation. Ashton  V.  Dashaway  Assoc, 
84  Cal.  61  (1890).  Upon  the  winding 
up  of  a  building  association  distribu- 
tion is  made  on  the  basis  of  fictitious 
dividends  being  first  charged  against 
each  member  and  dues  paid  being 
credited  to  them.  Boice  v.  Rabb,  24 
Ind.  App.  368  (1900).  A  corporate 
creditor,  after  obtaining  a  judgment 
against  the  corporation  and  having 
execution  returned  unsatisfied,  may 
hold  liable  the  stockholders  who  re- 
ceived the  stock  of  another  corpora- 
tion which  took  over  all  the  assets 
of  the  former  corporation,  even 
though  such  stockholders  were  not 
stockholders  of  record.  Each  stock- 
holder is  liable  for  the  entire  amount 
received  by  him  to  the  amount  of  the 
claim,  and  it  is  not  necessary  to  join 
aU  the  stockholders.  Williams  v.  Com- 
mercial Nat.  Bank,49  0reg.  492  (1907). 
1 A  foreclosure  which  is  brought 
about  by  the  stockholders  for  the  pur- 
pose of  buying  in  the  property  and 
reorganizing  the  property  so  as  to 
protect  the  mortgage  bondholders  and 
also  the  stockholders,  but  to  cut  off 
the  claims  of  unsecured  creditors,  and 
particularly  to  cut  off  a  guaranty  on 
the  bonds  of  another  corporation,  is 
illegal,  and  if  such  facts  are  proved 
the  foreclosure  sale  will  be  set  aside. 
Louisville,  etc.  Ry.  v.  Louisville  Trust 
Co.,  174  U.  S.  674  (1899),  the  court 
saying  (p.  683),  "no  such  proceedings 
can  be  rightfully  carried  to  consum- 
mation which  recognize  and  preserve 


distributed  its  assets  before  dissolution. 
O'Dea  V.  Hollywood,  etc.  Ass'n,  154 
Cal.  53  (1908).  Where  a  corporation 
has  sold  all  its  property,  and  all  the 
stockholders  but  one  have  transferred 
their  stock  and  received  pay  therefor, 
he  cannot  sue  for  his  share  because  the 
.transaction  is  a  division  of  the  capital 
stock  prohibited  by  the  California 
statutes,  and  his  remedy  is  to  undo  the 
transaction.  Tapscott ;;.  Mexican,  etc., 
Co.,  153  Cal.  664  (1908).  Where  the 
purchaser  of  half  the  capital  stock 
claims  that  there  was  fraud,  and  a  com- 
promise is  made  by  which  the  company 
is  to  be  dissolved  and  the  property 
sold  and  the  price  paid  by  him  for  the 
stock  is  to  be  first  paid  out  of  the  pro- 
ceeds, he  may  compel  the  carrying  out 
of  this  agreement.  Burne  v.  Lee, 
156  Cal.  221  (1909).  Where  a  lessor 
railroad  issues  mortgage  bonds  to  the 
lessee  and  the  lessee  uses  them  to  buy 
a  majority  of  the  stock  of  the  lessor,  the 
creditors  of  the  lessor,  if  it  becomes 
insolvent,  may  hold  liable  a  corporation 
guaranteeing  the  bonds  to  the  extent  of 
his  debt  to  the  extent  of  the  value  of 
such  bonds,  even  though  a  larger  sum 
has  been  expended  on  the  leased  road. 
Northern  Pac.  Ry.  v.  Boyd,  177  Fed. 
Rep.  804  (1910) ;  aff'd,  228  U.  S.  482. 
Where  a  corporation  divides  its  assets 
among  its  stockholders,  leaving  a  claim 
unpaid,  a  claimant  after  obtaining 
judgment  against  the  corporation, 
may  bring  suit  against  the  only  stock- 
holder within  the  jurisdiction  to  compel 
repayment,  and  the  judgment  against 
the  corporation  is  conclusive  as  to 
them.  Champagne  Lumber  Co.  v. 
Jahn,  168  Fed.  Rep.  510  (1909).  A 
solvent  corporation  does  not  hold  its 
property  in  trust  for  its  creditors,  even 
though  it  is  in  process  of  liquidation, 
and  hence  a  partial  distribution  of  the 
assets  of  a  bank  to  the  stockholders 
during  liquidation,  when  the  bank 
was  solvent  and  retained  what  seemed 
to  be  sufficient  assets  to  pay  its  lia- 
bilities, cannot  be  recovered  back  sub- 
sequently by  the  receiver  in  an  action 
at  law,  although  it  turned  out  that 
the   remaining    assets    were    not    suf- 


(102) 


1617 


§549. 


DIVIDENDS. 


[CH.  XXXII. 


But  this  is  the  extent  to  which  the  common  law  goes.  So  long  as  cor- 
porate creditors  are  paid,  no  one  is  injured  by  the  stockholders  distribut- 
ing among  themselves  the  assets.^ 

The  distribution  of  the  assets  among  the  stockholders,  upon  a  re- 
duction of  the  capital  stock  -  or  dissolution,  is  made  upon  equitable 
principles.^ 

§  549.  Proceedings  to  recover  hack  such  a  dividend.  —  It  is  in 
general  the  practice,  where  dividends  have  been  paid  out  of  the  capital 
stock  in  prejudice  of  the  rights  of  corporate  creditors,  for  a  judgment 
creditor,  upon  the  return  of  his  common-law  execution  against  the  cor- 
poration wholly  or  partly  unsatisfied,  to  commence  an  action  in  equity 
on  behalf  of  himself  and  all  other  creditors  who  may  come  in,  in  the 
nature  of  a  creditors'  bill,  against  the  stockholders  to  whom  the  dividend 
was  unlawfully  paid,  to  recover  back  so  much  thereof  as  was  paid  out 
of  the  capital  stock. ^ 

It  is  a  necessary  condition  precedent  to  the  right  to  bring  this  action 
that  a  valid  judgment  shall  have  been  obtained  against  the  corporation, 
and  that  execution  thereon  shall  have  been  returned  wholly  or  partly 
unsatisfied,  and  this  judgment  is  conclusive  as  to  the  merits  of  the 


an  interest  in  the  stockholders  with- 
out also  recognizing  and  preserving 
the  interests,  not  merely  of  the  mort- 
gagee, but  of  every  creditor  of  the 
corporation.  In  other  words,  if  the 
bondholder  wishes  to  foreclose  and  ex- 
clude inferior  lienholders  or  general 
unsecured  creditors  and  stockholders 
he  may  do  so  ;  but  a  foreclosure  which 
attempts  to  preserve  any  interest  or 
right  of  the  mortgagor  in  the  prop- 
erty after  the  sale  must  necessarily 
secure  and  preserve  the  prior  rights 
of  general  creditors  thereof.  This  is 
based  upon  the  familiar  rule  that  the 
stockholders'  interest  in  the  property 
is  subordinate  to  the  rights  of  cred- 
itors ;  first  of  secured  and  then  of  un- 
secured creditors.  And  any  arrange- 
ment of  the  parties  by  which  the  sub- 
ordinate rights  and  interests  of  the 
stockholders  are  attempted  to  be  se- 
cured at  the  expense  of  the  prior 
rights  of  either  class  of  creditors 
comes  within  judicial  denunciation." 
See  also  228  U.  S.  482.  Cf.  §  886,  infra. 
^  See  §§3  and  546,  supra,  and 
§§  671,  766,  infra. 

2  See  §  289,  supra. 

3  See  §  641,  infra. 

*  Hastings    v.    Drew,    70   N.    Y.    9 


(1879) ;  Bartlett  v.  Drew,  57  N.  Y.  587 
(1874) ;  McLean  v.  Eastman,  21  Hun, 
312  (1880) ;  Gratz  v.  Redd,  4  B.  Mon. 
(Ky.)  178  (1843);  Curran  v.  Arkan- 
sas, 15  How.  304  (1853);  Grant  v. 
Ross,  100  Ky.  44  (1896).  See  also 
U.  S.  V.  Globe  Works,  7  Fed.  Rep.  530 
(1881);  Brewer  v.  Michigan  Salt 
Assoc,  58  Mich.  351  (1885).  See  also 
§  548,  supra.  And  see  Vose  v.  Grant, 
15  Mass.  505  (1819),  where  it  was 
held  that  an  action  as  for  tort  could 
not  be  maintained  by  a  creditor 
against  an  individual  stockholder  who 
had  received  dividends.  Spear  v. 
Grant,  16  Mass.  9,  15  (1819),  holding 
that  an  action  at  law  will  not  lie.  An 
action  on  the  case  for  fraud  lies  for 
a  conspiracy,  the  stock  having  been 
sold  back  to  the  corporation  bank  and 
the  bank  then  closed.  Bartholomew 
V.  Bentley,  15  Ohio,  659  (1846). 
Where  all  the  property  of  a  telegraph 
company  is  sold  and  the  proceeds  dis- 
tributed among  the  stockholders,  a 
creditor  of  the  company  may  by  a  bill 
in  equity  compel  the  stockholders  to 
pay  the  claim  against  the  corporation, 
the  proceeds  being  a  trust  fund.  Balti- 
more, etc.  Co.  V.  Interstate  Co.,  54 
Fed.  Rep.  50  (1893). 


1618 


CH.  XXXII.] 


DIVIDENDS. 


[§  549. 


creditor's  claim. ^  It  is  held  in  Missouri  that  a  stockholder  in  an  in- 
solvent bank  cannot  be  compelled  to  pay  back  a  dividend  to  Hquidate 
a  creditor's  claim  against  the  bank  for  negligence,  unless  the  remedy 
against  the  negligent  officers  has  first  been  exhausted.'  A  corporation 
may  file  a  bill  in  equity  to  enjoin  the  foreclosure  of  a  mortgage  securing 
bonds,  which  have  been  issued  to  the  stockholders  as  a  dividend  illegally, 
and  to  compel  the  surrender  of  the  bonds  for  cancellation,  it  appearing 
that  no  other  rights  have  intervened.^  In  a  suit  to  foreclose  a  mort- 
gage there  cannot  be  joined  a  claim  for  dividends  illegally  paid."*  If 
the  treasurer  is  sued  by  a  corporate  creditor  to  reach  assets  of  the  cor- 
poration which  he  holds,  he  cannot  interplead.^  A  receiver  may  be 
authorized  by  the  court  to  institute  the  suit.^  He  may  file  a  bill  in 
equity  to  compel  stockholders  to  refund  dividends  illegally  paid  by 


1  In  a  judgment  creditor's  suit  to 
reach  assets  of  an  insolvent  corpora- 
tion which  have  been  turned  over  to 
the  stockholders  in  fraud  of  creditors, 
the  judgment  of  the  creditor  against 
the  corporation  cannot  be  impeached 
except  by  fraud  and  jurisdiction.  All 
of  the  stockholders  need  not  be  joined, 
but  if  any  stockholder  wishes  the 
equities  adjusted  as  between  the  vari- 
ous stockholders,  he  can  file  a  cross- 
bill. Singer  t'.  Hutchinson,  183  111. 
606  (1900) ;  Stui-ges  v.  Vanderbilt,  73 
N.  Y.  384  (1878).  In  this  case  there 
was  no  recovery  against  a  director 
who  had  sold  his  stock  and  ceased  to 
participate  in  the  company's  affairs 
five  years  before  the  dissolution. 
Dudley  v.  Price,  10  B.  Mon.  (Ky.)  84 
(1849);  Andrew  v.  Vanderbilt,  37 
Hun,  468  (1885) ;  Hastings  v.  Drew, 
76  N.  Y.  9  (1879),  where  this  liability 
was  enforced  against  one  who  had 
become  a  purchaser  of  stock  after  the 
cause  of  action  arose  upon  which  the 
judgment  was  secured,  the  stock  be- 
ing by  the  terms  of  the  transfer  sub- 
ject to  all  claims  against  it.  In  a  suit 
by  judgment  creditors  of  a  corpora- 
tion to  hold  stockholders  liable  for 
dividing  its  assets,  all  of  its  property 
having  been  sold  to  another  corpora- 
tion for  stock  of  the  latter  delivered 
directly  to  the  stockholders  of  the 
former,  the  judgment  by  the  creditor 
against  the  corporation  cannot  be  im- 
peached except  for  fraud  or  want  of 
jurisdiction.  Montgomery  v.  White- 
iead,  40  Colo.  320  (1907). 


-  Daugherty  v.  Poundstone,  120 
Mo.  300  (1906). 

3  Gunnison,  etc.  Co.  v.  Whitaker,  91 
Fed.  Rep.  191  (1898).  See  §  848, 
infra. 

*  New  Hampshire  Sav.  Bank  v. 
Riehey,  121  Fed.  Rep.  956  (1903). 
See  §  848,  infra.  A  bill  for  foreclosure 
need  not  also  ask  repayment  of  illegal 
dividends  in  case  of  a  deficiency  judg- 
ment, such  remedy  being  supple- 
mental. Continental,  etc.  Bank  v. 
AUis-Chalmers  Co.,  200  Fed.  Rep.  600 
(1912). 

*  A  treasurer  cannot  interplead  be- 
tween the  stockholders  and  a  corpo- 
rate creditor  who  is  seeking  to  reach 
bonds  received  by  the  corporation  in 
payment  for  its  property.  Stone  v. 
Reed,  152  Mass.  179  (1890). 

^  A  receiver  of  the  corporation  is 
the  proper  party  to  sue  to  recover 
back  any  dividends  which  were  paid 
from  the  capital  stock.  Corporate 
creditors  cannot  sue  for  these  after 
the  receiver  goes  in.  It  is  doubtful 
whether  the  corporation  itself  could 
complain  of  such  dividends.  A  sale 
of  the  assets  by  the  receiver  does  not 
carry  this  cause  of  action.  Minnesota, 
etc.  Co.  IK  Langdon,  44  Minn.  37 
(1890).  Dividends  paid  out  of  capital 
may  be  recovered  back  by  the  receiver 
so  far  as  necessary  to  pay  corporate 
debts  if  the  company  becomes  insol- 
vent. Mills  V.  Hendershot,  70  N.  J.  Eq. 
258  (1905).  A  receiver  of  an  in- 
solvent bank  may  recover  from  the 
stockholders  all  dividends  paid  them 


1619 


§549. 


DIVIDENDS. 


[CH.  XXXII. 


them.^  He  represents  the  creditors  as  well  as  the  corporation  and 
stockholders.  As  an  officer  of  the  court  he  may  sue,  and  is  not  estopped 
by  the  acts  of  the  corporation. 

In  a  suit  by  a  receiver  of  a  national  bank  to  recover  back  dividends 
illegally  paid,  the  books  of  the  bank  are  competent  evidence  to  prove 
the  acts  of  the  corporation  and  its  financial  condition,  except  as  to  deal- 
ings between  the  corporation  and  the  defendant.^  It  has  been  held 
that  even  though  a  receiver  is  in  charge,  yet  a  judgment  creditor  may 
file  a  bill  to  compel  a  stockholder  to  pay  back  an  illegal  dividend  and 
also  to  account  for  property  transferred  to  him  by  the  corporation  for 
a  portion  of  his  stock,  the  receiver  being  made  a  party  defendant.^ 
A  dividend  paid  out  of  the  capital  stock  is  illegal  under  the  New  York 
statute,  even  though  it  does  not  render  the  company  insolvent,  and  no 
demand  need  be  made  before  suit  by  a  trustee  in  bankruptcy  of  the  com- 
pany to  recover  back  the  same."* 

In  the  creditor's  suit  all  the  stockholders  who  can  be  reached  should 
be  made  parties  defendant,  and  as  to  those  unknown  or  insolvent  or 
beyond  the  jurisdiction  there  should  be  a  proper  averment  in  the  bill.^ 

a  stockholder  for  dividends  paid 
while  the  corporation  was  insolvent. 
Kretschmar  v.  Stone,  90  Miss.  37.5 
(1907).  Fricke  v.  Angemeier,  101  N.  E. 
Rep.  329  (Ind.  1913). 

1  Hayden  v.  Thompson,  71  Fed.  Rep. 
60  (1895),  rev'g  67  Fed.  Rep.  273. 

2  Hayden  v.  "Williams,  96  Fed.  Rep. 
279  (1899). 

3  Bowker  v.  Hill,  115  Fed.  Rep.  528 
(1879). 

<Cottrell  V.  Albany,  etc.  Co.,  142 
N.  Y.  App.  Div.  148  (1911). 

5  Wood  V.  Dummer,  3  Mason,  308 
(1824) ;  s.  c,  30  Fed.  Cas.  435;  Bart- 
lett  V.  Drew,  57  N.  Y.  587  (1874).  In 
the  case  last  cited  it  is  held  that  the 
creditor  is  not  required  to  bring  his 
suit  on  behalf  of  other  creditors  who 
may  choose  to  come  in,  but  may  sue 
alone  and  for  his  own  benefit  exclu- 
sively, and  that  he  need  not  make  all 
the  stockholders  parties,  but  may  pur- 
sue one,  any,  or  all,  as  he  may  elect, 
upon  the  theory  that  with  the  equities 
between  the  stockholders  themselves 
he  has  nothing  to  do,  unless  he  choose 
to  intervene  to  settle  them.  See  also 
Brewer  v.  Michigan  Salt  Assoc,  58 
Mich.  351  (1885) ;  Pacific  Ry.  v.  Cut- 
ting, 27  Fed.  Rep.  638  (1886);  Wil- 
liams V.  Boice,  38  N.  J.  Eq.  364  (1884). 


out    of    the    capital    stock.     Corn    v. 
Skillern,  75  Ark.  148  (1905).     In  New 
York  the  receiver  of  an  insolvent  cor- 
poration may  maintain  an  action  for 
the  benefit  of  the  creditors  against  the 
stockholders  to  recover  the  sums  re- 
ceived by   them  as  dividends  at   the 
time  the  company  was  insolvent ;   and 
in  such  an  action  the  creditors  of  the 
corporation    are    proper    parties    de- 
fendant for  the  purpose  of  restraining 
them    from     proceeding    individually 
against  the  stockholders  separately  to 
recover  the  unlawful  dividends.     Os- 
good V.  Laytin,  3  Keyes,  521   (1867). 
See   also   Lexington,   etc.    Ins.    Co.    v. 
Page,   17  B.  Mon.   (Ky.)  412   (1856), 
holding  that  an  assignee  of  the  com- 
pany for  the  benefit  of  the  company 
might  sue.     But  a  receiver's  suit  can- 
not in  such  a  case  be  brought  for  the 
benefit   of   the   stockholders.     Butter- 
worth  V.  O'Brien,  39  Barb.  192  (1863). 
Cf.  McLean  v.  Eastman,  21  Hun,  312 
(1880).     An  order  of  the  court  direct- 
ing  a   receiver    to    recover    dividends 
illegally   paid   is   not   an   adjudication 
binding  on  the  stockholders  to  the  ef- 
fect that  such  dividends  were  illegally 
paid.     Stewart  v.  Marion,  etc.  Co.,  155 
Ind.  174  (1900).     A  court  may  author- 
ize  a   receiver   to   bring   suit   against 


1620 


CH.  XXXII.] 


DIVIDENDS. 


550. 


The  corporation  Is  a  necessary  party  defendant  to  the  blll.^  The 
stockliolder  who  is  compelled  to-  pay  more  than  his  equitable  propor- 
tion of  any  unpaid  corporate  debt  may,  in  a  proper  proceeding,  re- 
sort to  his  associates  for  contribution.-  A  transferee  of  stock  against 
which  creditors  have  this  claim  at  the  time  of  transfer  is  not  liable 
to  respond  in  a  creditor's  suit  therefor.^  The  statute  of  limitations 
runs  in  favor  of  stockholders,  who  receive  such  dividends  in  good 
faith  and  without  actual  notice,  from  the  time  they  are  paid.^ 

§  550.   The  liability  herein  of  the  corporate  officers.  —  The  liability 
of  the  corporate  officers  as  to  dividends  paid  out  of  the  capital  stock 

(1856).     See  also  Re  Mammoth  Cop- 
peropolis,   50  L.  J.    (Ch.)    11    (1880); 
Dudley  v.  Price,  10  B.  Mon.  (Ky.)  84 
(1849).     A  dividend  paid  out  of  cap- 
ital may  be  recovered  back  by  a  re- 
ceiver  at   any   time   within   six   years 
after  such  payment  if  the  stockholders 
did     not     know     that     the     dividend 
was  paid  out  of  capital,  but  a  court  of 
equity  will  not  apply  the  statute  of 
limitations  as  regards  officers  and  di- 
rectors receiving  such  dividend.     Mills 
V.  Hendershot,  70  N.  J.  Eq.  258  (1905). 
Where  a  party  contracts  to  purchase 
the  stock  of  three  sugar  refining  com- 
panies for  $8,250,000  preferred  stock  in 
a  company   to  be  formed,   and   then 
forms    a    company    and    becomes    a 
director  himself  and  sells  the  stock  to 
the  new  company  for  $8,250,000  pre- 
ferred stock  and  $10,000,000  common 
stock,  he  and  his  principal  keeping  the 
common  stock,  a  preferred  stockholder 
may  compel  these  promoters  to  turn 
over  to  the  company  for  cancellation  on 
reduction  of  the  capital  stock  the  com- 
mon   stock    mentioned    above,    even 
though  eleven  years  have  elapsed,  the 
common  stock  still  being  in  the  original 
hands,  and  the  preferred  stockholders 
not  having  been  informed  fully  of  the 
facts,  and  even  though  the  preferred 
stockholders  had  given  proxies  to  the 
guilty  parties  and  the  latter  had  voted 
such  proxies  ratifying  the  acts  ;  but  the 
promoters  may  keep  dividends  which 
were  legally  declared  on  the  common 
stock  more  than  six  years  prior  to  the 
suit.     Even   though   the   stockholders 
in  their  meetings  had  ratified  the  trans- 
action this  was  not  binding,   the  act 
being  ultra  vires.     Tooker  v.  National, 
etc.  Co.,  84  Atl.  Rep.  10  (N.  J.  1912). 


Many  stockholders  may  be  joined  as 
defendants  in  a  suit  in  equity  to  re- 
cover back  illegal  dividends,  even 
though  some  received  a  greater  num- 
ber of  dividends  than  others.  Hayden 
V.  Thompson,  71  Fed.  Rep.  60  (1895). 
1  First  Nat.  Bank  v.  Smith,  6  Fed. 
Rep.  215  (1879),  followed  in  Dormit- 
zer  V.  Illinois,  etc.  Co.,  6  Fed.  Rep. 
217  (1881).  Where  all  the  assets  have 
been  distributed,  an  action  against 
the  stockholders  to  recover  back  dam- 
ages for  a  tort  committed  by  the  cor- 
poration must  include  the  corporation 
as  a  co-defendant.  Swan,  etc.  Co.  v. 
Frank,  39  Fed.  Rep.  456  (1889) ;  aff'd, 
148  U.  S.  603.  In  a  suit  to  compel 
stockholders  of  a  foreign  corporation 
to  discover  and  account  for  corporate 
property  illegally  divided  among  them, 
the  property  must  be  definitely  de- 
scribed. Service  on  the  corporation 
by  publication  is  insufficient.  King  v. 
Sullivan,  93  Ga.  621  (1894).  In  a  suit 
by  a  corporate  creditor  to  hold  stock- 
holders liable  for  illegal  dividends,  the 
corporation  is  a  necessary  party  de- 
fendant. Lathrop,  etc.  Co.  v.  Byrne, 
115  N.  Y.  App.  Div.  846  (1906). 

2Bartlett  v.  Drew,  57  N.  Y.  587 
(1874). 

3  Hurlbut 
(1885). 

^  The  statute  of  limitations  runs 
against  an  action  to  recover  back  ille- 
gal dividends  from  stockholders.  It 
begins  to  run  from  the  time  when  the 
dividend  is  paid,  provided  the  stock- 
holder did  not  know  or  have  reason  to 
know  the  condition  of  the  company. 
Hayden  v.  Thompson,  71  Fed.  Rep.  60 
(1895) ;  Lexington,  etc:  Ins.  Co.  v. 
Page,    17    B.    Mon.    (Ky.)    412,    446 


Tayler,    62   Wis.    607 


1621 


550. 


DIVIDENDS. 


[CH.  XXX 11. 


is  not  definitely  determined.     They  of  course  are  liable  for  the  amount 
of  any  such  dividend  that  they  themselves  receive  as  stockholders.^ 

Some  cases  go  to  the  full  extent  of  holding  the  directors  liable  abso- 
lutely for~aIl  dividends  paid  out  of  capTtaT^tocE^  But  thelSetter  rule 
isTFiat,  wTTeirtteTlirecf ors  declare  a  dividend  in  g6bd7aith  and  without 
negligence,  they  are  "noTToFeTieTg^Iiable  merely  because  the  dividend 
turns  out  to  have  impaired  the  capital  sfock.-     Directors  are  not  per- 


1 A  receiver  may  recover  back  a 
dividend  paid  to  a  director  when  the 
corporation  was  insolvent.  Daven- 
port V.  Lines,  72  Conn.  118  (1899); 
Main  v.  Mills,  6  Biss.  98,  and  note 
(1874) ;  s.  c,  16  Fed.  Cas.  506,  where 
a  dividend  paid  to  the  president,  but 
not  legitimately  earned,  was  recov- 
ered from  the  president  of  a  bank  by 
the  assignee  in  banlo-uptcy.  In  16 
Fed.  Cas.  506  it  is  stated  that  this  de- 
cision was  afterwards  partially  re- 
versed. Re  County  Marine  Ins.  Co., 
L.  R.  6  Ch.  App.  104  (1870),  which 
was  the  case  of  a  marine  insurance 
company,  where  the  directors  declared 
a  bonus  on  the  shares  of  stock  with- 
out making  out  a  profit  and  loss  ac- 
count, and  it  was  held  that  a  director 
who  had  received  such  bonus  on  a 
balance  sheet  thus  carelessly  drawn 
up  should,  in  consequence  of  his  neg- 
lect of  duty,  repay  the  amount  to  the 
liquidator.  It  was  the  gross  neglect 
of  the  directors  which  militated  so 
strongly  against  them,  and  both  the 
lord  justices  declared  the  court  would 
not  have  so  held  had  there  been  bona 
fides  and  regularity  in  the  declaration 
of  the  bonus.  Re  Denham,  L.  R.  25 
Ch.  D.  752  (1883).  Here  it  was  held 
that  an  innocent  director  was  not  per- 
sonally responsible  for  the  fraudulent 
reports  and  balance  sheets  and  the 
dividends  paid  under  them,  and  that  — 
having  regard  to  the  extraordinary 
powers  vested  by  the  articles  in  the 
chairman,  and  to  the  fact  that  the 
books  had  been  kept  and  audited  by 
duly  authorized  officers,  and  that  the 
director  sought  to  be  charged  had  no 
reason  to  suspect  any  misconduct  —  he 
was  not  liable  to  repay  any  of  the 
dividends  so  received  by  him,  al- 
though they  were  in  fact  paid  out  of 
the  capital.  Where  the  directors  pay 
a  dividend  to  themselves  only,  with- 


out there  being  any  profits,  they  must 
refund  the  same.  Latimer  v.  Equi- 
table, etc.  Assoc,  78  Mo.  App.  463 
(1898).  Directors  declaring  dividends 
in  good  faith  are  liable  each  only 
for  the  amount  actually  received  by 
him,  unless  their  conduct  amounted 
to  tort,  in  which  case  they  would  be 
generally  liable  for  the  whole  sum  so 
paid  out.  Ebelhar  v.  German,  etc.,  91 
S.  W.  Rep.  262  (Ky.  1906). 

2  Excelsior  Petroleum  Co.  v.  Lacey, 
63  N.  Y.  422  (1875).  In  a  suit  at  com- 
mon law  to  hold  directors  liable  for 
illegally  declaring  dividends  fraud 
and  bad  faith  must  be  shown.  Dav- 
enport V.  Lines,  77  Conn.  473  (1905). 
Directors  are  not  liable  to  corporate 
creditors,  either  at  common  law  or 
under  a  statute,  for  paying  dividends 
when  they  supposed,  and  the  books 
showed,  that  the  company  was  pros- 
perous and  had  profits  for  distribu- 
tion, but  it  subsequently  turned  out 
that  the  president  had  embezzled  the 
funds  and  substituted  fictitious  notes 
of  customers  and  had  falsified  the 
books  in  omitting  debts  for  material, 
there  being  no  proof  that  the  direc- 
tors, even  in  the  exercise  of  ordinary 
diligence,  would  have  discovered  that 
the  company  was  insolvent.  Chick  v. 
Fuller,  114  Fed.  Rep.  22  (1902). 
Where  losses  incurred  by  a  banking 
company  during  the  year  are  written 
off,  and  the  balance  of  the  receipts  in 
each  year  over  the  outgoings  in  the 
same  year,  after  making  some  allow- 
ance for  bad  debts  and  deductions  for 
sums  carried  over  to  a  reserve  fund, 
is  treated  as  the  profit  of  that  year, 
and  is  divided  as  dividends  without 
making  any  further  provision  for  the 
losses  of  previous  years,  the  directors 
are  not  liable  on  the  ground  that  the 
dividends  were  paid  out  of  capital, 
although    this   method    of    procedure 


1622 


CH.  XXXII.] 


DIVIDENDS. 


[§  550. 


snnally  liable  for  dividends  improperly  paid,  where  they  honestl;^ 
ikvt'Jn_a  state  of  facts  which  would  justify  the  payment  and  rely  upon 
the_general  managerVcertificate  as  to  theassets.^  The  "House  of  Xbrds 
in  England  has  held  that  even  though  dividends  have  been  declared 
and  paid  illegally,  by  reason  of  the  facts  that  bad  debts  have  not  been 
charged  off,  yet  a  director  who  acted  in  good  faith  and  relied  upon  the 
statements  of  the  officers  of  the  company  in  voting  for  such  dividends 
is  not  liable  to  repay  the  same  for  the  benefit  of  the  stockholders.- 


would  ultimately  exhaust  the  paid-up 
capital  of  the  company.  The  discre- 
tion of  the  managers  in  fixing  the 
losses  to  be  charged  to  the  capital  and 
those  to  be  charged  to  income  is  not 
inquired  into  by  the  courts,  unless 
obviously  improper  charges  to  capital 
have  been  made,  in  order  to  increase 
apparent  profits.  The  directors  are 
not  personally  liable  unless  they  were 
culpably  or  grossly  negligent  in  the 
matter.  Even  though  a  director  knew 
his  name  was  signed  to  a  report  to 
the  stockholders  after  he  has  re- 
signed, yet  he  is  not  liable,  where  he 
took  no  part  in  drawing  the  report  or 
in  recommending  the  dividend  based 
thereon.  It  seems  that  an  improper 
dividend  may  be  recovered  from  the 
directors,  even  though  the  creditors 
have  all  been  paid  and  the  stockholders 
will  have  the  benefit  of  the  recov- 
ery, they  having  been  ignorant  of  the 
fact  that  the  dividends  were  paid 
from  capital  stock.  Re  National  Bank 
of  Wales,  [1899]  2  Ch.  629,  rev'g 
79  L.  T.  Rep.  667.  In  Re  Mercantile 
Trading  Co.,  L.  R.  4  Ch.  App.  475 
(1869),  it  was  held,  in  accordance 
with  this  view,  that  where  the  action 
of  a  board  of  directors  in  making  a 
dividend  was  bona  fide,  they  are  not 
liable  for  errors  of  judgment  in  pre- 
paring a  balance  sheet  showing  the 
assets  of  the  concern.  In  this  case  it 
appears  that  the  directors  included 
among  the  corporate  assets  a  debt  due 
the  company  by  the  government  of 
the  Confederate  States ;  some  cotton 
owned  by  the  company  but  stored 
within  the  limits  of  the  Confederacy ; 
and  certain  merchant  ships  engaged 
in  running  the  blockade,  all  which 
were  estimated  at  their  full  value. 
These   assets   being   subsequently   de- 


stroyed and  lost  to  the  company,  its 
bankruptcy  followed.  Osgood  v.  Lay- 
tin,  3  Keyes  (N.  Y.),  521  (1867),  was 
an  action  by  a  receiver  to  recover 
dividends  improperly  declared.  The 
court  said  :  ' '  Ignorance  of  facts  that 
it  was  the  duty  of  the  managers  to 
know  —  not  to  know  which  was  gross 
ignorance  —  cannot  excuse  the  man- 
agers and  impart  any  virtue  or  valid- 
ity to  acts  otherwise  clearly  illegal, 
and  which  were  a  palpable  fraud 
upon  the  creditors."  But  the  direc- 
tors of  a  bank  are  not  liable  for  divi- 
dends declared  in  good  faith,  even 
though  it  subsequently  turns  out  that 
debts  to  the  bank  which  they  consid- 
ered good  were  found  to  be  bad.  Wit- 
ters t'.  Sowles,  31  Fed.  Rep.  1  (1887). 
However,  the  court  in  Re  Oxford 
Building,  etc.  Soc,  55  L.  T.  Rep.  598 
(1886),  say  it  is  settled  that  "direc- 
tors who  improperly  pay  dividends 
out  of  capital  are  liable  to  repay  such 
dividends  personally  upon  the  com- 
pany being  wound  up  ;  that  the  com- 
pany, or  a  creditor,  or  a  liquidator 
may  enforce  it ;  that  the  acquiescence 
of  the  stockholders  does  not  affect 
creditors ;  that  the  statute  of  limita- 
tions does  not  apply ;  and  that  the  in- 
nocent intent  of  the  directors  is  no 
defense.  The  directors  are  not  per- 
sonally liable  for  dividends  declared, 
even  though,  in  estimating  the  assets, 
claims  are  included  which  ultimately 
prove  to  be  bad,  the  result  thereby 
being  that  the  dividend  was  paid  out 
of  the  capital.  Re  London  &  Gen. 
Bank,  72  L.  T.  Rep.  227  (1894) ;  aff'd, 
[1895]  2  Ch.  166,  673. 

'  Re  Kingston  Cotton  Mill  Co., 
[1896]  2  Ch.  279,  rev'g  [1896]  1  Ch.  331. 

^  Dovey,  etc.  v.  Cory  (H.  of  L.), 
[1901]  A.  C.  477. 


1623 


§  550.] 


DIVIDENDS. 


[CH.  XXXII. 


But  where  the  directors  negligently  or  wilfully  and  knowingly  declare 
and  pay  a  dividend  out  of  the  capital  stock,  they  are  personally  liable 
to  refund  that  dividend.^     Such  also  is  the  rule,  if  they  knowingly  de- 


1  In  order  to  ascertain  profits  the 
directors  should  have  a  careful  valua- 
tion. If  they  employ  persons  whom 
they  reasonably  believe  to  be  com- 
petent and  adopt  their  conclusions, 
they  are  not  liable  for  mistakes. 
Where,  however,  the  directors  take  no 
active,  intelligent,  guiding  part  in  the 
affairs  of  the  company,  and  really  do 
nothing  except  as  suggested  by  the 
secretary,  and  do  not  examine  the  ac- 
counts at  all,  and  cause  the  stock- 
holders to  declare  dividends  on  a 
statement  which  omits  large  liabil- 
ities, so  that  dividends  are  really 
paid  out  of  the  capital  stock,  such  di- 
rectors are  personally  liable  to  corpo- 
rate creditors  for  such  dividends. 
The  secretary  also  is  liable,  he  being 
the  active  manager  of  the  company. 
The  six-years  statute  of  limitations, 
however,  applies,  and  only  those  divi- 
dends which  have  been  declared 
within  six  years  must  be  repaid.  In- 
terest, however,  will  be  allowed. 
Municipal,  etc.  Land  Co.  v.  PoUington, 
63  L.  T.  Rep.  238  (1890).  See  also 
Re  National  Funds,  etc.  Co.,  L.  R.  10 
Ch.  D.  118  (1878);  Gratz  r.  Redd,  4 
B.  Mon.  (Ky.)  178,  194  (1843);  Hill 
V.  Frazier,  22  Pa.  St.  320  (1853) ;  Re 
Alexandra  Palace  Co.,  L.  R.  21  Ch.  D. 
149  (1882) ;  Salisbury  v.  Metropolitan 
Ry.,  22  L.  T.  Rep.  839  (1870) ;  s.  c,  on 
previous  hearing,  38  L.  J.  (Ch.)  249, 
where  the  suit  was  by  a  non-partici- 
pating stockholder ;  Flitcroft's  Case, 
L.  R.  21  Ch.  D.  519  (1882) ;  Evans  v. 
Coventry,  8  De  G.,  M.  &  G.  8.35 
(1857) ;  Turquand  v.  MarshaU,  L.  R. 
4  Ch.  App.  376  (1869),  denying  this 
remedy  to  the  stockholders  as  a  body. 
In  Burnes  v.  Pennell,  2  H.  L.  Cas. 
497,  531  (1849),  Lord  Brougham  said: 
''I  beg  to  be  understood  as  going  with 
those  who  view  with  the  greatest 
severity  the  conduct  of  railway  direc- 
tors in  declaring  dividends  which  can 
only  be  paid  out  of  capital,  because  I 
consider  that  that  is  of  itself  a  most 
vicious  and  fraudulent  course  of  con- 
duct.    It  is  telling  the  world  that  their 


profits  are  large  when  it  may  be  that 
their  profits  are  nil,  or  that  their 
losses  are  large  with  no  profits.  It  is 
a  false  and  fraudulent  representation 
by  act  and  deed,  much  to  be  repro- 
bated ;  and  I  go  the  full  length  of 
what  my  noble  and  learned  friend  has 
laid  down,  that  it  would  be  a  just 
ground,  if  a  course  of  conduct  of  this 
sort  were  pursued,  coupled  with  such 
circumstances  as  clearly  to  show  a 
fraudulent  intent,  for  proceedings  of 
a  graver  nature  against  these  par- 
ties." The  payment  of  a  dividend  out 
of  the  capital  stock  is  ultra  vires. 
Accordingly,  where  the  directors  mis- 
lead the  stockholders  by  representing 
in  the  reports  and  balance  sheets,  as 
good,  debts  which  they  know  to  be 
bad,  and  thus  knowingly  pay  divi- 
dends which  in  fact  impair  the  cap- 
ital stock,  it  is  not  a  defense  that  the 
stockholders,  relying  in  good  faith 
upon  the  representations  and  reports 
of  the  directors,  pass  resolutions  de- 
claring the  dividends  at  regular  meet- 
ings of  the  corporation ;  and  an  action 
will  lie  on  behalf  of  creditors  to  com- 
pel the  directors  to  refund.  In  such 
an  action  the  directors  cannot  set  off 
any  money  due  from  the  company  to 
them,  nor  have  they  recourse  to  the 
stockholders  who  took  the  dividends 
bona  fide.  Flitcroft's  Case,  L.  R.  21 
Ch.  D.  519  (1882) ;  Re  County  Marine 
Ins.  Co.,  L.  R.  6  Ch.  104  (1870).  See 
also  Scott  V.  Eagle  Fire  Co.,  7  Paige, 
198  (1838).  Where  the  du-ectors  in 
a  failing  corporation  transfer  aU  its 
assets  to  another  corporation  for 
stock  of  the  latter,  which  they  divide 
among  'themselves,  the  creditors  of 
the  former  may  hold  the  directors  lia- 
ble and  may  also  hold  liable  the  com- 
pany that  received  the  property  for 
the  value  thereof.  Mclver  v.  Young 
Hardware  Co.,  144  N.  C.  478  (1907). 
In  Kentucky  it  is  doubted  whether 
directors  are  liable  to  creditors,  the 
courts  of  that  state  seeming  to  incline 
to  hold  them  liable  only  to  the  cor- 
poration or  the  stockholders.     Lexing- 


1624 


CH.  XXXII.]  '  DIVIDENDS.  [§  550. 

clare  an  illegal  dividend  for  the  purpose  of  deceiving  the  stockholders.^ 
Where  the  directors  of  a  national  bank  place  a  fictitious  value  on  the 
assets  of  the  bank  in  order  to  declare  a  stock  dividend,  such  directors 
are  liable  for  the  par  value  of  the  stock  to  the  receiver  of  the  bank  for 
the  benefit  of  its  creditors,  unless  the  directors  show  that  the  stock  could 
not  have  been  otherwise  issued  or  sold.-  Directors  ma}'  be  personally 
liable  to  corporate  creditors,  if  they  sell  all  the  corporate  property  for 
stock  in  another  corporation,  and  then  distribute  that  stock  among 
their  stockholders,  without  paying  corporate  debts.^  Corporate 
creditors  cannot  sue  the  directors  for  illegal  payment  of  dividends 
and  negligence  where  a  receiver  is  in  charge.  The  proper  remedy  is 
for  the  receiver  to  sue  or  for  a  creditor  to  apply  to  the  court  to 
compel  him  to  sue.^  The  receiver  of  an  insolvent  corporation  may 
hold  the  directors  personally  liable  for  a  dividend  declared  when 
there  were  no  profits,  even  though  they  relied  on  a  report  of  the 
treasurer,  but  such  report  on  its  face  called  for  further  investigation.^ 
A  shareholder  who  has  received  and  still  retains  a  dividend  paid  by 
directors  partly  out  of  capital  stock,  by  a  hona  fide  mistake,  cannot 
maintain  a  suit  in  behalf  of  himself  and  other  shareholders  to  compel 
the  directors  to  restore  to  the  company  such  part  of  the  dividend, 
especially  where  the  shareholders  knew  of  the  facts  at  the  time  of 
payment.^  Where  the  directors  make  even  grave  errors  in  the  exercise 
of  judgment  they  are  not  liable,  but  where  they  surrender  their  judg- 
ment to  others,  either  the  manager  or  auditors,  they  are  liable  for 
dividends  illegally  paid,  especially  where  they  include,  as  good,  loans 

ton,  etc.  R.  R.  v.  Bridges,  7  B.  Mon.  *  Cornell  v.  Seddinger,  85  Atl.  Rep. 

(Ky.)  556,  559  (1847).  446    (Pa.    1912).     Directors    are    not 

1  Where  a  majority  of  the  directors  liable    to    a    receiver    for    dividends, 

deceive  the  minority  as  to  the  amount  even  though  paid  out  of  capital,  bufc 

of  profits  and  cause  an  illegal  dividend  may  be  liable  to  corporate  creditors, 

to  be  declared,  the  corporation  itself  Childs  v.  Adams,  4.3  Pa.  Sup.  Ct.  239 

may    compel    any    one    of    the    guilty  (1910).     A  receiver  may  hold  directors 

parties  to  return  the  excessive  amount  liable  for  illegal  dividends  under  the 

illegally  received  by  all  of  the  guilty  Idaho  statute  even  though  the  com- 

parties.     Salina,  etc.  Co.  v.  Stiefel,  82  pany  has  not  been  dissolved.     Stoltz 

Kan.  7  (1910),  the  court  saying  that  v.  Scott,   129   Pae.   Rep.   340    (Idaho, 

it  found  no  case  where  a  dividend  was  1912). 

declared     illegal     simply     because     it  ^  Towers  v.  African,  etc.  Co.  Ltd., 

encroached   on   the   capital   stock,   all  [1904]    1    Ch.   558,   holding   also   that 

parties    concerned    agreeing    thereto,  even  though  a  dividend  has  been  paid 

but  in  this  case  actual  fraud  was  in-  partly   out    of    capital    stock,    yet    if 

volved.  the  error  is  about  to  be  corrected  by 

-  Coekrill  v.   Abeles,  86  Fed.   Rep.  profits   during   a   subsequent   year,    a 

505  (1898).  stockholder's  suit    to  compel    the    di- 

'  See  §  682,  infra.  rectors  to  replace  the  amount  will  not 

*  McTamany  v.  Day,  128  Pae.  Rep.  lie. 
563  (Idaho,  1912). 

1625 


§  550.] 


DIVIDENDS. 


[CH.  XXXII. 


which  they  had  not  looked  into,  and  where  they  do  not  take  into  con- 
sideration overdrafts.  They  will  be  held  liable  from  the  date  when  a 
prudent  man  would  not  have  included  in  the  profits  unpaid  interest. 
Each  director  is  liable  only  for  dividends  declared  or  recommended  at 
meetings  when  he  was  present.^ 

Frequently,  when  a  dividend  is  paid  out  of  the  capital  stock,  the 
directors  are  made  liable  therefor  by  statute  without  reference  to  any 
fraud  or  fraudulent  intent  on  their  part.-  A  court  of  equity  has  power 
to  entertain  a  suit  to  enforce  the  statutory  liability  of  directors  for  pay- 
ing dividends  in  violation  of  such  statute,  where  there  is  no  other  remedy 
in  any  other  court,  even  though  the  money  is  not  needed  to  pay  the 
company's  debts.  In  New  Jersey  under  a  statute  formerly  existing, 
a  stockholder  might  maintain  such  a  suit  in  behalf  of  himself  and  other 
stockholders,  for  the  benefit  of  the  corporation,  especially  where  he  was 
induced  to  purchase  his  stock  by  reason  of  such  dividends.  Investors 
as  well  as  stockholders  have  a  right  to  rely  on  dividends  as  having  been 
earned.^    This  New  Jersey  statute  rendering  the  directors  personally 


1  Re  London  &  Gen.  Bank,  72  L.  T. 
Rep.  227  (1894) ;  aff'd,  [1895]  2  Ch. 
166,  673.  See  Stroud  v.  Lawson, 
[1898]  2  Q.  B.  44. 

^  In  Massachusetts,  officers  of  a  cor- 
poration can  be  charged,  under  the 
statute  in  force  upon  the  subject  in 
that  state  (Stat.  1862,  ch.  218,  §  3 ; 
Stat.  1870,  ch.  224,  §§  40,  42),  with 
corporate  debts  after  a  judgment 
against  the  corporation  and  after  a 
demand  and  return  upon  the  execu- 
tion. Chamberlin  v.  Huguenot  Mfg. 
Co.,  118  Mass.  532,  536  (1875) ;  Priest 
V.  Essex,  etc.  Co.,  115  Mass.  380 
(1874).  In  that  state  the  liability  of 
the  directors  has  been  held  to  be  en- 
forceable by  corporate  creditors  only. 
Smith  V.  Hurd,  53  Mass.  371  (1847). 
Under  the  New  York  statute  making 
directors  liable  for  declaring  divi- 
dends from  the  capital  stock,  they  are 
liable  to  the  extent  to  v/hich  the  cap- 
ital stock  is  reduced  by  the  dividend, 
and  in  the  case  of  bank  directors  they 
may  show  that  notes  which  it  is 
claimed  they  should  have  charged  off 
were  actually  paid  later.  Dykman  v. 
Keeney,  10  N.  Y.  App.  Div.  610 
(1896).  Under  the  New  York  statute 
the  directors  are  liable  to  repay  only 
such  part  of  an  illegal  dividend  as 
wiU    recoup    the    corporation    or    its 


creditors  for  the  actual  loss  sustained 
thereby.  Dykman  v.  Keeney,  16  N.  Y. 
App.  Div.  131  (1897) ;  aff'd,  160  N.  Y. 
677.  Dividing  the  property  is  equiva- 
lent to  a  declaration  of  a  dividend  so 
far  as  the  directors  are  concerned. 
Rorke  v.  Thomas,  56  N.  Y.  .559  (1874). 
Where  a  statute  renders  directors  lia- 
ble for  declaring  a  dividend  from  its 
capital  stock,  the  creditors  may  hold 
them  liable  for  breach  thereof,  with- 
out first  exhausting  the  assets  of  the 
corporation,  but  the  corporation  is  a 
proper  party  defendant.  The  remedy 
may  be  at  law.  Swartley  v.  Oak,  etc. 
Co.,  135  Iowa,  573  (1907). 

^  Appleton  V.  American  Malting  Co., 
65  N.  J.  Eq.  375  (1903).  Cf.  Siegman 
V.  Maloney,  63  N.  J.  Eq.  422  (1902) ; 
aff'd,  Seegman  v.  Maloney,  65  N.  J.  Eq. 
372  (1903).  Stockholders  are  not  dis- 
qualified from  maintaining  a  suit  for 
the  benefit  of  the  corporation,  against 
its  directors  to  reimburse  it  because 
of  the  directors  declaring  and  paying  a 
dividend  out  of  capital,  though  such 
stockholders,  or  the  persons  from  whom 
they  purchased  their  stock,  partici- 
pated in  the  dividends,  and  did  not 
return  them.  Appleton  v.  American 
Malting  Co.,  65  N.  J.  Eq.  375  (1903). 
A  request  by  a  stockholder  to  the  cor- 
poration   to    bring    suit    against    the 


1626 


CH.  XXXII.] 


DIVIDENDS. 


[§  550. 


liable  upon  corporate  insolvency  for  all  dividends  paid  out  of  capital 
stock,  even  though  a  part  of  the  money  so  collected  would  go  to  stock- 
holders who  had  received  such  illegal  dividends,  was  so  inequitable  in 
its  operation  that  in  1904  it  was  amended  so  as  to  be  applicable  only 
to  any  loss  actually  sustained  by  the  stockholders  or  the  corporation 
by  reason  of  such  dividend.^  Under  the  statutes  of  New  York  where 
a  New  Jersey  corporation,  doing  business  in  Xew  York,  pays  dividends 
from  the  capital  stock,  a  director  participating  in  declaring  the  dividend 
is  personally  liable  therefor,  and  if  the  corporation  refuses  to  bring  the 
action  a  stockholder  may  bring  it  in  behalf  of  himself  and  other  stock- 
holders.- It  has  been  recently  held  by  the  highest  court  in  New  York 
that,  under  the  New  York  statute,  where  a  dividend  is  declared  out  of 
the  capital  stock,  and  a  person  purchases  the  stock  on  the  assumption 
that  the  dividend  was  paid  out  of  profits,  he  may  hold  the  directors 


directors  for  declaring  di\adends  in 
violation  of  a  statute,  is  not  excused  by 
the  fact  that  five  out  of  the  twelve 
directors  were  directors  when  such 
dividends  were  declared,  even  though 
one  of  the  others  was  a  brother  of  one 
of  the  five  and  another  was  an  em- 
ployee of  one  of  the  five.  Siegman  v. 
Maloney,  65  N.  J.  Eq.  372  (1903).  A 
New  Jersey  statute  rendering  directors 
personally  liable  for  dividends  paid 
out  of  capital  was  enforced  in  Siegman 
V.  Electric,  etc.  Co.,  72  N.  J.  Eq.  403 
(1907),  and  the  court  held  that  it  was 
no  defense  that  a  majority  of  the  stock- 
holders had  approved  their  action. 
Where  an  illegal  dividend  was  declared 
by  a  vote  of  five  of  the  eleven  direc- 
tors, before  a  stockholder  can  sue  to 
make  them  pay  it  back,  under  the  New 
Jersey  statute,  he  must  first  request 
the  corporation  to  bring  suit.  Herrick 
V.  Dempster,  73  N.  J.  Eq.  145  (1907). 
Where  the  directors  of  an  insolvent 
corporation  who  have  paid  dividends 
illegally,  assign  all  its  assets  to  an  as- 
signee for  the  benefit  of  its  creditors, 
the  assignee  being  one  of  their  num- 
ber, the  court  may  appoint  a  receiver 
and  remove  the  assignee,  under  the 
New  Jersey  statute.  Gilroy  v.  Somer- 
ville,  etc.  Mills,  67  N.  J.  Eq.  479 
(1904).  A  statutory  liability  of  a  di- 
rector for  voting  for  the  payment  of 
a  dividend  out  of  capital  was  enforced 
in  Siegman  v.  Kissel,  71  N.  J.  Eq.  123 
(1906),    by    a    minority    stockholder. 


even  though  a  majority  of  the  stock- 
holders were  opposed  to  the  suit.  A 
person  who  loans  money  to  a  corpora- 
tion organized  to  bring  about  a  con- 
solidation of  other  corporations  can- 
not complain  that  stock  issued  in 
exchange  for  stock  of  other  corpora- 
tions was  returned  upon  the  failure 
of  the  plan,  and  he  cannot  hold  the 
directors  liable  under  a  statute  mak- 
ing them  liable  for  distributing  the 
capital  stock,  where  it  appears  that  he 
was  partly  responsible  for  the  failure. 
Audenreid  v.  East,  etc.  Co.,  68  N.  J. 
Eq.  450  (1904).  The  New  Jersey 
statute  imposing  a  liability  on  directors 
for  illegally  declared  dividends  was 
applied  in  Whittaker  v.  Amwell  Nat. 
Bank,  52  N.  J.  Eq.  400  (1894). 

1  Ch.  143,  L.  1904. 

2  Hutchinson  v.  Stadler,  85  N.  Y. 
App.  Div.  424  (1903).  In  the  case 
Hutchinson  v.  Curtiss,  45  N.  Y.  Misc. 
Rep.  484  (1904)  a  director  in  a  New 
Jersey  corporation  was  held  liable  for 
SI, 855,350  dividends  paid  from  capital, 
the  profits  having  included  contem- 
plated profits  on  product  sold  in  ad- 
vance, the  raw  material  not  yet  hav- 
ing been  purchased.  The  defense  that 
a  complaint  by  a  stockholder  against 
a  director  for  negligence  and  also  for 
paying  illegal  dividends  is  multifa- 
rious must  be  raised  by  demurrer. 
Weed  V.  First  Nat.  Bank,  106  N.  Y, 
App.  Div.  285  (1905). 


1627 


§  550.]  DIVIDENDS.  [CH.  XXXII. 

personally  liable  for  any  loss.^  Where  the  directors  turn  over  the 
assets  to  a  stockholder  this  is  the  same  as  a  declaration  and  payment 
of  a  dividend,  and  if  it  renders  the  company  insolvent  the  directors 
are  liable  under  the  Massachusetts  statute."  In  Connecticut  by  stat- 
ute dividends  cannot  be  legally  declared  while  the  capital  stock  is  im- 
paired, and  officers  voting  for  such  dividends  are  made  liable  for  all 
losses  resulting  therefrom,^  and  in  such  a  suit  against  directors  for  pay- 
ing illegal  dividends  it  may  be  shown  that  some  of  the  dividends  were 
paid  by  vote  of  the  directors  and  other  dividends  were  paid  by  some  of 
the  defendants  without  such  vote.  Under  the  Kentucky  statutes 
directors  are  liable  to  restore  dividends  paid  by  the  bank  while  insolvent, 
even  though  they  acted  in  good  faith. "^  Where  by  statute  directors  are 
liable  to  the  corporation  itself  for  illegal  dividends,  which  have  been 
paid,  and  succeeding  directors  refuse  to  commence  suit,  a  stockholder 
may  institute  such  suit  in  behalf  of  the  corporation  after  request  to  the 
stockholders  and  directors  to  institute  such  suit.^  Under  the  New 
Jersey  statutes,  if  the  directors  upon  the  dissolution  of  a  corporation 
distribute  the  assets  among  the  stockholders  without  paying  the  debts, 
they  are  personally  liable  for  such  debts.®  In  England,  the  auditors 
of  a  company  are  officials,  and  are  liable  for  dividends  improperly  paid, 
based  on  balance  sheets  improperly  made  up  by  the  auditors,  especially 

'  Wesp  V.  Muckle,  136  N.  Y.  App.  porate    books    or    proceedings    at    a 
Div.  241  (1910),  holding  directors  liable  directors'  meeting  at  which  they  were 
under  the  New  York  statute  for  de-  not  present  and  of  thieh  they  have  no 
daring  a  dividend  from  capital  stock  knowledge,  and  what  they  are  not  liable 
notwithstanding  they  were  ignorant  of  by  reason   of  dividends   from   capital 
the  financial  status  of  the  company :  when  the  complaint  alleges  only  false 
affirmed  in  Wesp  v.  Strasenburgh,  201  representations  and  there  is  no  proof  of 
N.  Y.  527  (1911).     Where  a  dividend  conspiracy.     C/.  Downey  v.  Finucane, 
has  been  paid  out  of  capital  stock  in  205  N.  Y.  251  (1912). 
violation  of  the  statute,  a  person  pur-         ^  Pennsylvania  Iron  Works  v.  Mae- 
chasing  stock  by  reason  of  such  divi-  kenzie,  190  Mass.  61  (1906). 
dend  can  hold  a  director  liable  even         '  Davenport  v.  Lines,  77  Conn.  473 
though  he  did  not  take  part  in  declar-  (1905). 

ing  it  nor  make  any  representations  in  ^  City  of  Franklin  v.  Caldwell,  123 

regard  to  it,  a  statute  rendering  direc-  Ky.   528   (1906).     An  officer  is  liable 

tors  liable  for   the  amount  of  illegal  for   illegal    dividends   paid    out,    even 

dividends   in   case  of   insolvency  sus-  though  the  checks  were  returned  by 

taining  such  a  suit,  though  the  com-  the    stockholders  to  be   credited    on 

pany    is     still     solvent.     Ottinger     v.  corporate   bonds  purchased  by  them 

Bennett,  203  N.  Y.  5.54  (1911).     The  from  the  corporation  on  credit.     Ebel- 

allegations  and  proof  in  an  action  by  a  har    v.     German-American,    etc.,    119 

stockholder  against  directors  for  deceit  S.  W.  Rep.  220  (Ky.  1909). 
in  persuading  him  not  to  sell  his  stock  ^  Siegman  v.  Electric,  etc.  Co.,  140 

were  considered  in  Thayer  v.  Schley,  Fed.  Rep.  117  (1905). 
137  N.  Y.  App.  Div.  166  (1910),  and  «  Keen  v.  Maple,  etc.  Co.,  63  N.  J. 

it  was  held  that  the  directors  are  not  Eq.   321    (1901) ;   N.   J.   Rev.    (1877), 

in    such    an    action    chargeable    with  p.    178;   Williams  v.   Boice,   38  N.  j! 

knowledge  of  all  the  entries  in  the  cor-  Eq.  364  (1884). 

1628 


CH.   XXXII. I 


DIVIDENDS. 


[§  550. 


where  the  auditors  included  as  regular  investments  loans  for  which  there 
was  no  proper  security.^  The  manager  of  a  corporation  who  makes 
up  the  accounts  may  also  be  liable  for  dividends  illegally  declared.- 
After  dissolution  has  been  decreed  it  is  too  late  for  a  corporate  creditor 
to  bring  an  action  to  hold  the  directors  liable  for  declaring  dividends 
out  of  the  capital  stock,  no  fraud  in  obtaining  the  dissolution  being 
alleged.^ 

Under  certain  circumstances,  in  the  absence  of  actual  fraud,  the 
directors  who  have  been  compelled  to  pay  the  claims  of  corporate  credi- 
tors may  in  turn  recover  what  they  have  paid  in  an  action  against  the 
stockholders.^  But  where  a  treasurer,  who  is  also  a  director,  has  divided 
among  the  stockholders,  in  violation  of  the  statute,  the  corporate  funds 
of  an  insolvent  corporation,  and  is  afterwards  held  liable  to  creditors, 
he  cannot  have  contribution  from  the  other  directors,  even  though  they 
took  part  in  the  division.^  Claims  against  directors  who  are  made 
liable  by  statute  in  these  cases  may,  in  the  absence  of  actual  fraud  on 
their  part,  be  barred  by  laches  or  the  statute  of  limitations.^    A  stat- 


1  Re  London  &  Gen.  Bank,  72  L.  T. 
Rep.  227  (1894);  aff'd,  [1895]  2  Ch. 
166,  673.  Auditors  are  not  officers  in 
the  true  sense  of  the  word.  Re  West- 
ern, etc.  Co.,  [1897]  1  Ch.  617,  rev'g 
75  L.  T.  Rep.  648. 

2  Re  London  &  Gen.  Bank,  72  L.  T. 
Rep.  227  (1894);  aff'd,  [1895]  2  Ch. 
166,  673. 

3  Coxon  V.  Gorst,  [1891]  2  Ch.  73. 
^  Salisbury  v.  Metropolitan  Ry.,  22 

L.  T.  Rep.  839  (1870) ;  s.  c,  on  pre- 
vious hearing  38  L.  J.  (Ch.)  249;  Re 
Alexandra  Palace  Co.,  L.  R.  21  Ch.  D. 
149  (1882).  C/.  §548,  supra.  Where 
a  part  of  the  capital  stock  is  paid  by 
the  directors  to  the  stockholders  with 
the  knowledge  and  consent  of  all,  but 
without  the  capital  stock  being  regu- 
larly reduced,  the  directors  may  be 
required,  on  the  dissolution  of  the 
corporation,  to  repay  such  sum  so 
distributed,  but  the  directors  are  then 
entitled  to  recover  from  the  stock- 
holders the  amount  so  paid  to  the 
stockholders.  Noxham  v.  Grant,  [1900] 
1  Q.  B.  88,  aff'g  [1899]  1  Q.  B.  480; 
aff'd,  [1900]  1  Q.  B.  88.  A  director 
who,  with  knowledge  of  the  insolvency 
of  the  company,  loans  money  to  the 
corporation  for  the  purpose  of  declar- 
ing a  dividend,  is  not  entitled,  upon 
an  assignment  of  the  corporate  effects, 
to  repayment  of  any  part  of  the  loan 


so  made  until  the  claims  of  stock- 
holders are  satisfied.  Kisterbock's 
Appeal,  51  Pa.  St.  483  (1866).  But  a 
director  from  whom  a  recovery  is 
had  under  the  Pennsylvania  statute 
(Act  of  April  7,  1849,  §  9),  as  a  wrong- 
doer, has  no  right  of  subrogation  as 
against  the  corporation.  Hill  v.  Fra- 
zier,  22  Pa.  St.  320  (1853).  In  this 
case  it  was  held  that,  in  the  cred- 
itor's suit  against  the  director,  the 
corporation  itself  is  not  a  necessary 
co-defendant.  In  the  case  Towers  v. 
African,  etc.  Co.  Ltd.,  [1904]  1  Ch. 
558,  the  court  said  that  if  a  director 
is  held  liable  to  repay  a  dividend  paid 
partially  out  of  capital  stock,  but 
in  good  faith,  such  director  may  recover 
from  any  stockholder,  who  took  such 
dividend  with  knowledge  of  the  facts, 
the  amount  so  received  by  him. 

5  Sharp  V.  Call,  69  Neb.  72  (1903). 

«  Re  Mammoth  Copperopolis,  50 
L.  J.  (Ch.)  11  (1880).  The  acquiescence 
of  stockholders  does  not  bind  cred- 
itors, and  the  statute  of  limitations 
does  not  apply.  Re  Oxford,  etc.  Soc, 
55  L.  T.  Rep.  598  (1886).  That  the 
statute  of  limitations  does  not  apply, 
see  also  Flitcroft's  Case,  L.  R.  21  Ch. 
D.  519  (1882).  The  statute  of  limita- 
tions does  not  commence  to  run 
against  an  officer  of  the  corporation 
who  has  paid  dividends  to  himself  out 


1629 


§  550.] 


DIVIDENDS. 


[cH.  xxxir. 


utory  liability  in  reference  to  illegal  dividends  may  not  survive  the  death 
of  a  director  who  is  liable.^ 

An  action  on  the  case  is  not  the  proper  remedy  of  the  creditor  of 
an  insolvent  corporation  to  hold  a  director  liable  for  dividends  paid 
out  of  the  capital  stock.  The  remedy  is  in  equity.^  A  suit  to  hold 
the  directors  liable  for  declaring  a  dividend  out  of  the  capital  stock 
and  thereby  inducing  the  plaintiff  to  purchase  the  stock  cannot  at 
the  same  time  seek  to  hold  the  directors  liable  to  the  corporation  for 
the  dividend  so  declared.^  A  purchaser  of  stock  from  the  president 
cannot  hold  him  liable  for  misrepresentation  that  the  company's  last 
dividend  was  six  per  cent.,  it  appearing  that  that  dividend  was  actually 
paid,  even  though  it  is  proved  that  it  was  not  paid  out  of  profits,  the 
president,  however,  having  acted  in  good  faith,  and  supposed  that  the 
profits  existed.^  In  some  states  it  is  a  criminal  offense  to  pay  dividends 
from  the  capital  stock.^    The  action  of  the  directors  in  declaring  illegal 


of  the  capital  stock  until  the  fraud  is 
discovered.  Main  v.  Mills,  6  Biss.  98 
(1874) ;  s.  c,  16  Fed.  Cas.  506,  where 
it  is  stated  that  this  decision  was 
afterwards  partially  reversed.  Where 
the  directors  paid  out  dividends  from 
the  organization  of  the  company  in 
1868  until  1878,  and  were  then  stopped 
at  the  instance  of  the  board  of  trade, 
and  the  company  was  wound  up  in 
1886,  and  in  1889  the  receiver  brought 
suit  to  hold  the  directors  liable,  it 
was  held  that  there  was  no  such  delay 
as  to  bar  the  remedy,  since  the  defend- 
ants had  not  been  prejudiced  by  the 
delay.  Masonic,  etc.  Ass.  Co.  v. 
Sharpe,  [1892]  1  Ch.  154.  A  dividend 
paid  out  of  capital  may  be  recovered 
back  by  a  receiver  at  any  time  within 
six  years  after  such  payment  if  the 
stockholders  did  not  know  that  the 
dividend  was  paid  out  of  capital,  but 
a  court  of  equity  will  not  apply  the 
statute  of  limitations  as  regards  oflB- 
cers  and  directors  receiving  such  divi- 
dend. Mills  V.  Hendershot,  70  N.  J. 
Eq.  258  (1905). 

1  Boston,  etc.  R.  R.  v.  Graves,  80 
Fed.  Rep.  588  (1897).  A  statutory 
liability  of  directors  for  illegal  pay- 
ment of  dividends  is  penal  and  does 
not  survive  the  death  of  a  director 
and  is  not  assignable.  Killen  v.  State 
Bank,  106  Wis.  546  (1900).  The  stat- 
utory liability  of  directors  in  an  Ore- 
gon   corporation    for    declaring    divi- 


dends out  of  the  capital  stock  is  a 
penal  liability.  Patterson  v.  Wade, 
115  Fed.  Rep.  770  (1902).  In  the  case 
Gaither  v.  Bauernschmidt,  108  Md. 
1  (1908),  the  court  held  that  contri- 
bution between  the  directors  in  a 
receiver's  suit  to  hold  them  liable  for 
illegal  dividends  and  illegal  loans  and 
other  wrongful  acts  might  be  enforced 
in  the  same  suit  in  equity. 

2  John  A.  Roebling's,  etc.  Co.  v. 
Mode,  1  Pennewill,  515  (Del.  1899). 
Where  there  is  a  statutory  liability  of 
directors  to  corporate  creditors  for 
dividends  involving  oiiicial  delin- 
quency, but  not  intentional  fraud,  the 
creditors  have  no  common-law  remedy. 
Ellis  V.  French-Canadian,  etc.  Ass'n, 
189  Mass.  566  (1905). 

3  Stroud  V.  Lawson,  [1898]  2  Q.  B. 
44. 

^  Nash  V.  Rosesteel,  94  Pac.  Rep.  850 
(Cal.  1908).  Cf.  Downey  v.  Finucane, 
205  N.  Y.  251  (1912). 

s  See  N.  Y.  Penal  Law,  §  664.  A 
criminal  conviction  of  the  president 
of  a  bank  for  taking  part  in  the  decla- 
ration of  a  dividend  when  he  knew 
that  the  bank  was  insolvent  by  reason 
of  bad  debts  which  had  not  been 
charged  off,  was  sustained  in  Cabaniss 
V.  State,  8  Ga.  App.  129  (1910).  Cor- 
porate officers  are  guilty  of  a  criminal 
offense  in  Georgia  where  they  present 
to  the  directors  statements  misrepre- 
senting the  condition  of  the  company 


1630 


CH.   XXXII. 


DIVIDENDS. 


[§  551. 


dividends  when  the  corporate  expenses  were  twice  the  dividends  paid, 
may  be  a  criminal  conspiracy.^ 

§  551.  Guaranty  of  dividends  by  contract.  —  A  guaranty  of  divi- 
dends is  often  made  by  the  corporation  itself  that  issues  the  stock. 
The  stock  is  then  called  guaranteed  or  preferred  stock.  This  class 
of  stock  is  fully  considered  elsewhere.- 

A  guaranty  of  dividends  frequently  is  made  by  a  third  person.  Such 
a  guaranty  is  often  made  when  one  person  sells  stock  to  another  and 
guarantees  that  the  corporation  will  pay  certain  dividends  thereon.  It 
often  arises,  also,  where  one  company  buys  out  another  or  leases  the 
property  of  another  corporation  and  guarantees  dividends  on  the  stock 
or  the  interest  on  the  bonds  of  the  latter.  This  subject,  also,  is  con- 
sidered elsewhere.^  A  foreclosure  brought  about  for  the  purpose  of 
cutting  off  a  guaranty  of  the  bonds  of  another  corporation  is  illegal,  the 
real  purpose  being  to  allow  other  creditors  of  the  corporation  and  the 
stockholders  to  obtain  the  property  free  from  such  guaranty.^ 


and  cause  the  directors  to  declare  divi- 
dends when  the  corporation  is  prac- 
tically insolvent.  Manghain  v.  State, 
75  S.  E.  Rep.  508  (Ga.  1912).  It  is  no 
defense  to  a  criminal  prosecution  for 
making  false  entries  in  the  corporate 
books  that  the  stockholders  lost 
nothing  even  if  they  did  receive  divi- 
dends they  did  not  earn,  inasmuch  as 
the  entries  were  fraudulent  as  to  cred- 
itors. Commonwealth  v.  Dewhirst, 
190  Mass.  293  (1906).  As  to  when  the 
president  of  a  company  may  be  con- 


victed of  embezzlement,  under  the 
Kentucky  statutes,  by  reason  of  his 
taking  part  in  the  declaration  of  an 
illegal  dividend  from  the  capital  stock 
and  receiving  such  dividend  on  the 
stock  held  by  himself,  see  Taylor  v. 
Commonwealth,   119  Ky.  731    (1903). 

^  Commonwealth  v.  Donnelly,  40 
Pa.  Sup.  Ct.  116  (1909). 

-  See  ch.  XVI,  supra. 

3  See  eh.  XLVI,  §  775,  infra. 

*  Louisville,  etc.  Ry.  v.  Louisville 
Trust  Co.,  174  U.  S.  674  (1899). 


1631 


CHAPTER   XXXIII. 
LIFE  ESTATES  AND  REMAINDERS  IN  SHARES   OF  STOCK. 


§  552.  The  subject. 

553.  The   three   rules   in   regard    to 

stock   or   extraordinary   cash 
dividends. 

554.  The  American  or  Pennsylvania 

rule. 

555.  The  Massachusetts  rule. 


§§  556,  557.  The  English  rule. 

558.  The    apportionment    of     divi- 

dends. 

559.  The  right  to  subscribe  for  new 

shares  as  between  life    ten- 
ant and  remainderman. 

560.  Miscellaneous  questions  herein. 


§  552.  The  subject.  —  Where  shares  of  stock  are  held  by  an  estate, 
and  the  income  of  the  estate  is  to  go  to  a  Hfe  tenant  for  life,  and  the 
remainder  to  another  party,  the  question  of  whether  the  life  tenant  or 
the  remainderman  is  entitled  to  a  stock  dividend  or  extraordinary 
cash  dividend  is  a  perplexing  one.  The  stock  dividend  or  extraordinary 
cash  dividend  may  represent  profits  which  were  earned  or  accumulated 
before  the  life  tenancy  began.  In  that  case  it  is  clear  that  in  justice 
the  remainderman  should  receive  it.  If,  however,  it  was  earned  after 
the  life  tenancy  began,  it  is  clear  that  the  life  tenant  should  have  it. 
If  it  was  earned  partly  before  and  partly  after  the  life  tenancy  began, 
then  it  is  apparent  that  in  justice  some  apportionment  should  be  made 
if  possible. 

The  courts,  however,  differ  widely  in  laying  down  rules  on  this  sub- 
ject.    These  differences  form  the  subject  of  this  chapter. 

§  553.  The  three  rules  in  regard  to  stock  or  extraordinary  cash 
dividends.  —  When  a  stock  or  extraordinary  cash  dividend  is  declared 
upon  shares  held  in  trust,  or  owned  in  such  a  way  that  one  person  has 
an  estate  therein  for  life  and  another  person  the  remainder  over,  there 
at  once  arises  a  contest  between  life  tenant  and  remainderman.  Their 
interests  necessarily  conflict,  because  if  such  dividend  is  held  to  be  in- 
come, it  belongs  to  the  tenant  for  life ;  whereas  if  it  is  held  to  be  a  part  of 
the  corpus,  or  principal,  it  inures  to  the  benefit  of  the  remainderman's 
estate.  There  are  three  well-defined  rules  upon  this  subject,  which 
may  be  denominated  respectively  the  American  or  Pennsylvania,  the 
Massachusetts,  and  the  English  rule.^  They  lead  to  essentially  contrary 
conclusions,  and  will  be  considered  in  order. 

§  554.  The  American  or  Pennsylvania  rule.  —  This  rule,  inas- 
much as  it  obtains  in  nearly  every  state  in  the  Union,  may  well  be 

1  Quoted  and  approved  in  Alsop  v.  De  Koven,  107  111.  App.  Rep.  190,  208 
(1903) ;  aff'd,  205  III.  309. 

1632 


CH.  XXXIII. 


LIFE    ESTATES   AND   REMAINDERS   IN   STOCK. 


[§  554. 


called  the  American  rule.  It  proceeds  upon  the  theory  that  the  court, 
in  disposing  of  stock  or  property  dividends,  as  between  life  tenant  and 
remainderman,  may  properly  inquire  as  to  the  time  when  the  fund  out 
of  which  the  extraordinary  dividend  is  to  be  paid  was  earned  or  accu- 
mulated, and  also  as  to  the  method  of  accumulation.  If  it  is  found  to 
have  accrued  or  been  earned  before  the  life  estate  arose,  it  may  be  held 
to  be  principal,  and,  without  reference  to  the  time  when  it  is  declared 
or  made  payable,  to  belong  to  the  corpus  of  the  estate,  and  not  to  go 
to  the  life  tenant.^  But  when  it  is  found  that  the  fund,  out  of  which  the 
dividend  is  paid,  accrued  or  was  earned,  not  before  but  after  the  life 
estate  arose,  then  it  may  be  held  that  the  dividend  is  income,  and  be- 
longs to  the  tenant  for  life.-  The  court  will  also  take  into  consideration 
the  custom  and  regularity  of  the  corporation  in  accumulating  its  sur- 
plus, inasmuch  as  the  testator  may  be  presumed  to  have  expected 
the  corporation  to  continue  its  accumulation  of  a  surplus  or  to  provide 
for  improvements  out  of  profits.  This  equitable  rule  prevails  not  only 
in  Pennsylvania,  where  it  seems  to  have  been  first  clearly  declared,  but 
also  in  many  other  jurisdictions.^ 


1  Quoted  and  approved  in  Good- 
win V.  McGaughy,  108  Minn.  248 
(1909),  and  Soehnlein  v.  Soehnlein, 
146  Wis.  330  (1911). 

2Earp's  Appeal,  28  Pa.  St.  368 
(1857) ;  Wiltbank's  Appeal,  64  Pa.  St. 
256  (1870).  See  also  the  following 
later  Pennsylvania  eases  in  point : 
Moss's  Appeal,  83  Pa.  St.  264  (1877) ; 
Biddle's  Appeal,  99  Pa.  St.  278  (1882) ; 
Vinton's  Appeal,  99  Pa.  St.  434  (1882) ; 
Re  Thompson's  Estate,  11  W.  N.  Cas. 
482  (1882).  Cf.  Roberts's  Appeal, 
92  Pa.  St.  407  (1880) ;  Thomson's 
Appeal,  89  Pa.  St.  36  (1879) .  Every 
dividend  presumptively  goes  to  the 
life  tenant.  A  stock  dividend,  if  paid 
to  represent  profits  used  for  perma- 
nent improvements,  may  belong  to 
the  life  tenant,  it  being  shown  that  such 
stock  dividends  did  not  decrease  the 
value  which  the  stock  had  on  the 
creation  of  the  trust,  the  court  stating 
that  the  Pennsylvania  doctrine  is 
that  the  remainderman  is  "entitled 
to  just  what  the  stock  was  actually 
worth  at  the  time  of  the  creation  of 
the  trust,  no  less  and  no  more." 
Appeal  of  Boyer,  224  Pa.  St.  144 
(1909).  A  scrip  dividend  converted 
into  stock  may  belong  to  the  life 
tenant.     Philadelphia  Trust,  etc.  Co.'s 


Appeal,  16  Atl.  Rep.  734  (Pa.  1889). 
A  large  dividend  in  cash,  owing  to  a 
sale  of  part  of  the  property  of  an  unin- 
corporated association,  may  be  income, 
and  go  to  the  life  tenant.  Oliver's 
Estate,  136  Pa.  St.  43  (1890).  Money 
received  by  the  corporation  from  new 
stock  issued  to  obtain  funds  to  replace 
profits  which  had  been  used  for 
improvements  is  capital  and  not 
income,  and  does  not  go  to  the  life 
tenant.  Smith's  Estate,  140  Pa.  St. 
344  (1891).  Where  the  company  in 
which  the  trustee  holds  stock  gives 
to  its  stockholders  the  option  to  sub- 
scribe to  the  stock  of  another  com- 
pany, the  premium  at  which  the  trus- 
tee sells  this  option  is  principal  and 
not  income.  Thomson's  Estate,  153 
Pa.  St.  332  (1893).  A  life  tenant  who 
is  entitled  to  all  dividends,  whether  in 
money  or  scrip,  is  entitled  to  a  divi- 
dend of  scrip  which  gives  him  the 
right  thereafter  to  have  the  same  v^o 
rata  dividends  as  are  paid  on  the  capi- 
tal stock.  In  re  Robinson's  Trust,  218 
Pa.  St.  481  (1907). 

^Connecticut:  A  stock  dividend 
based  upon  the  profits  actually  invested 
in  the  business  is  not  income  or  divi- 
dends such  as  pass  to  the  life  tenant. 
Spooner    v.     Phillips,     62     Conn.     62 


(103) 


1633 


§  554.] 


LIFE   ESTATES   AND   REMAINDERS   IN   STOCK.  [cH.  XXXIII. 


Where  a  cestui  que  trust  is  to  receive  the  income  until  he  reaches 
a  certain  age  and  then  is  to  receive  the  principal,  he  is  considered  a 


(1892).  Where  an  estate  is  merged 
into  a  corporation,  the  life  tenant  of 
the  real  estate  cannot  claim  that  a 
part  of  the  capital  stock  represents 
past  increase  of  value  and  that  she 
is  entitled  absolutely  to  that  part  of 
the  stock.  Hotchkiss  v.  Brainerd 
Quarry  Co.,  58  Conn.  120  (1889). 
Where  it  is  impossible  for  the  com- 
pany to  pay  arrears  of  dividends  on 
cumulative  preferred  stock;  and  a 
compromise  is  made  by  which  the 
dividend  is  to  be  reduced  one  half,  and 
double  the  amount  of  stock  is  to  be 
given  to  each  stockholder,  this  new 
stock  goes  to  the  remainderman. 
Mills  V.  Britton,  64  Conn.  4  (1894).  A 
large  surplus  gradually  accumulated 
by  a  coal  company  is  a  part  of  the 
''floating  capital"  and  upon  distribu- 
tion does  not  go  to  the  life  tenant. 
Second,  etc.  Church  v.  Colegrove,  74 
Conn.  79  (1901),  was  a  case  involving 
the  distribution  of  a  large  surplus 
by  the  Pennsylvania  Coal  Company, 
upon  the  sale  of  its  assets.  Even 
though  a  corporation  discontinues  a 
part  of  its  business  and  sells  the  prop- 
erty used  for  that  part,  and  dis- 
tributes the  cash  as  a  dividend,  this 
dividend  belongs  to  the  life  tenant, 
especially  where  the  value  of  the 
property  of  the  corporation  is  still 
three  times  as  great  as  when  the  trust 
took  effect.  Smith  v.  Dana,  77  Conn. 
543  (1905).  A  cash  dividend  belongs 
to  the  remainderman,  even  though  it 
is  due  to  the  corporation  absorbing 
another  corporation,  it  appearing  that 
the  price  of  the  stock  remains 
unchanged.  Boardman  v.  Boardman, 
78  Conn.  451  (1905).  While  as  a  rule 
stock  dividends  are  capital,  and  not 
income,  yet  where  the  company  owns 
its  own  stock,  which  it  has  acquired 
in  liquidation  of  a  debt  owing  to  it 
and  declares  a  dividend  on  such  stock, 
it  belongs  to  the  life  tenant.  Green  v. 
Bissell,  79  Conn.  547  (1907).  Cash 
dividends  go  to  the  life  tenant  and 
cash  dividends  include  property  divi- 
dends as  well  as  money  dividends,  but 
where  a  bond  dividend  is  made  this 
goes    to    the    corpus    of    the    estate. 


inasmuch  as  it  is  not  a  separation  of  the 
profits.  Bishop  v.  Bishop,  81  Conn. 
509  (1909).  A  dividend  of  property, 
namely,  stock  in  another  corporation,  is 
the  same  as  a  cash  dividend  and  belongs 
to  a  life  tenant.  Union,  etc.  T.  Co.  v. 
Taintor,  85  Conn.  452  (1912). 

Iowa:  A  stock  dividend  is  pre- 
sumed to  be  income,  but  may  be 
shown  to  represent  the  enhanced 
value  of  the  property  of  the  com- 
pany, and  then  it  does  not  represent 
profits,  but  does  represent  capital. 
Kalbach  v.  Clark,  133  Iowa,  215 
(1907).  "Income"  means  dividends 
so  far  as  the  rights  of  the  life  tenant 
and  remainderman  are  concerned. 
Lauman  v.  Foster,  135  N.  W.  Rep.  14 
(Iowa,  1912). 

Kentucky:  As  between  a  life  bene- 
ficiary in  corporate  stock  and  the 
remainderman,  a  stock  dividend  will  be 
treated  as  income  if  it  in  fact  repre- 
sents a  profit.  Hite  v.  Hite,  93  Ky. 
257  (1892) ;  s.  c,  below,  2  Ry.  &  Corp. 
L.  J.  5G8. 

Maine:  For  the  rule  in  Maine,  see 
Richardson  v.  Richardson,  75  Me.  570 
(1884).  A  dividend  consisting  of 
stock  purchased  by  an  issue  of  bonds 
by  the  company  belongs,  not  to  the  life 
estate,  but  to  the  body  of  the  estate. 
Gilkey  v.  Paine,  80  Me.  319  (1888). 

Maryland :  Dividends  coming  from 
a  fund  accumulated  during  the  testa- 
tor's life  to  pay  a  mortgage,  but 
which  are  not  used  for  that  purpose, 
belong  to  the  life  tenant  and  not  to 
the  remainderman.  Quinn  v.  Safe 
Deposit,  etc.  Co.,  93  Md.  285  (1901). 
See  Thomas  v.  Gregg,  78  Md.  545 
(1894).  A  stock  dividend  may  be 
income,  not  principal.  Safe  Deposit, 
etc.  Co.  V.  White,  102  Md.  73  (1905). 
Under  a  will  directing  the  payment  of 
fixed  amounts  for  life  to  a  person  from 
the  estate,  a  stock  dividend  was  con- 
sidered income.  Coudon  v.  Upde- 
graff,  117  Md.  71  (1912). 

Minnesota:  A  stock  dividend 
declared  from  moneys  earned  after 
the  death  of  the  testator  belongs  to 
the  life  tenant.  Goodwin  v. 
McGaughy,    108    Minn.    248     (1909). 


1634 


CH.  XXXIII.]  LIFE   ESTATES   AND   REMAINDERS   IN   STOCK. 


[§  554. 


life  tenant  until  he  arrives  at  that  age.     The  life  tenant  takes  the  entire 
interest  on  bonds,  although  the  premium  on  the  bonds  gradually  disap- 


New  Hampshire:  Lord  v.  Brooks, 
52  N.  H.  72  (1872) ;  Wheeler  v.  Perry, 

18  N.  H.  307  (1846) ;  Peiree  v.  Bur- 
roughs, 58  N.  H.  302  (1878).  An 
increase  of  stock  upon  consolidation 
and  a  stock  dividend  thereon  are  prin- 
cipal. Law  V.  Alley,  67  N.  H.  93 
(1892).  A  fifty  per  cent,  cash  divi- 
dend is  presumed  to  be  from  the  prof- 
its and  to  belong  to  the  life  tenant. 
Walker  v.  Walker,  68  N.  H.  407 
(1896). 

New  Jersey:     Van  Doren  v.  Olden, 

19  N.  J.  Eq.  176  (1868) ;  xVshhurst  v. 
Field,  26  N.  J.  Eq.  1  (1875).  Where 
a  few  months  after  the  testator's 
death  a  large  cash  dividend  is  declared, 
the  court  wiU  consider  the  profits 
earned  during  such  months  of  the 
year  as  were  prior  to  his  death,  and 
also  such  part  as  was  earned  subse- 
quent to  his  death,  and  will  apportion 
the  dividend  on  such  basis.  Lang 
V.  Lang's  Executor,  57  N.  J.  Eq.  325 
(1898).  A  large  stock  dividend  will 
be  apportioned  between  life  tenants 
and  remaindermen  according  to  when 
it  was  earned.  Day  v.  Faulks,  79 
N.  J.  Eq.  66  (1911). 

New  York:  MeLouth  v.  Hunt,  154 
N.  Y.  179  (1897) ;  Riggs  v.  Cragg,  89 
N.  Y.  479  (1882) ;  Re  Kernochan,  104 
N.  Y.  618  (1887) ;  Riggs  v.  Cragg,  26 
Hun,  89  (1881);  Clarkson  v.  Clark- 
son,  18  Barb.  646  (1855) ;  Simpson  v. 
Moore,  30  Barb.  637  (1859);  Wood- 
ruff's Estate,  Tucker,  58  (1865),  and 
Goldsmith  v.  Swift,  25  Hun,  201 
(1881).  Cf.  Cragg  v.  Riggs,  5  Redf. 
82  (1880);  Scovel  v.  Roosevelt,  5 
Redf.  121  (1881).  A  bond  and  scrip 
dividend  representing  earnings  in  part 
and  part  in  increased  value  of  invest- 
ments, belongs  to  the  life  tenant  as 
to  the  earnings,  and  to  the  remainder- 
man as  to  the  increased  value  of  the 
investments.  Thayer  v.  Burr,  201 
N.  Y.  155  (1911).  Where  the  life 
tenant  is  entitled  to  "income  and 
profits"  of*  specific  securities,  he  is 
entitled  to  extraordinary  distributions 
or  dividends  representing  accumulated 
income  and  profits,  if  it  is  established 
that    the   amount   does   not   intrench 


upon  the  capital,  but  was  from  a  sur- 
plus of  corporate  earnings  and  income. 
Robertson  v.  Brulatour,  188  N.  Y. 
301(1907).  One  of  the  remaindermen, 
who  has  acquiesced  in  a  stock  dividend 
during  the  life  estate,  cannot  after- 
wards claim  that  it  was  illegal  and  that 
he  was  entitled  to  the  money  on 
which  it  was  based,  the  life  tenant 
having  bequeathed  to  him  all  her 
money.  Chester  v.  Buffalo,  etc.  Mfg. 
Co.,  183  N.  Y.  425  (1906).  A  stock 
dividend  goes  to  the  life  tenant  and 
not  to  the  remaindermen,  where  the 
words  in  the  will  clearly  indicate  that 
such  was  the  intent  of  the  testator, 
it  being  clear  that  the  stock  dividend 
represents  accumulated  profits  and 
not  a  diminution  of  the  capital  stock. 
Lowrv  V.  Farmers',  etc.  Co.,  172 
N.  Y.  137  (1902).  In  Matter  of 
Osborne,  153  N.  Y.  App.  Div.  312 
(1912),  a  stock  dividend  was  given  to 
the  life  tenant,  although  it  represented 
profits,  part  of  which  were  earned 
prior  to  the  death  of  the  testator.  In 
the  case  Matter  of  Stevens,  46  N.  Y. 
Misc.  Rep.  623  (1905),  the  court  sum- 
marized the  New  York  decisions  as 
follows  (p.  642):  "By  the  McLouth 
and  Lowry  cases,  that  whether  money 
or  property,  arising  from  corporate 
sources,  paid  over  upon  shares  of  stock 
constituting  a  trust  estate,  is  to  be 
treated  as  income  belonging  to  the  life 
tenant  or  as  constituting  a  part  of  the 
capital  of  the  trust  estate,  will  be 
determined  by  the  court  irrespective 
of  any  characterization  or  action  on 
the  part  of  the  officers  of  the  corpora- 
tion in  paying  it  over.  By  the  Kern- 
ochan, McLouth,  and  Lowry  cases, 
that  dividends  paid  over  upon  shares 
of  stock,  constituting  the  trust  estate, 
from  earnings  of  the  company,  in  the 
form  of  stock  certificates,  are  to  be 
treated  as  income  and  not  capital,  as 
between  life  tenants  and  remainder- 
men. By  the  Kernochan  and 
McLouth  cases,  that  dividends  paid 
upon  shares  of  stock  constituting  a 
trust  estate,  during  the  continuance 
of  the  trust,  from  surplus  earnings  of 
the    company    accumulated    prior    to 


1635 


§554. 


LIFE    ESTATES   AND   REMAINDERS   IN   STOCK.  [cH.  XXXIU. 


pears  as  they  come  nearer  to  being  due.  A  stock  dividend  representing 
accumulated  profits  goes  to  the  hfe  tenant,  the  court  stating  that  the 

the  creation  of  the  trust,  will,  unless  remainderman.  i2e  Curtis,  N.  Y.  L.  J., 
restricted  by  the  terms  of  the  will,  be  Jan.  24,  1890.  Money  received 
treated  as  income  payable  to  the  life  from  stock  upon  the  winding  up  of 
tenant.  By  the  Stewart  case,  that  the  the  corporation  belongs  to  the  remain- 
price  received  from  sale  of  shares  of  derman.  Re  Skillman's  Estate,  9 
capital  stock,  constituting  a  trust  N.  Y.  Supp.  469  (1890).  Where  the 
estate,  in  excess  of  the  value  of  such  capital  is  reduced  and  returned  to  the 
shares  at  the  time  of  the  creation  of  stockholders  with  a  surplus,  the  sur- 
the  trust,  is  to  be  deemed  an  accretion  plus  goes  to  the  life  tenant.  Re  War- 
to  the  capital  and  go  to  the  remainder-  ren's  Estate,  UN.  Y.  Supp.  787  (1890)* 
men ;  and  likewise,  that  the  price  Though  the  dividends  are  necessarily 
received  for  investment  securities,  in  from  the  capital  stock,  as  in  mining 
excess  of  the  amount  paid  therefor  or  other  similar  corporations,  the  life 
by  the  trustees,  is  also  to  be  treated  tenant  is  entitled  to  them.  Re  James, 
as  an  accretion  to  the  capital  and  as  78  Hun,  121  (1894) ;  aff'd,  146  N.  Y. 
belonging  to  the  remaindermen,  under  78  (1895).  Where  a  manufacturing 
the  terms  of  a  will  which  creates  a  corporation  had  a  capital  stock  of 
trust  'to  take,  receive,  hold,  collect,  $300,000,  and  in  course  of  time  it  sold 
manage,  invest  and  reinvest'  the  its  plant  and  part  of  its  working 
trust  estate  and  pay  over  the  'net  capital  for  $2,750,000  of  the  capital 
rents,  income,  issues  and  profits  stock  of  a  new  corporation,  and 
thereof  as  directed  by  the  terms  of  retained  certain  cash,  bonds,  stocks,  and 
the  will.  By  the  Rogers  case,  that  surplus  lands  which  it  proceeded  to 
earnings  of  a  corporation  accumulated  distribute  among  its  stockholders,  the 
prior  to  its  dissolution  and  subse-  court  held  that  the  plant  and  working 
quently  paid  over  on  shares  of  stock  capital  were  practically  capital  stock, 
constituting  a  trust  estate  are  to  be  but  that  the  cash,  bonds,  stocks,  and 
deemed  'profits'  belonging  to  the  surplus  lands  were  income  that  went 
life  tenant,  under  a  trust  similar  to  to  the  life  tenant.  Matter  of  Rogers, 
the  one  under  consideration.  In  all  161  N.  Y.  108  (1899).  The  words 
these  eases  is  the  principle  recognized  "capital"  and  "profits,"  as  used  in 
that  the  intention  of  the  testator  in  connection  with  life  estates  and  remain- 
creating  the  trust  should  be  arrived  ders  in  stocks,  have  a  different  mean- 
at  and  carried  into  effect,  where  it  ing  from  what  they  have  in  determin- 
may  be  done  without  violation  of  law  ;  ing  the  right  of  a  corporation  to  declare 
and  in  so  doing  courts  will  regard  dividends.  In  passing  upon  the  rela- 
the  substance  and  disregard  mere  tive  interests  of  a  remainderman 
matters  of  form  for  its  accomplish-  and  life  tenant  in  shares  of  stock  and 
ment.  Each  ease  must,  therefore,  the  dividends  therefrom,  the  courts 
depend  to  a  greater  or  less  extent  will  sometimes  include  in  capital 
upon  its  own  peculiar  circumstances."  stock,  extensions,  improvements,  plant, 
Profits  upon  the  sale  of  stock  are  and  working  capital  which  have  been 
principal  and  not  income  in  New  obtained  from  past  profits  and  not 
York.  Whitney  v.  Phoenix,  4  Redf.  180  from  subscriptions  to  the  capital 
(1880).  In  Hyatt  v.  Allen,  .56  N.  Y.  stock.  Matter  of  Rogers,  161  N.  Y. 
553,  557  (1874),  the  court  of  appeals  108  (1899),  the  court  saying :  "What, 
intimated  plainly  its  disapproval  of  then,  is  capital  and  what  is  profits  ? 
the  rule  prevailing  in  England  upon  In  a  manufactiu-ing  business  a  plant 
this  subject.  FarweU  v.  Tweddle,  10  is  of  first  importance,  and  as  the  busi- 
Abb.  N.  Cas.  94  (1881) ;  Prime's  ness  increases  an  enlargement  thereof. 
Estate,  N.  Y.  L.  J.,  March  6,  1891,  with  the  necessary  tools,  fixtures,  and 
reviewing  the  authorities.  A  dividend  machinery,  is  one  of  the  things  to 
arising  from  the  sale  of  a  part  of  the  which  the  earnings  of  the  company 
assets  of  a  company   belongs   to   the  may  properly  be  devoted.     This  must 

1636 


CH.  XXXIII. 


LIFE   ESTATES   AND    REMAINDERS   IN   STOCK. 


[§  554. 


question  is  always  to  be  decided  according  to  the  actual  facts  of  the 
transaction.  The  New  York  court  of  appeals  says  :  "  For  all  corporate 
purposes  the  corporation  may  doubtless  convert  earnings  into  capital, 
when  such  power  is  conferred  by  its  charter ;  but  when  a  question  arises 
between  life  tenants  and  remaindermen  concerning  the  ownership  of 
the  earnings  thus  converted,  the  action  of  the  corporation  will  not  con- 
clude the  courts."  ^ 

In  New  Jersey  the  reasonable  and  logical  rule  is  laid  down  that 
a  cash  dividend  from  earnings  is  apportioned  between  the  corpus 
of  the  estate  and  the  life  tenant,  in  the  proportion  of  the  lapse  of  time 
since  the  last  dividend,  unless  proof  is  given  that  such  dividend  was 
earned  not  day  by  day  but  at  irregular  times.  The  trustee  is  justified 
in  distributing  the  dividend  on  this  basis  unless  notice  by  an  interested 
party  is  given  him  not  to  do  so." 


be  deemed  to  be  fairly  within  the  con- 
templation of  the  testator  in  creating 
the  trusts  T\Tth  the  capital  stock  of  this 
company.  After  the  plant  there  arises 
a  necessity  for  raw  material  and  labor 
to  manufactm-e  it.  This  requires,  what 
is  usually  termed  a  working  capital, 
and  it,  of  necessity,  varies  in  amount, 
depending  upon  the  magnitude  of  the 
business.  It  must,  therefore,  also 
have  been  within  the  contemplation 
of  the  testator  that  a  reasonable 
amount  would  be  retained  by  the 
directors  for  this  purpose."  In  the 
ease  Chester  v.  Buffalo,  etc.  Co.,  70 
N.  Y.  App.  Div.  443  (1902),  where  a 
surplus  had  been  accumulated,  partly 
before  the  testator's  death  and  partly 
after  it,  and  a  stock  dividend  was  then 
declared,  the  court  refused  to  give  to 
the  life  tenant  such  part  of  the  stock 
dividend  as  would  correspond  to  the 
surplus  accumulated  after  the  testa- 
tor's death,  inasmuch  as  the  same  reg- 
ular dividends  had  been  paid  after  the 
testator's  death  as  before,  and  the 
testator  evidently  expected  that  sim- 
ilar dividends  should  go  to  the  life 
tenant.  This  decision  was  modified 
in  183  N.  Y.  425.  A  dividend  by  a 
raUroad  company  of  participation 
certificates  in  the  corporate  assets  set 
aside  for  that  purpose  is  not  a  divi- 
dend going  to  a  life  tenant.  Matter  of 
Bunker,  77  N.  Y.  Misc.  Rep.  320  (1912) . 
See  matter  of  Harteau,  204  N.  Y.  292. 
South  Carolina  :  Profits  and  income 
existing  when  the  trust  is  created  are 


corpus,  but  subsequent  profits  and 
income  are  income.  Cobb  v.  Fant,  36 
S.  C.  1  (1892).  An  increase  in  the 
book  value  of  stock  during  the  life 
tenancy  as  well  as  stock  dividends 
earned  during  that  time  belong  to  the 
life  tenant.  Wallace  v.  Wallace,  90 
S.  C.  61  (1911). 

Tennessee :  Stock  dividends  declared 
from  net  earnings  made  after  the 
death  of  testator,  who  bequeathed 
the  stock  on  which  the  dividends 
were  declared,  for  life,  belong  to  the 
life  tenant  as  income,  not  to  the  remain- 
dermen as  part  of  the  corpus.  Pritchitt 
V.  Nashville  Trust  Co.,  96  Tenn.  472 
(1896).  For  articles  on  "Right  to 
dividends  as  between  life  tenant  and 
remainderman,"  see  26  Am.  L.  Rev. 
1,  and  24  Am.  Rep.  169. 

Wisconsin :  A  legacy  of  one  million 
doUars  book  value  of  stock  carries  a 
stock  dividend  thereafter  declared 
from  stock  then  in  the  treasurJ^  Pabst 
V.  Goodrich,  133  Wis.  43  (1907).  A 
life  tenant  is  entitled  to  a  dividend  so 
far  as  it  represents  profits  accumulated 
since  the  death  of  the  testator.  Soehn- 
lein  V.  Soehnlein,  146  Wis.  330  (1911). 
Increased  value  of  the  corporate  prop- 
erty not  due  to  earnings  belongs  to 
the  remainderman  except  in  land 
companies.  Miller  v.  Payne,  136 
N.  W.  Rep.  811   (Wis.  1912). 

1  McLouth  V.  Hunt,  154  N.  Y.  179 
(1897). 

'  Lang  V.  Lang's  Ex'r,  57  N.  J.  Eq. 
325    (1898),   rev'g  56  N.   J.    Eq.   603 


1637 


§  555.]  LIFE   ESTATES   AND   REMAINDERS    IN   STOCK.  [cH.  XXXIII, 

§  555.  The  Massachusetts  rule.  —  The  rule,  which  prevails  in 
Massachusetts,  Georgia,  Rhode  Island,  and  Illinois,  is  some- 
times called  "  the  rule  in  Minot's  Case."  It  regards  cash  dividends 
whether  large  or  small,  as  income,  and  stock  dividends,  whenever 
earned  and  however  declared,  as  capital,  and  the  rule,  accordingly, 
is  a  simple  one.  Cash  dividends  belong  to  the  tenant  for  life  and  stock 
dividends  to  the  corpus}    There  is  little  doubt,  however,  that  this 


(1898).  The  court  held  that  there 
was  no  difference  between  ordinary 
and  extraordinary  dividends  so  far  as 
this  right  of  apportionment  is  con- 
cerned. The  court  said :  "We  think 
that  when  a  dividend  is  declared  out 
of  earnings,  the  reasonable  presump- 
tion is  that  those  earnings  have  been 
made  uniformly,  day  by  day,  since  the 
last  similar  dividend  was  declared, 
leaving  the  parties  in  interest  at  lib- 
erty to  show  that  the  earnings  were 
really  made  differently.  This  will 
afford  a  practical  rule  for  trustees 
who  receive  such  a  dividend,  and  if 
they  act  on  the  presumption,  without 
notice  to  the  contrary,  either  from 
the  parties  or  by  the  circumstances, 
they  will  be  protected.  So,  also,  they 
should  be  allowed  to  presume  that 
dividends  are  out  of  earnings,  unless 
like  notice  shall  charge  them  to  the 
contrary."  Cf.  §  558,  mfra,  and  New 
Jersey  cases,  supra. 

» Minot  V.  Paine,  99  Mass.  101 
(1868).  In  this  case  the  principle  is 
thus  stated:  "A  simple  rule  is  to 
regard  cash  dividends,  however  large, 
as  income,  and  stock  dividends,  how- 
ever made,  as  capital."  In  subsequent 
cases  this  rule  has  been  afiii-med  and 
elaborated.  Daland  v.  Williams,  101 
Mass.  571  (1869) ;  Leland  v.  Hayden, 
102  Mass.  542  (1869);  Heard  v. 
Eldredge,  109  Mass.  258  (1872) ;  Rand 
V.  Hubbell,  115  Mass.  461  (1874) ;  Gif- 
ford  V.  Thompson,  115  Mass.  478 
(1874) ;  Hemenway  v.  Hemenway,  134 
Mass.  446  (1883) ;  New  England  Trust 
Co.  V.  Eaton,  140  Mass.  532  (1886). 
See  also  Harvard  College  v.  Amory, 
26  Mass.  446  (18.30) ;  Balch  v.  Hallet, 
76  Mass.  402  (1858) ;  Atkins  v.  Albree, 
94  Mass.  359  (1866).  An  extra  divi- 
dend of  fifty  per  cent,  is  income  even 
though  it  is  payable  in  money  or  in 


new  stock  at  the  option  of  the  stock- 
holder. Gray  v.  Hemenway,  206  Mass. 
126  (1910).  A  dividend  of  stock 
which  a  corporation  owns  in  another 
corporation  is  not  a  stock  dividend. 
Inasmuch  as  such  a  dividend  must 
leave  the  capital  stock  intact  it  may 
belong  to  a  life  tenant.  Gray  v. 
Hemenway,  98  N.  E.  Rep.  789  (Mass. 
1912).  Where  preferred  shares  in  an 
unincorporated  trusteeship  to  hold 
stock  in  corporations  are  issued  by 
the  trusteeship  to  the  preferred  share- 
holders to  pay  arrears  of  preferred 
dividends,  a  life  tenant  of  an  estate 
owning  preferred  shares  is  entitled 
only  to  the  income  from  such  newly 
issued  shares,  there  not  having  been 
any  profits  added  to  the  capital  as 
representing  such  increased  preferred 
shares.  Gardiner  v.  Gardiner,  212 
Mass.  508  (1912).  Where  all  the 
stock  of  a  corporation  is  sold,  and  it 
is  a  part  of  the  sale  that  a  large  accu- 
mulated surplus  shall  be  distributed 
among  the  old  stockholders  by  way  of 
a  dividend,  this  dividend  belongs  to 
the  life  tenant.  Hemenway  v.  Hemen- 
way, 181  Mass.  406  (1902).  In  the 
case  Lyman  v.  Pratt,  183  Mass.  58 
(1903),  the  court,  after  quoting  the 
rule  from  Minot  v.  Paine,  "a  simple 
rule  is  to  regard  cash  dividends,  how- 
ever large,  as  income,  and  stock  divi- 
dends, however  made,  as  capital," 
said  "this  general  rule  has  been  fol- 
lowed by  this  court  ever  since."/ 
Hence  the  court  held  that  even 
though  a  cash  dividend  is  paid  on  the 
same  date  that  new  stock  is  offered, 
and  the  cash  dividend  is  equal  to  the 
amount  to  be  paid  for  the  new  stock, 
this  is  not  a  stock  dividend,  and  hence 
such  cash  dividend  belongs  to  a  life 
tenant  and  not  to  the  remaindermen. 


1638 


CH.   XXXIII. 


LIFE    ESTATES   AND   REMAINDERS    IN    STOCK. 


[§  555. 


rule  works  great  hardship  and  injustice  in  many  cases.  Hence  the  rule 
is  not  rigidly  adhered  to,  but  the  court,  in  deciding  whether  the  distribu- 
tion is  a  stock  or  a  cash  dividend,  may  consider  the  actual  and  substantial 
character  of  the  transaction,  and  not  its  nominal  character  merely.^ 


1  Where  a  joint-stock  association 
having  $12,000,000  surplus  invested  in 
securities  issues  its  bonds  to  the 
amount  of  $12,000,000  to  its  stock- 
holders as  a  dividend  in  place  of  dis- 
tributing such  securities  or  the  pro- 
ceeds thereof,  the  interest  on  the  bonds 
to  be  paid  only  from  the  income  from 
the  securities  after  paying  the  debts, 
such  bonds  do  not  belong  to  a  life 
tenant,  but  belong  to  the  remainder- 
men. D'Ooge  V.  Leeds,  176  Mass. 
558  (1900),  the  court  saying:  "In 
considering  the  distribution  to  deter- 
mine its  character,  substance,  and  not 
form,  is  regarded.  The  simple  ques- 
tion in  every  case  is  whether  the  dis- 
tribution made  by  the  corporation 
is  of  money  to  be  spent  as  income,  or 
capital  to  be  held  as  an  investment 
in  the  corporation.  While  this  arbi- 
trary rule  may  sometimes  defeat  the 
intention  of  the  testator,  in  most 
cases  it  accomplishes  the  result  in- 
tended, and  there  were  practical  con- 
siderations, as  well  as  principles, 
"which  required  the  adoption  of  it." 
Also,  "Our  court  does  not  inquire  fur- 
ther than  to  ascertain  whether  the 
distribution  is  of  money  to  be  used  as 
income,  or  is  of  capital,  to  be  con- 
tinued in  the  business."  The  court 
said  also  that  this  was  substantially 
the  rule  in  England,  and  the  rule  laid 
down  by  the  supreme  court  of  the 
United  States.  In  Daland  v.  Williams, 
101  Mass.  571  (1869),  where  the 
directors,  having  voted  to  increase  the 
capital  stock  by  three  thousand  shares, 
declared  a  cash  dividend  of  forty  per 
cent.,  and  authorized  the  treasurer  to 
receive  that  dividend  in  payment  for 
two  thousand  eight  hundred  of  the 
shares,  the  remaining  two  hundred 
shares  to  be  sold,  the  court  held  that 
the  transaction  was  virtually  a  stock 
dividend,  and  that  the  shares  must 
go  to  the  remainderman's  fund.  Cf. 
Rand  v.  Hubbell,  115  Mass.  461 
(1874).  In  Leland  v.  Hay  den,  102 
Mass.  542   (1869),  where  it  appeared 


that  the  company  had  invested  its 
surplus  earnings  in  its  own  stock, 
and  subsequently  declared  a  dividend 
of  that  stock,  the  life  tenant  was  held 
absolutely  entitled  to  it.  The  life 
tenant  takes  the  dividend  where  it  is 
in  cash,  although  the  cash  is  derived 
from  increased  stock  which  is  offered 
to  the  old  stockholders  for  subscrip- 
tion, the  profits  having  been  used  for 
improvements.  This  is  not  a  stock 
dividend.  Davis  v.  Jackson,  152  Mass. 
58  (1890).  See  also  Balch  v.  Hallet, 
76  Mass.  402  (1858) ;  Reed  v.  Head, 
88  Mass.  174  (1863) ;  Harvard  College 
V.  Amory,  26  Mass.  446  (1830);  Gif- 
ford  V.  Thompson,  115  Mass.  478 
(1874) ;  Hemenway  v.  Hemenway, 
134  Mass.  446  (1883).  In  New  Eng- 
land Trust  Co.  V.  Eaton,  140  Mass. 
532  (1886),  it  was  held,  in  an  elab- 
orate opinion  by  Devens,  J.,  that  the 
gain  or  loss  arising  from  the  sale  of 
stock  held  in  trust  is  the  gain  or  loss 
of  the  corpus,  and  that  the  sum 
received  constitutes  a  new  principal. 
Accordingly,  a  trustee  who  has  invested 
in  bonds  at  a  premium  may  retain 
annually  from  the  income  payable 
to  the  life  tenant  such  sums  as  will 
restore  to  the  fund  at  its  maturity 
what  was  taken  therefrom  at  the 
time  of  the  investment.  See  also 
the  dissenting  opinion  of  Mr.  Justice 
Holmes  in  this  case ;  and  cf.  Bowker 
V.  Pierce,  130  Mass.  262  (1881) ;  Dodd 
V.  Winship,  133  Mass.  359  (1882); 
Wright  V.  White,  136  Mass.  470  (1884) ; 
Parsons  v.  Winslow,  16  Mass.  361 
(1820);  Lovell  v.  Minot,  37  Mass. 
116  (1838).  The  court  will  take  into 
consideration,  in  determining  the  ques- 
tion as  between  life  tenant  and  remain- 
derman, the  whole  character  of  the 
transaction,  and  the  nature  and  source 
of  the  property  distributed,  with  due 
regard  to  all  the  facts  preceding, 
attending,  and  resulting  from  the  dec- 
laration of  the  dividend.  In  Heard 
V.  Eldredge,  109  Mass.  258  (1872),  it 
is    said:     "The    suggestion    that    the 


1639 


§§  556,  557.]         LIFE   ESTATES   AND   REMAINDERS   IN    STOCK.  [cH.  XXXIII. 

The  supreme  court  of  the  United  States  has  held  that  a  life  tenant 
of  stock  does  not  take  a  stock  dividend  declared  during  the  life  tenancy.^ 
Even  though  a  large  cash  dividend  is  exactly  equivalent  to  the  amount 
of  new  stock  which  is  offered  to  the  stockholders  for  subscription,  yet 
the  transaction  is  not  considered  as  a  stock  dividend,  there  being  no 
obligation  on  the  part  of  the  stockholders  to  take  the  new  stock ;  hence 
such  a  cash  dividend  belongs  to  the  life  tenant.^ 

In  Rhode  Island  the  courts  have  adopted  a  rule  somewhat  like  "  the 
rule  in  Minot's  Case,"  without  the  modification  engrafted  upon  it  by 
the  subsequent  decisions  of  the  Massachusetts  courts.  It  is  a  rule 
which  in  general  prefers  the  remainderman  to  the  life  tenant.^ 

§§  556,  557.  The  English  rule.  —  In  England  an  ordinary,  regular, 
usual  cash  or  stock  or  property  dividend  belongs  to  the  life  tenant, 
while  an  extraordinary  cash  or  stock  or  property  dividend  belongs  to  the 
corpus  of  the  trust.*     This  rule  was  established  in  England  in   1799. 


intention  of  the  directors  should 
determine  the  question  whether  the 
dividend  is  capital  or  income  cannot 
be  correct.  .  .  .  It  is  more  safe  to 
look  at  the  character  of  the  property 
and  the  transaction."  See  three  inter- 
esting and  valuable  little  pamphlets 
by  "A  Layman,"  wherein  the  merits 
of  the  question  are  fully  and  learnedly 
discussed,  and  entitled  respectively 
"Common  Sense  versus  Judicial  Legis- 
lation ;"  "  Stock  Dividends  ;  the  Rule 
in  Minot's  Case  Again  Restated  with 
Variations  by  the  Supreme  Judicial 
Court  of  Massachusetts,"  and  "A 
Third  Chapter  on  the  Rule  in  Minot's 
Case."  (N.  Y. :  G.  P.  Putnam's 
Sons.)  See  5  Am.  L.  Rev.  720; 
Perry,  Trusts  (3d  ed.),  §§544,  545, 
and  notes. 

In  Georgia  the  code  is  construed  so 
as  to  follow  the  Massachusetts  rule. 
Millen  v.  Guerrard,  67  Ga.  284  (1881) ; 
Ga.  Code,  §  2256.  A  stock  dividend 
belongs  to  the  remainderman.  Jack- 
son V.  Maddox,  136  Ga.  31  (1911). 

In  Illinois  a  stock  dividend  goes  to 
the  remainderman.  Billings  v.  War- 
ren, 216  111.  281  (1905).  A  stock  divi- 
dend based  on  earnings  accumulated 
during  the  testator's  lifetime  goes  to 
the  remainderman.  Blinn  v.  Gillett, 
208  111.  473  (1904).  An  extraordinary 
cash  dividend  belongs  to  the  life  ten- 
ant, but  stock  dividends  do  not.  De 
Koven  v.  Alsop,  205  111.  309  (1903). 


The  highest  court  in  Delaware  has 
recently  decided  that  the  Massachu- 
setts rule  is  not  the  better  rule,  and 
hence  that  a  stock  dividend  goes  to 
the  life  estate,  where  the  profits  rep- 
resenting such  stock  dividend  were 
earned  after  the  life  tenancy  began, 
and  of  course  the  income  from  such 
stock  dividend  thereafter  would  go 
to  the  life  tenant.  Bryan  v.  Aikin,  86 
Atl.  Rep.  674  (Del.  1913). 

1  Gibbons  v.  Mahon,  136  U.  S.  549 
(1890).  Where  a  corporation  sells 
the  larger  portion  of  its  property  for 
cash  and  stock  in  another  corporation 
and  distributes  the  same  among  its 
stockholders,  the  court  will  look  at 
the  substance  of  the  transaction,  and 
it  being  clear  that  such  distribution 
was  not  of  the  profits,  the  cash  and 
stock  will  not  be  considered  as  income. 
Mercer  v.  Buchanan,  132  Fed.  Rep.  501 
(1904).     Cf.  s.  c,  137  Fed.  Rep.  1019. 

2  Hyde  v.  Holmes,  198  Mass.  287 
(1908).     See  also  §  536,  supra. 

3  Parker  v.  Mason,  8  R.  I.  427 
(1867);  Bushee  v.  Freeborn,  11  R.  I. 
149  (1875);  Brown's  Petition,  14 
R.  I.  371  (1884).  A  stock  dividend  is 
capital  and  not  income.  Greene  v. 
Smith,  17  R.  I.  28  (1890).  A  cash 
dividend  belongs  to  the  life  tenatit 
even  though  it  is  very  large.  Newport 
T.  Co.  V.  Van  Rensselaer,  32  R.  I. 
231  (1911). 

*  The    courts,    perhaps    uniformly,. 


1C40 


CH.  XXXIII.]  LIFE    ESTATES   AND   REMAINDERS   IN   STOCK.        [§§  556,  557. 

Where  a  company  declares  a  large  cash  dividend  and  at  the  same  time 
offers  new  stock  at  par  to  the  stockholders,  the  one  offsetting  the  other. 


insist  upon  this  distinction.  Extraor- 
dinary dividends  may  be  either  of 
cash  or  stock,  and  appear  under  a 
variety  of  names,  such  as  "participa- 
tions," "distributions,"  or  more  com- 
monly, "bonuses."  See  Witts  v. 
Steere,  13  Ves.  Jr.  363  (1807) ;  Norris 
V.  Harrison,  2  Madd.  268  (1817); 
Hooper  v.  Rossiter,  McClel.  (Exch.) 
527  (1824).  To  the  point  that  regular 
dividends,  though  increased  in  amount, 
go  as  income  to  the  owner  of  the  life 
estate,  see  Barclay  v.  Wainewright, 
14  Ves.  Jr.  66  (1807) ;  Price  v.  Ander- 
son, 15  Sim.  473  (1847);  Bates  v. 
Mackinley,  31  Beav.  280  (1862),  a 
cash  dividend ;  to  the  point  that 
"extra"  or  unusual  dividends,  whether 
of  cash  or  shares,  go  to  augment  the 
principal  of  the  trust  fund,  see  Irving 
V.  Houstoun,  4  Pat.  H.  L .  Cas.  521 
(1803),  a  stock  dividend;  Hooper  v. 
Rossiter,  McClel.  (Exch.)  527  (1824), 
a  stock  dividend ;  Re  Barton's  Trust, 
L.  R.  5  Eq.  238  (1868),  a  stock  divi- 
dend ;  Paris  v.  Paris,  10  Ves.  Jr.  185 
(1804),  a  cash  dividend ;  Clayton  v. 
Gresham,  10  Ves.  Jr.  288  (1804), 
a  cash  dividend ;  Witts  v.  Steere,  13 
Ves.  Jr.  363  (1807),  a  cash  dividend. 
Cf.  Gilly  V.  Buriey,  22  Beav.  619 
(1856);  Straker  v.  Wilson,  L.  R.  6 
Ch.  App.  503  (1871);  Brander  v. 
Brander,  4  Ves.  Jr.  800  (1799) ;  Pres- 
ton V.  Melville,  16  Sim.  163  (1848); 
Murray  v.  Glasse,  17  Jur.  816  (1853)  ; 
Johnson  v.  Johnson,  15  Jur.  714 
(1850);  Plumbe  v.  Neild,  6  Jur. 
(N.  S.)  529  (1860) ;  Hollis  v.  Allan,  12 
Jur.  (N.  S.)  638  (1866).  See  also 
Re  Hopkins's  Trusts,  L.  R.  18  Eq.  696 
(1874);  Scholefield  v.  Redfern,  2  Dr. 
&  Sm.  173  (1863) ;  Hartley  v.  Allen,  4 
Jur.  (N.  S.)  500  (1858) ;  Lock  v.  Vena- 
bles,  27  Beav.  598  (1859),  holding  to 
the  effect  that  a  specific  bequest  of 
"the  dividends,  interest,  and  pro- 
ceeds" of  shares  will  not  pass  a  bonus 
on  the  shares.  In  Aleock  v.  Sloper, 
2  Myl.  &  K.  699  (1833),  the  income  of 
the  testator's  long  annuities  was  given 
to  the  life  tenant.  Wilday  v.  Sandys, 
L.  R.  7  Eq.  455  (1869).     In  Lane  v. 


Loughnan,  7  Vict.  L.  R.  Eq.  19  (1881), 
it  was  held  that  the  premium  on  a 
lease  of  part  of  a  trust  estate  belonged 
to  the  tenant  for  life  and  not  to  the 
corpus.  An  executor  may  plainly 
transfer  the  stock  to  pay  the  dece- 
dent's debts,  although  it  is  bequeathed 
for  life  with  remainder  over.  Frank- 
lin V.  Bank  of  England,  1  Russ.  575 
(1826).  In  Clive  v.  Clive,  Kay,  600 
(1854),  by  the  terms  of  the  deed  of 
settlement  the  net  profits  of  the  con- 
cern were  to  be  divided  ratably  to 
such  an  amount  as  should  be  declared 
at  the  semi-annual  meetings,  and 
were  to  be  paid  within  twenty-one 
days  thereafter ;  and  it  was  provided 
that  a  stockholder  was  not  to  receive 
any  dividend  after  the  period  at 
which  he  ceased  to  be  a  proprietor  of 
shares,  but  the  dividends  on  such 
shares  were  to  continue  in  suspense 
until  some  other  person  should  become 
proprietor  of  them.  When  a  stock- 
holder died  sixty-nine  days  after  a 
half  yearly  meeting  at  which  a  divi- 
dend had  been  declared,  but  before 
notice  had  been  given  that  such  divi- 
dend was  payable,  having  by  his  will 
bequeathed  the  interest  and  annual 
income  arising  from  all  his  shares  to 
one  for  life,  and  then  in  remainder 
to  others,  it  was  held  that  this  divi- 
dend belonged  to  the  legatee  for  Life, 
and  not  to  the  general  personal  estate 
of  the  testator.  See  also  Title  to  Divi- 
dends, 19  Am.  L.  Rev.  571  ;  Bostock  v. 
Blakeney,  2  Bro.  Ch.  653  (1789);  2 
Perry,  Trusts,  §§544,  545.  Mr. 
Moak's  note,  31  Eng.  Rep.  328-332; 
Browne  v.  Collins,  L.  R.  12  Eq.  586 
(1871),  is  to  the  effect  that  profits  of 
a  partnership  accrued  and  earned 
before,  but  not  set  aside  qua  profits 
until  after  the  death  of  the  testator, 
belong  to  the  corpus  of  the  estate,  and 
that  profits  accruing  after  his  death  go 
to  the  tenant  for  life  as  income.  See 
also  the  important  review  of  the  whole 
subject  in  Bouch  v.  Sproule,  L.  R.  12 
App.  Cas.  385  (1887),  reversing  the 
court  below,  Sproule  v.  Bouch,  L.  R. 
29  Ch.  D.  635  (1885). 


1641 


§§  556,  557.]  LIFE    ESTATES   AND    REMAINDERS    IN   STOCK.  [cH.  XXXIII. 

this  is  the  same  as  offering  either  the  cash  dividend  or  a  stock  dividend, 
and  it  belongs  to  the  remainderman.^ 

There  are,  however,  cases  in  England  to  the  effect  that  extraordinary 
cash  dividends  may  be  decreed  to  belong  to  the  life  tenant.^  There 
of  course  is  no  question  that  ordinary  cash  dividends  belong  to  the  life 
tenant.^  This  rule  applies  even  though  it  may  be  shown  that  the  divi- 
dend in  question  was  earned,  wholly  or  in  part,  before  the  commence- 
ment of  the  life  estate.* 

Where  it  is  shown  that  dividends  have  been  fraudulently  retained 
in  prejudice  of  the  rights  of  the  life  tenant,  and  subsequently  a  bonus 
is  paid  upon  the  shares,  it  belongs,  as  income  deferred,  to  the  tenant 
for  life,  even  though  it  be  called  a  bonus. ^  The  life  tenant  does  not  take 
any  part  of  the  surplus  value  of  shares  upon  distribution  after  dissolu- 
tion, if  such  surplus  was  clearly  capital.®  An  English  court  has  recently 
said :  "  The  true  rule  to  be  inferred  from  the  cases  as  between  tenant 
for  life  and  remainderman  seems  to  me  to  be  that  the  tenant  for  life  is 


1  Jones  V.  Evans,  107  L.  T.  Rep. 
■604  (1912),  the  court  saying:  "From 
the  necessity  of  the  case  it  has  always 
been  held  that  as  between  tenant  for 
life  and  remainderman,  the  court  must 
decide  whether  a  particular  fund  is  to 
be  treated  as  capital  or  whether  it  is 
to  be  divided  as  income  by  way  of  divi- 
dend, and  one  does  not  see  very  well 
how  any  other  rule  could  apply.  In 
ordinary  cases  there  is  no  difficulty 
about  it,  if  the  directors  have  involved 
the  reserve  fund  for  the  pxirpose  of 
equalizing  dividends,  or  for  the  pur- 
pose of  paying  dividends,  where  none 
were  earned  in  the  particular  year, 
I  do  not  think  it  could  be  successfully 
argued  that  such  payments  were  not 
payments  for  the  benefit  of  the  tenant 
for  life,  but  for  the  remainderman." 

2  In  Sugden  v.  Alsbury,  L.  R.  45  Ch. 
D.  237  (1890),  the  court  held  that  the 
life  tenant  was  entitled  to  an  extraor- 
dinary dividend  payable  in  cash.  The 
dividend  was  called  a  bonus,  but  was 
nothing  more  or  less  than  a  large  divi- 
dend, being  a  division  of  accumulated 
profits.  In  Ellis  v.  Barfield,  64 
L.  T.  Rep.  625  (1891),  the  court  held 
that  a  large  dividend  was  income  and 
belonged  to  the  life  tenant,  although 
it  was  used  by  the  trustee  to  pay  up 
the  stock  in  full,  and  also  to  pur- 
chase new  shares  which  he  imme- 
diately sold ;  but  the  excess  for  which 


he  sold  the  stock  at  a  profit  belongs  to 
the  remainderman. 

'  A  cash  dividend  of  profits  which 
have  been  earned  since  the  last  pre- 
ceding dividend,  such  last  preceding 
dividend  having  been  made  in  a  reg- 
ular and  reasonable  time  previously, 
belongs  to  a  life  tenant  of  stock,  and 
not  to  the  remainderman.  Barclay  v. 
Wainewright,  14  Ves.  Jr.  66  (1807); 
Norris  v.  Harrison,  2  Madd.  268 
(1817);  Clive  v.  Clive,  Kay,  600 
(1854) ;  Murray  v.  Glasse,  17  Jur.  816 
(1853);  Preston  v.  Melville,  16  Sim. 
163  (1848) ;  Cuming  v.  BosweU,  2  Jur. 
(N.  S.)  1005  (18.56).  Cf.  Ware  v. 
McCandlish,  11  Leigh  (Va.),  595 
(1841);  P*rice  v.  Anderson,  15  Sim. 
473  (1847);  Witts  v.  Steere,  13  Ves. 
Jr.  363  (1807). 

4  Bates  V.  Mackinley,  31  Beav.  280 
(1862);  Jones  v.  Ogle,  L.  R.  8  Ch. 
App.  192  (1872). 

^  Maclaren  v.  Stainton,  L.  R.  11  Eq. 
382  (1871) ;  s.  c,  3  De  G.,  F.  &  J.  202 
(1861),  reversing  s.  c,  27  Beav.  460 
(1859) ;  Edmondson  v.  Crosthwaite, 
34  Beav.  30  (1864) ;  Dale  v.  Hayes,  40 
L.  J.  (Ch.)  244  (1871).  Cf.  Lean  v. 
Lean,  32  L.  T.  Rep.  305  (1875) ;  Lam- 
bert V.  Lambert,  29  L.  T.  (N.  S.)  878 
(1874) ;  Re  Tinkler's  Estate,  L.  R.  20 
Eq.  Cas.  456  (1875). 

6  Re  Armitage,  [1893]  3  Ch.  337. 


1642 


CH.   XXXIII. 


LIFE    ESTATES   AND    REMAINDERS    IN    STOCK. 


[§  558. 


entitled  to  all  payments  out  of  profits  made  by  the  company  unless  they 
have  been  validly  capitalized  by  the  company  by  resolution  or  other- 
wise." ^ 

In  all  cases,  however,  the  intent  of  the  grantor  or  testator  is  the 
pole-star,  and  will  be  carried  out  by  the  courts.^ 

§  558.  The  apportionment  of  dividends.  —  When  a  life  tenant  dies 
before  the  date  at  which  a  dividend  is  declared,  the  question  arises 
whether  the  dividend  declared  next  after  his  death  ought  or  ought 
not  to  be  apportioned  between  the  reversioner  or  remainderman  and 
the  estate  of  the  life  tenant  for  the  period  of  time  partially  covered  by 
the  life  estate.  It  is,  in  general,  the  rule  in  such  a  case  that  the  dividend 
is  not  apportionable,  but  belongs  entirely  to  the  corpus  of  the  trust 
fund.^  But  where  a  tenant  for  life  dies  after  the  dividend  is  declared, 
but  before  the  dividend  becomes  due,  his  estate  will  be  entitled  to  the 
whole  of  that  dividend.^  In  England,  under  the  statute  known  as  the 
Apportionment  Act  of  1870,  dividends  are  apportionable  in  these  cases 
between  the  estate  of  the  life  tenant  and  the  corpus;  '"    and  in  this 


»  Re  Piercy,  [1907]  1  Ch.  289. 

2  Quoted  and  approved  in  Re  Rob- 
inson's Trust,  218  Pa.  St.  481  (1907). 
Sproule  V.  Boueh,  L.  R.  29  Ch.  D.  635 
(1885);  Re  Hopkins's  Trusts,  L.  R. 
18  Eq.  696  (1874) ;  Seholefield  v.  Red- 
fern,  2  Dr.  &  Sm.  173  (1863) ;  Jones  v. 
Ogle,  L.  R.  14  Eq.  419  (1872) ;  ReBox, 
1  Hem.  &  M.  552  (1863).  Cf.  Reed  v. 
Head,  88  Mass.  174  (1863) ;  Clarkson 
V.  Clarkson,  18  Barb.  646  (1855) ;  Alil- 
len  V.  Guerrard,  67  Ga.  284  (1881); 
Thomson's  Appeal,  89  Pa.  St.  36  (1879). 
The  life  tenant  takes  a  dividend  paid  im- 
mediately after  the  death  of  the  testa- 
tor, where  the  will  provides  that  each 
share  bequeathed  by  the  will  should 
carry  the  dividend  accruing  at  the  time 
of  the  testator's  death.  Lysaght  v. 
Lysaght,  [1898]  1  Ch.  115  (1897). 

3  Pearly  v.  Smith,  3  Atk.  260 
(1745);  Sherrard  v.  Sherrard,  3  Atk. 
502  (1747) ;  Wilson  v.  Harman,  2  Ves. 
Sr.  672  (1755);  Hartley  v.  Allen,  4 
Jur.  (N.  S.)  500  (1858);  Re  Max- 
weU's  Trusts,  1  Hem.  &  M.  610 
(1863);  Foote,  AppeUant,  39  Mass. 
299  (1839);  Granger  v.  Bassett,  98 
Mass.  462  (1868);  Clapp  v.  Astor,  2 
Edw.  Ch.  379  (1834).  Cf.  Hyatt  v. 
Allen,  56  N.  Y.  553  (1874) ;  Brundage 
V.  Brundage,  60  N.  Y.  544,  551  (1875) ; 
Perry,  Trusts,  §  556.  But  in  Massa- 
chusetts it  has  been  held  that  some- 


times dividends  declared  after  the  life 
tenant's  death  will,  nevertheless,  go  to 
his  estate.  Thus,  a  life  tenancy  in 
stock  for  the  support  of  the  testator's 
widow  and  children  was  held  to  entitle 
the  widow's  estate  to  a  dividend 
declared  after  her  death,  but  for  a 
period  which  expired  before  that 
event.  Johnson  v.  Bridgewater  Mfg. 
Co.,  80  Mass.  274  (1859).  See  also 
Ellis  V.  Essex  Merrimack  Bridge,  19 
Mass.  243  (1824);  Gifford  v.  Thomp- 
son, 115  Mass.  478  (1874).  Cf.  King 
V.  FoUett,  3  Vt.  385  (1831),  in  which 
the  residuary  legatee  claimed  from 
the  legatee  of  certain  stock  the  share 
of  dividends  earned  in  the  lifetime  of 
his  testator,  but  declared  after  his 
death ;  the  court  holding  that  a  sale 
or  gift  of  stock  carries  with  it  all  divi- 
dends declared  after  it  takes  effect, 
whether  earned  before  or  not.  A  life 
tenant  is  not  entitled  to  a  propor- 
tionate part  of  a  surplus,  even  though 
it  was  accumulated  during  the  life 
tenancy,  no  distribution  by  the  cor- 
poration being  contemplated.  Tubb 
V.  Fowler,  118  Tenn.  325  (1907). 
See  Lang  v.  Lang's  Executor,  57 
N.  J.  Eq.  325  (1898). 

*  Wright  V.  Tuckett,  1  J.  «&  H.  266 
(1860);  Paton  v.  Sheppard,  10  Sim. 
188  (1839). 

5  33  &  34  Vict.,  ch.  35,  §  2  ;  PoUock 


1643 


§  559. 


LIFE   ESTATES   AND   REMAINDERS   IN    STOCK.  [cH.  XXXIII. 


country,  at  common  law,  there  is  a  tendency  to  hold  that  dividends 
are  apportionable.^  In  Maryland  a  stock  dividend  has  been  appor- 
tioned.^ At  the  termination  of  the  life  estate  no  claim  can  be  made 
in  behalf  of  the  life  tenant  for  increase  in  the  value  of  the  stock,  no 
dividends  having  been  declared.^ 

§  559.  The  right  to  subscribe  for  new  shares  as  between  life  ten- 
ant and  remainderman.  —  The  right  to  subscribe  for  new  shares  at 
par  upon  an  increase  of  the  capital  stock,  which  is  an  incident  of  the 
ownership  of  the  stock,  does  not  belong  as  a  privilege  to  the  life  tenant, 
but  such  an  increment  must  be  treated  as  capital,  and  be  added  to  the 


V.  Pollock,  L.  R.  18  Eq.  329  (1874), 
qualifying  or  explaining  Whitehead  v. 
Whitehead,  L.  R.  16  Eq.  528  (1873) ; 
Beavan  v.  Beavan,  53  L.  T.  Rep.  245 
(1885).  Cf.  Capron  v.  Capron,  L.  R. 
17  Eq.  288  (1874);  and  see  Banner 
V.  Lowe,  13  Ves.  Jr.  135  (1806) ;  Hay 
V.  Palmer,  2  P.  Wms.  ,501  (1728).  The 
statute  applies  only  to  dividends  upon 
the  stock  of  corporations,  strictly 
speaking,  and  not  to  those  upon  the 
shares  in  private  trading  corpora- 
tions. Jones  V.  Ogle,  L.  R.  8  Ch.  App. 
192  (1872).  And  does  not  apply  to 
stock  dividends.  Hartley  v.  Allen,  4 
Jur.  (N.  S.)  500  (1858).  Under  the 
Apportionment  Act  of  England,  a 
dividend  declared  after  the  death  of 
the  tenant  for  life  may  be  appor- 
tioned between  his  estate  and  the 
remainderman.  Bulkeley  v.  Stephens, 
[1896]  2  Ch.  241. 

1  See  cases  in  §  554,  supra.  A 
stock  dividend  from  the  earnings 
earned  prior  to  the  creation  of  the 
trust  estate  belongs  to  the  remainder- 
man, but  if  earned  partly  before  and 
partly  after,  it  is  divided  between  the 
remainderman  and  the  life  tenant. 
Miller  v.  Payne,  150  Wis.  354  (1912). 
A  stock  dividend  will  be  apportioned 
where  a  part  of  the  assets  which  it 
represents  were  earned  after  the  death 
of  the  testator.  Day  v.  Faulks,  79 
N.  J.  Eq.  66  (1911).  Where  a  cor- 
poration declares  a  two  hundred  per 
cent,  cash  dividend  and  at  the  same 
time  offers  new  stock  to  the  stockholders 
at  par,  this  is  a  cash  dividend  and  not  a 
stock  dividend,  but  as  between  life 
tenant  and  remainderman  it  should  be 
apportioned  according  to  that  part  of 
it  which  was  earned  before  the  testa- 


tor's death.  Ballantine  v.  Young,  79 
N.  J.  Eq.  70  (1911).  In  Ex  parte  Rut- 
ledge,  1  Harp.  Eq.  (S.  C.)  65  (1824), 
a  dividend  was  apportioned  between 
life  tenant  and  remainderman.  This 
is  regarded  as  a  leading  ease  in  favor 
of  apportionment.  In  Pennsylvania 
the  interest  on  municipal  bonds  and 
on  the  bonds  of  private  corporations  is 
apportionable ;  but  quere  whether  or 
not  the  interest  on  government  bonds 
would  be.  Wilson's  Appeal,  108  Pa. 
St.  344  (1885),  overruling  Earp's 
Will,  1  Pars.  Eq.  Cas.  (Pa.)  453  (1850). 
But  in  Massachusetts  the  statute  of 
apportionment  is  held  not  to  apply  to 
dividends  upon  the  stock  of  corpo- 
rations. Granger  v.  Bassett,  98  Mass. 
462,  469  (1868),  construing  Mass. 
Gen.  Stat.,  ch.  97,  §24.  In  New 
York  an  apportionment  is  provided 
for  by  Laws  of  1875,  ch.  542.  See 
Goldsmith  v.  Swift,  25  Hun,  201 
(1881).  Where  dividends  are  declared 
at  irregular  intervals,  such  dividends 
are  not  apportionable  under  the  New 
York  statute.  Matter  of  Kane,  64 
N.  Y.  App.  Div.  566  (1901). 

2  A  stock  dividend  declared  in  1891 
to  represent  profits  which  for  three 
years  had  been  used  for  improvements 
should  be  apportioned  between  the 
life  tenant  and  remaindermen,  the  tes- 
tator having  died  in  1890.  Thomas  v. 
Gregg,  78  Md.  545  (1894). 

3  In  re  Connolly's  Estate,  198  Pa.  St. 
137  (1901).  A  dividend  paid  after  the 
death  of  the  life  tenant  belongs  to  the 
remaindermen  and  there  is  no  appor- 
tionment unless  the  will  provides 
otherwise.  Mann  v.  Anderson,  106  Ga. 
818  (1899). 


1644 


CH.  XXXIir.]  LIFE   ESTATES   AND   REMAINDERS   IN   STOCK. 


[§  559. 


trust  fund  for  the  benefit  of  the  remainderman.  This  is  equally  the 
rule  whether  the  trustee  subscribes  for  the  new  stock  for  the  benefit  of 
the  trust  or  sells  the  right  to  subscribe  for  a  valuable  consideration. 
In  either  event  the  increase  goes  to  the  corpus}    The  subsequent  in- 


'  Quoted  and  approved  in  De  Koven 
V.  Alsop,  205  111.  309  (1903).  Robert- 
son V.  Brulatour,  188  N.  Y.  301  (1907). 
Richmond  v.  Richmond,  123  N.  Y. 
App.  Div.  117  (1908);  aff'd,  196 
N.  Y.  535.  Jewett  v.  Schmidt,  45 
N.  Y.  Misc.  Rep.  471  (1904);  s.  c, 
83  N.  Y.  App.  Div.  276;  108  N.  Y. 
App.  Div.  322  and  184  N.  Y.  608. 
Brown  v.  Brown,  65  Atl.  Rep.  739 
(N.  J.  1907).  Atkins  v.  Albree,  94 
Mass.  359  (1866) ;  Brinley  v.  Grou,  50 
Conn.  66  (1882) ;  Biddle's  Appeal,  99 
Pa.  St.  278  (1882) ;  Moss's  Appeal,  83 
Pa.  St.  264  (1877);  Goldsmith  v. 
Swift,  25  Hun,  201  (1881) ;  Re  Brom- 
ley, 55  L.  T.  Rep.  145  (1886).  Profit 
upon  the  sale  of  stock  is  corpus,  and 
not  income  for  the  life  tenant.  Whit- 
ney V.  Phoenix,  4  Redf.  (Surr.)  180 
(1880).  Cf.  Leitch  v.  Wells,.  48  N.  Y. 
585  (1872) ;  Hemenway  v.  Hemenway, 
134  Mass.  446  (1883) ;  New  England 
Trust  Co.  V.  Eaton,  140  Mass.  532 
(1886).  Money  realized  from  the  sale 
of  a  right  to  subscribe  for  increased 
capital  stock  belongs  to  the  remainder- 
man. Ballantine  v.  Young,  79  N.  J. 
Eq.  70  (1911).  A  privilege  given  by  a 
corporation  to  its  stockholders  to  take 
additional  stock  at  par  is  appurtenant 
to  the  old  stock,  and  does  not  belong 
to  the  life  beneficiary.  Hite  v.  Hite, 
93  Ky.  257  (1892).  Where  the  life 
tenant  refuses  to  pay  for  increased 
capital  stock  which  is  issued  at  fifty 
cents  on  a  dollar,  the  remaining  fifty 
cents  being  a  stock  dividend,  and  the 
trustee  takes  the  stock  for  himself, 
and  ten  years  have  elapsed  since  the 
life  tenant  claimed  the  stock,  the  stat- 
ute of  limitations  is  a  bar  to  his  suit 
to  compel  the  trustee  to  account  for 
the  stock.  Matter  of  Smith,  66  N.  Y. 
App.  Div.  340  (1901) ;  aff'd,  179  N.  Y. 
563.  A  life  tenant  is  not  entitled 
to  the  price  realized  by  the  trustee 
from  the  sale  of  the  right  to  subscribe 
for  new  stock,  neither  is  the  life  ten- 
ant entitled   to  a  large  sum  realized 


on  the  sale  of  the  securities  in  excess 
of  the  inventoried  value,  the  sale  be- 
ing for  purposes  of  reinvestment,  nor 
is  he  entitled  to  profits  on  securities 
purchased  and  later  sold  at  a  higher 
price,  but  the  life  tenant  is  entitled  to 
a  stock  dividend  representing  earn- 
ings used  by  the  company  to  increase 
its  plant.  Stewart  v.  Phelps,  71  N.  Y. 
App.  Div.  91  (1902) ;  aff'd,  173  N.  Y. 
621.  Where  new  stock  is  issued  and 
the  right  to  subscribe  therefor  is  sold, 
the  proceeds  of  such  sale  belong  to  the 
remainderman,  and  only  the  income  to 
the  life  tenant.  Walker  v.  Walker, 
68  N.  H.  407  (1896).  Cash  realized 
by  the  sale  of  the  right  to  subscribe 
for  new  stock  belongs  to  the  remainder- 
man. Hyde  v.  Holmes,  198  Mass. 
287  (1908).  Where  upon  the  consoli- 
dation of  two  banks  one  of  them  pays 
a  cash  dividend  of  sixty-six  and  two 
thirds  per  cent,  or  gives  the  stock- 
holders the  right  to  subscribe  for  new 
stock  in  the  other  bank,  this  is  income. 
Cox  V.  Gaulbert's  Trustee,  147  S.  W. 
Rep.  25  (Ky.  1912).  A  life  tenant  is 
entitled  to  dividends  from  new  stock 
and  also  income  from  any  profit 
realized  from  selling  the  right  to  sub- 
scribe or  income  from  profit  derived 
by  selling  the  stock  after  it  has  been 
subscribed  for,  but  such  profit  itself 
belongs  to  the  corpus.  Lauman  v. 
Foster,  135  N.  W.  Rep.  14  (Iowa,  1912). 
Sometimes  certificates  of  new  stock 
issued  to  represent  property  acquired 
are  not  stock  dividends.  Chicago, 
etc.  R.  R.  V.  Page,  1  Biss.  461  (1864) ; 
s.  c,  5  Fed.  Cas.  600.  In  Londes- 
borough  V.  Somerville,  19  Beav.  295 
(1854),  where  consols  were  sold  just 
before  a  dividend  day  and  the  proceeds 
invested  in  realty,  a  tenant  for  life 
was  held  entitled  to  be  paid,  as  income 
on  the  consols,  the  difference  be- 
tween the  price  obtained  and  the 
value  exclusive  of  the  next  dividend. 
See  also  notes  in  §  554,  and,  in  general, 
§  286,  supra. 


1645 


§  560.]  LIFE   ESTATES   AND   REMAINDERS    IN    STOCK.  [cH.  XXXIII. 

come,  however,  of  such  increase  belongs,  during  the  continuance  of  the 
hfe  tenancy,  to  the  hfe  tenant  as  income ;  the  new  shares  are  part  of 
the  corpus,  and  the  hfe  tenant,  being  entitled  to  the  income  from  the 
corpus,  takes  the  income  from  the  accretions  thereto.^  Where  a  divi- 
dend is  used  to  pay  for  increased  capital  stock  the  stock  goes  to  the  life 
tenant.^ 

§  560.  Miscellaneous  questions  herein.  —  An  assessment  on  bank 
stock  to  restore  the  capital  stock  as  required  by  statute  should  be  paid 
from  the  corpus  of  the  trust  estate  that  owns  a  portion  of  the  stock.^ 
An  executrix  is  liable  on  stock  standing  in  the  name  of  the  estate  in- 
stead of  in  the  name  of  the  deceased  or  the  executrix,  it  being  shown  that 
the  stock  formerly  stood  in  the  name  of  the  deceased.^  Even  though 
executors  transfer  to  themselves  as  trustees  certain  national  bank  stock 
and  pay  the  dividends  to  a  legatee  of  a  share  in  the  estate,  yet  if  the 
will  did  not  set  aside  such  stock  for  such  legatee,  the  estate,  and  not  the 
legatee's  interest,  is  liable  for  an  assessment  on  such  stock. ^  The  life 
tenant  must  pay  calls  which  are  made  ^  and  taxes  levied  *"  during  the 
continuance  of  his  estate  upon  shares  held  in  trust  for  his  benefit. 
Dividends  and  interest  on  stocks  and  bonds  pledged  by  a  testator 
do  not  constitute  income  for  annuities.^  Where  stock  to  produce  a 
fixed  income  is  bequeathed  for  life,  a  subsequent  increase  in  the  earnings 

'  Quoted     and     approved     in     Re  ^  Earle  v.  Rogers,  105  Fed.  Rep.  208 

Eisner's     Estate,     175     Pa.     St.     143  (1900). 

(1896),   and   Richmond   v.   Richmond,  «  Re  Box,  1  Hem.  &  M.  552  (1863). 

123  N.  Y.  App.  Div.  117,  126  (1908) ;  If  the  testator  owns  the  stock  at  the 

aff'd,  196  N.  Y.  535.     Moss's  Appeal,  time  of  his  death  the  specific  legatee 

83  Pa.  St.  264  (1877),  Biddle's  Appeal,  thereof  must  pay  future  calls,  but  if 

99  Pa.   St.  278   (1882)  and  the  cases  he  did  not  own  it  completely  the  gen- 

generally  cited  in  the  preceding  note ;  eral  estate  must  pay  the  calls.     Day  v. 

Re  Bromley,  55  L.  T.  Rep.  145  (1886).  Day,  1  Dr.  &  Sm.  261  (1860) ;   s.  c,  6 

Dividends  from  increased  capital  stock  Juris.   (N.  S.)  365.     In  case  of  a  life 

go    to    the    life    tenant.     Lauman    v.  estate,  followed  by  a  life  estate,  fol- 

Foster,  135  N.  W.  Rep.  14  (Iowa,  1912).  lowed  by  a  remainder  to  the  nominees 

2  Brown  v.  Brown,  65  Atl.  Rep.  739  of  the  first  life  tenant,  the  estate  of 
(N.  J.  1907).  Where  an  extraor-  the  first  life  tenant  is  liable  for  calls 
dinary  cash  dividend  is  declared  and  made  after  the  remainder  commences, 
at  the  same  time  the  stockholders  are  Hobbs  r.  Wayet,  L.  R.  36  Ch.  D.  256 
given  the  opportunity  to  subscribe  for  (1887).  If  a  call  becomes  due  the  day 
new  stock  at  par,  a  life  tenant  is  en-  after  the  testator  dies,  it  is  the  duty 
titled  to  such  part  of  the  dividend  as  of  the  executor  to  pay  it  from  the 
was  earned  since  the  creation  of  the  general  fund.  Emery  v.  Wason,  107 
life  estate,  not  including  anything  for  Mass.  507  (1871). 

natural  growth  and  increase  of  values.  ">  Webb   v.   Burlington,   28  Vt.    188 

Holbrook  v.  Holbrook,  74  N.  H.  201  (1856) ;  Citizens'  Mut.  Ins.  Co.  v.  Lott, 

(1907).  45  Ala.    185    (1871).     See  also   §  248, 

3  Miller    v.    Payne,    150    Wis.    354  supra. 

(1912).  8  Skinner    v.    Taft,    140   Mich.    282 

'  Brown  v.  Ellis,  103  Fed.  Rep.  834     (1905). 
(1900).     See  also  §  248,  supra. 

1646 


CH.  xxxin. 


LIFE   ESTATES   AND   REMAINDERS   IN   STOCK. 


[§  560. 


from  that  stock  inures  to  the  benefit  of  the  Ufe  tenant.^  The  enhanced 
price  for  which  stock  sells  by  reason  of  dividends  earned  but  not  de- 
clared belongs  to  the  remainder.^  Profits  realized  from  the  enhanced 
value  of  securities  belong  to  the  remainderman.^  AVhere  a  trustee 
sells  stock  by  decree  of  the  court  on  account  of  the  precarious  nature  of 
the  stock,  the  life  tenant  is  not  entitled  to  anything  from  the  corpus 
of  the  estate,  where  it  is  not  shown  that  the  income  is  decreased.'*    The 


1  Russell  V.  Loring,  85  Mass.  121 
(1861).  But  when  a  fixed  income  is 
bequeathed  and  the  income  fails  or 
falls  short,  the  principal  must  be  re- 
sorted to.  Bonham  v.  Bonham,  33 
N.  J.  Eq.  476  (1881) ;  Haydel  v.  Hurck, 
72  Mo.  253  (1880).  The  opposite  rule, 
however,  prevails  in  New  York.  De- 
laney  v.  Van  Aulen,  84  N.  Y.  16 
(1881),  reversing  s.  c,  21  Hun,  274. 
Cf.  Cra-n^ord  v.  Dox,  5  Hun,  507 
(1875).     See  also   §  304,  supra. 

-  Where  stock  is  sold  the  life  ten- 
ant is  not  entitled  to  such  part  of  the 
price  as  might  represent  the  income 
since  the  last  dividend.  The  court 
has  no  power  to  make  any  division. 
Scholefield  v.  Redfern,  2  Dr.  &  Sm. 
173  (1863),  the  com-t  refusing  to  fol- 
low Londesborough  v.  Somerville,  19 
Beav.  295,  and  stating  that  the  latter 
turned  upon  very  special  circum- 
stances. See  also  Abercrombie  v.  Rid- 
dle, 3  Md.  Ch.  320  (1850) ;  Van  Blar- 
eom  V.  Dager,  31  N.  J.  Eq.  783  (1879) ; 
Re  Stutzer,  26  Hun,  481  (1882);  Re 
Gerry's  Accounting,  103  N.  Y.  445 
(1886).  A  life  tenant  entitled  to 
"dividends,  rents  and  profits"  is  not 
entitled  to  any  increase  in  the  value 
of  the  securities  during  the  life  ten- 
ancy, nor  to  profits  by  change  of  in- 
vestments, nor  money  received  from 
the  sale  of  right  to  subscribe  for  new 
stock,  nor  of  profits  due  to  subscrib- 
ing for  new  stock.  Boardman  v.  Mans- 
field, 66  Atl.  Rep.  169  (Conn.  1907). 
Where,  during  the  life  tenancy,  the 
corporation  passes  a  large  portion  of 
its  profits  to  surplus,  and  by  reason 
thereof  the  market  value  of  the  stock 
increases  and  is  sold  for  a  higher  price, 
the  difference  belongs  to  the  life  ten- 
ant. Simpson  v.  Millsaps,  80  Miss. 
239  (1902).  Where  a  wiU  directed 
that  the  "dividends,  issues  and  prof- 


its" from  certain  stock  should  be 
paid  to  certain  persons  until  they  be- 
came thirty  years  of  age,  and  before 
that  time  the  company  was  dissolved 
and  its  assets  divided,  the  court  held 
that  the  invested  surplus  and  work- 
ing cash  capital  were  dividends,  is- 
sues, and  profits,  but  that  materials, 
betterments,  and  good-will  were  prin- 
cipal. ISIatter  of  Stevens,  111  N.  Y. 
App.  Div.  773  (1906);  aff'd  on  this 
point  in  187  N.  Y.  471. 

3  Stewart  v.  Phelps,  71  N.  Y.  App. 
Div.  91  (1902) ;  aff'd,  173  N.  Y.  621. 
A  bond  and  scrip  dividend  representing 
earnings  in  part  and  part  in  increased 
value  of  investments,  belongs  to  the 
life  tenant  as  to  the  earnings,  and  to 
the  remainderman  as  to  the  increased 
value  of  the  investments.  Thayer  v. 
Burr,  201  N.  Y.  155  (1911).  Con- 
cerning the  question  as  to  the  rights 
of  the  life  tenant  and  remainder- 
man where  trustees  buy  securities 
at  a  premium  or  seU  them  at  a  pre- 
mium, see  Scovel  v.  Roosevelt,  5 
Redf.  121  (1881);  Townsend  v. 
U.  S.  Trust  Co.,  3  Redf.  220  (1877) ; 
Duclos  V.  Benner,  5  N.  Y.  Supp. 
733  (1888);  Farwell  v.  Tweddle, 
10  Abb.  N.  Cas.  94  (1881);  Whit- 
temore  v.  Beekman,  2  Dem.  275 
(1883) ;  Cridland's  Estate,  132  Pa.  St. 
479(1890).  See  note  in  18  Abb.  N.  Cas. 
185.  An  increase  in  the  value  of 
securities  in  which  a  trust  fund  of 
$10,000  is  invested  belongs  to  the  life 
tenant  where  the  instrument  creating 
the  trust  divides  "the  said  principal 
sum  of  $10,000"  among  remainder- 
men upon  the  death  of  the  life  tenant. 
Claflin  V.  Dewey,  177  Mass.  166 
(1900). 

^  Lister  v.  Weeks,  61  N.  J.  Eq. 
623  (1900).  See  s.  c,  60  N.  J.  Eq. 
215  (1900). 


1647 


§  560.] 


LIFE    ESTATES   AND    REMAINDERS    IN    STOCK.  [cH.  XXXIII. 


unpaid  interest  on  an  income  bond,  even  though  cumulative,  does  not 
belong  to  the  tenant  for  life  if  the  bond  is  sold  with  all  rights  as  regards 
arrears.^  Where  bonds  are  purchased  at  a  premium  for  a  trust  estate, 
enough  income  may  be  retained  to  offset  the  premium'  paid  so  as  to  keep 
the  trust  fund  intact.-  The  trustees  need  not  create  a  sinking  fund  for 
securities  which  were  specifically  bequeathed.^  Where,  during  the  life 
tenancy,  the  corporation  ceases  business  and  is  wound  up,  the  life 
tenant  is  entitled  to  such  part  of  the  surplus  value  of  the  stock  as  was 
earned  during  the  life  tenancy.*  W^here  a  trustee  has  power  to  sell  and 
reinvest,  profits  made  in  this  way  belong  to  the  corpus.^  Even  though 
the  trustee  invests  in  unauthorized  security,  yet  no  part  of  the  interest 
received  belongs  to  the  remaindermen.^  Where  a  trustee  is  authorized 
to  retain  investments  owned  by  the  testator  at  the  time  of  his  death, 
he  may  retain  hazardous  coal  stocks,  and  the  life  tenant  is  entitled  to 
the  entire  income.^  A  life  tenant  is  not  entitled  to  have  the  stock  trans- 
ferred to  him  on  the  corporate  books.^    The  corporation,  if  it  had  notice 


^Re  Taylor's  Trust,  [1905]  1  Ch. 
734. 

2  Curtis  V.  Osborn,  79  Conn.  555 
(1907).  Where  the  trust  estate  con- 
sists of  bonds  purchased  at  a  pre- 
mium the  depreciation  in  their  value 
as  they  approach  maturity  must  be 
deducted  from  the  income.  Matter  of 
Stevens,  187  N.  Y.  471  (1907).  Where 
trustees  buy  bonds  at  a  premium 
the  premium  should  be  returned  to 
the  principal  out  of  the  interest. 
AUis  V.  AUis,  123  Wis.  223  (1904); 
contra,  Re  De  Pothonier,  [1900]  2 
Ch.  529.  The  income  payable  to  the 
life  tenant  is  not  to  be  decreased 
on  account  of  depreciation  of  the 
premium  on  bonds  on  account  of  their 
approaching  maturity.  Re  Connec- 
ticut, etc.  Co.,  80  Conn.  540  (1908). 
The  premium  of  bonds  owned  by  the 
testator  at  the  time  of  his  death  need 
not  be  made  up  out  of  income  there- 
after paid  to  the  life  tenant,  but  a  con- 
trary rule  prevails  as  to  such  bonds 
purchased  by  the  trustees  from  the 
funds  of  the  estate.  Ballantine  v. 
Young,    74    N.   J.    Eq.    572     (1908). 

'  Robertson  v.  Brulatour,  188  N.  Y. 
301  (1907).  Where  specific  stock  is 
put  in  trust  the  di\'idends  to  be  paid 
to  a  life  beneficiary,  no  deduction  can 
be  made  from  them  for  depreciation 
in  the  value  of  the  stock.     Robertson 


V.  Brulatour,  111  N.  Y.  App.  Div.  882 
(1906). 

*  In  re  Connolly's  Estate,  198  Pa. 
St.  137  (1901).  A  dividend  paid  on 
liquidation  by  a  bank  belongs  to  the 
remainderman,  even  though  it  is  paid 
from  the  profit  and  loss  account  and 
from  the  surplus.  Brownell  v.  An- 
thony, 189  Mass.  442  (1905).  On  dis- 
solution of  the  corporation  the  dis- 
tribution is  capital  and  not  income, 
as  between  remaindermen  and  life 
tenant.  Bulkeley  v.  Worthington,  etc. 
Soc,  78  Conn.  526  (1906).  A  divi- 
dend from  the  assets  of  the  corpora- 
tion on  dissolution  belongs  to  the 
capital  and  not  the  income  of  a  trust 
estate.  Curtis  v.  Osborn,  79  Conn. 
555  (1907). 

5  In  re  Kemble's  Estate,  201  Pa.  St. 
523  (1902).  A  life  tenant  entitled  to 
dividends  and  income  is  not  entitled 
to  profits  made  in  the  sale  and  rein- 
vestment of  the  fund.  Smith  v. 
Hooper,  95  Md.  16  (1902).  Where  a 
trustee  is  authorized  to  sell  the 
securities  and  reinvest  the  money,  and 
he  seUs  bonds  at  a  premium,  the 
premium  does  not  belong  to  the  life 
tenant.  Whittingham  v.  Schofield's 
Trustee,  67  S.  W.  Rep.  846  (Ky.  1902). 

6  Slade  V.  Chaine,  [1908]  1  Ch.  522. 

7  Re  Bates,  [1907]  1  Ch.  22. 
sCoUier  v.  Collier,  3  Ohio  St.  369 


1648 


CH.   XXXIII. 


LIFE    ESTATES   AND   REMAINDERS    IN   STOCK. 


[§  560. 


of  the  trust,  may  be  held  Hable  for  transferring  shares  in  prejudice  of 
the  rights  of  the  hfe  tenant.^  And  an  administrator  who  permits  an 
irregular  transfer  in  fraud  of  the  life  tenant's  rights  makes  himself 
personally  liable.^  A  dividend  declared  before  but  payable  after  the  testa- 
tor's death  belongs  to  the  estate.^    A  claim  of  the  company  against  the 


(1854).  Cf.  State  v.  Robinson,  57  Md. 
486  (1881).  If  a  corporation  trans- 
fers the  stock  to  the  life  tenant,  even 
by  order  of  the  court,  and  issues  a 
certificate  not  stating  the  facts  of  life 
tenancy,  and  tells  a  purchaser  of  the 
certificate  that  it  is  all  right,  the  cor- 
poration is  liable  to  the  remainder- 
man. Caulkins  v.  Gaslight  Co.,  85 
Tenn.  683  (1887).  Where  a  life  ten- 
ant under  a  power  given  by  the  will 
to  the  trustee  to  turn  over  the  secur- 
ities to  the  life  tenants,  pledges  them, 
but  does  not  sell  them,  and  then  dies, 
the  equity  belongs  to  the  corpus  of 
the  estate.  Bristol  Sav.  Bank  v.  Hol- 
ley,  77  Conn.  225  (1904).  In  deliver- 
ing stock  to  a  life  tenant  the  executor 
may  indorse  on  the  certificate  that 
it  is  to  be  held  by  the  legatee  under 
the  terms  of  the  will.  De  Loney  v. 
Hull,  128  Ga.  778  (1907). 

1  Stewart  v.  Firemen's  Ins.  Co.,  53 
Md.  564  (1880).  Where  a  life  tenant 
transfers  the  stock  to  the  remainder- 
man, the  former's  executor  cannot 
hold  the  corporation  liable  for  divi- 
dends paid  to  the  latter.  Kennedy  v. 
First  Nat.  Bank,  115  N.  C.  223  (1894). 
Where  a  life  tenant  transfers  the 
stock  into  his  own  name,  the  remain- 
derman may  recover  the  stock  upon  the 
death  of  the  life  tenant  even  though 
the  latter  was  insolvent.  Mercantile, 
etc.  Co.  V.  Weld,  85  Md.  685  (1897). 
A  bank  is  liable  to  the  remainderman 
for  allowing  a  transfer  to  the  life 
tenant,  even  though  the  transfer  to 
the  life  tenant  is  by  the  executors. 
Cox  V.  First  Nat.  Bank,  119  N.  C.  302 
(1896).  Where  stock  is  specifically 
bequeathed  in  trust  for  a  certain  per- 
son during  her  life  and  then  for  her 
children,  and  the  corporation  allows 
the  executor  to  transfer  the  stock  to 
the  trustee  as  trustee  for  the  life  ten- 
ant only,  and  afterwards  allows  the 
trustee  to  transfer  the  stock  to  bona 
fide   hands,    the   corporation   is   liable 


for  allowing  the  second  transfer.  In 
a  suit  by  a  remainderman  to  recover 
from  a  corporation  the  value  of  stock 
which  the  corporation  had  trans- 
ferred to  the  life  tenant  absolutely 
and  which  had  been  lost,  the  statute 
of  limitations  does  not  begin  to  run 
until  the  death  of  the  life  tenant, 
even  though  the  trust  was  created  in 
1854  and  the  life  tenant  died  in  1898. 
Wooten  ;;.  Wilmington,  etc.  R.  R.,  128 
N.  C.  119  (1901).  See  also  §  330, 
supra.  Where  by  will  the  widow  is 
given  a  life  interest  in  the  personalty, 
and  certain  stock  was  transferred  to 
her  and  she  transfers  to  one  of  the 
life  tenants  such  stock,  retaining  the 
right  to  the  dividends  during  her 
life,  and  upon  her  death  the  other  life 
tenants  claim  their  interest,  the  cor- 
poration may  interplead  as  between 
them,  even  though  it  issued  a  new 
certificate  in  the  name  of  such  life 
tenant,  but  retained  the  certificate 
itself.  Dickinson  v.  Griggsville  Nat. 
Bank,  209  111.  350  (1904).  Even 
though  the  corporation  allows  the  life 
tenant  to  sell  the  stock  outright,  yet 
if  the  remainderman  does  not  sue 
within  the  period  of  limitations,  after 
knowledge  of  the  facts,  the  corpora- 
tion is  not  liable.  Yeager  v.  Bank  of 
Kentuckv,  127  Ky.  751  (1908). 

2  Keeney  v.  Globe  MUl  Co.,  39 
Conn.  145  (1872).  See  also  Amiss  v. 
Williamson,  17  W.  Va.  673  (1881). 
Where  the  executor,  who  is  also  the 
life  tenant,  wrongfully  pledges  the 
stock,  his  executor  may  rightfully  use 
the  funds  of  the  estate  to  redeem  such 
stock.  In  re  Orne's  Estate,  192  Pa. 
St.  626  (1899). 

3  De  Gendre  v.  Kent,  L.  R.  4  Eq. 
283  (1867).  Cf.  Browne  v.  CoUins, 
L.  R.  12  Eq.  586,  594  (1871) ;  Lock  v. 
Venables,  27  Beav.  598  (1859).  See 
also  Cogswell  v.  Cogswell,  2  Edw.  Ch. 
231  (1834) ;  Abercrombie  v.  Riddle,  3 
Md.     Ch.    320     (1850);      Wright    .v. 


(104) 


1649 


§  560.] 


LIFE    ESTATES   AND   REMAINDERS   IN    STOCK.  [cH.  XXXIII- 


life  tenant  for  dividends  paid  cannot  be  enforced  against  the  remainder- 
man's interest.^     Where  a  hfe  interest  is  given  to  one  person  with  re- 
mainder over,  and  it  is  necessary  that  the  stock  be  sold  in  order  to  pre- 
serve the  estate,  a  decree  of  sale  is  valid  if  both  the  executor  and  life 
tenant  are  parties  to  such  suit.-     A  decree  of  a  South  Carolina  court 
allowing  the  transfer  of  stock  held  in  trust  in  a  South  Carolina  corpora- 
tion is  not  binding  on  the  remaindermen  if  they  were  not  parties  to  the 
proceedings.^     A  gift  of  stock  on  condition  that  the  dividends  should 
all  go  to  the  owner,  and  that  he  should  vote  it,  is  a  gift  of  a  remainder, 
with  a  life  interest  in  the  donor.^    A  tenant  for  life,  unless  restrained 
by  condition,  may  sell  his  interest.^     Where  stock  in  several  corporations 
is  put  in  trust  by  a  deed  acknowledged,  delivered  and  accepted  by  the 
trustees  in  New  York  where  the  grantor  resided,  the  trust  deed  is  gov- 
erned by  the  law  of  New  York,  without  reference  to  the  residence  of  the 
trustees  or  the  subsequent  residence  of  the  grantor.^    A  residuary  es- 
tate including  stock    may  be    divided    among  the  residuary  legatees 


Tuekett,  1  Johns.  &  H.  266  (1860); 
Furley  v.  Hyder,  42  L.  J.  (Ch.)  626 
(1873). 

1  Where  a  fixed  per  cent,  is  paid  an- 
nually to  stockholders  instead  of  div- 
idends and  charged  to  them,  and  the 
stock  held  in  pledge  for  the  same, 
such  a  payment  to  the  life  tenant 
does  not  create  a  valid  lien  on  the 
stock  as  against  the  remainderman. 
Reading  Trust  Co.  v.  Reading  Iron 
Works,  137  Pa.  St.  282  (1891). 

2  Drovers',  etc.  Bank  v.  Hughes,  83 
Md.  355  (1896). 

3  Putnam  v.  Lincoln,  etc.  Co.,  118 
N.  Y.  App.  Div.  469  (1907). 

4  Matter  of  Brandreth,  169  N.  Y. 
437  (1902).  A  gift  of  stock,  the  donee 
to  have  the  possession  and  management 
of  the  same,  but  the  donor  to  have 
the  income  during  his  life,  makes  the 
donee  trustee  until  the  death  of  the 
donor,  and  hence  such  gift  is  taxable 
under  the  New  York  statutes  as  a 
transfer  to  take  effect  on  his  death. 
Matter  of  Cornell,  170  N.  Y.  423 
(1902).  In  the  case  State  v.  Probate 
Court,  etc.  County,  102  Minn.  268 
(1907),  a  stockholder  transferred  title 
to  his  children  and  the  children  then 
leased  to  him  the  use  of  the  stock 
during  his  life  and  the  transaction  was 
upheld  by  the  court. 

^  Jackson  v.  Van  Hoesen,  4  Cowen, 
325  (1825) ;  Bailey  v.  Bailey,  97  N.  Y. 


460,   470   (1884).     An  estate  may  be 
rendered  inalienable  by  vesting  it  in 
trustees  or  by  creating  futm-e,  contin- 
gent,   or    expectant    estates,    so    that 
there  are  no  persons  in  being  during 
the  two  lives  who  can  convey  a  per- 
fect  title.     Murphy   v.   Whitney,    140 
N.  Y.  546  (1894) ;    Williams  v.  Mont- 
gomery,   148  N.   Y.   519    (1896).     An 
assignment  by  a  life  tenant  of  his  in- 
terest  in   stock   may   not    transfer   to 
the    assignee    profits    already    earned 
and  carried  as  a  surplus  account,  and 
hence  upon  dissolution  of  the  corpora- 
tion the  life   tenant  may  be  entitled 
to  such  surplus,   so  far  as   the  same 
was  accumulated  before  the  transfer. 
Tuttle  V.  First  Nat.  Bank,  44  N.  Y. 
Misc.    Rep.    318    (1904).     The    New 
York   statute   prohibiting   the   benefi- 
ciary from  transferring  his  interest  in 
a  trust  estate  which  has  been  created 
for   the   purpose   of   applying   the   in- 
come to  his  use  (L.  1897,  Ch.  417,  Sec. 
3)   does  not  apply   to  a   trust   estate 
created    and    carried    out    in   another 
state,   inasmuch  as   the  common  law 
is  presumed  to  govern  in  such  other 
state.     First    National    Bank    v.    Na- 
tional Broadway  Bank,  156  N.  Y.  459 
(1898). 

«  Mercer  v.  Buchanan,  132  Fed.  Rep. 
501  (1904).  Cf.  8.  c,  137  Fed.  Rep. 
1019. 


1650 


CH.  XXXIII.]  LIFE    ESTATES   AND   REMAINDERS   IN   STOCK.  [§  560. 

instead  of  being  sold.^     A  life  estate  in  the  shares  of  a  joint  stock  com- 
pany is  the  same  as  in  an  incorporated  company .^ 

iWiUiams  v.   Taylor,  81   Conn.  90         ^  Bigi^op   j,    Bishop,   81    Conn.   509 
(1908).  (1908). 


1651 


CHAPTER   XXXIV. 


TAXATION  OF  SHARES  OF  STOCK  AND  OF  CORPORATIONS. 


§  561.  The  different  methods  of  taxing 
corporate  interests. 

A.     TAXATION      OF     SHARES     OF     STOCK. 

562.  Relation     of     stockholders     to 

these  various  methods  of 
taxation. 

563.  Tax  on  shares  of  stock  as  dis- 

tinguished from  the  other 
methods. 

564.  Tax  by  a  state  or  municipality 

on  stockholders  residing  in 
the  state  creating  the  corpo- 
ration. 

565.  Tax  on  resident  stockholders  in 

a  non-resident  or  foreign 
corporation. 

566.  Tax  on  non-resident  stockhold- 

ers in  resident  or  domestic 
corporation  —  Mode  of  col- 
lecting. 

567.  Double  taxation. 

568.  Exemptions    from    taxation    as 

affecting  tax  on  shares  of 
stock. 


B.   TAXATION  OF  NATIONAL-BANK  STOCK. 


§569. 
570. 


571. 


General  rides. 

Place  in  which  shares  in 
national-bank  stock  may  be 
taxed. 

The  tax  must  not  be  greater 
than  that  imposed  on  other 
"moneyed  capital." 
572.  The  bank  may  bring  suit  to  re- 
strain illegal  tax  on  its 
stockholders. 


C.  OTHER  METHODS  OF  TAXING  COR- 
PORATIONS. 

572a.  General  principles. 

5726.  Exemptions  from  taxation. 

572c.  Taxation  of  foreign  corpora- 
tions. 

572d.  Taxation  must  not  interfere 
with    interstate    commerce. 

572e.  Inheritance  and  income  taxes. 


§  561.  The  different  methods  of  taxing  corporate  interests.  —  There 
seem  to  be  an  indefinite  number  of  methods  of  taxing  corporate  interests. 
These  are,  first,  a  tax  on  the  franchise ;  second,  on  the  capital  stock ; 
third,  on  the  real  estate  and  personal  property  of  the  corporation; 
fourth,  a  tax  on  the  shares  of  stock  in  the  hands  of  the  stockholders ;  ^ 
fifth,  a  tax  on  corporate  dividends ;  -  sixth,  a  tax  on  corporate  income  ^ 
or  profits;^  seventh,  a  tax  on  stock  transfers;^  eighth,  a  tax  on 
inheritances  of  stocks ;  ^  ninth,  a  tax  on  any  increase  of  the  capital 
stock ;  ^  tenth,  license  fees.^ 


1  2  Redfield,  Railw.  (3d  ed.),  p.  453  ; 
Ottawa  Glass  Co.  v.  McCaleb,  81  111. 
556  (1876);  Louisville,  etc.  R.  R.  v. 
State,  8  Heisk.  (Tenn.)  663,  795 
(1875). 

2  See  §  572a,  infra. 

3  See  §  572c,  infra. 

*  See  §  572c,  infra. 

*  See  §  572a,  infra. 


«  See  §  572c. 

'  The  legislature  may  increase  the 
fees  required  from  corporations  upon 
increasing  the  capital  stock,  even 
though  the  corporation  is  a  foreign 
corporation,  doing  business  in  the 
state.  Cudahy,  etc.  Co.  v.  Denton, 
79  Kan.  368  (1908). 

8  See  §§  572a  and  938,  infra. 


1652 


CH.  XXXIV.]  TAXATION   OF   STOCK   AND   CORPORATIONS.  [§  562. 

It  is  entirely  within  the  discretion  of  the  legislature  to  say  which  one 
of  these  ten  methods  of  taxation  shall  be  adopted,  where  the  matter 
is  not  regulated  by  the  state  constitution.  Not  only  this,  but  it  is 
also  within  the  discretion  of  the  legislature  to  levy  taxes  on  the  corpora- 
tion in  two  or  more  of  these  ways  —  to  levy  a  double  tax  on  the 
corporate  interests,  and  even  to  levy  a  treble  or  quadruple  or  even  a 
still  more  multiplex  tax  thereon. 

A.    TAXATION   OF   SHARES    OF   STOCK. 

§  562.  Relation  of  stockholders  to  these  various  methods  of  taxa- 
tion. —  The  stockholders  in  a  corporation  have  very  little  to  do  directly 
with  any  of  the  direct  modes  of  taxing  corporate  interests.  The 
tax  is  levied  directly  against  the  corporation,  and  is  paid  by  the  corporate 
oflficers  out  of  the  treasury  of  the  corporation.  If  the  tax  is  unauthorized 
or  illegal,  or  improperly  assessed,  or  is  based  on  too  high  a  valuation, 
it  is  ordinarily  the  duty  of  the  corporate  officers  to  rectify  or  oppose 
such  tax.  The  stockholders  have  nothing  to  do  with  the  ordinary  trans- 
action of  corporate  business,  of  which  this  forms  a  part.  Where,  how- 
ever, the  corporate  ofiicers  refuse,  upon  request  of  one  or  more  stock- 
holders, to  oppose  or  decline  to  pay  an  unauthorized  tax  levied  in  any 
one  of  the  direct  methods  mentioned  above,  the  stockholder  himself 
may  bring  a  suit  in  a  court  of  equity,  in  behalf  of  and  for  the  protection 
of  the  corporate  interests,  to  enjoin  the  payment  and  collection  of  such 
unauthorized  tax.^ 

1  Dodge  V.  Woolsey,  18  How.  331  tender  of  the  amount  of  tax  conceded 
(1855) ;  Barnes  v.  Kornegay,  62  Fed.  to  be  due.  Allegation  of  readiness 
Rep.  671  (1894) ;  State  Bank  v.  to  pay  is  insufficient.  Huntington  v. 
Knoop,  16  How.  369  (1853);  Wil-  Palmer,  8  Fed.  Rep.  449  (1881).  See 
mington  R.  R.  v.  Reid,  13  Wall,  also  Trask  v.  Maguire,  18  Wall.  391 
264  (1871);  Delaware  R.  R.  Tax,  (1873);  Wood  ?;.  Draper,  24  Barb.  187 
18  Wall.  206  (1873);  Greenwood  (1857);  London  v.  Wilmington,  78 
V.  Freight  Co.,  105  U.  S.  13  (1881);  N.  C.  190  (1878).  See  also  §  494,  supra. 
Paine  v.  Wright,  6  McLean,  395  The  case  State  v.  Flavell,  24  N.  J.  L. 
(1855);  8.  c,  18  Fed.  Cas.  1010;  370  (1854),  denies  this  right.  A 
Foote  V.  Linek,  5  McLean,  616  (1853) ;  stockholder's  injunction  against  a  tax 
8.  c,  9  Fed.  Cas.  366,  holding  also  that  on  corporate  property  fails  when  the 
the  corporation  is  a  necessary  party,  property  is  subsequently  sold  under 
and  that  if  the  complainant  is  a  non-  execution.  Secor  v.  Singleton,  35  Fed. 
resident  he  may  bring  the  suit  in  the  Rep.  376  (1888).  The  general  char- 
United  States  circuit  court ;  Daven-  acter  of  such  a  suit  as  this  comes 
port  V.  Dows,  18  Wall.  626  (1873),  under  the  principles  of  law  set  forth 
also  holding  that  the  corporation  is  a  in  ch.  XLV,  infra.  A  stockholder  may 
necessary  party  defendant ;  Bailey  v.  enjoin  the  corporation  from  obeying 
Atlantic,  etc.  R.  R.,  3  Dill.  22  (1874) ;  an  illegal  order  of  railroad  commis- 
s.  c,  2  Fed.  Cas.  365 ;  Parmley  v.  St.  sioners  of  a  state  requiring  shippers 
Louis,  etc.  R.  R.,  3  Dill.  13,  25  (1874) ;  to  pay  a  war  revenue  stamp  tax. 
s.  c,  18  Fed.  Cas.  1223,  1226.  But  Dinsmore  v.  Southern,  etc.  Co.,  92 
the    stockholder    must    allege    actual  Fed.   Rep.  714   (1899) ;    rev'd  on  an- 

1653 


§  563.] 


TAXATION    OF    STOCK   AND   CORPORATIONS. 


[CH.   XXXIV. 


§  563.  Tax  on  shares  of  stock  as  distinguished  from  the  other 
methods.  —  A  tax  on  shares  of  stock  is  clearly  different  from  a  tax 
upon  the  franchise,  the  corporate  property,  or  the  capital  stock.  Es- 
pecially is  it  important  to  distinguish  a  tax  on  shares  of  stock  from  a 
tax  on  the  capital  stock.^    The  latter  is  always  taxed  against  the  cor- 


other  point  in  102  Fed.  Rep.  794.  A 
suit  in  equity  lies  in  the  federal  court 
to  enjoin  the  collection  of  taxes  on 
stock  held  by  one  corporation  in  an- 
other on  the  ground  that  it  deprives 
the  stockholder  of  the  equal  protec- 
tion of  the  law,  where  the  statutes  of 
the  state  forbid  such  tax.  Louisville 
T.  Co.  V.  Stone,  107  Fed.  Rep.  305 
(1901).  A  stockholder  in  a  corpora- 
tion cannot  maintain  a  bill  to  enjoin 
the  payment  by  the  corporation  of  the 
tax  imposed  by  act  of  congress  upon 
such  corporation  for  doing  business 
in  Alaska.  Corbus  v.  Alaska,  etc.  Co., 
99  Fed.  Rep.  334  (1899);  aff'd,  187 
U.  S.  455  (1903).  A  stockholder  can- 
not enjoin  the  payment  of  an  alleged 
illegal  tax  on  its  income  imposed  by 
act  of  congress.  Straus  v.  Abrast 
Realty  Co.,  200  Fed.  Rep.  327  (1912). 
1  In  Porter  v.  Rockford,  etc.  R.  R., 
76  111.  561  (1875),  the  court  clearly 
recognized  this  distinction,  and  said : 
"The  legal  property  of  the  share- 
holder is  quite  distinct  from  that  of 
the  corporation,  although  the  shares 
of  stock  have  no  value  save  that 
which  they  derive  from  the  corporate 
property  and  franchise,  and  a  tax 
levied  upon  the  property  of  the  one 
is  not,  in  a  legal  sense,  levied  upon  the 
property  of  the  other."  See  also  Brad- 
ley V.  Bauder,  36  Ohio  St.  28  (1880). 
Cf.  Delaware  R.  R.  Tax,  18  WaU.  206, 
2.30  (1873) ;  Farrington  v.  Tennessee, 
95  U.  S.  679  (1877),  where  the  distinc- 
tion is  clearly  drawn;  Quincy  Bridge 
Co.  V.  Adams  County,  88  111.  615 
(1878).  In  North  Ward  Nat.  Bank  v. 
Newark,  39  N.  J.  L.  380  (1877) ;  rev'd 
on  another  point  in  40  N.  J.  L.  558, 
the  court  said :  !'The  moneyed  capital 
of  a  bank  is  an  entirely  different 
thing  from  its  capital  stock.  The 
former  is  the  property  of  the  corpora- 
tion. It  may  consist  of  cash  or  bills 
discounted,  or  be  in  part  invested  in 
real  estate  or  in  the  securities  of  fed- 


eral government.  In  whatever  form 
it  is  invested,  it  is  owned  by  the  bank 
as  a  corporate  entity  and  not  by  the 
stockholders.  The  stock  or  shares 
represent  the  interests  of  the  share- 
holders, which  entitle  them  to  partici- 
pate in  the  net  profits  of  the  bank  in 
the  employment  of  its  capital,  and  is 
a  distinct  and  independent  interest  or 
property  in  the  shareholders,  held  by 
them  like  other  property."  The  case 
Porter  v.  Rockford,  etc.  R.  R.,  76 
111.  561  (1875),  holds  also  that  a  tax 
on  the  "capital  stock"  means  the  prop- 
erty of  the  corporation  and  not  the 
aggregate  of  the  shares  of  stock.  .  See 
also  State  v.  Hamilton,  5  Ind.  310 
(18.54),  where  the  word  "stock"  was 
construed  to  mean  the  tangible  prop- 
erty of  the  corporation.  But  see  Trask 
V.  Maguire,  18  WaU.  391  (1873),  and 
§  8,  supra,  where  the  word  "stock" 
is  defined.  And  even  though  the 
value  of  the  capital  stock  is  esti- 
mated by  the  aggregate  value  of  the 
shares,  it  is  still  a  tax  on  the  capital 
stock.  New  Orleans,  etc.  R.  R.  v. 
Board  of  Assessors,  32  La.  Ann.  19 
(1880).  See  also  State  Bank  v.  Rich- 
mond, 79  Va.  113  (1884).  So  also 
where  the  franchise  is  valued  in  that 
manner  for  taxation.  Commonwealth 
V.  Hamilton  Mfg.  Co.,  94  Mass.  298 
(1866) ;  Att'y-Gen.  v.  Bay  State  Min. 
Co.,  99  Mass.  148  (1868).  Hamilton 
Co.  V.  Massachusetts,  6  Wall.  632 
(1867),  holds  that  a  tax  on  the  excess 
of  the  market  value  of  the  stock  over 
the  value  of  the  corporate  realty  and 
machinery  is  a  franchise  tax.  In 
Indiana  it  is  held  that  a  tax  on  the 
shares  of  stock  is  the  proper  mode 
of  taxation  unless  the  statute  provides 
otherwise.  Whitney  v.  Madison,  23 
Ind.  331  (1864).  Cf.  Wright  v.  Stelz, 
27  Ind.  338  (1866).  The  mere  fact 
that  the  corporation  is  compelled  to 
pay  the  tax  does  not  prevent  its  being 
considered  a  tax  on  the  shares.     Na- 


1654 


CH.  XXXIV.]  TAXATION   OF   STOCK  AND   CORPORATIONS.  [§  564. 

poration,  is  paid  by  the  corporation,  and  is  based  on  a  valuation  which 
does  not  necessarily  depend  on  the  value  of  the  shares  of  stock.  A  tax 
on  the  shares  of  stock  is  generally  levied  directly  against  the  stockholders 
themselves  at  their  place  of  residence,  is  based  on  the  market  value  of 
the  stock,  and  is  entirely  distinct  from  the  location,  interests,  property, 
or  taxes  of  the  corporation  itself.  There  are,  however,  some  instances 
of  taxation  herein  which  are  on  the  border-line  between  the  two.  Thus, 
a  statute  expressly  laying  a  tax  on  the  capital  stock,  but  requiring  the 
corporation  to  pay  that  tax  from  the  corporate  funds,  has  been  held  to 
be  a  tax,  not  on  the  shares  of  stock,  but  on  the  property.^  In  other 
jurisdictions  it  has  been  held  to  be  a  tax  on  the  shares  of  stock.  Taxes 
on  shares  of  stock  in  national  banks  are  frequently  so  levied  and  col- 
lected, and  are  held  to  be  upon  the  shares  of  stock  and  not  on  the  capital 
stock.-  A  tax  laid  on  shares  owned  by  non-residents  of  the  state  which 
creates  the  corporation  and  which  levies  the  tax  is  a  tax  on  the  shares 
of  stock  and  not  on  the  capital  stock,  even  though  the  corporation  is 
required  to  pay  it  and  to  collect  the  same  from  the  owners  of  those  shares. 
A  state  may  tax  the  shares  of  stock  of  a  corporation,  even  though  a  part 
of  its  assets  consist  of  United  States  bonds.^ 

§  564.  Tax  by  a  state  or  municipality  on  stockholders  residing  in 
the  state  creating  the  corporation.  —  The  right  of  the  state  to  tax 
resident  stockholders  of  a  resident  corporation  on  their  shares  of  stock 
is  undoubted,  and  has  been  unquestioned  except  where  double  taxa- 
tion would  result  therefrom  and  is  prohibited  ;  or  wl^ere  a  constitutional 
provision  restricts  this  mode  of  taxation.'*  Generally  such  a  tax  on 
resident  stockholders  is  levied  on  them,  not  in.  the  municipality  where 

tional  Bank  v.  Commonwealth,  9  Wall,  taxing  railroad  corporations,  resident 

353,  360  (1869),  per  Miller,  J.     Stock-  stockholders  in  domestic  corporations 

holders  are  liable  for  taxes  levied  on  are  not  taxed.     Porter  v.  Rockford,  etc. 

a    distillery  where    the  statute    levies  R.   R.,   76  111.   561    (1875).     In   Iowa 

the  tax  on  "persons  interested  in  the  stock  is  taxed  under  §  813  of  the  Code, 

use  of  the  distillery."     U.  S.  v.  Wol-  See  Cook  v.  Burlington,  59  Iowa,  251 

ters,  46  Fed.  Rep.  509  (1891).  (1882) ;  Henkle  v.  Keota,  68  Iowa,  334 

1  A  tax  of  one  per  cent,  on  capital  (1886).  Cf.  National  State  Bank  v. 
stock  was  held  in  the  case  Powers  v.  Young,  25  Iowa,  311  (1868).  In  Iowa, 
Detroit,  etc.  Ry.,  201  U.S.  543  (1906),  where  deductions  for  debts  are  al- 
to be  a  tax  upon  the  property  of  the  lowed  to  persons  taxed  on  their 
corporation  and  not  upon  the  shares  "credits,"  no  deduction  is  allowed 
of  stock.  In  a  tax  on  the  market  from  the  tax  on  shares  of  stock.  They 
value  of  stock  less  a  proportion  of  the  are  not  "credits."  Bridgman  v.  Keo- 
"capital"  invested  in  real  estate,  the  kuk,  72  Iowa,  42  (1887).  As  to  the 
word  "capital"  means  the  excess  of  valuation  of  the  shares  of  stock,  see 
assets  over  liabilities.  Appeal  of  St.  Charles,  etc.  R.  R.  v.  Assessors,  31 
Bulkeley,  77  Conn.  45  (1904).  La.  Ann.  852  (1879).     If  the  corpora- 

2  See  §  570,  infra.  tion  owns  shares  of  its  own  stock  it  is 

3  Cleveland  T.  Co.  v.  Lander,  184  taxable  the  same  as  though  owned  by 
U.  S.  Ill  (1902).  another.     Richmond,    etc.    R.    R.    v. 

*  in  Illinois,  under  the  act  of  1872    Alamance  Co.,  84  N.  C.  504  (1881). 

1655 


§  564. 


TAXATION    OF   STOCK  AND   CORPORATIONS. 


CH.   XXXIV. 


the  corporation  is,  but  in  the  cities,  counties,  or  towns  where  the  stock- 
holders respectively  reside.  This  is  always  the  rule  if  the  statute  is 
silent,  and  is  the  rule  unless  the  statute  expressly  provides  otherwise.^ 

Controversies  sometimes  arise  as  to  the  power  of  a  municipality 
to  tax  stockholders  living  in  the  state,  but  not  in  the  municipality 
which  levies  a  tax  on  their  shares  of  stock,  the  corporation  itself  being 
located  within  that  municipality.  The  law  plainly  is  that  such  a  tax 
is  unauthorized,  illegal,  and  not  collectible,  unless  the  municipahty  is 
authorized  by  statute  to  levy  the  tax.^  A  mere  general  authority  to  the 
municipality  to  tax  all  property  within  its  boundaries  will  authorize 
a  tax  by  it  of  shares  of  stock  owned  by  persons  living  within  it.^  But 
such  authority  does  not  sustain  a  tax  on  stockholders  residing  out  of  the 
municipality,  although  within  the  state.  The  location  of  such  shares 
of  stock,  as  property  for  purposes  of  taxation,  is  not  where  the  corpora- 
tion is  located,  but  where  the  stockholder  lives.*    The  statutes  of  the 


1  Evansville    v.    Hall,    14    Ind.    27    of  stock  only  when  authorized  so  to 


(1859).  A  pledgor  is  the  proper  per- 
son to  be  assessed  on  stock  which  has 
been  pledged.  Tucker  v.  Aiken,  7 
N.H.I  1.3  (1834).  A  pledgee  of  stock  is 
not  subject  to  a  tax  levied  on  the 
shares  of  stock  held  by  him.  Wal- 
tham  Bank  v.  Waltham,  51  Mass.  334 
(1845).  In  Massachusetts  shares  held 
by  executors  or  administrators  are 
taxed  in  the  town  of  which  the  de- 
ceased was  an  inhabitant  at  the  time 
of  his  death,  and  shares  held  by  trus- 
tees are  taxed  in  the  towns  in  which 
the  cestuis  que  trust  respectively  re- 
side. Revere  v.  Boston,  123  Mass.  375 
(1877).  As  to  the  legal  remedy  in 
Massachusetts  for  an  unjust  valuation 
of  stock  for  taxation,  see  Boston  .Mfg. 
Co.  V.  Commonwealth,  144  Mass.  598 
(1887).  As  to  taxation  of  stock 
under  the  Vermont  law,  see  Willard 
V.  Pike,  59  Vt.  202  (1887).  For  a  case 
relative  to  the  taxation  of  stock  in 
Illinois,  see  The  Hub  v.  Hanberg,  211 
111.  43  (1904).  A  Nebraska  stock- 
holder in  a  Nebraska  company,  not  an 
investment  company,  is  taxable  on 
his  stock.  Bressler  v.  County  of 
Wayne,  84  Neb.  774  (1909). 

2  A  city  has  no  inherent  power  to 
levy  a  tax  on  the  capital  stock  of  a 
corporation.  Macon  v.  Macon  Constr. 
Co.,  94  Ga.  201  (1894);  Stetson  v. 
Bangor,  56  Me.  274  (1868),  the  court 
saying  :   "Municipalities  can  tax  shares 


do  by  some  law  of  the  state.  They  are 
the  creatures  of  state  law,  and 
derive  their  powers  in  this  respect 
solely  from  state  enactments;"  Grif- 
fith V.  Watson,  19  Kan.  23  (1877); 
Evansville  v.  Hall,  14  Ind.  27  (1859) ; 
Conwell  V.  Connersville,  15  Ind.  150 
(1860).  Such  a  tax  may  be  levied 
under  a  general  power  of  the  munici- 
pality to  tax  property.  Gordon  v. 
Mayor,  etc.,  5  GiU  (Md.),  231  (1847). 
Cf.  Richmond  v.  Daniel,  14  Gratt. 
(Va.)  385  (1858) ;  Augusta  v.  National 
Bank,  37  Ga.  620  (1868).  Markoe 
V.  Hartranft,  6  Am.  L.  Reg.  (N.  S.)  487 
(1867),  holds  that  in  Pennsylvania 
such  a  tax  is  unconstitutional,  and 
that  a  tax  must  be  levied  where  the 
stockholder  resides.  See  also  Craft 
V.  Tuttle,  27  Ind.  332  (1866). 

3  But  a  municipality  can  levy  a  tax 
only  when  specially  authorized  so  to 
do,  and  can  tax  only  such  property  as 
the  statute  permits  it  to  tax.  Cooley, 
Taxation  (2d  ed.),  678.  Hence,  power 
to  a  municipality  to  levy  a  tax  for 
watchmen  purposes  will  not  authorize 
a  tax  on  shares  of  stock.  Bank  of 
Georgia  v.  Savannah,  Dudley  (Ga.), 
130  (1832).  Under  a  statute  authoriz- 
ing it,  a  city  may  levy  a  tax  on  stock 
in  a  local  bank,  even  though  some  of 
the  stockholders  are  non-residents. 
Union  Bank  v.  City,  94  Va.  316  (1897). 

*  See  §  566,  infra. 


1656 


CH.  XXXIV.]  TAXATION    OF   STOCK   AND   CORPORATIONS.  [§  565. 

state  may  change  this  situs  of  the  stock  so  as  to  render  it  taxable  where 
the  corporation  is,  but  unless  there  is  a  statute  to  that  effect,  such  a 
tax  by  a  municipality  is  unauthorized  and  void.  Where  a  corporation 
purchases  its  own  stock  such  stock  cannot  be  taxed. ^  The  purchaser 
of  the  equity  of  redemption  of  stock  which  has  been  pledged  is  the  owner 
thereof  and  may  be  taxed  thereon.^  In  taxing  state  bank  stock  the 
legislature  need  not  allow  deduction  on  account  of  the  capital  stock 
being  invested  in  state  bonds.^  A  statute  taxing  stockholders  may  be 
retroactive.^ 

§  565.  Tax  on  resident  stockholders  in  a  non-resident  or  foreign 
corporation.  —  It  is  undoubtedly  within  the  constitutional  power  of 
the  legislature  of  a  state  to  enact  a  statute  that  persons  residing  in 
that  state,  who  are  stockholders  in  a  corporation  created  by  another 
state,  shall  be  taxed  on  their  shares  of  stock  at  their  residence  within 
the  former  state. ^  This  principle  of  law  is  based  on  the  fact  that  shares 
of  stock  are  personal  property;  that  they  are  distinct  from  the  cor- 
porate property,  franchises,  and  capital  stock ;  ^  that  they  follow  the 
domicile  of  their  owner  like  other  personal  property,  and  that  conse- 
quently he  may  be  taxed  therefor  wherever  he  may  reside.  It  accord- 
ingly is  a  question  of  policy  and  expediency  with  a  state  whether  or 
not  it  will  tax  its  citizens  who  are  stockholders  in  foreign  corporations.^ 
A  few  of  the  states  levy  such  taxes. ^    A  state  may  tax  stock  held  by 

'  City  of  Worcester  v.  Board  of  Ap-  such    tax,    giving    the    corporation    a 

peal,  184  Mass.  460  (1904).  right    to    recover    against    the    stock- 

2  Central,  etc.  Co.  v.  Wright,  124  Ga.  holders    and    a    lien    on    the    stock. 

630  (1906).  Notice  of  such  a  tax  to  the  corpora- 

'  Pullen    V.    Corporation    Commis-  tion   in   accordance   with   the   statute 

sion,  152  N.  C.  548  (1910).  may  be  sufficient.     Such  a  tax  may  be 

*  Citizens',  etc.  Bank  v.  Kentucky,  levied    under    the    reserved    right    to 

217  U.  S.  443  (1910).  amend    the   charter.     Corry   v.   Balti- 

'  Worthington  v.  Sebastian,  25  Ohio  more,  196  U.  S.  466  (1905). 

St.   1    (1874) ;    Bradley  v.  Bauder,  36  «  Quoted  and  approved  in  Mayor, 

Ohio  St.  28   (1880),  holding  it  valid,  etc.  v.  Allegany,  etc.  Com'rs,  99  Md.  1 

although   the  corporation  is  taxed  in  (1904). 

the   state   where   it   exists.     To  same  '  Quoted  and  approved  in  Hart  v. 

effect,   Seward  v.  Rising  Sun,  79  Ind.  Smith,  159  Ind.  182  (1902). 

351    (1881);  Dyerr.  Osborne,  11  R.  I.  «  State  v.  Hannibal,  etc.  R.  R.,  37 

321    (1876) ;   McKeen    v.    Northamp-  Mo.  265  (1866) ;    Ogden  v.  St.  Joseph, 

ton  County,   49  Pa.   St.   519    (1865) ;  90  Mo.  522  (1887) ;    Sturges  v.  Carter, 

Dwight     V.     Boston,     94    Mass.     316  114  U.  S.  511  (1884),  upholding  such 

(1866) ;      Whitesell    v.    Northampton  a  tax  in  Ohio ;    Newark  City  Bank  v. 

County,  49  Pa.  St.  526  (1865) ;    Great  Assessor,   30  N.   J.   L.    1    (1862).     In 

Barrington  v.  County  Com'rs,  33  Mass.  Missouri  now  a  resident  stockholder  in 

572  (1835) ;  Worth  v.  Com'rs,  82  N.  C.  a  foreign  corporation  cannot  be  taxed 

420  (1880) ;   s.  c,  90  N.  C.  409  (1884).  thereon    if    such    corporation  has  no 

A  state  may  levy  a  tax  on  stock  in  property  in  the  state.     State  v.  Lesser, 

a  domestic  corporation  whether  owned  237  Mo.  310  (1911).     In  New  Jersey 

by  residents  or  non-residents  and  may  resident     stockholders     in     a     foreign 

compel   the  corporation  itself  to  pay  corporation  are  not  taxed  if  the  cor- 

1657 


§  565. 


TAXATION    OF   STOCK   AND   CORPORATIONS. 


[CH.   XXXIV. 


residents  in  foreign  corporations,  even  though  it  does  not  in  the  same 
wav  tax  stock  in  a  domestic  corporation.^     But  New  York  pursues 


poration  has  paid  taxes  in  its  own 
state  on  its  property.  Inhabitants, 
etc.  V.  Standard,  etc.  Co.,  77  N.  J.  L. 
757  (1909).  A  state  may  tax  stock  in 
a  foreign  railroad  corporation  held 
by  a  domestic  railroad  corporation. 
Wright  V.  Louisville,  etc.  R.  R.,  195 
U.  S.  219  (1904).  A  resident  holder 
of  stock  in  a  foreign  corporation  may 
be  taxed  thereon,  even  though  stock 
in  a  domestic  corporation  is  not  taxed. 
Weiss  V.  Stubblefield,  85  Kan.  199 
(1911).  A  resident  may  be  taxed  on 
stock  held  by  him  in  a  foreign  corpora- 
tion. Hawley  v.  City  of  Maiden,  204 
Mass.  138  (1910).  In  Minnesota  resi- 
dent holders  of  stock  in  foreign  cor- 
porations may  be  taxed  thereon,  even 
though  the  property  of  the  corpora- 
tion is  taxed  in  another  state,  and 
even  though  there  is  no  tax  on  stock 
of  a  domestic  corporation  where  the 
corporation  pavs  a  tax.  State  v. 
Nelson,  107  Minn.  319  (1909).  Stock 
is  property  and  hence  may  be  taxed 
under  the  Wisconsin  statutes.  State 
V.  Hinkel,  136  Wis.  66  (1908).  In 
Illinois,  also,  resident  stockholders 
in  foreign  corporations  are  taxed  on 
their  shares  of  stock.  Porter  v.  Rock- 
ford,  etc.  R.  R.,  76  111.  561  (1875). 
Under  the  Illinois  statute  a  resident 
of  the  state  is  subject  to  taxation  on 
stock  owned  by  him  in  a  Kansas  cor- 
poration, all  the  property  of  the  cor- 
poration being  in  Kansas.  In  re 
Greenleaf,  184  111.  226  (1900) ;  Cooley, 
Taxation  (2d  ed.),  57,  221;  Holton  v. 
Bangor,  23  Me.  264  (1843) ;  Smith  v. 
Exeter,  37  N.  H.  556  (1859).  A  stat- 
ute levying  a  tax  on  all  property 
authorizes  a  tax  on  stock  in  foreign 
and  domestic  corporations.  Hasely  v. 
Ensley,  40  Ind.  App.  598  (1907). 
In  Indiana  resident  owners  of  stock  in 
foreign  corporations  are  taxable  thereon. 
Cook  V.  Board  of  Com'rs,  175  Ind.  218 
(1910).  A  resident  owner  of  stock  in 
a  foreign  corporation  may  be  taxed 
thereon.  Darnell  v.  State,  174  Ind. 
143  (1910).     Stock  held  by  a  resident 


in  a  foreign  corporation  may  be  taxed, 
and    this    does   not   constitute    double 
taxation.     Judy  v.  Beckwith,  137  Iowa, 
24    (1908).     Stock    held    by    residents 
in  a  foreign  corporation  may  be  taxed. 
Morril  v.  Bentley,  126  N.  W.  Rep.  155 
(Iowa,  1910).     A  resident  stockholder 
in  a  foreign  corporation  may  be  taxed 
in  Iowa,  even  though  domestic  stock 
is    exempt.     Morril    v.    Bentley,     150 
Iowa,    677    (1911).     In    a    suit   by  a 
stockholder  of  record   to  set  aside  a 
tax   levied   on   him   as   the   owner   of 
such  stock  if  he  claims  that  he  is  merely 
the  nominal  owner  but  refuses  to  tell 
who  the  real  owner  is,  he  is  guilty  of 
contempt   of   court.     Witmer   v.    Dis- 
trict   Court,    136    N.    W.    Rep.    113 
(Iowa,   1912).     A    resident    holder  of 
stock  in  a  foreign  corporation  may  be 
taxed  in  Kentucky,  where  the  statute 
exempts     merely     those   stockholders 
whose    corporations    report    and    pay 
taxes  in  the  state.     Commonwealth  v. 
Lovell,  125  Ky.  491   (1907).     A  Ken- 
tucky   executor    of    an    Ohio    estate 
cannot  be  taxed  in  Kentucky  on  stock 
owned  by  the  estate  in  Ohio  corpora- 
tions.    Commonwealth  v.  Peebles,  134 
Ky.   121   (1909).     A  Kentucky  stock- 
holder in  a  New  York  telegraph  cor- 
poration   which    is    doing  business  in 
Kentucky    and    paying    taxes    cannot 
be   taxed  in   Kentucky  on  his  stock. 
Commonwealth    ;;.    Walsh's    Trustee, 
133     Ky.     103     (1909),     withdrawing 
decision  in  106  S.  W.  Rep.  240.     Cali- 
fornia  made  a  wise  resolution  when, 
in    1881,    it    repealed    §  3640    of    its 
political  code,  taxing  shares  of  stock, 
and     added     the     following     (§  3608) 
to    the    code:     "Shares    of    stock    in 
corporations  possess  no  intrinsic  value 
over  and   above   the  actual  value  of 
the  property  of  the  corporation  which 
they  stand  for  and  represent,  and  the 
assessment  and  taxation  of  such  shares 
and    also    of    the    corporate  property 
would     be     double     taxation.     There- 
fore   all    property    belonging     to    cor- 
porations shall  be  assessed  and  taxed ; 


1  Darnell  v.  Indiana,  226  U.  S.  390  (1912) ;   aff'g  174  Ind.  143. 

1658 


CH.   XXXIV. 


TAXATION   OF   STOCK   AND   CORPORATIONS. 


[§  565. 


the  more  broad  and  liberal  policy  that  shares  of  stock  should  not  be 
taxed  where  the  corporation  is  already  taxed;    that  the  state  which 


but  no  assessment  shall  be  made  of 
shares  of  stock,  nor  shall  any  holder 
thereof  be  taxed  therefor."  Sustained 
and  applied  in  Burke  t'.  Badlam, 
57  Cal.  594  (1884);  Spring  Valley 
Waterworks  v.  Schottler,  62  Cal. 
69,  118  (1882).  But  the  temptation 
to  tax  stockholders  in  non-resident 
corporations  was  yielded  to.  See  San 
Francisco  v.  Fry,  63  Cal.  470  (1883) ; 
San  Franeiso  v.  Flood,  64  Cal.  504 
(1884).  A  citizen  of  California  may 
be  taxed  on  mortgage  bonds  held 
by  him  in  an  Arizona  railroad  com- 
pany, payable  in  New  York.  Maekay 
V.  San  Francisco,  113  Cal.  392  (1896). 
Stocks  and  bonds  of  a  foreign  cor- 
poration owned  by  a  resident  of  Cali- 
fornia are  located  in  that  state  for 
taxation  purposes,  even  though  they 
are  pledged  for  a  loan  in  another 
state.  Stanford  v.  City,  etc.,  131  Cal. 
34  (1900).  Bonds  secured  by  a  mort- 
gage on  a  railroad  in  California  are 
not  taxable,  under  the  California  con- 
stitution, the  railroad  itself  being 
taxed  for  its  full  value.  Germania, 
etc.  Co.  V.  City,  etc.  of  San  Francisco, 
128  Cal.  589  (1900).  The  situs  of 
stock  for  the  purpose  of  taxation  may 
be  where  the  owner  of  the  stock  re- 
sides. Stanford  v.  City,  etc.,  131  Cal. 
34  (1900).  But  mortgage  bonds  of 
a  foreign  railroad  company  are  tax- 
able. In  re  Fair's  Estate,  128  Cal.  607 
(1900).  If  such  bonds  are  held  by  two 
trustees,  one  a  resident  and  the  other 
a  non-resident,  one  half  in  value  of 
the  bonds  will  be  taxed  in  the  state, 
even  though  all  the  bonds  are  outside 
of  the  state.  Maekay  v.  City,  etc.  of 
San  Francisco,  128  Cal.  678  (1900). 
See  also  Webb  v.  Burlington,  28  Vt. 
188  (1856) ;  Lycoming  County  v.  Gam- 
ble, 47  Pa.  St.  106  (1864).  Re  Short's 
Estate,  16  Pa.  St.  63  (1851),  where  a 
decedent  who  died  a  resident  of  Penn- 
sylvania left  a  fortune  in  stocks  of 
non-resident  corporations.  The  stocks 
were  held  subject  to  a  collateral  in- 
heritance tax.  In  1879  Pennsylvania 
adopted  in  large  part  the  system  of 
taxation  that  prevails  in  New  York 
for  the  taxation  of  corporations.     See 


Hunter's  Appeal,  10  Atl.  Rep.  429  (Pa. 
1887).  By  the  still  later  statute  of 
1885,  manufacturing  corporations  are 
specially  favored  in  the  way  of  tax- 
ation. MacKellar,  etc.  Co.  v.  Com- 
monwealth, 10  Atl.  Rep.  780  (Pa. 
1887).  In  ascertaining  the  value  of 
stock  for  purposes  of  ta.xation  the 
amount  paid  in  on  the  stock  may  be 
taken  as  the  value  if  there  have  been 
no  sales  of  the  stock,  and  if  there  is 
no  other  evidence  as  to  its  value. 
Commonwealth  v.  People,  etc.  Co.,  183 
Pa.  St.  405  (1898).  In  New  Jersey 
now  there  is  no  tax  on  shares  of  stock 
except  in  banks.  See  Newark  Banking 
Co.  V.  Newark,  121  U.  S.  163  (1887), 
and  in  that  state  shares  of  stock 
owned  by  residents  in  foreign  cor- 
porations are  not  taxable  if  a  tax  is 
paid  by  the  corporation  itself.  State 
V.  Ramsey,  54  N.  J.  L.  546  (1892).  In 
Texas  shares  of  stock  are  not  taxed 
where  the  capital  or  property  of  the 
corporation  is  taxed.  Gillespie  v.  Gas- 
ton, 67  Tex.  599  (1887).  As  to  Ohio, 
see  R.  S.  1886,  §§  2737,  2739,  2744, 
construed  in  Jones  v.  Davis,  35  Ohio  St. 
474  (1880).  In  Ohio  resident  stock- 
holders in  foreign  corporations  may 
be  taxed  on  their  stock.  Lee  v.  Sturges, 
46  Ohio,  153  (1889).  In  Ohio  stock  of 
both  foreign  and  domestic  corpora- 
tions is  taxed  unless  the  property  of 
the  corporation  is  taxed  in  its  name 
in  that  state.  Lander  v.  Burke,  65 
Ohio  St.  532  (1902).  A  trustee  of  an 
estate  consisting  of  stocks  in  foreign 
corporations  cannot  be  taxed  thereon 
in  Ohio,  even  though  he  resides  there, 
it  appearing  that  the  estate  itself  and 
the  beneficiaries  are  non-residents. 
Goodsite  v.  Lane,  139  Fed.  Rep.  593 
(1905).  See  also  Worth  v.  Ashe 
County,  90  N.  C.  409  (1884) ;  Seward 
V.  Rising  Sun,  79  Ind.  351  (1881).  As 
to  taxation  of  shares  of  stock  in  for- 
eign corporations  under  the  Michigan 
statutes,  see  Graham  v.  St.  Joseph,  67 
Mich.  652  (1888).  Under  the  Mich- 
igan statute  a  resident  stockholder  in 
a  foreign  corporation  is  taxable  on  his 
stock,  even  though  the  corporation 
owns  property  in  Michigan  and  such 


1659 


§  565.] 


TAXATION    OF   STOCK   AND    CORPORATIONS.  [cH.  XXXIV. 


furnishes  facilities  to  the  corporation  for  the  earning  of  dividends  should 
have  the  sole  benefit  of  taxes  on  such  corporate  interests ;  that  a  tax 
on  resident  stockholders  in  non-resident  corporations  would  generally 
result  in  a  double  taxation  of  stockholders  not  residing  in  the  state 
creating  the  corporation;  and  that  interstate  comity,  interests,  and 
financial  investments  are  promoted  best  by  taxing  corporations  directly, 
and  not  levying  a  tax  on  either  resident  stockholders  in  non-resident 
corporations  or  resident  stockholders  in  resident  corporations  where  the 
corporation  itself  is  subject  to  taxation.^    The  injustice  of  a  tax  on 


property  is  taxed  there,  it  appearing 
that  from  the  assessed  value  of  the 
stock  a  proportion  corresponding  to 
the  property  in  the  state  had  been  de- 
ducted. Thrall  v.  Guiney,  141  Mich. 
392  (1905).  Stock  held  by  residents 
in  foreign  corporations  may  be  taxed. 
Bacon  v.  Board,  etc.  Com'rs,  126  Mich. 
22  (1901).  Shares  of  stock  may  be 
taxed  although  the  corporation  is  also 
taxed.  The  corporation  may  be  com- 
pelled to  pay  the  tax  on  the  shares  of 
stock  by  deducting  it  from  dividends. 
South  Nashville  Street  R.  R.  v.  Mor- 
row, 87  Tenn.  406  (1889).  Under  the 
Connecticut  statutes,  shares  of  stock 
owned  by  residents  in  foreign  express 
companies  are  taxed,  even  though 
such  companies  are  not  incorporated. 
Lockwood  V.  Weston,  61  Conn.  211 
(1891).  In  Mayor,  etc.  of  Baltimore 
V.  Baltimore,  etc.  St.  Ry.,  57  Md.  31 
(1881),  it  was  held  that  stock  in 
street  railway  companies  in  Maryland 
may  be  taxed,  although  by  statute 
stock  in  steam  railroad  companies 
cannot  be.  Stock  of  a  foreign  cor- 
poration, held  by  residents,  may  be 
taxed,  although  stock  in  a  domestic 
corporation  is  not  taxed.  Georgia,  etc. 
Co.  V.  Wright,  124  Ga.  596  (1906). 
Even  though  a  Georgia  railroad  has 
pledged  to  a  New  York  trust  company 
stock  owned  by  the  former  in  an 
Alabama  railroad,  and  such  stock  is 
taxed  in  Alabama,  the  state  of  Georgia 
may  tax  such  stock,  it  being  shown  that 
the  Georgia  railroad  has  retained  the 
right  to  vote  the  stock  and  receive  the 
dividends,  and  has  merely  pledged  it. 
Central  of  Georgia  Ry.  v.  Wright,  166 
Fed.  Rep.  1.53  (1908).  Where  all 
the  property  of  a  corporation  is  taxed 
and    its   stockholders   are   also    taxed 


on  their  stock,  this  is  double  taxation, 
and  where  there  is  no  statute  specifi- 
cally requiring  the  taxation  of  stock, 
a  tax  need  not  be  made  on  the  stock 
of  domestic  corporations  which  already 
pay  a  tax,  even  though  a  similar  tax 
is  levied  upon  stock  of  foreign  corpo- 
rations. Georgia  R.  &  Banking  Co. 
V.  Wright,  125  Ga.  589  (1906).  In 
Virginia  shares  of  stock  in  domestic 
as  well  as  foreign  corporations  held  by 
residents  are  taxed.  Jennings  v.  Com- 
monwealth, 98  Va.  80  (1900).  Citi- 
zens of  Alabama  owning  stock  in 
foreign  corporations  may  be  taxed 
thereon  in  Alabama.  State  v.  Kidd, 
125  Ala.  413  (1900). 

1  The  statute  is  as  follows:  "The 
owner  or  holder  of  stock  in  an  in- 
corporated company  liable  to  taxation 
on  its  capital  shall  not  be  taxed 
as  an  indi^adual  for  such  stock." 
Con.  Laws,  Tax  Law,  §  16.  See  also 
People  V.  Com.  of  Taxes,  4  Hun,  595 
(1875);  aff'd,  62  N.  Y.  630,  holding 
that  residents  of  this  state,  owning 
shares  of  stock  in  a  corporation  cre- 
ated under  and  by  the  laws  of  this 
state  or  of  any  foreign  state,  are  not 
subject  to  be  personally  assessed  and 
taxed  thereon  under  the  laws  of  this 
state.  Also  People  v.  Com'rs,  5  Hun, 
200  (1875) ;  aff'd,  64  N.  Y.  541.  Re 
Enston's  Will,  113  N.  Y.  174  (1889). 
For  the  purpose,  however,  of  making 
the  taxation  of  moneyed  corporations 
correspond  to  taxation  of  stockholders 
in  national  banks,  and  for  the  purpose 
of  taxing  the  latter,  stockholders  in 
banks  incorporated  under  the  laws  of 
New  York  are  taxed  on  their  shares 
of  stock.  The  tax  generally  levied  on 
corporations  in  New  York  is  held  to 
be  a  tax  on  their  franchises.     See  Peo- 


1660 


CH.  XXXIV.]  TAX.\TION   OF   STOCK  AND   COKPORATIONS.  [§  566. 

resident  stockholders  in  foreign  corporations  is  at  once  apparent  when 
it  is  considered  that  the  state  creating  the  corporation  nearly  ahvays 
taxes  the  corporation  itself  or  all  its  stockliolders,  resident  and  non-resi- 
dent ;  and  that  if  stockholders  residing  elsewhere  are  taxed  again  where 
they  reside,  they  are  taxed  both  in  the  state  of  the  corporation,  directly 
or  indirectly,  and  also  directly  in  the  state  where  they  reside.  No 
reduction  need  be  allowed  in  the  latter  state  for  taxes  levied  upon  the 
corporation  in  another  state.^ 

§  566.  Tax  on  non-resident  stockholders  in  resident  or  domestic 
corporation  —Mode  of  collecting.  —  \Mien  it  is  determined  by  a  state 
that  it  prefers  to  levy  a  tax  on  shares  of  stock  rather  than  on  the  fran- 
chises, capital  stock,  or  tangible  property  of  the  corporation,  or  to  levy 
a  tax  on  both,  there  is  no  doubt  as  to  its  right  to  tax  the  stockholders 
residing  within  the  state.  But  more  difficulty  occurs  as  to  the  right  of 
the  state  to  tax  non-resident  stockholders  in  corporations  created  by 
the  state.  This  right  has  been  strenuously  denied  on  the  ground  that 
shares  of  stock  are  not  located  at  the  domicile  of  the  corporation,  but 
follow  the  domicile  of  the  stockliolder. 

It  is  the  well-established  rule,  however,  that  although  shares  of  stock 
have  at  common  law  a  situs  at  the  domicile  of  the  stockliolder,  yet  that 
a  statute  enacted  by  the  state  creating  the  corporation  may  give  to 
the  shares  of  stock  a  situs  at  the  location  of  the  corporation ;  that  such 
a  statute  may  thus  determine  the  situs  of  shares  of  non-resident  stock- 
holders without  changing  the  situs  of  shares  of  resident  stockholders; 
and  that  consequently,  under  a  statute  expressly  authorizing  such  a 
tax,  non-resident  stockholders  in  a  resident  corporation  may  be  taxed 
thereon  in  the  place  where  the  corporation  has  its  domicile.^      The 

pie  V.  Home  Ins.   Co.,  92  N.  Y.  328  ^  in  Ottawa  Glass  Co.  v.  McCaleb, 

(1883);    People  v.  McLean,  SO  N.  Y.  81  111.  556  (1876),  the  court  said  that 

254    (1880);     People   v.   Ferguson,   38  the    legislature    might    "require    the 

N.  Y.  89  (1868) ;    People  v.  Assessors,  taxes  to  be  paid  by  the  corporation, 

etc.,  76  N.  Y.  202  (1879).     See  People  and  collected  by  them  of   the  share- 

V.  New  York,  etc.  Co.,  92  N.  Y.  487  holder,  by  deducting  the  amount  from 

(1883);      People     v.     Davenport,     91  his  dividends  or  otherwise";  State  v. 

N.  Y.  574  (1883) ;    Nassau,  etc.  Co.  r.  Mayhew,    2    Gill    (Md.),    487    (1845), 

Brooklyn,  89  N.  Y.  409  (1882) ;    Os-  where  the  corporation  was  to  pay  the 

wego  Starch  Factory  v.  DoUoway,  21  tax  from   dividends   if   declared,    and 

N.  Y.  449  (1860) ;  People  v.  Com'rs,  95  from  profits  if  no  dividends  were  de- 

N.  Y.  554  (1884);   Valle  v.  Ziegler,  84  clared  ;  St.  Albans  t'.  National  Car  Co., 

Mo.  214  (1884) ;   People  v.  Bradley,  39  57   Vt.    68    (1884),    holding    that    the 

111.  130  (1866).     Cf.  Bank  of  Republic  statute  giving  shares  of  stock  a  situs 

V.  Hamilton  County,  21  111.  54  (1858).  at  the  location  of  the  corporation  may 

See  also  Smith  v.  Exeter,  37  N.  H.  556  be  passed  after  the  incorporation,  and 

(1859),    and    Jersey    City    Gas    Light  that    mandmnus    lifes    to    compel    the 

Co.  V.  Jersey  City,  46  N.  J.   L.   194  corporation  to  pay  the  tax.     In  Tap- 

(1884).  pan  v.  Merchants'  Nat.  Bank,  19  Wall. 

1  See  §§  566,  567,  infra.  490,  499  (1873),  the  court  said  :   "Per- 

1661 


§  566.] 


TAXATION    OF   STOCK  AND   CORPORATIONS. 


[cn.  XXXIV. 


method  of  enforcing  the  payment  of  this  tax  may  be  by  compeUing  the 
corporation  to  pay  it  and  giving  it  a  Hen  therefor  on  the  stock,  or  au- 


sonal  property,  in  the  absence  of  any 
law  to  the  contrary,  follows  the  per- 
son of  the  owner,  and  has  its  situs  at 
his  domicile.  But,  for  the  purpose  of 
taxation,  it  may  be  separated  from 
him,  and  he  may  be  taxed  on  its 
accoxmt  at  the  place  where  it  is 
actually  located."  See  also  Whitney 
V.  Ragsdale,  33  Ind.  107  (1870) ;  Tall- 
man  V.  Butler  County,  12  Iowa,  531 
(1861) ;  Faxton  v.  McCosh,  12  Iowa, 
527  (1861) ;  Mayor,  etc.  of  Baltimore 
V.  Baltimore,  etc.  Ry.,  57  Md.  31 
(1881).  In  Maryland  shares  of  stock 
held  by  non-residents  in  domestic  cor- 
porations are  taxed.  Corry  v.  Mayor, 
etc.,  96  Md.  310  (1903).  Cf.  Richmond 
V.  Daniel,  14  Gratt.  (Va.)  385  (1858) ; 
also  the  case  Oliver  v.  "Washington 
Mills,  93  Mass.  268  (1865),  which 
holds  such  a  tax  to  be  unconstitu- 
tional. The  eommon-law  rule  is  well 
expressed  in  Union  Bank  v.  State,  9 
Yerg.  (Tenn.)  490  (1836),  where  the 
court  said:  "The  power  to  tax  non- 
resident stockholders  is  denied,  and 
we  think  correctly ;  from  its  very  na- 
ture it  must  be  a  tax  in  personam  and 
not  in  rem.  Stock  is  in  the  nature 
of  a  chose  in  action  and  can  have  no 
locality ;  it  must,  therefore,  of  neces- 
sity follow  the  person  of  the  owner. 
.  .  .  Bank  stock  is  not  a  thing  in 
itself  capable  of  being  taxed  on 
account  of  its  locality,  and  any  tax 
imposed  upon  it  must  be  in  the  na- 
ture of  a  tax  upon  income,  and  of 
necessity  confined  to  the  person  of 
the  owner;  and  if  he  be  a  non-resi- 
dent, he  is  beyond  the  jurisdiction  of 
the  state  and  not  subject  to  her  laws." 
See  also  Minot  v.  Philadelphia,  etc. 
R.  R.,  18  Wall.  206  (1873) ;  Davenport 
V.  Miss.  etc.  R.  R.,  12  Iowa,  539 
(1861) ;  Howell  v.  Cassopolis,  35  Mich. 
471  (1877).  In  Bradley  v.  Bauder,  36 
Ohio  St.  28  (1880),  the  court  said: 
"That  shares  of  stock  may  be  sep- 
arated from  the  person  of  the  owner 
by  statute,  and  given  a  situs  of  their 
own,  was  held  in  Tappan  v.  Mer- 
chants' Nat.  Bank,  19  Wall.  490 
(1873).  But  when  not  so  separated, 
that  this  situs  follows  and  adheres  to 


the  domicile  of  the  owner,  is  supported 
by  a  great  weight  of  authority."  See 
State  Tax  on  Foreign-held  Bonds,  15 
Wall.  300  (1872).  See  also  Jenkins  v. 
Charleston,  5  S.  C.  393  (1874).  In 
National  Com.  Bank  v.  Mobile,  62  Ala. 
284  (1878),  the  com-t  well  said:  "It 
may  be  made  the  duty  of  a  bank  to 
pay  for  its  shareholders  the  tax  legally 
assessed  against  their  respective  shares, 
whether  the  stockholders  reside  in  the 
state  of  Alabama  or  not.  Contesta- 
tions upon  these  points  have  been 
made  time  and  again,  sometimes  by  the 
banks  and  sometimes  by  the  share- 
holders, to  avoid  this  liability.  But  it 
is  established  by  repeated  adjudica- 
tions, and  ought  to  be  considered 
definitely  settled."  And  in  First  Nat. 
Bank  v.  Smith,  65  111.  44  (1872), 
the  court  said:  "The  separation  of 
the  situs  of  personal  property  from 
the  domicile  of  the  owner  for  the 
pm-poses  of  taxation  is  familiar  doctrine 
of  the  coiu"ts  of  this  country,  and  has 
been  sanctioned  by  this  court  in  vari- 
ous cases.  .  .  .  The  act  of  con- 
gress itself  contemplates  a  severance 
of  the  situs  of  such  shares  from  the 
person  of  their  owner  by  provid- 
ing that  they  should  not  be  taxed  ex- 
cept in  the  state  where  the  bank  is 
established.  But,  apart  from  this,  it 
is  really  much  more  reasonable  to 
fix  the  situs  of  shares  at  the  place 
where  the  bank  is  located,  and  where 
it  must  continue  to  do  its  business 
or  wind  up  its  affairs,  than  to  sep- 
arate by  legislation  tangible  personal 
property  from  the  person  of  its  owner." 
In  St.  Louis  Nat.  Bank  v.  Papin,  4 
Dill.  29  (1876);  s.  c,  21  Fed.  Cas. 
203,  the  following  statute  was  sus- 
tained :  "The  taxes  assessed  on  shares 
of  stock  embraced  in  such  list  shall 
be  paid  by  the  corporations  respec- 
tively, and  they  may  recover  from 
the  owners  of  such  shares  the  amount 
so  paid  by  them,  or  deduct  the  same 
from  the  dividends  accruing  on  such 
shares :  and  the  amount  so  paid  shall 
be  a  lien  on  such  shares  respectively, 
and  shall  be  paid  before  a  transfer 
thereof  can  be  made."     And  again,  in 


1662 


CH.  XXXIV.J 


TAX.'S.TION   OF   STOCK   AND   CORPORATIONS. 


[§  566. 


thorizing  it  to  deduct  the  tax  from  the  non-resident  stockholders'  divi- 
dends;  or,  if  the  statute  is  silent  as. to  the  mode  of  collection,  a  tax 
warrant  or  an  attachment  and  execution  therefor  may  be  levied  on  the 
shares  of  stock. ^    Where  the  statute  provides  that  stock  shall  be  taxed 

American  Coal  Co.  v.  County  Com'rs,    enforced  against  the  corporation  un- 
,.  .,  .        .,       less  the  statute  specially  authorizes  it. 

First  Nat.  Bank  v.  Faneher,  48  N.  Y. 
524  (1872).  As  to  collection  by  execu- 
tion, see  Gordon  v.  Mayor,  etc.,  5  Gill 
(Md.),  231  (1847);  Weld  v.  Bangor, 
59  Me.  416  (1871).  But  a  levy  of  exe- 
cution on  stock  can  only  exist  when 
the  statute  allows  stock  to  be  so  taken. 
Barnes  v.  Hall,  55  Vt.  420  (1883).  See 
also  §  480,  supra.  A  state  may  pre- 
scribe that  resident  stockholders  shall 
pay  a  tax  where  they  reside,  and  that 
the  corporation  shall  pay  a  tax  based 
upon  the  value  of  the  shares  of  stock 
held  by  non-residents,  and  that  the 
corporation  shall  have  a  lien  on  the 
stock  of  such  stockholders  for  such 
tax  so  paid.  State  v.  Travelers'  Ins. 
Co.,  70  Conn.  590  (1898).  In  this  case 
the  Connecticut  statute  of  1897  im- 
posing a  tax  of  one  and  one  half  per 
cent,  on  the  value  of  stock  held  by 
non-resident  stockholders  in  resident 
corporations  was  upheld  and  applied. 
The  court  held  also  that  a  state  may 
tax  shares  of  stock  held  by  non-resi- 
dents in  domestic  corporations,  even 
though  the  corporations  pays  a  tax  on 
all  its  property.  It  also  held  that  al- 
though resident  stockholders  in  a 
domestic  corporation  are  allowed  a  de- 
duction of  $183  per  share  from  a  mar- 
ket value  of  $230  a  share  of  their 
holdings  of  stock,  leaving  the  taxable 
value  of  the  stock  $47,  a  similar  de- 
duction may  be  refused  to  non-resi- 
dent stockholders,  inasmuch  as  the 
statute  did  not  p^o^^de  for  such  de- 
duction for  the  latter,  and  'inasmuch 
as  there  was  no  proof  that  the  non- 
resident stockholders  were  citizens  of 
the  United  States.  As  to  levy  under  a 
tax  warrant,  see  McNeal  v.  Mechanics', 
etc.  Assoc,  40  N.  J.  Eq.  351  (1885). 
But  if  the  stockholder  pays  the  tax, 
even  under  protest,  he  cannot  re- 
cover back  the  money  paid.  Sowles  v. 
Soule,  59  Vt.  131  (1887).  In  the  ease 
State  V.  Thomas,  26  N.  J  L.  181 
(1857),  the   court   refused    to  compel 


59  Md.  185  (1882),  the  court  said: 
"The  state  may  give  the  shares  of 
stock  held  by  individual  stockholders 
a  special  or  particular  situs  for  pur- 
poses of  taxation,  and  may  provide 
special  modes  for  the  collection  of  the 
tax  levied  thereon."  But  where  the 
statute  merely  made  the  bank  the  agent 
to  pay  the  tax  and  to  deduct  it  from 
the  dividends,  the  bank  is  not  liable  if 
there  have  been  no  dividends.  Her- 
shire  v.  First  Nat.  Bank,  35  Iowa, 
272  (1872).  Non-resident  stockhold- 
ers in  Virginia  banks  are  taxed. 
Stockholders  v.  Supervisors,  88  Va. 
293  (1891).  Concerning  the  situs  of 
stock,  see  also  an  article  in  45  Alb.  L.  J. 
330. 

1  A  state  may  levy  a  tax  on  stock 
in  a  domestic  corporation  whether 
owned  by  residents  or  non-residents 
and  may  compel  the  corporation  itself 
to  pay  such  tax,  giving  the  corpora- 
tion a  right  to  recover  against  the 
stockholders  and  a  lien  on  the  stock. 
Notice  of  such  a  tax  to  the  corpora- 
tion in  accordance  with  the  statute 
may  be  sufficient.  Such  a  tax  may  be 
levied  under  the  reserved  right  to 
amend  the  charter.  Corry  v.  Balti- 
more, 196  U.  S.  466  (1905).  The  situs 
of  stock  held  by  non-residents  is  at 
the  domicile  of  such  non-residents, 
unless  the  statute  requires  the  cor- 
poration to  report  the  stock  as  the 
agent  of  the  owners.  Covington  v. 
First  Nat.  Bank,  189  U.  S.  100  (1905). 
In  Farrington  i'.  Tennessee,  95  U.  S. 
679,  687  (1877),  the  court  said:  "The 
bank  may  be  required  to  pay  the  tax 
out  of  its  corporate  funds  or  be 
authorized  to  deduct  the  amount  paid 
for  each  stockholder  out  of  his  divi- 
dend." And,  in  general,  under  the  act 
of  Congress  allowing  taxation  of  shares 
of  stock  in  national  banks,  a  situs  is 
given  by  statute  to  the  shares  so  as  to 
locate  them  where  the  bank  is  located, 
even  though  the  stockholders  be  non- 
resident.    But    collections   cannot    be 


1663 


566.1 


TAXATION    OF   STOCK   AND   CORPORATIONS. 


CH.  XXXIV. 


and  that  the  corporation  shall  pay  the  tax  and  have  a  lien  therefor  on 
the  stock,  the  stockholder  is  not  personally  liable  to  the  corporation 
which  has  paid  such  tax.^  Even  though  a  statute  states  that  stock 
in  banks  shall  be  listed  by  the  banks  and  the  tax  paid  by  the  banks 
with  a  right  to  recover  from  its  stockholders,  yet  this  does  not  authorize 
the  assessment  of  the  stock  to  the  bank.^  The  Connecticut  statute 
authorizing  the  taxation  of  stock  held  by  non-residents  in  resident  cor- 
poration is  constitutional,  even  though  a  deduction  for  real  estate  held 
by  the  corporation  is  allowed  the  resident  stockholders,  but  not  to  non- 
resident stockholders.^  In  New  York,  where  neither  resident  nor  non- 
resident stockholders  in  either  foreign  or  domestic  corporations,  except- 


the  corporation  to  pay  the  tax  on 
stock  of  non-residents,  and  said:  "It 
has  been  decided  by  this  court  that 
the  bonds  and  stocks  of  corporations 
in  this  state  held  by  non-residents  are 
not  liable  to  taxation,  though  they  are 
clearly  within  the  letter  of  the  act." 
A  tax  on  stock  may  be  assessed  against- 
the  corporation  which  is  then  given  a 
lien  on  the  stock  for  repayment.  Court 
of  Commissioners  v.  State,  172  Ala. 
242  (1911).  A  corporation  cannot  be 
taxed  on  the  stock  owned  by  the  stock- 
holders unless  the  statute  so  provides. 
Butte,  etc.  Co.  v.  Sheehan,  44  Mont. 
371  (1911).  A  state  may  collect  a 
non-resident  stockholder's  tax  from 
the  corporation  and  give  it  a  lien 
therefor  on  his  stock.  North  Ward 
Nat.  Bank  v.  Newark,  39  N.  J.  L. 
380  (1877) ;  rev'd  on  another  point 
in  40  N.  J.  L.  5.58 ;  but  see  Raleigh, 
etc.  R.  R.  V.  Wake  County  Com'rs, 
87  N.  C.  414  (1882).  A  tax 
collector  cannot  levy  on  and  sell 
stock  under  the  law  relative  to  at- 
tachments. Kennedy  v.  Mary  Lee,  etc. 
Ry.,  93  Ala.  494  (1891).  The  statute 
may  provide  for  the  sale  of  stock  at 
the  place  where  the  corporation  ex- 
ists, in  case  the  taxes  upon  such 
stock  are  not  paid.  A  purchaser  of 
the  outstanding  certificates  after  the 
assessment  has  been  made  takes  sub- 
ject to  the  tax  and  tax  seizure.  Par- 
ker V.  Sun  Ins.  Co.,  42  La.  Ann.  1172 
(1890).  It  is  clear,  where  shares  of 
stock  are  sold  under  a  tax  warrant, 
that  the  corporation  is  not  obliged  to 
oppose  the  sale.  McNeal  v.  Mechanics' 
Building,  etc.  Assoc,  40  N.  J.  Eq.  351 
(1885).     Where  by  statute  taxes  levied 


on  stock  are  to  be  paid  by  the  cor- 
poration, such  taxes  must  be  paid  by 
the  corporation  although  it  becomes 
insolvent.  Boston,  etc.  Co.  v.  Mercan- 
tile, etc.  Co.,  82  Md.  535  (1896). 
Cooley,  Taxation  (2d  ed.),  433,  clearly 
upholds  the  rule  that  the  state  may 
levy  a  tax  on  shares  of  stock  and  com- 
pel the  corporation  to  pay  it,  citing 
Maltby  v.  Reading  R.  R.,  52  Pa.  St. 
140  (1866) ;  Haight  v.  Railroad  Co., 
6  Wall.  15  (1867) ;  National  Bank  v. 
Commonwealth,  9  Wall.  353  (1869); 
U.  S.  V.  Raih-oad  Co.,  17  Wall.  ,322 
(1872);  Minot  v.  Raih-oad  Co.,  18 
Wall.  206  (1873) ;  Ottawa,  etc,  v.  Mc- 
Caleb,  81  111.  556  (1876);  New  Or- 
leans V.  Saving,  etc.  Co.,  31  La.  Ann. 
826  (1879) ;  Baltimore  v.  City  Pas- 
senger R.  R.,  ,57  Md.  31  (1881) ;  St. 
Albans  v.  National  Car  Co.,  57  Vt.  68 
(1884) ;  American  Coal  Co.  v.  Allegany 
County,  ,59  Md.  185  (1882) ;  Barney  v. 
State,  42  Md.  480  (1875) ;  McVeagh 
V.  Chicago,  49  111.  318  (1868);  First 
Nat.  Bank  v.  Fancher,  48  N.  Y.  524 
(1872) ;  Lionberger  v.  Rowse,  43  Mo. 
67  (1868) ;  Relfe  v.  Life  Ins.  Co.,  11 
Mo.  App.  374  (1882). 

1  Mercantile,  etc.  Co.  v.  Mellon,  196 
Pa.  St.  176  (1900). 

2  State  V.  Merchants'  Bank,  160  Mo. 
640  (1901).  A  statute  taxing  prop- 
erty in  the  hands  of  a  bailee  does  not 
make  a  corporation  liable  for  the  tax 
upon  shares  of  stock,  inasmuch  as 
the  corporation  is  not  a  bailee  of  such 
stock.  Commonwealth  v.  Chesapeake, 
etc.  Ry.,  116  Ky.  951  (1903). 

3  Travellers',  etc.  Co.  v.  Connecticut, 
185  U.  S.  364  (1902). 


1664 


CH.   XXXIV.] 


TAXATION    OF   STOCK   AND   CORPORATIONS. 


[§  567. 


ing  banking  corporations,  are  taxed  on  their  shares  of  stock,  these 
interstate  comphcations,  hardships,  and  jealousies  do  not  arise.  Trover 
and  case  He  against  a  tax  collector  for  selling  stock  for  an  illegal  tax.^ 
Where  a  New  Jersey  holding  company  owns  all  the  stock  of  a  Kentucky 
railway  company  and  nothing  else,  the  New  Jersey  stock  is  not  taxable 
in  Kentucky,  inasmuch  as  all  the  property  of  the  railway  is  taxed,  which 
under  the  Kentucky  statutes  exempts  the  stock.' 

§  567.  Double  taxation.  —  The  most  objectionable  feature  of  a  tax 
levied  on  shares  of  stock  is  that  almost  inevitably  it  operates  to  impose 
a  double  tax  on  a  part  or  all  of  the  stockholders.^  Such  a  double  tax 
exists  where  either  the  corporate  realty  or  personalty  or  franchise  or 
capital  is  taxed,  and  a  tax  is  also  levied  on  the  shares  of  stock  without 
any  deduction  for  the  former  taxation.^  There  has  been  some  contro- 
versy as  to  the  right  of  a  state  to  levy  a  double  tax  on  property.  Some- 
times the  state  constitution  prohibits  such  taxation.^     Thus,  in  Michi- 


iSprague  v.  Fletcher,  69  Vt.  69 
(1896). 

-  Commonwealth  v.  Ledman,  127 
Ky.  603  (1907). 

3  In  Ohio  such  double  taxation  is 
advocated  and  recommended.  In 
Frazer  v.  Siebern,  16  Ohio  St,  614 
(1866),  the  court  said  that  an  equi- 
table system  of  taxation  "is  best 
attained  in  ease  of  a  corporation  or 
joint-stock  company  by  taxing  the 
stockholders,  the  persons  who  own 
the  property,  upon  the  full  value  of 
their  shares  therein,  including,  of 
course,  their  interest  in  the  franchise 
or  privilege,  and  in  all  tangible  prop- 
erty owned  by  the  company ;  and  by 
taxing  the  corporation  also  upon  the 
value  of  such  tangible  property.  The 
stockholder  is  thus  taxed,  as  all  other 
individuals  who  own  tangible  and  in- 
tangible property  are  sometimes  un- 
avoidably taxed,  once  upon  all  he  is 
worth,  and  a  second  time  upon  that 
part  of  his  property  which  is  tangi- 
ble." 

*  This  is  practically  the  result.  In 
the  case  Farrington  v.  Tennessee, 
95  U.  S.  679,  687  (1877),  however,  the 
court  said  in  a  dictum:  "The  capital 
stock  and  the  shares  may  both  be 
taxed,  and  it  is  not  double  taxa- 
tion." See  also  New  Orleans  v.  Hous- 
ton, 119  U.  S.  265,  277  (1886).  Cf. 
Ryan  v.  Com'rs,  30  Kan.  185  (1883). 
A  tax  on  the  tangible  property  and 


on  the  capital  stock  is  not  double 
taxation.  Second  Ward  Sav.  Bank  v. 
Milwaukee,  94  Wis.  587  (1896).  A  tax 
on  the  corporate  property  and  also  on 
the  stockholders  for  their  stock  is  not 
double  the  taxation,  inasmuch  as 
these  are  distinct  values  belonging  to 
different  persons.  Wilkens  Co.  v. 
Mayor,  etc.,  103  Md.  293  (1906).  It  is 
not  double  taxation  to  tax  the  stock- 
holder on  his  stock  and  also  the  cor- 
poration upon  its  capital.  Common- 
wealth V.  Walsh's  Trustee,  133  Ky. 
103  (1909).  Even  though  a  Georgia 
railroad  has  pledged  to  a  New  York 
trust  company  stock  owned  by  the 
former  in  an  Alabama  railroad,  and 
such  stock  is  taxed  in  Alabama,  the 
state  of  Georgia  may  tax  such  stock, 
it  being  shown  that  the  Georgia  rail- 
road has  retained  the  right  to  vote  the 
stock  and  receive  the  dividends,  and 
has  merely  pledged  it.  Central  of 
Georgia  Ry.  v.  Wright,  166  Fed.  Rep. 
1,53  (1908). 

^  County  Com'rs  v.  Farmers'  Nat. 
Bank,  48  Md.  117  (1877),  the  consti- 
tution saying  that  each  person  shall 
pay  a  tax  "according  to  his  actual 
worth  in  real  or  personal  property." 
See  also  San  Francisco  v.  Mackey,  21 
Fed.  Rep.  539  (1884) ;  Burke  v.  Bad- 
lam,  57  Cal.  594  (1881),  relative  to 
the  California  constitution,  art.  XII, 
§  1,  that  "all  property  shall  be  taxed 
in  proportion  to  its  value."     In  Cali- 


(105) 


1665 


§567. 


TAXATION    OF   STOCK  AND   CORPORATIONS. 


[cH.  XXXIV. 


gan  it  is  held  that  the  constitutional  requirement  of  uniform  taxation 
prevents  a  tax  being  levied  on  stock  held  by  residents  in  a  foreign  cor- 
poration where  the  property  of  the  corporation  is  situated  in  that  state 
and  is  taxed  by  it.  Such  taxation  is  double  taxation.^  But,  aside  from 
constitutional  restrictions,  it  unquestionably  is  within  the  power  of  the 
state  to  levy,  not  only  a  double  tax,  but  even  a  treble  or  quadruple 
tax,  if  it  so  chooses.^  The  injustice  of  such  taxation,  however,  generally 
prevents  its  occurrence.  The  courts  also  do  their  utmost  to  prevent 
double  taxation,  and  will  construe  a  taxation  statute  so  as  to  avoid 


fornia  shares  of  stock  in  domestic 
corporations  are  taxed  at  their  full 
value  less  the  value  of  the  corporate 
property  taxed  in  the  state,  and  as  to 
property  outside  of  the  state,  the  tax 
is  not  double  taxation.  Cheese- 
borough  V.  City,  etc.,  153  Cal.  559 
(1908).  The  taxation  of  the  capital 
stock  and  corporate  property  and  also 
of  shares  of  stock  is  double  taxation  in 
violation  of  the  Arkansas  constitution. 
Dallas  County  v.  Home,  etc.  Co.,  97 
Ark.  254  (1911). 

1  Stroh  V.  City  of  Detroit,  131  Mich. 
109  (1902).  Under  the  Missouri  con- 
stitution providing  for  uniformity  of 
taxation,  stock  in  a  corporation  that 
has  already  paid  a  tax  on  its  property 
cannot  be  taxed  as  against  an  insur- 
ance company  or  bank  owning  such 
stock.  State  v.  Brinkop,  238  Mo.  298 
(1911). 

2  Salem  Iron,  etc.  Co.  v.  Danvers,  10 
Mass.  514  (1813),  where  corporate 
realty  was  taxed  although  the  shares 
of  stock  were  also  taxed.  See  also 
Belo  V.  Forsyth  Com'rs,  82  N.  C.  415 
(1880).  The  legislature  may  tax  stock, 
even  though  its  property  is  also  taxed, 
thereby  resulting  in  double  taxation. 
Hasely  v.  Ensley,  40  Ind.  App.  598 
(1907).  In  the  remarkable  case  Toll 
Bridge  Co.  v.  Osborn,  35  Conn.  7 
(1868),  it  seems  that  the  realty,  capital 
stock,  and  shares  of  stock  of  a  corpora- 
tion were  taxed,  and  that  the  chief 
stockholder,  a  railroad,  was  taxed  on 
its  capital  stock  and  shares  of  stock, 
making  four  or  five  taxations  of  the 
same  property.  Evidently  corpora- 
tions were  not  popular  in  Connecticut 
in  1868,  except  for  taxation  purposes. 
Cf.  Jones,  etc.  Co.  v.  Commonwealth, 
69  Pa.  St.  137  (1871).     See  also  Cook 


t'.  Burlington,  59  Iowa,  251  (1882); 
State  V.  Branin,  23  N.  J.  L.  484  (18-52) ; 
State  V.  Bentley,  23N.  J.L.  532  (1852)  ; 
Memphis  v.  Ensley,  6  Baxt.  (Tenn.) 
553  (1873);  Providence,  etc.  R.  R. 
V.  Wright,  2  R.  I.  459,  464  (1853), 
holding  that  a  tax  on  the  stock  does 
not  raise  a  presumption  that  a  muni- 
cipality is  thereby  prevented  from 
taxing  the  corporate  realty.  See  also 
Hannibal,  etc.  R.  R.  v.  Shacklett,  30 
Mo.  550,  560  (1860).  Although  by 
the  charter  a  tax  is  levied  on  the 
capital  stock,  a  tax  may  also  be 
levied  on  the  shares  of  stock.  Memphis 
V.  Home  Ins.  Co.,  91  Tenn.  558  (1892). 
A  tax  on  the  bonds  which  are  issued 
by  a  corporation  does  not  constitute 
double  taxation  although  there  is  also 
a  tax  on  the  franchises  of  the  corpora- 
tion. Commonwealth  v.  New  York, 
etc.  R.  R.,  150  Pa.  St.  234  (1892). 
Where  the  stock  is  not  taxable  if  the 
tangible  property  is  taxed,  the  stock 
may  nevertheless  be  taxed  for  such 
part  of  its  value  as  the  capital  stock 
exceeds  in  value  the  tangible  property. 
Hyland  v.  Central  Iron,  etc.  Co.,  129 
Ind.  68  (1891).  A  tax  may  be  levied 
on  the  capital  stock  even  though 
the  shares  of  stock  are  also  taxed. 
Durham  County  v.  Blaekwell,  etc.  Co., 
116  N.  C.  441  (1895).  The  franchise 
may  be  taxed  although  the  shares  of 
stock  are  also  taxed,  the  latter  tax 
being  collected  also  from  the  corpora- 
tion. U.  S.  Electric,  etc.  Co.  v.  State, 
79  Md.  63  (1894).  A  national  bank 
may  be  taxed  on  stock  owned  by  it  in 
other  corporations,  even  though  such 
latter  corporations  also  pay  a  tax. 
Pacific  Nat.  Bank,  etc.  v.  Pierce  County, 
20  Wash.  675  (1899). 


1666 


CH.   XXXIV.] 


TAX.\TION   OF   STOCK  AND   CORPORATIONS. 


[§  567. 


such  a  result,  and  sometimes  even  in  opposition  to  the  plain  words  of 
the  statute  itself.^     Nevertheless,  even  though  an  owner  of  real  estate 


1  Thus,  in  Illinois,  in  cases  where 
the  capital  stock  is  taxed  by  the 
state,  the  shares  of  stock  are  held  to 
be  free  from  taxation.  Republic  Life 
Ins.  Co.  V.  Pollak,  75  111.  292  (1874). 
See  also  Lackawanna  County  v.  First 
Nat.  Bank,  94  Pa.  St.  221  (1880), 
holding  that  under  the  act  of  March 
31,  1870,  releasing  corporations  from 
all  other  taxes  if  they  pay  one  per 
cent,  tax  on  the  par  value  of  the 
stock,  the  corporate  realty  cannot  be 
taxed  after  such  one  per  cent,  has 
been  paid ;  State  v.  Hannibal  &  St. 
J.  R.  R.,  37  Mo.  265  (1866) ;  Jersey 
City,  etc.  Co.  v.  Jersey  City,  46  N.  J.  L. 
194  (1884);  Cheshire,  etc.  Teleph. 
Co.  V.  State,  63  N.  H.  167  (1884); 
VaUe  V.  Zeigler,  84  Mo.  214  (1884); 
Tax  Cases,  12  G.  &.  J.  (Md.)  117 
(1841);  Provident  Inst.  v.  Gardiner,  4 
R.  I.  484  (1857) ;  Mechanics'  Bank  v. 
Thomas,  26  N.  J.  L.  181  (1857); 
American  Bank  v.  Mumford,  26  N.  J.  L. 
478  (1857) ;  State  v.  Tunis,  23  N.  J.  L. 
546  (1852);  Smith  v.  Burley,  9 
N.  H.  423  (1838) ;  Frazer  v.  Siebern, 
16  Ohio  St.  614  (1866) ;  Savings  Bank 
V.  Nashua,  46  N.  H.  389  (1866),  the 
coxirt  saying:  "It  is  a  fundamental 
principle  in  taxation  that  the  same 
property  shall  not  be  subject  to  a 
double  tax,  payable  by  the  same 
party,  either  directly  or  indirectly ; 
and  where  it  is  once  decided  that  any 
kind  or  class  of  propertj^  is  liable  to 
be  taxed  under  one  provision  of  the 
statutes,  it  has  been  held  to  follow  as 
a  legal  conclusion  that  the  legislature 
could  not  have  intended  the  same 
property  would  be  subject  to  another 
tax,  though  there  may  be  general 
errors  in  the  law  which  would  seem 
to  imply  that  it  was  to  be  taxed  a 
second  time."  In  Michigan,  where 
shares  of  stock  in  savings  banks  are 
taxed,  a  reduction  being  allowed  for 
realty,  which  is  taxed  separately,  the 
courts  held  that  no  other  tax  can 
be  levied  against  the  corporation. 
Lenawee,  etc.  Bank  v.  Adrian,  66 
Mich.  273  (1887).  The  Kentucky  tax 
statutes  are  so  construed  that  a  cor- 


poration need  not  pay  a  tax  on  its 
property  in  addition  to  the  tax  on 
the  stock.  Louisville,  etc.  Co.  v.  Bar- 
bour, 88  Ky.  73  (1888);  Common- 
wealth V.  St.  Bernard  Coal  Co.,  9 
S.  W.  Rep.  709  (Ky.  1888).  The  Penn- 
sylvania acts  are  construed  so  as  to 
prevent  double  taxation.  Pennsyl- 
vania Co.  etc.  V.  Commonwealth,  15 
Atl.  Rep.  4.56  (Pa.  1888).  Where  a 
coal  company  owns  all  the  stock  of  a 
railroad  company,  and  taxes  have 
been  paid  by  the  railroad  on  the  ap- 
praised value  of  its  capital  stock,  the 
coal  company  cannot  be  taxed  on  such 
stock  again.  Double  taxation  is  legal, 
but  will  not  be  imposed  unless  the 
statute  clearly  requires  it.  Common- 
wealth V.  Fall  Brook  Coal  Co.,  156  Pa. 
St.  488  (1893).  A  Georgia  stockholder 
in  an  Alabama  corporation  may  be 
taxed  thereon  in  Georgia  on  such 
stock,  even  though  it  amounts  to 
double  taxation.  Wright  t'.  Louisville 
R.  R.,  195  U.  S.  219  (1904).  Where 
all  the  property  of  the  corporation  is 
taxed  and  then  a  tax  is  levied  on  the 
capital  stock,  this  amounts  to  a 
double  taxation  and  will  not  be  upheld 
unless  the  statute  clearly  authorizes 
such  double  taxation.  Lewiston,  etc. 
Co.  V.  Asotin  County,  24  Wash.  371 
(1901).  Where  all  the  property  of  a 
corporation  is  taxed  and  its  stock- 
holders are  also  taxed  on  their  stock, 
this  is  double  taxation,  and  where 
there  is  no  statute  specifically  requir- 
ing the  taxation  of  stock,  a  tax  need 
not  be  made  on  stock  of  domestic  cor- 
porations which  already  pay  a  tax, 
even  though  a  similar  tax  is  levied 
upon  stock  of  foreign  corporations. 
Georgia  R.  &  Banking  Co.  v.  Wright, 
125  Ga.  589  (1906).  Even  though  a 
statute  imposes  a  tax  on  the  real  es- 
tate of  a  corporation,  notwithstanding 
its  shares  of  stock  are  also  taxed,  yet 
if  the  corporation  owns  stock  in  still 
another  corporation  it  will  not  be  re- 
quired to  pay  a  tax  on  the  latter  stock. 
Inhabitants,  etc.  v.  Livermore,  etc. 
Co.,  103  Me.  418  (1907). 


1667 


§  568.]  TAXATION   OF   STOCK    AND    CORPORATIONS.  [cH.  XXXIV. 

has  transferred  it  to  a  corporation  for  convenience  only  and  he  owns  all 
the  stock  and  the  company  merely  holds  the  title  and  has  no  employees 
or  officers,  and  pays  no  wages,  and  neither  expends  nor  receives  money, 
and  is  practically  a  dummy,  yet  the  corporation  must  pay  a  tax  on  its 
capital  stock  although  it  has  already  paid  a  tax  on  the  land.^ 

§  568.  Exemptions  from  taxation  as  affecting  tax  on  shares  of 
stock.  —  An  exemption  of  shares  of  stock  is  a  contract  protected  by 
that  provision  of  the  constitution  of  the  United  States  which  pre- 
vents a  state  from  passing  a  law  which  will  impair  the  validity  of  con- 
tracts.2  This  provision  has  frequently  been  construed  and  applied 
in  cases  involving  the  taxation  of  the  corporate  franchises,  capital 
stock,  or  tangible  property.  In  the  numerous  decisions  on  this  subject 
there  appear  two  classes  of  cases  of  exemptions  from  taxation  which 
affect  the  taxation  of  shares  of  stock.  The  first  class  involves  the  ques- 
tion whether  an  exemption  of  the  corporate  property,  franchises,  or 
capital  stock  from  taxation  exempts  also  the  shares  of  stock  from  any 
tax ;  the  second,  whether  an  exemption  of  the  shares  of  stock  from  taxa- 
tion exempts  the  corporate  property,  franchises,  and  capital  stock.  As 
regards  the  former  exemption,  the  effect  thereof  depends  largely  on  the 
words  used  in  the  statute  or  charter  granting  the  exemption.  The 
question  has  given  rise  to  a  difference  of  opinions.  In  the  federal  courts, 
New  Jersey,  Indiana,  and  Kentucky,  it  has  been  decided  that  an  exemp- 
tion of  the  corporation  from  taxation  on  one  or  more  of  the  first  three 
methods  of  taxation  exempts  by  implication  the  shares  of  stock,^  al- 

1  People,  etc.  v.  Williams,  198  N.  Y.  ation  of  the  capital  of  a  corporation 

54  (1910).  exempts  the  shares  of  stock.     Pem-ose 

2Farrington  v.  Tennessee,  95  U.  S.  v.  Chaffraix,  106  La.  250  (1901).  An 
679  (1877).  See  also  §  497,  supra.  An  exemption  of  the  capital  and  personal 
exemption  of  the  stock  of  a  railroad  property  of  the  corporation  from  tax- 
company  does  not  exempt  stock  issued  ation  exempts  the  shares  of  stock. 
for  constructing  branch  roads  of  that  Richardson  v.  City  of  St.  Albans,  72 
company,  such  construction  being  sub-  Vt.  1  (1899).  Gordon  v.  Appeal  Tax 
sequent  to  a  constitutional  provision  Court,  3  How.  133  (1845),  held  that 
prohibiting  exemptions.  Chicago,  etc.  an  exemption  prohibiting  any  "fur- 
R.  R.  V.  Guffey,  120  U.  S.  569  (1887).  ther  tax  or  burden  upon  them,"  the 

'  State  V.  Branin,  23  N.  J.  L.  484  banks,  exempted  the  shares  of  stock. 
(1852) ;  State  v.  Bentley,  23  N.  J.  L.  Again,  where  the  charter  provided 
532  (1852);  Johnson  v.  Common-  that  "the  capital  stock  of  said  com- 
wealth,  7  Dana  (Ky.),  338  (1838) ;  pany  shall  be  forever  exempt  from 
King  V.  Madison,  17  Ind.  48  (1861),  taxation,  the  shares  of  stock  cannot  be 
holding  that  an  exemption  of  the  taxed.  .  .  .  Each  share  is  a  part 
capital  stock  exempts  shares  of  stock,  of  the  whole,  and,  as  the  whole  is 
An  exemption  of  the  corporation  on  exempt  from  taxation,  it  follows  that 
its  property  exempts  also  the  shares  each  part  or  share  must  also  be  ex- 
of  stock,  and  exemption  of  the  shares  empt."  Tennessee  v.  Whit  worth,  22 
of  stock  exempts  the  corporation.  Fed.  Rep.  75  (1884).  And  the  pur- 
State  V.  Heppenheimer,  58  N.  J.  L.  chaser  and  successor  of  a  railroad, 
633  (1896).     An  exemption  from  tax-  taking   by  statute   all   its   rights   and 

1668 


CH.  XXXIV.]  TAXATION   OF   STOCK   AND   CORPORATIONS. 


[§  568. 


though  the  supreme  court  of  the  United  States  has  recently  held  that 
exemption  of  the  capital  stock  does  not  necessarily  exempt  the  stock- 
holders.^ In  Tennessee,  North  Carolina,  and  Maryland,  and  in  fact 
generally,  an  exemption  is  strictly  construed.- 

As  regards  the  second  class  of  exemptions,  it  seems  to  be  established 
by  the  great  weight  of  authority  that  an  exemption  of  the  shares  of 
stock  from  taxation  exempts  also,  by  implication,  the  corporate  fran- 
chises, the  capital  stock,  and  tangible  property  from  any  tax.^    Where 


privileges,  is  also  exempt  in  the  same 
mamier.  Tennessee  v.  Whitworth,  22 
Fed.  Rep.  81;  aflf'd,  117  U.  S.  139 
(1886).  An  exemption  of  the  corpora- 
tion exempts  it  from  a  tax  upon  the 
stock  of  stockholders,  which  the  com- 
pany is  required  to  pay  irrespective  of 
any  dividends  or  profits  payable  to  the 
stockholder,  since  this  is  substantially 
a  tax  on  the  corporation  itself.  New 
Orleans  v.  Houston,  119  U.  S.  265 
(1881).  Cf.  U.  S.  V.  Railroad  Co.,  17 
WaU.  322  (1872).  An  exemption  of 
shares  of  stock  from  taxation  is 
waived  by  the  acceptance  of  subse- 
quent statutes  imposing  a  tax.  Han- 
nibal, etc.  R.  R.  V.  Shaeklett,  30  Mo. 
550  (1860);  Cooley,  Taxation  (2d 
ed.),  212.  A  city  tax  applies  to  the 
property  of  a  water-works  company, 
even  though  the  entire  capital  stock 
of  the  company  is  owned  by  the  city 
itself.  City  of  Louis\nlle  v.  McAteer, 
81  S.  W.  Rep.  698  (Ky.  1904).  An 
exemption  of  stock  from  taxation,  if 
the  property  of  the  corporation  is 
taxed,  does  not  refer  to  corporations 
which  pay  taxes  on  only  such  part  of 
its  property  as  is  situated  in  the 
state.  Commonwealth  v.  Walsh's 
Trustee,  106  S.  W.  Rep.  240  (Ky. 
1907). 

1  New  Orleans  v.  Citizens'  Bank,  167 
U.  S.  371  (1897). 

2  Union  Bank  v.  State,  9  Yerg. 
(Tenn.)  490  (1836),  holding  that  an 
exemption  of  the  capital  stock  did  not 
exempt  shares  of  stock.  To  same 
effect,  Memphis  v.  Farrington,  8 
Baxt.  (Tenn.)  539  (1876),  the  court 
sajdng  :  "The  capital  stock  and  shares 
of  stock  are  two  distinct  properties, 
and  an  exemption  of  the  one  does  not 
thereby  necessarily  exempt  the  other, 
nor  the  taxation  of  the  latter  operate 
as  a  tax  on  the  former,  so  as  to  inter- 


fere with  its  exemption  from  such 
burdens."  A  tax  may  be  levied  on 
the  shares  of  stock  although  the  cap- 
ital stock  is  exempt.  State  v.  Bank  of 
Commerce,  95  Tenn.  221  (1895) ;  Belo 
V.  Forsyth  Com'rs,  82  N.  C.  415  (1880), 
holding  that  an  exemption  of  the  cor- 
porate realty  does  not  exempt  the 
shares  of  stock ;  Appeal  Tax  Court  v. 
Rice,  50  Md.  302  (1878) ;  Tax  Cases, 
12  G.  &  J.  (Md.)  117  (1841).  In 
County  Com'rs  v.  Annapolis,  etc.  R.  R., 
47  Md.  592  (1877),  the  court  said: 
"To  make  out  the  claim  to  this  exemp- 
tion from  the  taxing  power  of  the 
state,  so  essential  to  the  support  of  its 
government,  it  is  incumbent  upon 
corporations  to  show  that  the  power 
to  tax  has  been  clearly  relinquished 
by  the  state ;  and  if  this  has  not  been 
done  in  clear  and  explicit  terms,  or 
by  necessary  implication,  the  ques- 
tion whether  or  not  the  exemption 
has  been  granted  must  be  resolved  in 
favor  of  the  state."  Citing  Provi- 
dence Bank  v.  Billings,  4  Pet.  514 
(1830) ;  Wilmington  R.  R.  i-.  Reid,  13 
Wall.  264  (1871);  Philadelphia  & 
W.  R.  R.  V.  State,  10  How.  376  (1850). 
But  a  clear  exemption  of  the  shares 
of  stock  is  a  contract  which  is  pro- 
tected by  the  United  States  constitu- 
tion. .  State  t'.  Baltimore,  etc.  R.  R.,  48 
Md.  49  (1877).  A  charter  provision, 
however,  that  a  certain  tax  shall  be 
paid  by  the  corporation  does  not  pre- 
vent a  subsequent  change  in  that  tax. 
Delaware  Raikoad  Tax.  18  Wall.  206 
(1873).  And  an  exemption  by  the 
state  has  been  held  not  to  exempt 
the  shares  from  taxation  by  a  mu- 
nicipality. Gordon  v.  Mayor,  etc.,  5 
Gill  (Md.),  231  (1847). 

3  In  State  v.  Bank  of  Commerce, 
53  Fed.  Rep.  735  (1892);  rev'd  on 
another  point  in  152  U.  S.  454,  it  is 


1669 


568. 


TAXATION    OF   STOCK   AND   CORPORATIONS. 


[CH.  XXXIV. 


the  charter  compels  a  corporation  to  pay  an  annual  tax  on  each  share  of 
stock  "  in  lieu  of  all  other  taxes,"  the  stockholders  themselves  cannot 
be  taxed  on  their  stock. ^  Such  an  exemption,  however,  does  not  pre- 
vent the  state  from  levying  a  tax  on  the  capital  stock,^  and  such  an 
exemption  is  lost  by  a  judicial  sale  of  the  franchises  of  the  company.'^ 
A  statute  conferring  upon  a  new  corporation  "  all  the  rights  and  priv- 
ileges "  of  a  former  corporation  does  not  confer  such  an  exemption.^ 
Nor  does  such  exemption  continue  where  the  charter  is  so  amended  as 
to  change  an  insurance  company  into  a  banking  company.^  Nor  is 
such  an  exemption  good  where,  after  the  granting  of  a  charter,  but  be- 
fore the  first  organization  meeting,  a  new  constitution  is  adopted  by  the 
state  forbidding  such  exemptions.^  An  exemption  of  stock  does  not 
exempt  the  property  of  the  corporation  where  the  charter  provides 
against  such  latter  exemption.^  Exemptions  have  no  effect  and  are 
of  no  avail  beyond  the  boundaries  of  the  state  granting  them ;  and 
accordingly  a  non-resident  stockholder,  who  is  taxed  on  his  stock  in 


held  that  a  provision  imposing  a  tax 
on  each  share  of  stock,  "which  shall 
be  in  lieu  of  all  other  taxes,"  exempts 
the  property  of  the  company  as  well 
as  the  stock  from  further  taxation. 
Scotland  County  v.  Missouri,  etc.  Ry., 
65  Mo.  123  (1877),  the  court  saying: 
"It  is  clear  that  a  tax  on  the  prop- 
erty represented  by  the  stock  is  sub- 
stantially a  tax  on  the  stock."  An 
exemption  of  shares  of  stock  from 
"any  tax  or  impost  whatsoever"  ex- 
empts the  capital  stock  also  by  impli- 
cation. Hancock  v.  Singer  Mfg.  Co., 
62  N.  J.  L.  289  (1898).  See  also 
County  Com'rs  v.  Annapolis,  etc. 
R.  R.,  47  Md.  592  (1877),  where  the 
court  said:  "It  is  settled  by  repeated 
decisions  of  this  court,  which  we  are 
not  disposed  to  disturb,  that  the  ex- 
emption of  the  shares  of  the  capital 
stock  operates  as  an  exemption  of 
the  property  of  the  corporation,  or  so 
much  of  it  as  the  corporation  is  fairly 
authorized  to  hold  for  the  proper  ex- 
ercise of  its  franchises ;  and  this  upon 
the  principle  that  the  shares  of  the 
stock  in  the  hands  of  the  shareholders 
represent  the  property  held  by  the 
corporation;"  Cape  Fear  Bank  f.  Ed- 
wards, 5  Ired.  L.  (N.  C.)  516  (1845), 
where  the  charter  said:  "The  said 
bank  shall  not  be  liable  to  any  fur- 
ther tax;"  Mayor,  etc.  v.  Baltimore  & 
O.   R.  R.,  6  Gill   (Md.),  288   (1848) ; 


Tax  Cases,  12  G.  &  J.  (Md.)  117 
(1841);  Gordon  v.  Mayor,  etc.  5  Gill 
(Md.),  231  (1847).  In  Wilmington, 
etc.  R.  R.  V.  Reid,  64  N.  C.  226  (1870), 
however,  it  was  held  that  an  exemp- 
tion of  shares  of  stock  does  not  ex- 
empt the  corporate  franchise  from 
taxation.  Raleigh,  etc.  R.  R.  v.  Reid, 
64  N.  C.  155  (1870).  And  in  State  v. 
Petway,  2  Jones,  Eq.  (N.  C.)  396 
(1856),  it  was  held  that  a  charter  pro- 
vision that  the  shares  of  stock  should 
be  taxed  a  certain  amount  did  not 
prevent  a  tax  on  dividends. 

1  Bank  of  Commerce  v.  Tennessee, 
161  U.  S.  134  (1896).  On  a  rehearing 
the  decision  in  this  case  was  modified 
so  as  to  allow  a  recovery  against 
holders  of  new  stock,  but  not  as  against 
holders  of  old  stock.  Bank  of  Com- 
merce V.  Tennessee,  163  U.  S.  416 
(1896). 

2  Shelby  County  v.  Union,  etc.  Bank, 
161  U.  S.  149  (1896). 

3  Mercantile  Bank  v.  Tennessee,  161 
U.  S.  161  (1896). 

*  Phoenix  F.  &  M.  Ins.  Co.  v.  Ten- 
nessee, 161  U.  S.  174  (1896). 

^  Memphis  City  Bank  v.  Tennessee, 
161  U.  S.  186  (1896). 

8  Planters'  Ins.  Co.  v.  Tennessee, 
161  U.  S.  193  (1896). 

7  Central  R.  R.  etc.  Co.  v.  Wright, 
164  U.  S.  327  (1896). 


1670 


CH.  XXXIV. J 


TAXATION    OF   STOCK   AND    CORPORATIONS. 


569. 


the  state  where  he  resides,  cannot  defeat  that  tax  by  reason  of  exemp- 
tions enjoyed  within  the  state  creating  the  corporation.^ 


B.     TAXATION   OF   NATIONAL-BANK    STOCK. 

§  569.  General  rules.  —  It  is  one  of  the  estabhshed  principles  of 
constitutional  law  in  this  country  that  the  instruments  of  government 
by  the  United  States  shall  not  be  taxed  by  any  state,  and  also  that 
those  of  a  state  shall  not  be  taxed  by  the  United  States.  Accordingly, 
bonds  issued  by  the  United  States  government  cannot  be  taxed  by  any 
state.^  So,  also,  when  the  old  United  States  Bank  was  in  existence,  it 
was  held  that  neither  the  bank  nor  its  capital  stock  could  be  taxed  by 
a  state.  But  it  was  also  held  that,  inasmuch  as  the  interest  of  the 
stockholders  in  the  bank  was  different  from  the  franchises,  property, 
capital  stock,  and  the  United  States  bonds  held  by  the  bank,  such  interest 
of  the  stockholder  could  be  taxed  by  a  state,  and  that  such  taxation 
would  be  constitutional  and  legal.^  The  same  rules  apply  to  the  present 
national  banks.  A  state  tax  on  the  capital  stock  of  the  bank  is  illegal 
and  void.^    But  a  tax  on  its  real  estate  or  on  its  shares  of  stock  is  up- 


'  Appeal  Tax  Court  v.  Patterson,  50 
Md.  354  (1878) ;  Appeal  Tax  Court  v. 
Gill,  50  Md.  377  (1878).  See  also 
Railroad  Co.  v.  Pennsylvania,  15  Wall. 
300  (1872). 

2  Cooley,  Taxation  (2d  ed.),  84,  85. 
Formerly  government  bonds  were 
called  stock  both  in  England  and  in 
this  country.  That  use  of  the  term, 
however,  has  become  practically  obso- 
lete. See  Bank  of  Commerce  v.  New 
York,  2  Black,  620  (1862) ;  Weston  v. 
Charleston,  2  Peters,  449  (1829). 

3  McCulloch  V.  Maryland,  4  Wheat. 
316,  436  (1819) ;  Bulow  v.  Charleston, 
1  Nott  &  M.  (S.  C.)  527  (1819).  See 
also  Berney  v.  Tax  Collector,  2  Bailey 
(S.  C),  654  (1831) ;  National  Bank  v. 
Commonwealth,  9  Wall.  353  (1869), 
per  Miller,  J. 

^  A  state  tax  upon  the  franchise  or 
intangible  property  of  a  national  bank 
is  illegal.  Owensboro  Nat.  Bank  v. 
Owensboro,  173  U.  S.  664  (1899); 
First  Nat.  Bank  v.  Douglas  County, 
3  Dill.  298  (1873) ;  s.  c,  9  Fed.  Cas. 
100;  Collins  v.  Chicago,  4  Biss.  472 
(1867);  s.  c,  6  Fed.  Cas.  118;  Salt 
Lake,  etc.  Bank  v.  Golding,  2  Utah,  1 
(1876);  Mavor,  etc.  t'.  First  Nat. 
Bank,  59  Ga.  648  (1877) ;  Bradley  v. 
People,  4  WaU.  459  (1866) ;  Bank  of 

16 


Commerce  v.  New  York  City,  2  Black, 
620  (1862),  reversing  People  v.  Com'rs 
of  Taxes,  23  N.  Y.  192  (1861) ;  s.  c, 
32  Barb.  509,  and  declaring  uncon- 
stitutional the  New  York  statutes 
under  which  the  national  banks  were 
taxed.  New  York  has  been  exceed- 
ingly unfortunate  in  its  efforts  to  tax 
national  banks.  After  the  decision 
in  Bank  of  Commerce  v.  New  York 
Citv,  2  Black,  620  (1862),  came  Bank 
Ta.x  Case,  2  Wall.  200  (1864),  declar- 
ing unconstitutional  the  New  York 
statute  of  April  29,  1863,  for  the  taxa- 
tion of  national  banks,  the  tax  still 
being  on  the  capital  stock.  Next 
came  Van  Allen  v.  Assessors,  3  WaU. 
573  (1865)  (reversing  Utica  v. 
Churchill,  33  N.  Y.  161  —  1865. 
See  also  First  Nat.  Bank  v.  Fancher, 
48  N.  Y.  524  —  1872),  declaring 
unconstitutional  the  New  York  stat- 
ute of  March  9,  1865,  taxing  the  stock- 
holders in  national  banks,  because  the 
act  did  not  prescribe  expressly  that 
the  tax  should  be  no  greater  than  the 
tax  on  other  shares  of  stock,  and 
because  taxes  in  New  York  on  other 
corporations  were  not  on  shares  of 
stock,  but  on  the  capital  stock.  New 
York  then  passed  the  act  of  April 
23,  1866,  which  was  sustained  in  Peo- 
71 


§  569. 


TAXATION   OF   STOCK   AND   CORPORATIONS. 


[CH.  XXXIV. 


held  as  legal  and  enforceable  where  such  tax  is  substantially  the  same 
as  on  state-bank  stock.^  This  is  the  law,'  although  a  large  part  or  all 
of  the  bank's  capital  stock  is  invested  in  United  States  bonds.^  But 
even  though  a  tax  statute  states  that  the  tax  is  on  shares  of  stock,  yet 
if  it  is  assessed  on  the  corporation  itself,  and  the  surplus  and  undivided 
profits  are  considered  in  figuring  the  value,  it  is  a  tax  on  the  property 
of  the  corporation,  and  if  a  part  of  such  property  consists  of  United 
States  bonds  the  tax  is  illegal .^  The  authority  of  a  state  to  tax  shares 
of  stock  in  national  banks  is  expressly  conferred  by  the  statutes  of  the 
United  States  which  create  and  regulate  these  banks.''  A  tax  on  na- 
tional-bank stock  follows  the  stock  into  a  transferee's  hands  until  barred 
by  the  statute  of  limitations.^ 


pie    V.    Com'rs,    4    Wall.    244    (1866). 
Still   later   came    the    case   People    v. 
Weaver,  100  U.  S.  539  (1879),  revers- 
ing 67  N.   Y.  516,  overruling  People 
V.    Dolan,   36   N.    Y.    59    (1867),   and 
declaring  void  the  New  York  tax  of 
national-bank   stock,    for   the    reason 
that  the  New  York  court  of  appeals 
construed    the    New    York    taxation 
statute  to  allow  persons  taxed  on  ordi- 
nary securities  a  deduction  for  debts, 
while    a    similar    deduction    was    not 
allowed     to     stockholders     in     banks, 
state  or  national.     Supervisors  v.  Stan- 
ley,   105  U.   S.   305    (1881)    [see  Peo- 
ple  V.   Dolan,   36  N.    Y.   59  —  1867], 
practically  modified  the  preceding  case, 
however,    by    holding    that    a    stock- 
holder who  owed  no  debts  could  not 
complain,  and  that  those  who  did  owe 
debts  were  entitled,  not  to  a  release 
from  the  tax  altogether,  but  only  to  the 
extent  of  what  the  state  ought  to  have 
allowed    as    a    deduction.     The    New 
York  system  of  taxing  national-bank 
stock  was  reviewed  in  People  v.  Feitner, 
191  N.  Y.  88  (1908).     States  cannot  tax 
national-bank     currency.       Home     v. 
Green,  52  Miss.  452  (1876).     Cf.  Ruffin 
V.   Orange   County    Com'rs,  69   N.  C. 
498     (1873);      Lilly     v.     Cumberland 
County  Com'rs,  69  N.  C.  300  (1873) ; 
Com'rs  V.  Elston,  .32  Ind.  27  (1869). 

1  Austin  V.  Boston,  96  Mass.  359 
(1867) ;  Fu-st  Nat.  Bank  v.  Douglas 
County,  3  Dill.  330  (1874);  s.  c,  9 
Fed.  Cas.  84 ;  Stetson  v.  Bangor,  56 
Me.  274  (1868). 


2  Van  Allen  v.  Assessors,  3  Wall. 
573  (1865) ;  People  v.  Com'rs,  4  Wall. 
244  (1866).  See  also  Home  Ins.  Co. 
V.  New  York,  119  U.  S.  129  (1886).  In 
taxing  the  stock  no  reduction  is 
allowed  for  bonds  held  by  the  corpora- 
tion. Home  Ins.  Co.  v.  Board  of 
Assessors,  42  La.  Ann.  1131  (1890); 
Parker  v.  Sun  Ins.  Co.,  42  La.  Ann. 
1172  (1890). 

3  Home,  etc.  Bank  v.  Des  Moines, 
205  U.  S.  503  (1907). 

«U.  S.  Rev.  vStat.,  §5219  (taken 
from  act  of  June  3,  1864,  as  amended 
by  act  of  Feb.  10,  1868).  The  case 
People  V.  ^e&YQT,  100  U.  S.  539,  543 
(1879),  says  that  the  effect  of  the  act 
of  congress,  as  regards  the  taxation  of 
national  banks,  is  that  congress  says 
to  the  states :  "You  may  tax  the  real 
estate  of  the  banks  as  other  real 
estate  is  taxed,  and  you  may  tax  the 
shares  of  the  bank  as  the  personal 
property  of  the  owner  to  the  same 
extent  you  tax  other  moneyed  capital 
invested  in  your  state.  It  was  con- 
ceived that  by  this  qualification  of 
the  power  of  taxation  equality  would 
be  secured  and  injustice  prevented." 
Wasson  v.  Indianapolis  Nat.  Bank, 
107  Ind.  206  (1886).  New  shares  can- 
not be  taxed  until  the  increase  has 
been  approved  by  the  comptroller  of 
tlie  currency.  Charleston  v.  People's 
Nat.  Bank,"  5  S.  C.  103  (1873).  A 
state  tax  on  a  national  bank  giving  a 
lien  to  the  bank  on  the  stock  of  the 
stockholders  for  such  tax  is  not  legal 


6  Citizens',  etc.  Bank  v.  Kentucky,  217  U.  S.  443  (1910). 
1672 


CH.   XXXIV.] 


TAXATION    OF   STOCK   AND    CORPORATIONS. 


[§  570. 


§  570.  Place  in  which  shares  of  national-bank  stock  may  he  taxed. 
—  The  Revised  Statutes  of  the  United  States  expressly  declare  that 
non-resident  stockholders  in  a  national  bank  are  to  be  taxed  at  the 
place  where  the  bank  is  located.^  Under  this  statute  a  non-resident 
of  the  state  within  which  the  bank  is  situated  can  be  taxed  on  his  stock 
only  where  the  bank  is  located.-  The  state  where  he  resides  cannot 
also  tax  him  on  such  stock.  As  regards  residents  of  the  state  within 
which  the  bank  is  located,  the  state  itself  determines  where  the  tax 
is  to  be  levied.^  If  the  state  statute  requires  that  the  whole  tax  shall 
be  paid  in  the  city,  county,  or  town  where  the  bank  is  located,  even 
though  some  of  the  stockholders  reside  in  other  counties  or  cities,  the 
statute  must  be  obeyed.^  Generally,  however,  the  statute  requires 
that  stockholders  residing  in  the  state  shall  be  taxed  at  their  place  of 
residence  on  stock  owned  by  them  in  a  national  bank  within  that  state.^ 


where  the  bank  is  insolvent.  Stapyl- 
ton  V.  Thaggard,  91  Fed.  Rep.  93 
(1898).  Taxes  upon  the  capital  stock 
of  a  national  bank  cannot  be  collected 
from  the  receiver  thereof.  Gray  v. 
Logan  County,  7  Okla.  321  (1898). 

1  Such  was  the  effect  of  the  amend- 
ment of  1866.  Previous  to  that  time 
there  was  controversy  herein  as  to 
the  meaning  of  the  act  of  1863.  See 
Austin  V.  Boston,  96  Mass.  359  (1867). 

-  See  Mclver  v.  Robinson,  53  Ala. 
456  (1875);  WiUiams  v.  Weaver,  75 
N.  Y.  30  (1878) ;  Kyle  v.  Fayetteville, 
75  N.  C.  445  (1876) ;  National  Bank 
V.  Commonwealth,  9  Wall.  353  (1869) ; 
Lionberger  v.  Rouse,  9  Wall.  468 
(1869). 

^  Austin  V.  Aldermen,  7  Wall.  .694 
(1886).  The  tax  may  be  levied  on 
resident  stockholders  in  the  city,  coun- 
try, or  town  where  they  reside.  Aus- 
tin V.  Boston,  96  Mass.  359  (1867). 
And  the  cashier  of  the  bank  may  be 
required  by  statute  to  send  to  the 
■clerks  of  the  various  towns  the  names 
of  such  stockholders  as  reside  in 
those  towns.  Waite  v.  Dowley,  94 
U.  S.  527  (1876).  As  to  the  taxation  of 
national-bank  stock  in  Iowa,  see  First 
Nat.  Bank  v.  Albia,  86  Iowa,  28  (1892). 
As  to  the  assessment  of  bank  stock  in 
West  Virginia,  see  Bank  of  Bramwell 
V.  Mercer  County  Court,  36  W.  Va. 
341  (1892).  Concerning  the  taxa- 
tion of  national-bank  stock  in  Nevada, 
see  First  Nat.  Bank  v.  Kreig,  21  Nev. 
404   (1893).     National-bank  stock    in 


Delaware  may  be  taxed  by  the  state. 
First  Nat.  Bank  v.  Herbert,  44  Fed. 
Rep.  158  (1890).  As  to  the  taxation 
of  bank  stock  in  Washington,  see 
First  Nat.  Bank  v.  Hungate,  62  Fed. 
Rep.  548  (1894).  As  to  the  taxation 
of  national-bank  stock  in  Indiana,  see 
First  Nat.  Bank  v.  Turner,  154  Ind. 
456  (1900).  The  Kentucky  tax  on 
national-bank  stock  is  legal.  First 
Nat.  Bank  v.  Stone,  88  Fed.  Rep.  409 
(1898). 

*  National  Bank  v.  Commonwealth, 
9  Wall.  353  (1869);  Tappan  v.  Mer- 
chants' Nat.  Bank,  19  Wall.  490 
(1873) ;  Provident  Inst.  i'.  Boston, 
101  Mass.  575  (1869);  McLaughlin 
V.  Chadwell,  7  Heisk.  (Tenn.)  389 
(1872).  Craft  v.  Tuttle,  27  Ind.  332 
(1866),  holds  that  if  a  municipality 
has  no  power  to  tax  shares  in  state 
banks,  it  cannot  tax  national-bank 
shares. 

^Clapp  V.  Burlington,  42  Vt.  579 
(1870).  See  Trustees  of  Eminence  v. 
Deposit  Bank,  12  Bush  (Ky.),  538 
(1877) ;  Farmers'  Nat.  Bank  v.  Cook, 
32  N.  J.  L.  347  (1867).  Cf.  State  v. 
Hart,  31  N.  J.  L.  434  (1866) ;  State  v. 
Haight,  31  N.  J.  L.  399  (1806).  The 
decision  in  North  Ward  Nat.  Bank 
V.  Newark,  39  N.  J.  L.  380  (1877), 
rev'd  on  another  point  in  40  N.  J.  L. 
558,  however,  placed  New  Jersey 
among  the  states  which  levy  the  tax 
in  the  most  approved  manner,  resi- 
dents being  taxed  where  they  reside, 
non-residents     being     taxed     at     the 


1673 


§  571.]  TAXATION   OF   STOCK   AND   CORPORATIONS.  [cH.  XXXIV. 

If  the  statute  is  silent  herein,  then  the  state  statutes  regulating  the  taxa- 
tion of  stockholders  in  other  corporations  are  to  apply  to  stockholders 
in  national  banks  situated  within  the  state.  A  state  statute  may  re- 
quire a  national  bank  to  pay  a  tax  on  the  stock  of  non-resident  as  well 
as  of  resident  stockholders  in  the  bank.^  The  statute  may  require 
the  bank  to  retain  from  dividends  the  tax  on  the  shares  of  stock,  such 
tax  being  determined  by  the  amount  of  dividends.^  The  collection 
of  a  tax  on  national-bank  stock  may  be  enforced  by  the  same  procedure 
through  which  taxes  on  other  personal  property  are  collected.^  A 
non-resident  holder  of  national-bank  stock  is  not  personally  liable  for 
a  tax  thereon,  under  the  New  York  statute.* 

§  571.  The  tax  must  not  be  greater  than  that  imposed  on  other 
*' moneyed  capital." — The  most  difficult,  unsettled,  and  litigated 
questions  connected  with  the  taxation  of  shares  of  stock  in  national 
banks  arise  from  the  meaning  and  application  of  that  provision  of 
the  statutes  of  the  United  States  requiring  that  the  taxation  of  national- 
bank  shares  of  stock  shall  not  be  at  a  higher  rate  than  the  taxation  of 
other  "  moneyed  capital  "  within  the  state.  The  term  "  moneyed 
capital  "  as  used  in  the  statute  authorizing  taxation  of  national-bank 
stock  refers  to  capital  which  comes  in  competition  with  the  business 
of  national  banks. ^  The  words  "  moneyed  capital  "  have  been  construed 
to  mean  "  not  only  bonds,  stocks,  and  money  loaned,  but  all  credits 
and  demands  of  every  character  in  favor  of  the  taxpayer."  ^     This  has 

domicile  of  the  corporation.     See  also  solido  is  invalid.     It  may  be  collected 

Kyle    V.    Fayetteville,   75    N.    C.    445  from  the  bank,  but  should  be  assessed 

(1876) ;    Buie   v.    Fayetteville   Com'rs,  against  the  stockholders.     Deductions 

79  N.  C.  267  (1878) ;  Austin  v.  Boston,  should  also  be  allowed  when  allowed 

96  Mass.  359  (1867) ;  First  Nat.  Bank  on  other  similar  property.     Leoti  Nat. 

V.  Smith,  65  111.  44  (1872) ;  Baker  v.  Bank  v.  Fisher,  45  Kan.  726  (1891). 
First  Nat.  Bank,  67  111.  297   (1873);  ^  paimer   v.   McMahon,    1.33   U.    S. 

Clapp     V.     Burlington,     42     Vt.     579  660  (1890).     A  tax   on  national-bank 

(1870) ;  Howell  v.  Cassopolis,  35  Mich,  stock,    to    be    collected    in    the    first 

471  (1877).     Cf.  Mintzer  v.  Montgom-  instance  from  the  bank,  cannot  be  eol- 

ery    County,    54   Pa.    St.    139    (1867).  lected  from  the  receiver  of  the  bank. 

For    taxation    of   national-bank   stock  the  bank  being  insolvent.     Boston  v. 

under  the  Alabama  act,  see  Maguire  Beal,  51  Fed.  Rep.  306  (1892). 
V.    Board    of    Revenue,    71    Ala.    401  *  City  of  New  York  v.  McLean,  170 

(1882).  N.  Y.  .374  (1902). 

1  Merchants',  etc.  Bank  v.  Penn-  ^  First  Nat.  Bank,  etc.  v.  Chapman, 
sylvania,    167    U.    S.    461    (1897).     A  173  U.  S.  205  (1899). 

state    may    tax    national-bank    stock-  ^  Wasson  v.  Indianapolis  Nat.  Bank, 

holders  and  may  hold  the  bank  liable  107  Ind.  206  (1886)  ;  Boyer  v.  Boyer, 

for  such  tax.     Citizens',  etc.  Bank  v.  113  U.  S.  689  (1884).     Shares  of  stock 

Kentucky,  217  U.  S.  443   (1910).  in  banks  are  other  moneyed  capital, 

2  Central  Nat.  Bank  v.  U.  S.,  137  but  shares  of  stock  in  other  eorpora- 
U.  S.  355  (1890).  C/.  First  Nat.  Bank  t;.  tions  are  not  necessarily  so.  "Mon- 
Richmond,  39  Fed.  Rep.  309  (1889).  eyed  capital"  means  money  put  out 
The  taxation  of  the  capital  stock  of  by  way  of  loan,  discount,  etc.,  or 
a  national  bank  against  the  bank  in  invested  in  stocks  of  banks,  etc.,  which 

1674 


CH.  XXXIV. 


TAXATION    OF   STOCK   AND   CORPORATIONS. 


[§  571. 


been  the  subject  of  much  controversy,  however ;  and  the  decisions  go 
very  far  in  upholding  the  tax,  if  substantial  justice  has  been  done.^ 
Money  invested  in  railroads,  manufacturing,  mining,  or  mortgages  is 
not  "  moneyed  capital  "  competing  with  national-bank  capital,  and 
hence  a  tax  on  the  latter  need  not  be  at  the  same  rate  as  upon  the 
former.^  The  fact  that  by  statute  general  stocks  can  be  taxed  at  only 
thirty  cents  on  each  hundred  dollars  does  not  prevent  a  higher  rate 
on  national-bank  stock.^ 

The  method  of  taxing  shares  of  national-bank  stock  need  not  corre- 
spond to  that  followed  in  taxing  other  corporations  in  the  state. ^    The 


put  out  money  by  way  of  loan,  dis- 
count, etc.  Trust  companies  are  dif- 
ferent from  banks  herein.  ISIercantile 
Bank  v.  New  York,  121  U.  S.  138 
(1887),  affirming  28  Fed.  Rep.  776. 
A  tax  on  national-bank  stock  is  legal 
although  stock  in  state  and  savings 
banks  is  not  taxed  directly,  but  the 
corporation  itself  is  taxed  in  another 
way.  Richards  i'.  Rock  Rapids,  31 
Fed.  Rep.  505  (1887).  See  also  Hep- 
burn V.  School  Directors,  23  Wall.  480 
(1874).  Other  moneyed  capital  means 
capital  employed  in  banking  or  loan- 
ing, and  not  in  business.  Talbott  v. 
Silver  Bow  Co.,  139  U.  S.  438  (1891). 
1  People  V.  Commissioners,  4  Wall. 
256  (1866) ;  Adams  v.  Nashville,  95 
U.  S.  19  (1877).  Re  McMahon,  102 
N.  Y.  176  (1886),  holds  that  shares  of 
stock  in  railroads,  manufacturing, 
and  other  corporations  are  not  "mon- 
eyed capital"  in  the  sense  in  which 
these  terms  are  used  in  the  act  of  con- 
gress. See  also  First  Nat.  Bank  v. 
Waters,  7  Fed.  Rep.  152  (1881). 
Provident  Inst.  v.  Boston,  101  Mass. 
575  (1869),  holds  that  the  comparison 
is  to  be  made  with  other  moneyed 
capital  in  the  same  town  or  citj^ 
where  the  tax  is  levied.  See  also 
People  r.  Moore,  1  Idaho,  504  (1873). 
Subject  to  this  rule  the  shares  of 
national  banks  may  be  assessed  at 
their  value  even  above  par.  Hepburn 
V.  School  Directors,  23  Wall.  480 
(1874) ;  People  v.  Commissioners  of 
Taxes,  94  U.  S.  415  (1876) ;  s.  c,  67 
N.  Y.  516  (1876),  affirming  8  Hun, 
536 ;  St.  Louis  Nat.  Bank  v.  Papin,  4 
Dill.  29  (1876) ;  s.  c,  21  Fed.  Cas.  203, 
the  court  saying,  also,  that  the  asses- 
sors   may    ascertain    that    value    by 


including  "all  reserve  funds,  profits, 
earnings,  and  other  values"  when  the 
intent  of  the  statute  is  to  base  the  tax 
"upon  an  inquiry,  inter  alia,  into 
the  actual  value  of  the  property  of 
the  banks  so  far  as  this  imparts  or 
confers  a  value  upon  the  shares." 
A  stockholder  cannot  enjoin  the  tax, 
unless  he  first  pays  such  part  of  it 
as  he  admits  is  legal.  Rosenberg  v. 
Weekes,  67  Tex.  578  (1887).  The 
stock  is  listed  against  the  stockholder, 
not  against  the  bank.  Miller  v.  First 
Nat.  Bank,  46  Ohio  St.  424  (1889). 
The  statute  may  authorize  taxation 
for  vears  past.  State  v.  Simmons, 
70  Miss.  485  (1893). 

2  Aberdeen  Bank  v.  Chehalis  County, 
166  U.  S.  440  (1897).  "Moneyed 
capital  means  money  employed  in 
a  business  whose  object  is  to  make 
profit  by  investing  such  money  in 
securities  by  waj^  of  loan,  discount, 
or  otherwise,  which  from  time  to 
time,  in  the  course  of  business,  are 
reduced  again  to  money  and  rein- 
vested." jSIercantile  Nat.  Bank  v. 
Shields,  59  Fed.  Rep.  952  (1894). 

3  National  Bank  v.  Mayor,  etc.,  100 
Fed.  Rep.  24  (1900).  Where  a  con- 
stitution requires  uniformity  of  taxa- 
tion bank  stock  cannot  be  ta.xed  sixty 
per  cent,  of  its  value  while  other 
property  is  taxed  only  forty  per  cent. 
Spokane,  etc.  Co.  v.  Spokane  County, 
126  Pac.  Rep.  54  (Wash.  1912). 

*  Davenport  Bank  v.  Davenport,  123 
U.  S.  83  (1887).  While  state-bank 
stock  may  be  taxed  in  a  different  way 
from  national-bank  stock,  yet  if  there 
is  a  real  discrimination  against  the 
latter  the  ta.x  is  illegal.  San  Fran- 
cisco, etc.  Bank  v.  Dodge,   197  U.  S. 


1675 


§571. 


TAXATION    OF    STOCK   AND    CORPORATIONS. 


CH.  XXXIV. 


material  point  is  that  national  banks  must  not,  as  a  result,  be  taxed 
higher  than  other  moneyed  investments.  If  this  rule  is  observed,  it 
is  of  little  consequence  whether  the  tax  on  national-bank  stock  is  levied 
and  assessed  in  the  same  way  as  other  corporations  are  taxed. 

If  the  state  laws  allow  a  deduction  to  a  person  taxed  on  bonds,  notes, 
and  similar  property  for  debts  due  from  him  to  others,  a  similar  deduc- 
tion must  be  allowed  to  stockholders  taxed  on  their  shares  in  a  national 
bank.^     If  the  statute  does  not  allow  the  same  to  the  latter,  and  the 


70  (1905).  It  is  held  in  California 
that  national-bank  stock  may  be 
taxed,  even  though  state-bank  stock 
is  not  taxed,  if  it  is  shown  that  the 
property  is  taxed  in  a  different  but 
equivalent  way.  Crocker  v.  Aseott, 
149  Cal.  575  (1906).  "There  is  no 
reason  to  suppose  that  congress  cared 
at  all  about  the  mode  the  states  might 
adopt  for  the  collection  of  their  taxes. 
A  tax  imposed  on  the  capital  or  prop- 
erty of  a  corporation  falls  as  effec- 
tually on  the  capital  of  the  shareholder 
represented  by  his  shares  as  does  a 
tax  upon  the  shares  directly ;  and 
although,  in  legal  discrimination,  a 
tax  upon  the  former  is  not  a  tax  upon 
the  latter,  practically  and  substantially 
taxation  of  the  capital  of  the  corpora- 
tion is  taxation  of  the  capital  of  the 
shareholder."  A  tax  on  national-bank 
stock  was  upheld,  though  all  other 
stock  except  bank  stock  was  exempt, 
the  tax  being  on  capital  stock,  in  Mer- 
cantile Nat.  Bank  v.  New  York,  28 
Fed.  Rep.  776  (1886);  aff'd,  121 
U.  S.  138.  The  mode  of  collection  need 
not  be  the  same.  The  state  may  com- 
pel the  bank  to  pay  the  tax.  National 
Bank  v.  Commonwealth,  9  Wall.  353, 
363  (1869),  per  Miller,  J.  But  if  the 
assessment  is  illegal,  in  that  no  notice 
and  opportunity  is  given  to  the  stock- 
holder to  appear  and  resist  the  tax, 
it  cannot  be  enforced.  Albany  City 
Nat.  Bank  v.  Maher,  9  Fed.  Rep.  884 
(1882).  In  general,  cf.  Van  Allen  v. 
Assessors,  3  Wall.  573  (1865) ;  Brad- 
ley V.  People,  4  Wall.  459  (1866); 
Hubbard  v.  Johnson  County,  23  Iowa, 
130  (1867);  People  v.  Assessors,  29 
How.  Pr.  371  (1865) ;  Wright  v.  Stelz, 
27  Ind.  338  (1866),  overruling  Whitney 
V.  Madison,  23  Ind.  331  (1864),  on 
certain  points ;  Cooley,   Taxation   (2d 


ed.),  390.  Contra,  People  v.  Bradley, 
39  111.  130  (1866).  See  also  Frazer  v. 
Siebern,  16  Ohio  St.  614  (1866); 
Smith  V.  First  Nat.  Bank,  17  Mich. 
479  (1869);  Van  Slyke  v.  State,  23 
Wis.  655  (1869) ;  Bagnall  v.  State,  25 
Wis.  112  (1869).  Where  a  state  and 
also  a  local  tax  are  levied  on  shares 
of  stock  in  a  state  bank,  and  the  local 
tax  is  declared  illegal,  the  same  local 
tax  is  illegal  as  regards  shares  in 
national  banks.  City  Nat.  Bank  v. 
Paducah,  2  Flip.  61  (1877) ;  s.  c,  5 
Fed.  Cas.  755.  Even  though  the  prop- 
erty of  other  corporations  is  taxed 
instead  of  the  stock,  yet  it  may  be 
legal  to  tax  stock  in  national  banks. 
Nevada  Nat.  Bank  v.  Dodge,  119  Fed. 
Rep.  57  (1902). 

1  Evansville  Bank  v.  Britton,  105 
U.  S.  322  (1881),  aff'g  8  Fed.  Rep.  867. 
But  a  deduction  to  individuals  for 
United  States  bonds  held  by  them 
will  not  invalidate  a  tax  on  the 
national-bank  stock  without  a  deduc- 
tion for  bonds  held  by  the  bank. 
People  V.  Commissioners,  4  Wall.  244 
(1866) ;  Fu-st  Nat.  Bank  v.  Ayers,  160 
U.  S.  669  (1896).  In  Wasson  v.  Indi- 
anapolis Nat.  Bank,  107  Ind.  206 
(1886),  the  court  held  that  the  deduc- 
tion allowed  to  others  is  fatal  to  a  tax 
on  national-bank  shares  without  that 
deduction  only  when  it  is  "material, 
and  serious";  and  that  that  depends 
on  the  proportion  of  moneyed  capital 
which  is  allowed  the  deduction  to  that 
moneyed  capital  which  is  not  allowed 
it.  If  material,  the  national-bank- 
share  tax  is  to  be  allowed  a  similar 
deduction.  National-bank  stock  can- 
not be  taxed  at  a  higher  valuation  on 
its  actual  value  than  other  moneyed 
property  is  valued  at.  Deductions 
allowed  to  other  moneyed  capital  must 


1676 


CH.   XXXIV. 


TAXL\TION    OF   STOCK    AXD   CORPORATIONS. 


[§  571. 


courts  of  the  state  refuse  to  allow  the  deduction,  then  the  tax  is  illegal. 
Such  was  the  result  of  a  tax  in  New  York  on  national-bank  stock. ^ 


also  be  allowed  on  national-bank  stock. 
Whitbeek  v.  Mercantile,  etc.  Bank, 
127  U.  S.  193  (1888).  A  stockholder 
in  a  national  bank  is  entitled  to  the 
same  deductions  as  a  stockholder  in  a 
state  bank.  McHenry  v.  Downer,  116 
Cal.  20  (1897).  In  Ohio  the  debts  of  a 
stockholder  in  a  national  bank  cannot 
be  deducted  from  the  value  at  which 
the  stock  is  taxed.  Niles  v.  Shaw,  50 
Ohio  St.  370  (1893).  In  Ohio  no 
deduction  for  the  debts  of  a  stock- 
holder is  made  in  the  taxation  of 
national-bank  stock.  Chapman  v. 
First  Nat.  Bank,  56  Ohio  St.  310 
(1897).  Deductions  allowed  general 
taxpayers  of  their  debts  from  credits 


taxed  against  them  give  to  national- 
bank  stockholders  the  right  to  a  sim- 
ilar reduction  in  the  taxation  of  their 
stock.  Non-resident  stockholders  are 
entitled  to  the  same  deductions.  Mer- 
cantile Nat.  Bank  v.  Shields,  59  Fed. 
Rep.  952  (1894).  National-bank  stock 
is  taxed  at  its  par  value,  under  the 
New  Jersey  statute,  but  the  taxpayer 
may  claim  the  same  deductions  and 
exemptions  as  to  that  stock  as  he  does 
as  to  his  other  personal  property. 
Lippineott  v.  Lippineott,  74  N.  J.  Eq. 
439  (1907). 

Where  a  tax  on  stock  is  not  illegal 
except  in  that  the  assessors  have  pro- 
ceeded in  a  wrong  manner,  the  court 


1  People  V.  Weaver,  100  U.  S.  539 
(1879).  The  New  York  court  held 
that  "the  effect  of  the  state  law  is  to 
permit  a  citizen  of  New  York,  who 
has  moneyed  capital  invested  other- 
wise than  in  banks,  to  deduct  from 
that  capital  the  sum  of  all  his  debts, 
leaving  the  remainder  alone  subject 
to  taxation,  while  he  whose  money  is 
invested  in  shares  of  bank  stock  can 
make  no  such  deduction."  The 
supreme  court  of  the  United  States 
declared  the  tax  on  the  national-bank 
shares  to  be  invalid.  But  the  case 
Supervisors  v.  Stanley,  105  U.  S.  305, 
315  (1881),  holds  that  the  tax  is  not 
void  absolutely.  A  deduction  allowed 
to  individuals  for  national  and  state 
securities,  but  not  allowed  on  national- 
bank  stock,  invalidates  a  tax  on  the 
latter.  Whitney  Nat.  Bank  v.  Parker, 
41  Fed.  Rep.  402  (1890).  If  the  stock- 
holder owed  no  debts  he  is  not  injured  ; 
and  even  if  he  owes  debts  he  cannot 
defeat  the  tax  altogether,  but  is 
allowed  a  similar  deduction.  No  dis- 
crimination is  allowable,  although  the 
state  taxes  oanks  and  nothing  else. 
Gorgas'  Appeal,  79  Pa.  St.  149  (1875). 
No  discrimination,  though  a  deduc- 
tion for  debts  is  allowed  to  those 
whose  property  consists  of  debts  due 
them ;  but  no  deduction  otherwise. 
First  Nat.  Bank  v.  St.  Joseph,  46  Mich. 
526    (1881).     The    exemption    of    all 


capital  which  is  wholly  invested  in  min- 
ing is  not  a  discrimination.  Silver 
Bow  County  v.  Davis,  6  Mont.  306 
(1887).  Exemption  from  taxation  of 
savings  banks,  municipal  bonds,  and 
shares  of  stock  in  all  foreign  and 
domestic  corporations  other  than 
banks  does  not  invalidate  a  tax  on 
shares  of  stock  in  national  banks. 
Mercantile  Bank  v.  New  York,  121 
U.  S.  138  (1887);  Newark,  etc.  Co. 
V.  Newark,  121  U.  S.  163  (1887); 
Bank  of  Redemption  v.  Boston,  125 
U.  S.  60  (1888).  No  discrimination 
exists  in  taxation  of  national-bank 
stock  in  territory  where  the  shares 
of  stock  in  corporations  paying  taxes 
on  their  property  or  capital  stock  are 
exempted  from  taxation.  Silver  Bow 
County  V.  Davis,  6  Mont.  306  (1887). 
In  Nebraska  the  owner  of  national- 
bank  stock,  in  listing  his  shares  for 
taxation,  is  not  entitled  to  deduct  his 
bona  fide  indebtedness  from  the  value 
of  such  shares  of  stock.  The  decision 
on  the  former  hearing  of  the  ease, 
reported  in  25  Neb.  468,  is  overruled. 
Bressler  v.  Wayne  County,  32  Neb. 
834  (1891).  National-bank  shares  in 
Massachusetts  are  taxed  at  their 
actual  value,  and  the  bank  may  peti- 
tion for  a  reduction  of  the  tax. 
National  Bank  of  Commerce  v.  New 
Bedford,  155  Mass.  313  (1892). 


1677 


§571. 


TAXATION   OF   STOCK   AND   CORPORATIONS. 


ICH.  XXXIV. 


A  refusal  to  allov/  a  deduction  to  stockholders  in  national  banks 
similar  to  a  deduction  allowed  on  a  tax  levied  on  other  "  moneyed 
capital  "  is  held  to  be  a  discrimination  in  contravention  of  the  stat- 
ute. Special  exemptions,  however,  of  certain  stocks  or  other  forms 
of  "  moneyed  capital  "  do  not  require  that  a  similar  exemption  should 
be  made  on  national-bank  stock. ^     Even  though  the  state  statute  taxing 


will  not  enjoin  its  collection  unless  (1887).  Deductions  are  to  be  allowed 
the  plaintiff  stockholders  pay  in  such  the  national-bank  stockholder  for 
a  tax  as  would  have  been  legal.  Frazer  debts  due  from  him  to  others  where 
V.  Siebern,  16  Ohio  St.  614  (1866) ;  the  state  statute  permits  its  citizens 
Cummings  v.  Merchants'  Nat.  Bank,  to  deduct  their  debts  from  the  valu- 
101  U.  S.  153  (1879) ;  Supervisors  v.  ation  of  their  personal  property. 
Stanley,  105  U.  S.  305  (1881) ;  s.  c,  Richards  v.  Rock  Rapids,  31  Fed.  Rep. 
sub  nom.  Stanley  v.  Supervisors,  121  505  (1887) ;  Peavey  v.  Greenfield,  64 
U.  S.  535  (1887),  holding  that  the  N.  H.  284  (1887).  As  regards  deduc- 
stockholder  cannot  recover  back  the  tions  for  surplus  funds  which  are 
excess  of  tax  where  he  has  not  already  taxed,  see  Strafford  Nat. 
attempted  to  have  the  tax  remedied;  Bank  v.  Dover,  58  N.  H.  316  (1878). 
Hills  V.  Exchange  Bank,  105  U.  S.  Cf.  North  Ward,  etc.  Bank  v.  Newark, 
319  (1881),  reversing  National  Albany  39  N.  J.  L.  380  (1877);  rev'd  on 
Exeh.  Bank  v.  Wells,  5  Fed.  Rep.  248.  another  point  in  40  N.  J.  L.  558 ;  First 
In  consequence  of  this  escape  of  the  Nat.  Bank  v.  Peterborough,  56  N.  H. 
stockholders  from  taxation,  a  special  38  (1875).  As  regards  its  realty,  see 
statute  was  passed  levying  a  back  Rice  County  Com'rs  v.  Citizens'  Nat. 
tax.  See  N.  Y.  Laws,  1883,  ch.  341.  Bank,  23  Minn.  280  (1877).  In  Indi- 
Such  a  statute  is  constitutional.  See  ana  the  national-bank  stockholder 
McVeagh  v.  Chicago,  49  111.  318  may  recover  back  such  part  of  the 
(1868).  The  legislature  may  cure  any  tax  as  should  have  been  deducted  by 
defects  in  the  levy  of  taxes  in  past  reason  of  his  indebtedness.  Indian- 
years,  provided  such  defects  could  apolis  v.  Vajen,  111  Ind.  240  (1887) ; 
have  been  so  modified  before  the  levy  Exchange  Nat.  Bank  v.  Miller,  19  Fed. 
was    made.     Williams    v.    Supervisors  Rep.  372  (1884). 

of  Albany,  122  U.  S.  154  (1887),  sus-  '  Thus,  a  special  contract  exemp- 
taining  ch.  345,  Laws  of  1883.  Cf.  tion  of  a  few  state  bonds  from  taxa- 
City  Nat.  Bank  v.  Paducah,  2  Flip,  tion  will  not  exempt  the  national 
61  (1877) ;  s.  c,  5  Fed.  Cas.  755.  A  bonds.  Lionberger  v.  Rouse,  9  Wall, 
deduction  to  other  moneyed  corpora-  468  (1869) ;  Hepburn  v.  School  Direc- 
tions for  their  real  estate  must  be  tors,  23  Wall.  480  (1874),  where  an 
allowed  in  taxing  national-bank  shares,  exemption  of  mortgages,  judgments, 
Pollard  V.  State,  65  Ala.  628  (1880),  and  contracts  to  sell  land  were  imma- 
overruling  Mclver  v.  Robinson,  53  terial  therein.  See  also  Adams  v. 
Ala.  456  (1875),  and  Sumter  County  Nashville,  95  U.  S.  19  (1877) ;  Super- 
V.  National  Bank,  62  Ala.  464  (1878).  visors  v.  Stanley,  105  U.  S.  305,  317 
In  general,  see  also  Ruggles  r.  Fond  du  (1881) ;  Re  McMahon,  102  N.  Y.  176 
Lac,  53  Wis.  436  (1881);  Miller  v.  (1886);  McLaughlin  ;;.  Chadwell,  7 
Heilbron,  58  Cal.  133  (1881);  St.  Heisk.  (Tenn.)  389  (1872);  Boyer  v. 
Louis  Nat.  Bank  v.  Papin,  4  Dill.  29  Boyer,  113  U.  S.  689  (1885) ;  Everitt's 
(1876) ;  Covington,  etc.  Bank  v.  Cov-  Appeal,  71  Pa.  St.  216  (1872) ;  Albany, 
ington,  21  Fed.  Rep.  484  (1884).  A  etc.  Bank  v.  Maher,  19  Blatchf.  175 
deduction  for  debts,  if  allowed  to  per-  (1882).  See  also  Richmond  v.  Scott, 
sons  taxed  generally,  must  be  allowed  48  Ind.  568  (1874) ;  Mercantile  Nat. 
national-bank  stockholders  who  are  Bank  v.  New  York,  28  Fed.  Rep.  776, 
taxed  on  their  stock.  McAden  v.  785  (1886).  The  question  of  whether 
Mecklenburg  County,   97  N.   C.    355  state  taxation  of  a  national  bank  vio- 

1678 


CH.  XXXIV.] 


TAX.\TION   OF   STOCK   AND   CORPORATIONS. 


[§  572. 


national-bank  stock  does  not  allow  such  deductions  as  should  be  allowed, 
yet  if  the  proper  deductions  may  be  figured  out,  the  stockholders  cannot 
enjoin  the  tax  unless  they  offer  to  pay  the  amount  which  should  be  paid.^ 
A  statute  taxing  national-bank  stock  for  prior  years  and  imposing  a 
penalty  and  requiring  the  bank  to  pa}^  for  all  the  stockholders,  imposes 
a  burden  not  borne  by  other  moneyed  capital  in  the  state,  and  is  illegal.^ 

Again,  the  national  bank  act  cannot  be  evaded  by  an  unfair  assess- 
ment of  the  shares  in  national  banks  as  compared  with  the  assessment 
of  other  moneyed  capital.  It  is  a  well-known  fact  and  an  understood 
matter  in  nearly  all  localities  that  no  kinds  of  property  are  valued  at 
their  actual  selling  worth  in  making  the  valuation  for  taxation  purposes. 
Consequently,  if  other  moneyed  capital  is  valued  in  the  assessment  rolls 
at  a  certain  proportion  of  the  actual  value,  and  national-bank  stock  at  a 
higher  proportion,  the  tax  is  illegal  and  cannot  be  collected.^ 

§  572.  The  bank  may  bring  suit  to  restrain  an  illegal  tax  on  its 
stockholders.  —  There  has  been  some  doubt  as  to  whether  a  national 
bank  could  bring  suit  to  restrain  an  illegal  tax  on  its  stockholders. 


lates  the  act  of  Congress,  can  be  raised 
only  by  expressly  bringing  in  that  act 
of  Congress.  First  Nat.  Bank  v. 
City  Council,  etc.,  215  U.  S.  341  (1910). 

1  People's,  etc.  Bank  v.  Marye,  191 
U.  S.  272  (1903). 

2  Covington  v.  First  Nat.  Bank,  198 
U.  S.  100  (1905). 

3  Pelton  V.  National  Bank,  101  U.  S. 
143  (1879),  the  court  saying  that 
"any  system  of  assessment  of  taxes 
which  exacts  from  the  owner  of  the 
shares  of  a  national  bank  a  larger 
sum  in  proportion  to  their  actual 
value  than  it  does  from  the  o'WTier  of 
other  moneyed  capital  valued  in  like 
manner  does  tax  them  at  a  greater 
rate  within  the  meaning  of  the  act  of 
congress."  Where,  however,  the  asses- 
sors assess  ordinary  securities  at  three- 
fifths  of  their  actual  value,  and  assess 
bank  stock  at  its  full  actual  value, 
and  such  method  of  unequal  assess- 
ment is  contrary  to  the  constitution 
of  the  state,  the  court  will  relieve 
the  stockholders  only  upon  payment 
by  them  of  such  a  tax  as  would  have 
been  legal.  Cummings  v.  Merchants' 
Nat.  Bank,  101  U.  S.  153  (1879); 
Supervisors  v.  Stanley,  105  U.  S.  305 
(1881).  When  the  national-bank 
stock  is  assessed  too  low,  the  fact  that 
another   bank   is   assessed    still   lower 


will  not  invalidate  the  tax  against  the 
former.  People  v.  Assessors,  2  Hun, 
583  (1874);  aff'd,  67  N.  Y.  521.  In 
First  Nat.  Bank  v.  Treasurer,  25  Fed. 
Rep.  749  (1885),  where  ordinary 
moneyed  capital  was  assessed  at  six 
tenths  of  its  actual  value,  while  shares 
in  national  banks  were  assessed  at  a 
higher  proportion  of  the  real  value,  the 
collection  thereof  was  enjoined  upon 
the  complainant  paying  the  tax  ad- 
mitted to  be  due.  As  to  the  pleadings, 
see  National  Bank  v.  Kimball,  103 
U.  S.  732  (1880).  Lower  valuation 
of  other  property  has  been  held  to  be 
immaterial.  Wagoner  v.  Loomis,  37 
Ohio  St.  571  (1881).  As  regards 
taxation  of  national  banks,  a  custom 
of  assessing  property  at  fifty  per  cent, 
of  its  value  is  not  proved  by  a  few 
examples.  Engelke  v.  Schlenker,  75 
Tex.  559  (1890).  If,  as  a  matter  of 
fact,  personal  property  and  capital  of 
individuals  escape  taxation,  and  little 
effort  is  made  to  tax  such  capital, 
then  a  tax  on  national-bank  stock 
cannot  be  enforced.  If  such  stock  is 
assessed  at  two  thirds  of  its  actual 
value,  and  other  personal  property 
at  one  half  its  value,  the  assess- 
ment is  illegal.  First  Nat.  Bank  v. 
Lindsay,  45  Fed.  Rep.  619  (1891). 


1679 


§572. 


TAXATION    OF   STOCK   AND.  CORPORATIONS. 


[cH.  XXXIV. 


Ordinarily  a  corporation  cannot  do  so.  Each  stockholder  must  pro- 
tect his  own  interests.  But  where,  as  in  the  case  of  national  banks, 
the  tax  is  paid  by  the  bank  itself,  and  collected  by  it  from  its  stockholders, 
if  the  latter  refuse  to  pay  the  bank  or  recognize  its  payment  as  legal, 
many  suits  would  result.  Accordingly,  in  order  to  avoid  a  multiplicity 
of  suits,  it  is  now  well  established  that  the  bank  itself  may  file  a  bill 
in  equity  to  prevent  and  enjoin  the  collection  of  an  illegal  tax  on  its 
stockliolders.^  A  suit  to  declare  invalid  a  tax  levied  on  national-bank 
stock  must  be  in  equity .^  The  New  York  court  of  appeals  holds,  however, 
that  a  suit  in  equity  does  not  lie  at  the  instance  of  a  national  bank  to 
enjoin  the  collection  of  taxes  on  the  stock  of  the  bank,  excepting  in  a 
case  involving  fraud  or  illegal  discrimination  or  classification,^  but  that 


1  Quoted  and  approved  in  Knopf  v. 
First  Nat.  Bank,  173  111.  331  (1898) ; 
City  Nat.  Bank  v.  Padueah,  2  Flip.  61 
(1877);  s.  c,  5  Fed.  Cas.  755,  where 
the  court  said:  "The  bank  is  so  far 
the  trustee  of  the  stockholders  and 
the  custodian  of  the  dividends  that 
it  is  entitled  to  maintain  the  bill.  It 
might  be  subjected  to  great  annoy- 
ance by  stockholders  who  denied  the 
legality  of  the  tax,  and  gave  the  bank 
notice  that  it  would  pay  at  the  peril 
of  being  sued  by  them.  It  is  certainly 
no  hardship  to  permit  the  whole  ques- 
tion to  be  litigated  in  a  single  action." 
This  case  holds  that  an  injunction 
against  the  collection  of  the  illegal 
tax  will  be  granted.  In  general,  see 
also  Albany  City  Nat.  Bank  v.  Maher, 
20  Blatchf.  341  (1882);  North  Ward 
Nat.  Bank  v.  Newark,  40  N.  J.  L. 
558  (1878).  Cf.  Dows  v.  Chicago, 
11  Wall.  108  (1870);  Tappan  v.  Mer- 
chants' Nat.  Bank,  19  Wall.  490 
(1873) ;  Pelton  v.  National  Bank,  101 
U.  S.  143  (1879);  Cummings  v. 
National  Bank,  101  U.  S.  153  (1879). 
Contra,  First  Nat.  Bank  v.  Meredith, 
44  Mo.  500  (1879).  See  also  Union 
Nat.  Bank  v.  Chicago,  3  Biss.  82 
(1871) ;  s.  c,  24  Fed.  Cas.  615.  As  to 
the  rule  in  New  York,  see  People  v. 
Wall  Street  Bank,  39  Hun,  525  (1886) ; 
People  V.  Coleman,  41  Hun,  344  (1866). 
The  same  rule  does  not  apply  to  a  cor- 
poration which  brings  suit  to  prevent 
the  levy  upon  and  sale  of  a  non-resi- 
dent stockholder's  stocks  for  non-pay- 
ment of  his  tax.  Waseca  Co.  Bank  v. 
McKenna,  32  Minn.  468  (1884).     The 


case  of  Farmers'  Nat.  Bank  v.  Cook, 
32  N.  J.  L.  347  (1867),  denies  the  right 
of  the  bank  to  bring  the  action,  and 
says:  "The  corporation  is  not  the 
agent  of  the  stockholders  for  any  such 
piu-pose."  A  national  bank  may  file 
a  bill  to  restrain  the  imposition  of  a 
tax  on  stock,  the  bank  having  to  pay 
the  tax.  But  the  injunction  against 
collection  of  the  tax  is  granted  only 
as  to  the  excess  of  tax.  Whitney  Nat. 
Bank  v.  Parker,  41  Fed.  Rep.  402 
(1890).  A  national  bank  may  test 
the  validity  of  a  tax  on  its  stock. 
Charleston,  etc.  Bank  v.  Melton,  171 
Fed.  Rep.  743  (1909).  The  bank 
cannot  file  a  bill  in  the  federal  court 
unless  the  tax  involved  is  over  $2,000. 
Sioux  Falls  Nat.  Bank  v.  Swenson,  48 
Fed.  Rep.  621  (1892).  A  national 
bank  may  bring  suit  to  relieve  its 
stockholders  from  an  excessive  tax. 
Citizens',  etc.  Bank  v.  Columbia 
County,  23  Wash.  441  (1900).  A 
national  bank  may  appear  and  appeal 
from  a  tax  which  it  is  compelled  to 
pay  in  behalf  of  its  stockholders. 
First  Nat.  Bank  v.  City  of  Independ- 
ence, 123  Iowa,  482  (1904). 

2  Lindsay  v.  First  Nat.  Bank,  156 
U.  S.  485  (1895). 

3  Mercantile,  etc.  Bank  v.  Mayor, 
etc.,  172  N.  Y.  35  (1902).  A  national 
bank  canoot  maintain  an  injunction 
against  the  collection  of  taxes  on  its 
stock  unless  some  ground  of  equity 
jurisprudence  is  involved,  and  cannot 
maintain  such  a  suit  where  the  stock- 
holders do  not,  and  where  the  bank 
has  nothing  to  do  with  the  tax  unless 


1680 


CH.  XXXIV.]  TAXATION   OF   STOCK  AND   CORPORATIONS.  .  [§  572a. 

in  behalf  of  its  stockholders  a  bank  may  institute  proceedings  by  cer- 
tiorari as  to  the  assessment  and  taxation  of  its  shares  of  stock.^  Where 
a  bank  pays  taxes  on  the  shares  of  its  stock  and  claims  that  the  tax  is 
illegal  it  may  maintain  a  suit  to  recover  back  the  tax  without  joining 
the  stockholders.-  Where  a  national  bank  has  paid  an  illegal  tax  on 
its  stock  and  charges  the  same  to  its  stockholders,  a  stockholder  may 
recover  it  back  from  the  municipality  so  collecting  the  tax.^  Even 
though  a  bank  which  in  accordance  with  the  statute  has  paid  taxes 
in  behalf  of  its  stockholders,  has  not  deducted  the  same  from  dividends 
as  it  should  have  done,  a  stockholder  who  has  paid  his  tax  cannot 
hold  the  bank  liable  for  his  proportion  of  the  taxes  not  collected  by  the 
bank  from  other  stockholders.'* 

C.    OTHER   METHODS   OF   T.YXING   CORPORATIONS. 

§  572a.  General  'principles.  —  A  state  may  tax  corporations,  and 
the  rate  of  taxation  may  be  greater  or  less  than  or  equal  to  the  rate 
at  which  individuals  are  taxed. ^  Where,  however,  other  property  is  as- 
sessed at  one  fifth  its  actual  value,  but  street  railway  property  at  its 
full  value,  this  is  depriving  the  street  railway  company  of  the  equal 
protection  of  the  law.®  The  method  of  assessing  taxes  upon  corporations 
varies  of  course  in  the  different  states.^  Where  the  constitution  re- 
quires property  to  be  taxed  at  its  worth,  the  assessors  in  taxing  bank 

they  desire  to  pay  it.     People's,  etc.  porations  having  their  principal  places 

Bank   v.   Marye,    107   Fed.    Rep.   570  out  of  the  state  than  upon  those  hav- 

(1901) ;  aff'd,  191  U.  S.  272.  ing  their  principal  places  of  business 

»  People,  etc.  v.  Purdy,   196  N.  Y.  within  the  state.     Blue  Jacket,  etc.  Co. 

270  (1909).  V.    Scherr,    50    W.    Va.    5.53    (1901). 

2  State  Nat.  Bank  v.  City  of  Mem-  The    Kentucky    statute    imposing    a 

phis,  116  Tenn.  641  (1906).  tax    on    corporations    exercising    any 

'  Guaranty  T.  Co.  v.  City  of  New  special  franchise  not  allowed  by  law 

York,  108  N.  Y.  App.  Div.  192  (1905).  to    natural    persons    does    not    apply 

^  Kennedy  v.  Citizens'  Nat.  Bank,  to    a    tobacco    warehouse    company. 

128  Iowa,  561  (1905).  Louisville,  etc.  Co.  v.  Commonwealth, 

6  It  is  constitutional  to  tax  corpo-  106  Ky.  165  (1899).     229  U.  S.  322. 
rations     without    taxing    individuals.  ^  Raymond  v.  Chicago,  etc.  Co.,  207 

Singer  Mfg.  Co.  v.  Wright,  33  Fed.  Rep.  U.  S.  20  (1907).     An  excessive  valua- 

121  (1887) ;   State  R.  R.  Tax  Cases,  92  tion  of  corporate  property  is  not  in 

U.  S.  575   (1875).     Cf.  Railroad  Tax  itself     evidence     of     fraud.      City   of 

Cases,  13  Fed.  Rep.  722  (1882) ;  Santa  Los   Angeles   v.   Western   Union,   etc. 

Clara  Co.  v.  Raikoad,   18   Fed.  Rep.  Co.,  161  Cal.  204  (1911). 
385  ;  8.  c,  118  U.  S.  396  (1885).     A  tax         ^  A  tax  on  a  gas  company  on  gross 

on  railroads  may  be  legal,  although  the  receipts  and  on  dividends  by  way  of 

assessment  is  for  eighty  per  cent,  of  license  for  the  right  to  act  as  a  cor- 

the  value,  while  on  other  property  in  poration  is  not  a  tax  upon  the  prop- 

the  state  the  assessment  is  sixty  per  erty  or  corporate  franchises,  but  is  a 

cent.     Chamberlain  v.  Walter,  60  Fed.  license  fee.     Jersey  City  Gas-Light  Co. 

Rep.  788  (1894).     It  is  legal  for  a  state  v.  United  Gas,  etc.  Co.,  46  Fed.  Rep. 

to  impose  a  larger  tax  on  domestic  cor-  264  (1891). 
(106)                                        1681 


§  572a. 


TAXATION   OF   STOCK   AND   CORPORATIONS. 


[cH.  XXXIV. 


stock  cannot  put  together  the  capital  stock,  surplus  fund,  and  undivided 
profits  and  then  deduct  one  fourth  in  order  to  arrive  at  the  value  of 
the  stock.  They  must  ascertain  the  market  or  actual  value. ^  A  state 
may  legally  distribute  the  taxes  paid  by  a  railroad  on  its  rolling-stock 
and  personalty  among  the  counties  traversed  by  the  railroad.^ 

Where  a  company  is  really  located  in  a  city  and  does  all  its  busi- 
ness there,  but  its  articles  of  incorporation  state  its  principal  place 
of  business  as  being  in  an  adjacent  town,  the  sole  object  being  to  evade 
taxation,  the  court  will  hold  that  for  taxation  purposes  its  principal 
place  of  business  is  in  such  city.^  If  the  capital  stock  is  invested  in 
patent-rights  there  is  a  difference  of  opinion  as  to  whether  it  may  be 
taxed  by  the  state  .^    A  state  may  compel  corporations  to  pay  taxes 


^  Schley    v.    Montgomery    County    and   in   New    York   under   somewhat 


Com'rs,  106  Md.  407  (1907). 

2  Columbus  Southern  Ry.  v.  Wright, 
151  U.  S.  470  (1894),  the  court  hold- 
ing that  the  rolling-stock,  choses  in 
action,  etc.,  of  a  railroad  have  their 
situs  at  the  domicile  or  place  of  busi- 
ness of  the  company,  but  the  legisla- 
ture may  change  this  situs  for  pur- 
poses of  taxation. 

3  Milwaukee  Steamship  Co.  v.  Mil- 
waukee, 83  Wis.  590  (1892).  Where 
the  actual  place  of  business  of  a  cor- 
poration is  at  one  place,  but  its  nom- 
inal place  of  business  is  fixed  else- 
where in  order  to  evade  taxation,  the 
actual  place  of  business  is  the  place 
where  the  company  will  be  taxed  un- 
der the  Michigan  statutes.  Detroit 
Transp.  Co.  v.  Board  of  Assessors,  91 
Mich.  382  (1892),  distinguishing  the 
New  York  eases.  Where  a  corpora- 
tion does  all  its  business  and  has  all 
its  property  in  a  town  other  than  the 
town  named  as  its  principal  place  of 
business,  the  latter  town  cannot  tax 
it.  Portsmouth  Tp.  v.  Cranage  S.  S. 
Co.,  148  Mich.  230  (1907).  See 
also  Galveston,  etc.  Ry.  v.  Gonzales, 
151  U.  S.  496  (1894),  relative  to 
domicile  and  residence  for  purposes 
of  jurisdiction  of  the  federal  courts. 
In  regard  to  a  corporation  being 
taxed  in  another  place  in  the  state 
from  the  place  where  its  principal 
office  is  located,  see  also  Re  McLean, 
66  Hun,  122  (1892),  aff'd,  138  N.  Y. 
158.  It  must  be  the  principal  place 
or  places  of  business  for  the  purposes 
of    taxation    and    service    of    process; 


similar  statutes  it  is  held  that  the  cer- 
tificate is  conclusive  as  to  this.  West- 
ern Transp.  Co.  v.  Scheu,  19  N.  Y.  408 
(1859).  A  domestic  corporation  will 
not  be  allowed  to  deny  that  it  has  a 
place  of  business  in  the  state.  Chap- 
man V.  Doray,  89  Cal.  52  (1891). 
The  principal  place  of  business  fixed 
by  the  certificate  of  incorporation  is 
conclusive  as  to  taxation.  Loyd's, 
etc.  Trustees  ;;.  City  of  Lynchburg,  75 
S.  E.  Rep.  233  (Va.  1912).  In  tax 
matters  the  state  is  not  bound  by  the 
place  which  is  named  in  the  certificate 
of  incorporation  as  the  chief  place  of 
business.  Home,  etc.  Co.  v.  Benton, 
153  S.  W.  Rep.  830  (Ark.  1913). 
Generally,  the  statutes  prescribe  that 
a  corporation  shall  be  taxed  where  its 
principal  office  or  place  of  business  is 
located.  People  v.  McLean,  17  Hun, 
204  (1879) ;  aff'd,  80  N.  Y.  254  ;  Pelton 
V.  Northern  Transp.  Co.,  37  Ohio  St. 
450  (1882);  Baltimore  v.  Baltimore, 
etc.  Ry.,  57  Md.  31  (1881);  Western 
Transp.  Co.  v.  Scheu,  19  N.  Y.  408 
(1859) ;  Glaize  v.  South  Carolina  R.  R., 
1  Strobh.  (S.  C.)  70  (1846),  holding 
that  a  corporation  may  have  a  special 
or  constructive  residence  extending 
to  the  territorial  limits  of  the  juris- 
diction which  granted  its  charter  for 
purposes  of  taxation. 

''  In  Pennsylvania  it  is  not  taxable. 
Commonwealth  v.  Westinghouse  Elec- 
tric, etc.  Co.,  151  Pa.  St.  265  (1892). 
The  corporate  franchise  may  be  taxed, 
although  substantially  all  the  capital 
stock    is    invested    in    patent-rights. 


1682 


CH.  XXXIV.]  TAX.\TION   OF   STOCK   AND   CORPORATIONS. 


[§  572a. 


for  years  past.^    A  state  may  impose  a  stamp  tax  on  sales  of  stock  made 
in  the  state.^    But  a  statute  imposing  a  tax  of  two  cents  per  share  on 

People    1'.    Knight,    174    N.    Y.    475  owned  by  the  corporation  might  be  in- 

(1903).     In  ascertaining  the  value  of  eluded  in  an  estimate  of  its  property 

capital    stock    for    taxation    stock    is-  for    the    purpose   of   ascertaining    the 

sued  for  patents  may  be  considered  as  taxable  value  of  its  shares  of  stock. 

worth  par.     People  r.  Kelsey,  101  N.  Y.  '  McVeagh  i;.  Chicago,  49  111.  318 

App.  Div.  325  (1905) ;  aflf'd,  181  N.  Y.  (1868).     A  statute  taxing  stockholders 

512.     A  state   may  tax  capital  stock  may    be    retroactive.     Citizens',    etc, 

issued  for  letters  patent,  the  issue  for  Bank?;.  Kentucky,  217 U.  S. 443  (1910). 

patents  in  this  case  being  the  entire  An    attempt    of    the    state    to    make 

capital    stock    of    12,000,000    except  a  railroad  corporation  pay  $1,250,000 

$2,500    which    was    issued    for    cash,  back  taxes,  not  levied,  under  an  alleged 

American,  etc.  Co.   v.  State,   etc.,   70  mistaken  view  of  the  law,  by  former 

N.  J.  L.  172  (1903).     Where  the  entire  state  officials,  failed  in  Commonwealth 

capital    stock   is   invested   in   patent-  v.     Pennsylvania    Co.,     145    Pa.     St. 

rights  and   the  business  of  the  com-  266(1892).     A  statute  taxing  national- 

pany  is  granting  licenses   to  use  the  bank  stock  for  prior  years  and  imposing 

same,  the  value  of  such  patent-rights  a  penalty  and  requiring  the  bank  to 

is  a  part  of  the  capital  to  be  taxed  in  pay  for  all  the  stockholders,  imposes 

New  York.     People,  etc.  v.  Knight,  174  a  burden  not  borne  by  other  moneyed 

N.  Y.  475  (1903) ;  rev'g  67  N.  Y.  App.  capital    in    the    state,    and    is    illegal. 

Div.  333  (1901).     In  Holt  v.  Indiana  Covington    v.   First    Nat.    Bank,    198 

Mfg.  Co.,   80  Fed.   Rep.   1    (1897),  it  U.  S.  100  (1905).     Where  the  charter 

appears  that  the  corporation  enjoined  provides    for    "a    tax    not    exceeding 

state  officials  from  levying  a  tax    on  twenty-five     cents     per     annum     per 

capital   stock   which  represented   pat-  share    on    each   share   of    the   capital 

ent-rights  and  nothing  else.     The  cap-  stock    whenever    the    annual    profits 

ital  stock  of  a  corporation  cannot  be  thereof    shall    exceed    six    per    cent." 

taxed   by  a  state  where  it  has  been  the  legislature  may  compel  the  com- 

issued  for  the  right  to  make,  use,  or  pany   to   pay   such   tax,   and   to   pay 

license  certain  inventions  covered  by  it  for  twenty-five  years  past,   during 

patents,  there  having  been  no  appa-  which  time  the  company  had  evaded 

ratus  or  tangible  property  received  for  payment.      State     v.     Seaboard,    etc, 

the   stock.     This   is   on   the   principle  R.  R.,  52  Fed.  Rep.  450  (1892). 

that  a  patent-right  cannot    be  taxed         ^  Hatch  v.  Reardon,  204  U.  S.  152 

by  a  state.     Commonwealth  v.  Phila-  (1907).     A   state   may   tax   sales   and 

delphia  Co.,   157  Pa.  St.  527   (1893).  transfers  of  certificates  of  stock,  even 

Compare    People    v.    Campbell,    138  though    made    by    non-residents,    the 

N.  Y.  543  (1893).     The  New  Jersey  an-  transaction  being  in  the  state.     People 

nual  tax  is  legal,  although  nearly  the  v.    Reardon,    184   N.    Y.    431    (1906). 

entire  capital   stock  of   the  company  The  defense  in  New  York  State  that 

was  issued  for  patents.     State  v.  State  the   tax   stamps,   which   must   be   at- 

Board,  61  N.  J.  L.  461  (1898).     Where  tached  to  a  sale  of  stock,  had  not  been 

the  stock  is  issued  in  payment  for  the  attached,     must     be     pleaded.     Bean 

exclusive    right    to    use    certain    pat-  v.    Flint,   204   N.    Y.    153    (1912).     A 

ented    articles    within    certain    terri-  gift  of  stock  in  New  York  is  not  good 

tory,    it    is    not    invested    in    patent-  unless    stamps    are    attached    at    the 

rights  so  as  to  be  exempt  from  taxa-  time  of  the  gift  and  delivery.     Matter 

tion  by  reason  of  the  acts  of  Congress,  of  Raleigh,   75  N.  Y.  Misc.   Rep.  55 

Commonwealth   v.    Central,   etc.    Tel.  (1911).     A    person    selling    stock   but 

Co.,  145  Pa.  St.  121  (1891);  Common-  who   fails   to   attach   a  tax   stamp  in 

wealth    V.    Brush,    etc.    Co.,    145   Pa.  accordance  with  the  New  York  statute 

St.  147    (1891).     In   the   ease  Crown,  cannot  enforce  the  sale,  even  though 

etc,  Co.  V.  State,  87  Md.  687  (1898),  he  omitted   the  stamp  inadvertently. 

the     court     held     that     patent-rights  Sheridan  v.   Tucker,   145  N.   Y.  App. 

1683 


§  572a. 


TAXATION   OF   STOCK   AND   CORPORATIONS. 


[cH.  XXXIV. 


all  sales  of  stock,  irrespective  of  the  par  value  of  such  stock,  is  uncon- 
stitutional.^ A  tax  on  transfers  of  stock  does  not  apply  to  an  original 
issue  of  stock.2  ^  statute  authorizing  state  officers  to  examine  the  pri- 
vate books  and  papers  of  an  individual  or  copartnership  to  ascertain 
whether  they  have  affixed  revenue  stamps  to  their  transfers  of  stock  as 
required  by  statute  is  unconstitutional,  as  practically  compelling  a 
person  to  be  a  witness  against  himself  in  a  criminal  proceeding  which 
may  be  brought.^  It  is  constitutional  for  a  state  to  tax  railroad  stock 
without  taxing  stock  in  other  corporations.* 

A  tax  on  the  capital  stock  based  upon  the  amount  of  dividend  declared 
cannot  be  evaded  by  distributing  profits  without  declaring  a  dividend. 
But  a  stock  dividend  may  not  come  within  the  tax  statute.^    The  fact 


Div.  145  (1911).  The  tax  applies  to 
voting  trust  certificates.  United  States 
Rad.  Co.  V.  State,  208 N.  Y.  144  (1913). 
A  tax  on  sales  of  certificates  of  stock 
is  legal  under  the  Massachusetts  con- 
stitution. Opinion  of  the  Justices,  196 
Mass.  603  (1905). 

^  People,  etc.  Farrington  v.  Mensch- 
ing,  187  N.  Y.  8  (1907). 

2  People  V.  Duffy,  etc.  Co.,  122 
N.  Y.  App.  Div.  336  (1907);  aff'd, 
193  N.  Y.  636. 

3  People,  etc.  v.  Reardon,  197  N.  Y. 
236  (1910). 

^  Kidd  V.  Alabama,  188  U.  S.  730 
(1903). 

'  Lehigh,  etc.  Co.  v.  Commonwealth, 
55  Pa.  St.  448  (1867) ;  Commonwealth 
V.  Pittsburg,  etc.  Ry.,  74  Pa.  St.  83 
(1873).  See  State  v.  Franklin  Bank, 
10  Ohio,  91  (1840) ;  People  v.  Home 
Ins.  Co.,  92  N.  Y.  328  (1883).  Where 
taxes  are  based  upon  dividends,  the 
tax  must  be  paid,  even  though  a  divi- 
dend is  declared  nearly  equal  to  the 
capital  stock,  it  being  shown  that  the 
value  of  the  stock  after  the  declara- 
tion of  the  dividend  was  practically 
par,  and  hence  that  the  dividend 
was  not  a  distribution  of  the  capital 
stock.  Commonwealth  v.  Western 
Land,  etc.  Co.,  156  Pa.  St.  455  (1893). 
Where  a  company  has  in  its  treasury 
stock  in  another  company,  and  dis- 
tributes it  among  its  stockholders, 
this  is  a  dividend.  Allegheny  v. 
Pittsburgh,  etc.  Ry.,  179  Pa.  St.  414 
(1897).  Where  a  consolidation  of 
three  corporations  is  made,  by  in- 
creasing the  capital  stock  of  one,  and 
issuing    the    increased    stock    to    the 


stockholders  of  all  three  corporations 
in  the  proportion  agreed  upon,  this  is 
not  a  stock  dividend,  even  though  the 
aggregate  capital  stock  was  $400,000, 
but  by  the  consolidation  is  $1,000,000. 
Allegheny  v.  Federal,  etc.  Ry.,  179 
Pa.  St.  424  (1897).  Where  a  com- 
pany leases  its  property  to  another 
company  at  a  nominal  rental,  and  the 
stockholders  of  the  first  company 
transfer  their  stock  to  the  second 
company  in  exchange  for  stock  of  the 
latter,  no  dividend  is  involved,  and  a 
tax  on  dividends  of  the  first  corpora- 
tion does  not  attach.  Allegheny  v. 
Pittsburgh,  etc.  Ry.,  179  Pa.  St.  414 
(1897).  Where  the  dividends  de- 
clared during  the  year  were  partly 
earned  during  prior  years,  the  latter 
portion  are  not  taxable  under  the 
Pennsylvania  statute  taxing  the  cap- 
ital stock  according  to  the  dividends. 
Commonwealth  v.  Brush,  etc.  Co.  145 
Pa.  St.  147  (1891).  Where  all  the 
shares  are  reduced  in  par  value  from 
$50  to  $38,  and  the  $12  difference  is 
paid  to  the  stockholder  in  cash,  this 
is  a  reduction  of  capital  stock  and 
not  a  dividend,  and  cannot  be  taxed 
as  a  dividend.  Commonwealth  v. 
Central  Transp.  Co.,  145  Pa.  St.  89 
(1891).  A  tax  upon  the  receipts  of 
a  railroad  is  not  a  tax  upon  divi- 
dends. Com'rs,  etc.  v.  Buckner,  48 
Fed.  Rep.  .533  (1891).  A  dividend 
declared  and  ordered  deposited  to  the 
order  of  the  stockholders,  and  so  held 
until  the  further  order  of  the  court,  is 
legal,  and  the  amount  cannot  be  taxed 
as  belonging  to  the  bank.  Pollard  v. 
First  Nat.  Bank,  47  Kan.  406  (1891). 


1684 


CH.  XXXIV.]  TAXL^TION   OF   STOCK   AND   CORPORATIONS. 


[§  572a. 


that  a  company  has  declared  a  dividend  does  not  show  that  the  capital 
stock  has  a  value  subject  to  taxation  under  the  New  York  statute.^ 
A  corporation  claiming  that  it  is  taxed  too  much  cannot  enjoin  collection 
unless  it  offers  to  pay  the  amount  it  admits  to  be  due.^  The  court  will, 
under  the  New  Jersey  statute,  enjoin  a  corporation  from  doing  busi- 
ness if  it  does  not  pay  taxes  levied  upon  it.^  A  statute  may  provide 
that  corporate  charters  granted  by  the  state  shall  cease  ipso  facto  on 
a  certain  date  unless  certain  license  fees  to  the  state  are  paid.^  A  pur- 
chaser of  a  railroad  at  foreclosure  sale  cannot  revive  an  action  begun 
by  the  mortgagor,  after  the  giving  of  the  mortgage,  to  enjoin  the  col- 
lection of  taxes. ^  Where  taxes  are  based  on  the  aggregate  value  of  all 
the  shares  of  stock,  unissued  stock  should  not  be  considered,  even  though 
ten  per  cent,  has  been  paid  on  the  subscription  to  the  latter.^ 

In  ascertaining  the  actual  value  of  capital  stock  for  taxation,  the 
price  at  which  the  stock  is  selling  is  not  taken  as  the  actual  value  where 
the  market  value  is  due  to  speculation  and  market  influences.^  A  tax 
on  the  value  of  the  capital  stock  is  a  tax  on  the  property  in  which  that 


Profits  applied  to  betterments  are  not 
"dividends  earned"  within  the  mean- 
ing of  a  statute  imposing  taxation. 
State  V.  Comptroller,  54  N.  J.  L.  135 
(1891).  See  also  §  534,  supra.  Where 
all  the  stockholders  are  officers,  and, 
instead  of  dividends,  the  corporation 
distributes  its  profits  by  large  salar- 
ies, there  is  danger  that  upon  the 
death  of  one  of  them  others  may  con- 
tinue the  payment  of  such  salaries  to 
themselves,  even  though  they  are  exec- 
utors of  the  deceased  officers'  estate. 
Matter  of  Schaefer,  65  N.  Y.  App.  Div. 
378  (1901);  aff'd,  171  N'.  Y.  686. 
Where  the  stockholders  contribute  a 
surplus  and  afterwards  distribute  it 
again,  this  is  not  a  dividend  within 
the  meaning  of  a  tax  statute.  Peo- 
ple V.  Knight,  96  N.  Y.  App.  Div.  120 
(1904). 

1  People  V.  Barker,  141  N.  Y.  251 
(1894). 

2  Smith  V.  Rude,  etc.  Co.,  131  Ind. 
150  (1892).  See  also  §  572,  notes, 
supra.  An  injunction  is  not  the  proper 
remedy  to  attack  a  tax  erroneously  laid 
on  the  capital  stock.  Jones  v.  Rush- 
ville  Nat.  Gas  Co.,  135  Ind.  595 
(1893). 

'  Re  Electro-pneumatic  Transit  Co., 
51  N.  J.  Eq.  71  (1893). 

*  Kaiser,  etc.  Co.  v.  Curry,  155  Cal. 
638  (1909). 


5  Keokuk,  etc.  R.  R.  v.  Scotland 
County,  152  U.  S.  318  (1894). 

^  Boston,  etc.  R.  R.  v.  Common- 
wealth, 157  Mass.  68  (1892).  Even 
though  a  gas  company  issues  stock 
without  the  consent  of  a  state  board, 
as  required  by  statute,  yet  this  is  no 
defense  to  a  tax  levied  on  the  cor- 
poration based  on  the  amount  of  its 
capital  stock,  including  such  tax.  At- 
torney General  v.  Massachusetts,  etc. 
Co.,  179  Mass.  15  (1901).  The  whole 
capital  stock  may  be  taxed  under  a 
city  charter,  although  only  a  part  of 
it  has  been  paid  in.  Shelby  County, 
etc.  Co.  V.  Shelbyville  Trustees,  91 
Ky.  578  (1891).  Funds  accumulated 
by  a  bank  and  carried  on  the  books 
under  the  head  of  profit  and  loss  may 
not  be  "surplus,"  yet  may  be  subject 
to  taxation  as  an  accretion  to  capital. 
Leather,  etc.  Bank  v.  Treat,  128  Fed. 
Rep.  262  (1904). 

'  Commonwealth  v.  Philadelphia, 
etc.  R.  R.  145  Pa.  St.  74  (1891).  The 
statute  of  1891  in  Pennsylvania  for 
taxing  corporations  according  to  the 
value  of  their  capital  stock  is 
a  tax  on  the  property,  franchises, 
bonds,  money,  and  assets  of  the  cor- 
poration, all  of  which  are  considered 
in  arriving  at  the  tax,  and  the  in- 
debtedness should  also  be  considered. 
Various  decisions  on  this  statute   are 


1685 


§  572a. 


TAXATION    OF   STOCK   AND   CORPORATIONS. 


[CH. 


XXXIV. 


capital  is  invested,  and  hence  if  a  portion  of  the  property  is  beyond  the 
limits  of  the  state,  and  thus  exempt  from  taxation  in  the  state,  that 
portion  of  the  capital  stock  cannot  be  taxed.^  Bonds  of  a  domestic 
corporation  held  by  non-residents  are  not  taxable  by  the  state  creating 
the  corporation.-     A  statute  by  which  Pennsylvania  requires  a  New 

given  in  Commonwealth  v.  N.  Y.  etc.  be  mentioned  make  stock  quotations 
R.  R.,  188  Pa.  St.  169  (1898) ;    Com-    an  indicia,  but  an  unstable  indicia,  of 


monwealth  v.  Manor,  etc.  Co.,  188  Pa. 
St.  195  (1898);  Commonwealth  v. 
Beech  Creek  R.  R.,  188  Pa.  St. 
203  (1898) ;  Commonwealth  v.  Fall 
Brook  R.  R.,  188  Pa.  St.  199  (1898) ; 
Commonwealth  v.   Ontario,   etc.    Ry., 


the  real  value  of  the  capital  stock  as 
an  entirety." 

1  Delaware,  etc.  R.  R.  v.  Pennsyl- 
vania, 198  U.  S.  341  (1905),  holding 
also  that  a  tax  on  a  corporation  on 
its  capital  stock  based  on  a  valuation, 


188  Pa.  St.  205  (1898).     In  Louisiana    which  includes  property  situated  out 
the  corporation  may  sue  to  reduce  or    of  the  state  and  not  to  be  returned,  is 


annul  taxation  of  the  shares  of  stock. 
The  value  of  the  stock  may  be  ascer- 
tained from  various  sources,  includ- 
ing that  of  stock  for  which  it  has 
been  exchanged.  Planters',  etc.  Co. 
Assessor,  41  La.  Ann.  1137  (1889) 


taking  property  without  due  process 
of  law,  in  violation  of  the  United 
States   Constitution. 

2  Railroad  Co.  v.  Jackson,  7  Wall. 
262  (1868) ;  State  Tax  on  Foreign-held 
Bonds,  15  Wall.  300  (1872);    Daven- 


Where  all  the  stockholders  sell  then-    port  v.  Mississippi,  etc.  R.  R.,  12  Iowa, 
stock  at  a  certain  time,  the  price  re-    539  (1861) ;   Commonwealth  v.  Chesa- 


peake, etc.  R.  R.,  27  Gratt.  344  (1876) ; 

,_^_, r.„^.- .,.      ..-      People  V.  Eastman,  25  Cal.  603  (1864), 

etc.    Co.    V.     Gilford,    67    where  the  same  principle  was  applied 

between   counties  in   the  same  state. 

Contra,  Maltby  v.  Reading,  etc.  R.  R., 


ceived  may  be  the  basis  for  the  taxa- 
tion of  the  corporate  property.     Win 
nepiseogee. 


N.  H.  514  (1894).     In  the  case  Chi 

cago,  etc.  Co.  v.  State  Board  of  Equal      , 

ization,  112  Fed.  Rep.  607  (1901),  the  52  Pa.  St.  140  (1866).  As  to  the  rule 
court,  in  speaking  about  the  unrelia-  where  part  of  the  capital  stock  is 
bility'  of  quotations  of  stock  as  a  used  out  of  the  state,  see  Common- 
basis  for  its  intrinsic  value,  said  wealth  v.  Standard  Oil  Co.,  101  Pa. 
(p.  612):  "  The  court  knows  by  experi-  St.  119  (1882);  State  Treasurer  v. 
ence  and  observation  that  railroad  Auditor-General,  46  Mich.  224  (1881) ; 
properties,  when  sold  as  an  entirety.  People  v.  Equitable,  etc.  Co.,  96  N.  Y. 
almost  without  exception,  yield  noth-  387  (1884).  The  Pennsylvania  system 
ing  to  the  stockholder,  although  the  of  taxing  against  corporations  all 
stock  may  have  been  sold  in  share  bonds  issued  by  them  and  owned  by 
lots  upon  the  stock  exchange  for  citizens  of  the  state  and  compelling 
years  previously  at  advanced  figures,  the  corporation  to  pay  the  tax  and 
The  court  knows,  also,  from  observa-  deduct  it  from  the  interest  on  the 
tion,  that  these  stock  quotations  are  bonds  is  constitutional.  Bell's  Gap 
frequently  advanced  by  contending  in-  R.  R.  v.  Pennsylvania,  134  U.  S.  232 
terests  for  control,  or  by  short  inter-  (1890).  The  Pennsylvania  statute  re- 
ests  in  the  market,  such  as  ran  the  quiring  Pennsylvania  corporations  to 
Northern  Pacific  within  a  year  to  deduct  a  tax  from  the  interest  on  its 
quotations  almost  tenfold  its  real  bonds  held  by  residents  and  pay  the 
value.     The    covu-t    also    knows    from  same  to  the  state  is  not  a  preferential 


observation  that  the  speculative  pub 
lie,  dealing  in  stock  sales,  and  making 
its  quotations,  are  governed  largely 
by  the  prospect  of  present  dividends, 
and  not  by  any  general  conception  of 
permanent  earning  capacity.  These 
and   other   considerations    that    could 


debt  against  the  corporation  upon 
its  bankruptcy.  Commonwealth  of 
Pennsylvania  v.  York,  etc.  Co.,  192 
Fed.  Rep.  81  (1911).  A  consolidated 
New  York  and  Pennsylvania  railroad 
must  deduct  from  the  interest  on  its 
bonds  owned  by  residents  in  Pennsyl- 
1686 


CH.  XXXIV.] 


TAXATION   OF   STOCK   AND   CORPORATIONS. 


[§  572o. 


York  railroad  corporation  doing  business  in  Pennsylvania  to  pay  to  the 
latter  a  part  of  coupons  due  to  residents  of  Pennsylvania,  such  coupons 
being  by  their  terms  payable  in  New  York,  is  void.^  In  Kentucky  a 
railroad  cannot  be  taxed  to  aid  in  paying  a  municipal  subscription  to  its 
construction.^ 

"  A  license  fee  is  understood  to  be  a  charge  for  the  privilege  of  carry- 
ing on  a  business  or  occupation,  and  is  not  the  equivalent  or  in  lieu 
of  a  property  tax."  Hence  a  license  fee  exacted  for  cars  on  a  street 
railroad  does  not  prevent  other  forms  of  taxation.^  The  franchise 
to  build  and  operate  a  street  railway  is  subject  to  taxation.  A  license 
fee  may  be  imposed  on  the  railway,  although  under  its  franchise  it  is 
also  bound  to  pay  other  taxes  annually.'*  The  taxation  of  unincorpo- 
rated associations  is  considered  elsewhere.^  Where  a  railroad  company 
of  one  state  is  consolidated  with  companies  of  other  states,  the  consoli- 
dated company  is  considered,  for  the  purposes  of  taxation,  to  be  a  corpo- 
ration of  each  state  to  the  extent  that  its  property  is  in  that  state.  It  is 
taxed  in  the  state  on  the  capital  stock  of  the  company  which  it  absorbed.^ 


vania  the  tax  as  required  by  statute, 
even  though  the  bonds  are  in  New  York 
as  security  for  a  debt.  Commonwealth 
V.  Excelsior,  etc.  Co.,  233  Pa.  St.  84 
(1911).  Where  an  express  company, 
being  an  unincorporated  stock  asso- 
ciation, has  twelve  million  dollars  sur- 
plus and  invests  it  in  outside  securi- 
ties, and  then  deposits  the  securities 
with  a  trust  company  in  New  York, 
and  then  makes  a  bond  dividend,  the 
bonds  to  be  payable  only  out  of  such 
securities,  and  the  creditors  of  the 
company  to  have  recourse  to  such 
seciirities,  a  tax  cannot  be  levied 
thereon  in  Kentucky.  Coulter  v.  Weir, 
127  Fed.  Rep.  897  (1904). 

'  New  York,  etc.  R.  R.  v.  Penn- 
sylvania, 153  U.  S.  628  (1894),  rev'g 
150  Pa.  St.  245.  Where  a  state,  by 
charter  granted  to  a  railroad  com- 
pany, limits  the  taxation  to  a  certain 
amount,  it  cannot  afterwards  compel 
the  company  to  deduct  from  coupons 
due  on  bonds  owned  by  residents  a 
part  of  such  coupons,  and  pay  that 
part  to  the  state.  New  York,  etc. 
R.  R.  V.  Pennsylvania,  153  U.  S.  628 
(1894). 

2  Louisville,  etc.  R.  R.  v.  Common- 
wealth, 89  Ky.  531  (1890). 

3  Brooklyn  City  R.  R.  v.  New  York, 
199  U.  S.  48  (1905).  See  also  §  938, 
infra. 


*  New  Orleans,  etc.  Co.  v.  New  Or- 
leans, 143  U.  S.  192  (1892).  A  state 
may  levy  an  occupation  tax  on  whole- 
sale dealers  in  some  articles  without 
levying  it  on  wholesale  dealers  in 
other  articles.  Southwestern  Oil  Co. 
V.  Texas,  217  U.  S.  114  (1910). 

^  See  ch.  XXIX,  supra. 

6  Ohio,  etc.  R.  R.  v.  Weber,  96  111. 
443  (1880) ;  Chicago,  etc.  Ry.  v.  Audi- 
tor-General, 53  Mich.  79  (1884) ;  Rail- 
road Co.  V.  Vance,  96  U.  S.  450  (1877). 
In  this  case  a  railroad  corporation  of 
Indiana  which  had  been  recognized 
by  an  act  of  the  Illinois  legislature  as 
a  corporation  of  that  state  was  held 
for  taxes  upon  the  capital  and  fran- 
chises of  a  road  leased  by  it  in  Illi- 
nois and  assessed  to  the  lessor 
company,  but  charged  to  the  lessee 
company  and  to  be  collected  from  it. 
Quincv  R.  R.  Bridge  Co.  v.  Adams 
County,  88  111.  615  (1878),  where  a 
bridge  company  originally  incorpo- 
rated by  two  states,  and  consolidated 
by  articles  which  were  confirmed  by 
the  legislature  of  one  of  them  (Illi- 
nois), was  held  to  be  a  corporation  of 
that  state  for  purposes  of  taxation. 
An  incorporating  fee  is  not  imposed  on 
the  whole  consolidated  capital  under 
the  New  York  statute.  People  v.  New 
York,  etc.  R.  R.,  129  N.  Y.  474  (1892). 
The  state  may  constitutionally  charge 


1687 


§  572a.]  TAXATION    OF   STOCK   AND   CORPORATIONS.  [cH.  XXXIV. 

After  the  charter  of  a  corporation  expires  if  business  is  continued 
in  its  name,  this  is  a  copartnership  and  the  property  cannot  be  as- 
sessed for  taxation  in  the  name  of  the  corporation.^  The  word  "  fran- 
chise "  has  been  construed  to  mean  the  entire  property,  tangible  and 
intangible,  when  so  intended  in  a  taxation  statute.^  A  state  may  tax 
a  franchise  of  the  corporation  at  its  full  value,  although  it  taxes  tangible 
property  at  less  than  the  full  value  .^  The  valuation  of  the  franchises 
of  a  public  service  corporation  for  taxation  purposes  was  carefully 
considered  by  the  New  York  court  of  appeals  in  1909.  The  court 
approved  the  application  of  the  plan  of  using  the  new  earnings  as  a 
basis  of  arriving  at  the  value  of  the  franchise  to  use  the  streets,  although 
the  court  said  that  bad  management  of  the  corporation  might  in  partic- 
ular instances  necessitate  the  use  of  some  other  plan  of  arriving  at  such 
value.  The  net  earnings  plan  was  applied  by  ascertaining  the  gross 
earnings  and  deducting  therefrom  the  operating  expenses  (including 
taxes  actually  paid ;  also  a  reasonable  allowance  for  depreciation  to  be 
determined  by  experts),  and  six  per  cent,  on  the  capital  invested  in 
tangible  property  (including  the  present  value  of  land  instead  of  the 
original  cost),  and  then  capitalizing  the  remainder  at  seven  per  cent.^ 
The  court  also  held  that  the  value  of  the  franchise  so  capitahzed  should 
be  correspondingly  reduced  if  ordinary  real  estate  is  not  assessed  at  its 
full  value.  Obsolescence  as  well  as  depreciation  are  to  be  considered 
in  valuing  property  for  taxation.^  The  franchise  to  be  a  corporation 
exists  only  in  the  state  creating  it  and  hence  a  tax  statute  relative  to 
domestic  corporations  cannot  be  construed  as  allowing  deductions  for 
a  part  of  the  franchise  which  is  exercised  outside  of  the  state.®     A  statute 

a  large  fee  as  a  condition  of  granting  from  such  stock,  is  not  subject  to  a 

a  charter.      Edwards  v.   Denver,   etc.  license  or  franchise  tax  in  New  York. 

R.  R.,  13  Colo.  .59  (1889).  People  v.  Kelsey,  101  N.  Y.  App.  Div. 

1  Ewald  Iron  Co.  v.  Commonwealth,  205  (190.5).  A  holding  corporation  is 
140  Ky.  692  (1910).  subject    to    tax   by    the    state   on   its 

2  Adams  Express  Co.  v.  Kentucky,  franchise  and  the  assessed  value  of  the 
166  U.  S.  171  (1897).  A  clause  that  a  franchise  may  be  based  on  the  value  of 
lessee  shall  pay  all  taxes  was  con-  its  holdings  of  stock,  bonds,  etc. 
strued  to  cover  a  franchise  tax  in  the  Commonwealth  v.  Southern  Pac.  Co., 
case  Thomas  v.   Cincinnati,  etc.   Ry.,  149  S.  W.  Rep.  1105  (Ky.  1912). 

93  Fed.  Rep.  587   (1889).     The  fran-  ^  Coulter  ;;.   Louisville,  etc.   R.   R., 

chises  of  a  bank,  namely,  the  corporate  196  U.  S.  599  (1905). 

franchise  to  do  banking  business,  may  ^  People  v.  State  Board  of  Tax  Com., 

be  taxed.     The  value  of  the  shares  of  196  N.  Y.  39,  and  197  N.  Y.  33  (1909). 

stock  may  be  considered  in  fixing  the  ^  People,  etc.  v.  Tax  Commissioners, 

value  of  the  franchise.     Bank  of  Call-  69  N.   Y.   Misc.    Rep.    646,   656,   657 

fornia    v.    City,    etc.,     142    Cal.    276  (1910) ;  aff'd,  146  N.  Y.  App.  Div.  373  ; 

(1904).     A   New   Jersey   holding   cor-  United  States  v.  Nipissing  Mines  Co., 

poration    whose   entire   assets   consist  202  Fed.  Rep.  803  (1912). 

of  stock  in  a  New  York  corporation,  ^  American   Glue   Co.   v.   Common- 

and   whose   entire   income   is   derived  wealth,  195  Mass.  528  (1907). 

1688 


CH.  XXXIV.]  TAXATION   OF   STOCK  AND   CORPORATIONS.  [§  572a. 

by  which  a  corporation  which  fails  to  return  its  property  for  taxation, 
is  bound  by  the  assessment  thereafter  made  without  opportunity  to 
object  to  the  same,  except  for  fraud  or  corruption,  is  unconstitutional 
as  depriving  the  corporation  of  its  property  without  due  process  of 
law.^  An  adjudication  as  to  an  assessment  or  tax  for  one  year  is  not  res 
judicata  as  to  subsequent  years  if  the  vahie  or  the  assessors  have 
changed.-  Real  estate  necessary  to  a  quasi-public  corporation  cannot 
be  taxed  locally  unless  the  statute  expressly  so  provides,  inasmuch  as 
it  might  result  in  a  sale  of  the  property  piecemeal.^  A  tax  on  national- 
bank  stock  follows  the  stock  into  a  transferee's  hands  until  barred  by 
the  statute  of  limitations.^  A  state  cannot  tax  submarine  cable 
lying  on  the  bottom  of  the  ocean  beyond  the  jurisdiction  of  the  state.^ 
An  assessment  will  not  be  set  aside  by  the  court  unless  it  is  shown  to 
have  been  made  fraudulently  or  by  the  clear  adoption  of  a  fundamentally 
wrong  principle.^  Mere  demand  of  a  tax  is  not  duress  but  a  penalty 
for  non-payment  may  constitute  duress.^  And  a  corporation  upon 
which  an  illegal  license  fee  has  been  levied  need  not  wait  until  the  state 
seizes  its  property  or  commences  suit,  but  may  pay  and  sue  to  recover 
the  amount  back.^  A  state  in  fixing  for  assessment  purposes  the  value 
of  the  property  and  franchises  within  the  state  of  a  quasi-public  corpora- 
tion which  owns  a  system  of  telegraphs  running  through  many  states, 
may  consider  the  unity  of  use  of  a  whole  system  as  adding  value  to  that 
part  of  the  system  which  is  within  the  state  first  mentioned.^  The 
same  principle  of  law  has  been  applied  to  taxation  of  a  ferry  company 

1  Central  of  Georgia  Ry.  v.  Wright,  ^  Gaar,   Scott    &    Co.    v.    Shannon, 
207  U.  S.  127  (1907) .     See  229  U.  S.  481.  223  U.  S.  468  (1912). 

2  People  V.  Lundel,   1.57  N.  Y.  513  » Atchison,  etc.  Ry.,  223  U.  S.  280 
(1899),   distinguishing  People  v.   Car-  (1912). 

ter,   119  N.  Y.  557   (1890).     See  also  ^  Massachusetts    v.  Western  Union 

Liquidating    Commissioners    v.    Mar-  Tel.  Co.,   141  U.  S.  40   (1891) ;  State 

rero,    106    La.    130    (1902);     City    of  t).  Western  Union  Tel.  Co.,  165  Mo.  502 

Lowell  t'.  Middlesex  County,  1.52  Mass.  (1901);    aff'd    in  Western  Union  Tel. 

372  (1890) ;  Am.  &  Eng.  Eney.  of  Law  Co.  v.  Gottlieb,  190  U.  S.  412  (1903) ; 

(2d  ed.),  pp.  694,  701.     A  judgment  Western  Union   Tel.   Co.   v.   Taggart, 

against  state  officials  as  to  the  validity  141  Ind.  281  (1894) ;  aff'd,  163  U.  S.  1 ; 

of  corporate  taxes  is  not  res  judicata  Adams    Express   Co.    v.    Indiana,    165 

binding    on    a    county    in    the    state.  U.  S.  255  (1897) ;   Adams  Express  Co. 

Bank  of  Kentucky  v.   Kentucky,  207  v.  Ohio,  165  U.  S.  194  (1897) ;    Cleve- 

U.  S.  258  (1907).  land,  etc.  Ry.  Co.  v.  Backus,  154  U.  S. 

3  Conoy  Tp.  Sup'rs  v.  York  Haven,  439  (1894) ;    Pittsburgh,  etc.  Ry.  Co. 
etc.  Co.,  222  Pa.  St.  319  (1908).  v.    Backnis,    154    U.    S.    421    (1894) ; 

*  Citizens',  etc.  Bank  v.  Kentucky,  Pullman  Co.  v.  Pennsylvania,  141  U.  S. 

217  U.  S.  443  (1910).                        .  18(1891);     Western   Union  Tel.  Co. 

=  Commercial    Cable    Co.   v.  Attor-  v.    Missouri,    190    U.    S.    412  (1903) ; 

ney-General    of    Newfoundland,     107  Comp.  Delaware,  etc.  R.  Co.  v.  Penn- 

L.  T.  Rep.  101  (1912).  sylvania,  198  U.  S.  341  (1905) ;    Fargo 

«  Chicago,  B.  &  Q.  Ry.  v.  Babeock,  v.  Hart,  193  U.  S.  490  (1904)  ;    State 

204  U.  S.  585  (1907).  v.   Northwestern   Tel.    Exchange   Co., 

1689 


§  5726. 


TAXATION    OF    STOCK   AND    CORPORATIONS. 


[cH.  XXXIV. 


which  owns  the  entire  capital  stock  of  two  subsidiary  railroad  com- 
panies, one  in  the  state  and  one  in  the  adjoining  state. ^ 

§  5726.  Exemptions  from  taxation.  —  A  state,  if  not  restricted  by 
its  constitution,  may  exempt  the  property  of  a  corporation  from  taxa- 
tion. Such  an  exemption  constitutes  a  contract  between  the  state  and 
the  corporation,  which  cannot  be  repealed  or  changed  by  subsequent 
legislation,  unless  the  right  to  alter  or  repeal  it  has  been  reserved  by 
the  state.^     Exemptions  from  taxation,  however,  are  not  favored  by 


107  Minn.  390  (1909) ;  Hart  v.  Smith, 
159  Ind.  182  (1902),  the  court  in  the 
last  case  holding  that  the  "good-will" 
could  not  be  assessed  on  this  plan. 
See  130  Pac.  Rep.  565  and  §  572d, 
infra. 

1  State  V.  Wiggins  Ferry  Co.,  208 
Mo.  622  (1907),  the  court  saying 
(p.  649)  :  "It  is  perfectly  legitimate  in 
estimating  the  value  of  the  property 
of  the  respondent  in  this  State,  to 
take  into  consideration  the  value  such 
property  derived  from  its  use  in  a 
system  of  doing  business  by  reason  of 
its  connection  with  and  relation  to 
other  property  of  the  respondent  which 
may  be  located  in  another  State."  It 
will  be  noticed  that  the  court  is 
referring  to  other  property  owned  by 
the  ferry  company. 

2  See  §  568,  supra.  An  exemption 
of  a  railroad  from  taxation,  except 
when  the  dividends  exceed  eight  per 
cent.,  is  a  contract  protected  by  the 
federal  constitution.  Mobile  &  Ohio 
R.  R.  V.  Tennessee,  153  U.  S.  486  (1894). 
An  exemption  from  state  taxation  is  a 
contract  between  the  state  and  the 
corporation  which  cannot  be  impaired 
by  a  subsequent  statute.  Such  ex- 
emption, however,  will  not  be  ex- 
tended to  branch  lines  thereafter  con- 
structed. Wilmington,  etc.  R.  R.  v. 
Alsbrook,  146  U.  S.  279  (1892). 
An  exemption  from  taxation  on  cor- 
porate property  exempts  any  natural 
increase  in  value  of  that  property. 
Wright  V.  Georgia,  etc.  Co.,  216  U.  S. 
420  (1910).  In  Commissioners,  etc. 
V.  Baltimore,  etc.  Co.,  99  Md.  481 
(1904),  the  court  construed  the  Mary- 
land statute  exempting  the  personal 
property  of  corporations  from  taxa- 
tion, where  the  shares  of  stock  were 
taxed.  See,  in  general,  Tomlinson 
V.     Branch,     15     Wall.     460     (1872); 


Home  of  the  Friendless  v.  Rowse, 
8  Wall.  430  (1869);  Wilmington 
R.  R.  V.  Reid,  13  WaU.  264  (1871) ; 
Mobile,  etc.  R.  R.  v.  Moseley,  52  Miss. 
127  (1876) ;  Jefferson  Bank  v.  SkeUey, 
1  Black,  436  (1861),  where  the  char- 
ter provided  for  the  payment  of  six 
per  cent,  of  the  bank's  profits  in  lieu 
of  taxes ;  Livingston  County  v.  Han- 
nibal, etc.  R.  R.,  60  Mo.  516  (1875), 
where,  however,  an  exemption  from 
county  taxes  was  held  not  to  include  a 
school  tax  which  originated  after  the 
charter  was  granted ;  St.  Joseph  v. 
Hannibal,  etc.  R.  R.,  39  Mo.  476 
(1867),  holding  that  an  exemption 
from  county  taxation  will  not  prevent 
taxation  by  a  city.  A  contract  be- 
tween the  state  and  a  railroad,  that  the 
latter  shall  pay  a  certain  tax  and  no 
more,  is  not  repealable  by  the  state. 
State  Board  v.  Morris,  etc.  R.  R.,  49 
N.  J.  L.  193  (1886).  Though  a  char- 
ter may  be  repealable,  yet  an  amend- 
ment giving  an  exemption  from  tax- 
ation may  be  irrepealable,  since  the 
latter  may  be  a  contract  and  not  a 
franchise.  State  Board  v.  Morris,  etc. 
R.  R.,  49  N.J.  L.  193  (1886).  A  bonus 
to  the  state  on  increase  of  capital 
stock  cannot  apply  to  previous  char- 
ters having  charter  right  to  increase. 
Commonwealth  v.  Erie,  etc.  Transp. 
Co.,  107  Pa.  St.  112  (1884) ;  Railroad 
Cos.  V.  Gaines,  97  U.  S.  698  (1878), 
holding  that  a  new  corporation  in- 
vested with  the  powers  and  privileges 
of,  and  subject  to  the  obligations  of 
the  charter  of,  another  corporation, 
does  not  take  an  exemption  from  tax- 
ation. To  same  effect,  Railroad  Co.  v. 
Commissioners,  103  U.  S.  1  (1880), 
Dauphin,  etc.  Ry.  v.  Kennerly,  74  Ala. 
583  (1883).  But  see  East  Tennessee, 
etc.  R.  R.  V.  Pickerd,  24  Fed.  Rep.  614 
(1885) ;     Delaware   Raikoad   Tax,    18 


1690 


CH.   XXXIV. 


TAXATION   OF   STOCK   AND   CORPORATIONS. 


[§  5726. 


the  courts,  and  are  strictly  limited  to  the  terms  of  the  exemption.     Thus 
an  exaction  of  a  money  consideration  from  a  street  railway  as  a  condition 


Wall.  206  (1873) ;  Dartmouth  College 
V.  Woodward,  4  Wheat.  518  (1819); 
Providence  Bank  v.  Billings,  4  Pet. 
514  (1830);  Binghamton  Bridge,  3 
Wall.  51  (1865);  Humphreys  v. 
Pegues,  16  Wall.  244  (1872);  Pacific 
R.  R.  V.  IMaguire,  20  Wall.  36  (1873) ; 
North  Missouri  R.  R.  v.  Maguire,  20 
WaU.  46  (1873);  People  v.  Soldiers' 
Home,  etc.,  95  lU.  561  (1880) ;  Univer- 
sity V.  People,  99  U.  S.  309  (1878), 
holding  void  a  statute  limiting  a  gen- 
eral exemption  previously  conferred 
to  property  in  immediate  use  by  a 
corporation ;  Farrington  v.  Tennessee, 
95  U.  S.  679  (1877) ;  Railway  Co.  v. 
Philadelphia,  101  U.  S.  528  (1879); 
Hoge  V.  Railway  Co.,  99  U.  S.  348 
(1878);  Dodge  v.  Woolsey,  18  How. 
331  (1855),  holding  that  the  adoption 
of  a  new  constitution  declaring  that 
corporate  property  shaU  be  taxed  will 
not  be  allowed  to  impair  the  contract ; 
Mobile,  etc.  R.  R.  v.  Kennerly,  74  Ala. 
566  (1883) ;  Richmond  v.  Richmond, 
etc.  R.  R.,  21  Gratt.  (Va.)  604  (1872), 
holding  also  that  an  exemption  of 
corporate  property  in  a  city  from  tax- 
ation, which  conflicts  with  the  charter 
of  the  city  previously  granted,  is  not 
unconstitutional  if  the  city  has  re- 
maining ample  means  of  taxation  to 
meet  its  needs  ;  Commonwealth  v.  Fay- 
ette R.  R.,  55  Pa.  St.  452  (1867), 
holding  that,  where  power  to  alter  or 
repeal  the  exemption  is  reserved,  the 
exercise  of  the  power  is  no  impair- 
ment of  the  contract ;  State  v.  Miller, 
30  N.  J.  L.  368  (1863),  holding  that 
the  repeal  may  be  made  by  a  general 
law ;  State  v.  Commissioners  of  Taxa- 
tion, 37  N.  J.  L.  240  (1874),  holding 
that,  where  a  general  exemption  from 
taxation  is  granted  to  a  corporation 
without  reserving  the  power  to  alter 
or  repeal  it,  and  there  is  a  provision 
for  a  special  mode  of  assessing  its 
property,  it  may  consent  to  another 
mode  of  assessment  without  sur- 
rendering or  altering  its  exemption 
from  general  taxation ;  East  Tennes- 
see, etc.  R.  R.  V.  Pickerd,  24  Fed.  Rep. 
614  (1885) ;  Temple  Grove  Seminary 
V.  Cramer,  98  N.  Y.  121  (1885),  hold- 


ing that  an  incorporated  academy 
does  not  waive  or  forfeit  its  exemp- 
tion from  taxation  by  reason  of  hav- 
ing leased  its  building  for  a  boarding- 
house  during  vacations ;  Elizabeth- 
town,  etc.  R.  R.  V.  Elizabethtown, 
12  Bush  (Ky.),  233  (1876),  hold- 
ing that  an  exemption  of  railroad 
property  from  taxation  precludes  any 
imposition  of  taxes  by  the  state, 
whether  for  state  or  local  purposes. 
In  Mott  V.  Pennsylvania  R.  R.,  30  Pa. 
St.  9  (1858),  a  sale  of  a  railroad  and 
canal  by  the  state  on  terms  exempting 
the  vendee  from  future  taxes  was  en- 
joined. The  exemption  was  held  to 
be  unconstitutional.  County  Com'rs 
V.  Woodstock  Iron  Co.,  82  Ala.  151 
(1886),  holding  that  an  exemption  of 
private  corporations  from  taxation 
made  by  a  general  law  was  not  a  con- 
tract, but  only  a  legislative  bounty, 
subject  to  be  repealed. 

The  act  by  which  the  exemption 
from  taxation  is  made  must  be  clear 
and  unequivocal ;  the  intent  to  confer 
the  immunity  must  be  beyond  reason- 
able doubt.  Ohio,  etc.  Trust  Co.  v. 
Debolt,  16  How.  416  (1853) ;  Delaware 
Railroad  Tax,  18  Wall.  206  (1873); 
North  Missouri  R.  R.  v.  Maguire,  20 
Wall.  46  (1873) ;  Mobile,  etc.  R.  R.  v. 
Kennerly,  74  Ala.  566  (1883),  holding 
that  a  reasonable  doubt  is  to  be 
construed  against  the  exemption ; 
Dauphin,  etc.  Ry.  v.  Kennerly,  74  Ala. 
583  (1883) ;  Richmond  v.  Richmond, 
etc.  R.  R.,  21  Gratt.  (Va.)  604  (1872). 
An  exemption  of  a  corporation  from 
taxation  upon  payment  of  a  fixed  an- 
nual tax  on  the  capital  stock  is  not 
voidable.  State  v.  Butler,  86  Tenn. 
614  (1888).  A  particular  mode  of 
taxation  may  be  changed  under  the 
reserved  right  to  amend  the  charter. 
Detroit  St.  Rys.  v.  Guthard,  51  Mich. 
180  (1883).  See  also  Bank  of  Re- 
public V.  Hamilton  County,  21  111.  53 
(1858) ;  Mayor,  etc.  v.  Twenty-thu-d 
Street  R.  R.,  113  N.  Y.  311  (1889).  A 
specific  rate  of  taxation  prescribed  in 
the  charter  raises  no  implication  of 
a  legislative  contract  to  impose  no 
further  burdens  by  way  of  taxation. 


1691 


§  5726. 


TAXATION   OF   STOCK   AND   CORPORATIONS. 


CH.  XXXIV. 


of  a  franchise  does  not  exempt  it  from  further  taxation.^     An  amendment 
exempting  a  corporation  from  taxation  may  be  repealed,  there  being 


Iron  City  Bank  v.  Pittsburgh,  37  Pa. 
St.  340  (1860).  A  constitutional  pro- 
hibition as  to  exemptions  from  taxa- 
tion does  not  apply  to  railroad  cor- 
porations, they  being  quasi-public. 
Yazoo,  etc.  R.  R.  v.  Levee  Com'rs,  37 
Fed.  Rep.  24  (1888).  A  charter  ex- 
emption from  all  taxation  upon  pay- 
ment of  a  certain  tax  is  legal.  Frank- 
lin County  Court  v.  Deposit  Bank,  87 
Ky.  370  (1888).  An  exemption  from 
taxation  which  is  a  gift  may  be  re- 
pealed. Philadelphia  v.  Pennsylvania 
Hospital,  134  Pa.  St.  171  (1890).  An 
exemption  from  taxation  may  be  re- 
pealed under  the  reserved  right  to 
amend,  etc.  Wagner,  etc.  Institute 
V.  Philadelphia,  132  Pa.  St.  612  (1890). 
An  exemption  from  all  other  taxation 
is  an  exemption  from  local  as  well  as 
state  taxation.  People  v.  Coleman,  121 
N.  Y.  542  (1890).  A  railroad  may 
give  up  its  exemption  from  state  tax- 
ation and  still  retain  its  exemption 
from  county  taxation.  State  v.  Han- 
nibal, etc.  R.  R.,  101  Mo.  136  (1890). 
A  railroad  that  is  divided  by  the  leg- 
islature with  the  consent  of  the  stock- 
holders does  not  lose  its  exemptions. 
Louisville,  etc.  R.  R.  v.  Common- 
wealth, 89  Ky.  531  (1890).  An  ex- 
emption from  taxation  is  not  a  fran- 
chise. Hence  quo  warranto  does  not 
lie  to  oust  the  corporation  from  such 
exemption.  International,  etc.  Ry.  v. 
State,  75  Tex.  356  (1889).  The  deci- 
sion of  the  state  court  that  an  exemp- 
tion does  not  apply  to  a  certain  prop- 
erty is  not  an  impairment  of  a  con- 
tract. St.  Paul,  etc.  Rv.  v.  Todd 
County,  142  U.  S.  282  (1892).  Where 
a  contract  of  exemption  from  taxation 
between  a  state  and  a  water-works 
company  is  declared  unconstitutional 
by  the  highest  court  of  the  state, 
there  is  no  impairment  of  the  con- 
tract by  subsequent  legislation  which 
assumes  the  old  contract  to  have  been 
invalid.  New  Orleans  v.  New  Orleans, 
etc.  Works,  142  U.  S.  79  (1891).  In 
Citizens'  Bank  v.  Board  of  Assessors, 


54  Fed.  Rep.  73  (1893),  an  exemption 
from  taxation  was  held  to  apply  to 
extensions  of  the  original  charter. 
Although  the  charter  provides  that 
the  real  and  personal  property  of  the 
company  shall  be  taxed  the  same  as 
that  of  individuals,  this  does  not  ex- 
empt the  capital  stock  from  taxation. 
State  V.  Simmons,  70  Miss.  485  (1893). 
An  exemption  from  taxation  does  not 
pass  to  a  company  that  buys  out  the 
company  which  is  exempt.  Common- 
wealth V.  Nashville,  etc.  Co.,  93  Ky. 
430  (1892).  A  company  to  generate 
and  sell  electric  power  is  not  a  manu- 
facturing company  as  regards  taxa- 
tion. Commonwealth  v.  Northern,  etc. 
Co.,  145  Pa.  St.  105  (1891) ;  Common- 
wealth V.  Brush,  etc.  Co.,  145  Pa.  St. 
147  (1891).  An  exemption  of  manu- 
facturing corporations  from  taxation 
was  construed  to  exempt  merely  such 
of  their  property  as  was  invested  in 
manufacttiring,  in  Commonwealth's 
Appeal,  129  Pa.  St.  346  (1889) ;  Com- 
monwealth V.  Mahoning  RoUing-Mill 
Co.,  129  Pa.  St.  360  (1889).  Where, 
subsequently  to  the  incorporation  of 
a  company,  a  general  act  reserves  to 
the  legislature  the  right  to  amend  or 
repeal  any  and  all  charters,  the  leg- 
islature may  repeal  any  amendments 
to  the  charter,  so  far  as  such  amend- 
ments are  passed  after  the  general 
act,  when  the  amendments  do  not 
expressly  waive  the  legislative  right  of 
amendment  or  repeal,  unless  the 
amendment  is  worded  "saving,  when- 
ever that  power  was  exerted,  all 
rights  previously  vested."  An  exemp- 
tion from  taxation  may  be  repealed 
under  the  reserve  power.  (Approving 
Tomlinson  v.  Jessup,  15  Wall.  454  — 
1872,  and  Raih-oad  Co.  v.  Maine,  96 
U.  S.  499  —  1877.)  Creditors  stand 
upon  the  same  footing  in  this  respect. 
Louisville  Water  Co.  v.  Clark,  143 
U.  S.  1  (1892).  A  contract  of  a  lessee 
to  pay  taxes  upon  the  real  and  personal 
property,  franchises,  capital  stock,  or 
gross  receipts  does  not  bind  the  lessee 


1  Metropolitan,  etc.  Co.  v.  New  York,  199  U.  S.  1  (1905). 
1692 


CH.   XXXIV. 


TAXATION   OF   STOCK   AND   CORPORATIONS. 


[§  5726. 


no  consideration  for  the  contract.^  Moreover,  under  a  reservation 
of  power  to  alter,  amend,  or  repeal  the  charter,  the  legislature  may 
take  away  an  exemption  from  taxation.^ 

Where  a  corporation  whose  property  is  exempt  from  taxation  is 
merged  into  or  consolidated  with  another,  the  question  of  whether 
the  exemption  from  taxation  passes  with  its  property  to  the  lessee, 
vendee,  or  consolidated  company  is  a  question  which  turns  largely 
on  the  words  granting  the  exemption.^  A  statute  authorizing  a  cor- 
poration to  transfer  its  privileges  does  not  authorize  a  transfer  of  an 
exemption  from  taxation.^  Wliere  a  state  owns  a  railroad  and  sells  it 
and  agrees  that  the  tax  shall  be  two  per  cent,  of  its  gross  earnings,  this 
contract  does  not  pass  to  a  purchaser  of  the  railroad.^     Even  though  a 


to  pay  taxes  on  dividends.  Jersey 
City  Gaslight  Co.  v.  United  Gas  Imp. 
Co.,  58  Fed.  Rep.  323  (1893).  An  ex- 
emption of  a  corporation  may  not 
exempt  also  its  timber  lands.  Todd 
County  V.  St.  Paul,  etc.  Ry.,  38  Minn. 
163  (1888).  See  also,  on  this  subject, 
§  501,  supra,  and  §  639,  infra. 

1  Manistee,  etc.  Co.  v.  Commissioner 
of  Raih-oads,  118  Mich.  349  (1898). 

"^  Commissioners,  etc.  Co.  v.  Ban- 
croft, 203  U.  S.  112  (1906).  Louis- 
ville Water  Co.  v.  Clark,  143  U.  S.  1 
(1892);  Pearsall  v.  Great  Northern 
Ry.,  161  U.  S.  646,  663  (1896). 

'  An  exemption  from  taxation  per- 
tains to  the  franchise  as  a  corpora- 
tion, and  does  not  pass  with  the  sale 
of  the  franchise  to  operate  the  road. 
Chesapeake,  etc.  Ry.  v.  Miller,  114 
U.  S.  176  (1885) ;  Memphis  R.  R.  v. 
Com'rs,  112  U.  S.  609  (1884) ;  Tomlin- 
son  i;.  Branch,  15  Wall.  460  (1872); 
Branch  v.  Charleston,  92  U.  S.  677 
(1875);  Central  R.  R.  v.  Georgia,  92 
U.  S.  665  (1875),  reversing  s.  c,  54  Ga. 
401 ;  Chesapeake,  etc.  R.  R.  v.  Vu-- 
ginia,  94  U.  S.  718  (1876) ;  Delaware 
Raih-oad  Tax,  18  Wall.  206  (1873). 
See  also  cases  in  preceding  note,  and 
§  897,  infra.  A  charter  exemption  of 
a  street  railway  company  from  assess- 
ment for  paving  does  not  pass  to  a 
purchaser  of  its  property,  even  though 
the  sale  is  made  under  authority  of  a 
statute  authorizing  the  transfer  of 
"the  estate,  property,  rights,  privileges 


and  franchises."  Moreover  if  the  new 
company  is  incorporated  under  the 
general  act  which  requires  it  to  pave, 
it  cannot  receive  such  exemption  by 
reason  of  any  such  purchase.  Roches- 
ter Ry.  V.  Rochester,  205  U.  S.  236 
(1907);  aff'g  182  N.  Y.  116.  Where 
by  statute,  "all  rights"  of  a  railway 
are  to  pass  to  another,  an  exemption 
from  taxation  passes.  Atlantic,  etc. 
R.  R.  V.  AUen,  15  Fla.  637  (1876).  An 
exemption  will  not  be  extended  to  the 
property  of  other  corporations  con- 
solidated with  it.  Philadelphia,  etc. 
R.  R.  V.  Maryland,  10  How.  376 
(1850) ;  Chesapeake,  etc.  R.  R.  v.  Vir- 
ginia, 94  U.  S.  718  (1876) ;  Delaware 
Raih-oad  Tax,  18  Wall.  206  (1873). 
See  also  Wait,  Insolv.  Corp.  381.  An 
exemption  of  railroad  lands  from 
taxation  may  pass  to  a  railroad  pur- 
chasing the  same.  Stevens  County  v. 
St.  Paul,  etc.  Ry.,  36  Minn.  467  (1887). 
Consolidation  in  Missouri  destroys  ex- 
emption from  taxation.  Keokuk,  etc. 
R.  R.  V.  County  Court,  41  Fed.  Rep. 
305  (1890).  A  consolidated  company 
under  the  Missouri  statutes  relative 
to  railroads  meeting  at  the  state  line 
is  a  new  corporation,  and  the  old  one 
is  dissolved.  An  exemption  from  tax- 
ation of  the  old  corporation  is  thereby 
lost.  State  V.  Keokuk,  etc.  R.  R.,  99 
Mo.  30  (1889).  Although  an  exemp- 
tion from  taxation  is  to  pass  to  a  con- 
solidated company,  yet  this  is  a 
gratuity  to  the  new  company  and  may 


*  Wright  V.   Georgia,  etc.   Co.,  216         ^  Chicago,   etc.    Ry.    v.   Minnesota, 
U.  S.  420  (1910).  216  U.  S.  234  (1910). 

1693 


§  5726.] 


TAXATION    OF   STOCK  AND   CORPORATIONS. 


[CH.  XXXIV. 


railroad  company  is  by  its  charter  exempt  from  taxation,  yet  if  it  merges 
with  other  corporations  in  an  entirely  new  corporation  after  the  adoption 
of  the  constitution  which  reserves  the  right  to  the  legislature  to  amend 
or  repeal  charters,  the  legislature  may  repeal  such  exemption.^  A 
railroad  company  reorganized  under  a  special  act  of  the  legislature 
without  a  new  company  being  chartered,  does  not  lose  a  statutory  exemp- 
tion from  taxation.^ 

Where  a  consolidation  is  effected  after  the  adoption  of  constitutional 
provisions  prohibiting  the  legislature  from  exempting  the  property 
of  corporations  from  taxation,  the  consolidated  company  is  looked  upon 
as  a  new  corporation,  which  is  not  entitled  to  exemptions  from  taxation 
possessed  by  the  companies  of  which  it  is  composed.^  A  state  owning 
a  railroad  cannot  in  selling  it  exempt  it  from  regular  taxation  where 
the  constitution  of  the  state  prohibits  such  exemptions.'* 

Consolidation,  being  a  dissolution  of  the  old  companies,  destroys 
an  exemption  of  one  of  them  from  taxation.^ 

If  the  franchises  and  property  of  a  corporation  be  transferred  by  a 
sale  in  foreclosure,  an  exemption  from  taxation  does  not  accompany 
the  transfer.     The  exemption  is  a  personal  privilege  and  not  a  franchise.^ 


be  repealed.  Wilmington,  etc.  R.  R. 
V.  Alsbrook,  110  N.  C.  137  (1892); 
aff'd,  146  U.  S.  279. 

1  Northern,  etc.  Ry.  v.  Maryland, 
187  U.  S.  258  (1902). 

2  Powers  V.  Detroit,  etc.  Ry.,  201 
U.  S.  543  (1906). 

'Memphis,  etc.  R.  R.  v.  Berry,  112 
U.  S.  609  (1884) ;  St.  Louis,  etc.  R.  R. 
V.  Berry,  113  U.  S.  465  (1885) ;  Chesa- 
peake, etc.  R.  R.  V.  Miller,  114  U.  S. 
176  (1885).  Where  the  legislature 
ceded  to  a  company  to  be  formed  "all 
the  right,  interest,  and  privileges  of 
whatever  kind"  of  a  defunct  railroad 
company,  it  was  held  that  an  exemp- 
tion from  taxation  conferred  on  the 
old  company  was  not  vested  in  the 
new  one.  Railroad  Co.  v.  Georgia,  98 
U.  S.  359  (1878).  In  this  case  the 
restriction  upon  granting  exemptions 
was  in  a  statute  instead  of  a  consti- 
tutional provision. 

^  Great  Northern  Ry.  v.  Minnesota, 
216  U.  S.  206  (1910). 

*  Keokuk,  etc.  R.  R.  v.  Missouri,  152 
U.  S.  301  (1894),  reviewing  the  cases 
on  this  subject  of  dissolution,  and 
holding  that  the  presumption  is  always 
against  the  dissolution.  Where,  in 
consolidating,      new      certificates      of 


stock  are  issued,  a  new  board  of  di- 
rectors elected,  and  the  constituent 
companies  cease  their  functions,  the 
old  companies  are  thereby  dissolved 
and  a  new  company  is  formed,  even, 
though  the  name  of  the  new  company 
is  the  same  as  one  of  the  old  com- 
panies. Hence  exemptions  from  tax- 
ation existing  under  the  old  charters 
cease  where  a  new  constitution 
enacted  prior  to  such  consolidation 
prescribes  that  the  property  shall  be 
taxed  in  proportion  to  its  value. 
Yazoo,  etc.  Ry.  v.  Adams,  180  U.  S.  1 
(1901),  aff'g  77  Miss.  194. 

«  Morgan  v.  Louisiana,  93  U.  S.  217 
(1876) ;  Louisville,  etc.  R.  R.  v. 
Palmes,  109  U.  S.  224  (1883) ;  Wilson 
V.  Gaines,  103  U.  S.  417  (1880),  where 
the  transfer  was  under  proceedings  to 
enforce  a  statutory  lien  of  a  state ; 
Arkansas  Midland  R.  R.  v.  Berry,  44 
Ai-k.  17  (1884).  See  also  Picard  v. 
East  Tennessee,  etc.  R.  R.,  130  U.  S. 
637  (1889),  and  cases  supra.  Where 
the  exemption  is  to  all  the  property 
of  a  railroad  its  franchise  is  included. 
Wilmington  R.  R.  v.  Reid,  13  Wall.  264 
(1871).  As  to  whether  an  exemption 
from  taxation  is  a  franchise  or  priv- 
ilege, see  Keokuk,  etc.  R.  R.  v.  Mis- 


1694 


CH.   XXXIV.] 


TAXATION   OF   STOCK  AND   CORPORATIONS. 


[§  5726. 


The  federal  courts  will  follow  a  state  decision  to  the  effect  that  the  stat- 
utes of  that  state  have  repealed  an  exemption  which  is  repealable  legally.^ 
A  statute  exempting  the  property  of  a  corporation  from  being  taxed 
does  not  prevent  the  taxation  of  land  held  by  it  merely  for  convenience 
and  not  necessary  to  its  operation.^  Where  a  corporation  owns  prop- 
erty in  excess  of  an  amount  specified  and  limited  by  the  charter,  an 
exemption  from  taxation  does  not  apply  to  such  excess.^  In  general, 
an  exemption  from  taxation  by  the  state  is  not  an  exemption  also  from 
municipal  taxation  for  local  purposes/  nor  from  assessments  for  improve- 
ments,^ nor  from  a  license  fee.^    An  exemption  of  the  capital  stock  of 

of  the  manufactured  product  in  the 
state  is  included.  Re  Consolidated 
Electric  Storage  Co.,  26  Atl.  Rep.  983 
(N.  J.  1893).  For  cases  passing  upon 
the  exemption  of  manufacturing  cor- 
porations from  taxation  in  Pennsyl- 
vania, see  Commonwealth  v.  Keystone 
Bridge  Co.,  156  Pa.  St.  500  (1893); 
Commonwealth  v.  J.  B.  Lippincott  Co., 

156  Pa.  St.  513  (1893);  Common- 
wealth V.  Thackara  Mfg.  Co.,  156  Pa. 
St.  510  (1893);  Commonwealth  v. 
PottsviUe  Iron,  etc.  Co.,  157  Pa.  St. 
500  (1893) ;  Commonwealth  v.  Juniata 
Coke  Co.,  157  Pa.  St.  507  (1893); 
Commonwealth   v.   National   Oil   Co., 

157  Pa.  St.  516  (1893). 
^  Children's  Seashore  House,  etc.  v. 

City  of  Atl.  City,  65  N.  J.  Eq.  488 
(1900). 

*  Elizabethtown,  etc.  R.  R.  v.  Eliza- 
bethtown,  12  Bush  (Ky.),  233  (1876) ; 
Roosevelt  Hospital  v.  Mayor  of  New 
York,  84  N.  Y.  108  (1881),  where  real 
estate  exempted  from  state  taxation 
was  held  to  be  subject  to  assessment 
by  a  citj'  for  the  construction  of  a 
sewer.  Cf.  Applegate  v.  Ernst,  3  Bush 
(Ky.),  648  (1868),  where  a  tax  by  a 
county  upon  a  railroad  to  obtain 
money  to  pay  a  county  subscription 
for  the  piu*pose  of  completing  the 
road  was  held  to  be  unlawfiil.  An  ex- 
emption from  local  taxation  is  not  an 
exemption  from  state  taxation.  Wilkes 
Barre,  etc.  Bank  v.  Wilkes  Barre,  148 
Pa.  St.  601  (1892). 

^  New  Jersey,  etc.  R.  R.  v.  Jersey 
City,  42  N.  J.  L.  97  (1880).  An  exemp- 
tion from  taxation  does  not  apply  to  as- 
sessments for  improvements.  Illinois 
Cent.  R.R.  ?;.Mattoon,  141  111.  32  (1892). 

^  An  exemption  of  the  capital  stock 


souri,  152  U.  S.  301,  311  (1894).  In 
a  mortgage  foreclosiu-e  a  new  cor- 
poration taking  over  the  property  does 
not  succeed  to  an  exemption  from  tax- 
ation, even  though  it  is  given  by  stat- 
ute all  the  "  franchise  rights  and  priv- 
ileges" of  the  old  corporation.  Lake 
Drummond,  etc.  Co.  v.  Commonwealth, 
103  Va.  337  (1905).  Where  a  raib-oad 
is  foreclosed  an  exemption  from  tax- 
ation does  not  pass  to  the  purchaser 
at  the  foreclosure  sale,  even  though  the 
statutes  give  to  such  purchaser  all  the 
rights,  immunities,  privileges,  etc.,  of 
the  former  company.  Baltimore,  etc. 
Ry.  V.  Ocean  City,  89  Md.  89  (1899). 

^  Com'rs  of  Wicomico  County  v. 
Bancroft,  203  U.  S.  112  (1906) ;  rev'g 
135  Fed.  Rep.  977. 

2  State  V.  Commissioners,  23  N.  J.  L. 
510  (1852);  State  v.  Collectors,  25 
N.  J.  L.  315  (1855).  In  these  cases 
lands  owned  by  a  railroad  and  occu- 
pied by  dwellings  for  employees,  ear 
and  locomotive  works,  coal  mines, 
etc.,  were  held  to  be  subject  to  taxa- 
tion. See  also  Toll-bridge  Co.  v.  Os- 
born,  35  Conn.  7  (1868),  where  lands 
held  for  wharves  by  a  bridge  company 
by  authority  of  law  were  held  taxable 
as  real  estate  —  a  provision  in  its  char- 
ter that  all  its  property  should  be 
considered  personal  property  and  be 
divided  into  shares  being  construed 
to  relate  to  the  property  of  the  stock- 
holders as  represented  by  the  shares ; 
Re  Swigert,  119  111.  83  (1886),  holding 
that  a  railroad  exemption  did  not  ex- 
empt its  elevator.  In  ascertaining, 
under  the  New  Jersey  taxation  stat- 
ute, whether  one  half  of  the  capital  is 
employed  in  the  state  in  manufactur- 
ing, the  capital  employed  in  disposing 


1695 


§  572c. 


TAXATION   OF   STOCK   AND   CORPORATIONS. 


[CH.  XXXIV. 


the  property  of  a  corporation  does  not  exempt  from  taxation  its  shares 
of  stock.^  Unless  there  is  a  statute  expressly  authorizing  the  taxation 
of  real  estate  acquired  by  a  water-works  company  under  the  power  of 
eminent  domain,  or  by  purchase  in  lieu  thereof,  it  cannot  be  taxed.^ 
Under  the  Massachusetts  constitution  requiring  proportional  taxes,  it 
would  be  illegal  to  exempt  stock  from  taxation,  upon  its  paying  at  the 
rate  of  three  mills  on  each  dollar  of  the  fair  value  of  the  stock.^ 

§  572c.    Taxation  of  foreign  corporations.  —  Any  state  may  tax 
foreign  corporations  doing  business  within  its  borders.^ 


from  taxation  is  not  an  exemption 
from  a  license  fee,  inasmuch  as  a  tax 
means  a  tax  on  property,  while  a 
license  fee  is  a  form  of  tax  on  occu- 
pations. State  V.  Citizens'  Bank,  52 
La.  Ann.  1086  (1899). 

1  Wright   V.  Georgia,  etc.   Co.,   216 
U.  S.  420  (1910). 

2  Milford,  etc.  Co.  v.  Town  of  Hop- 
kinton,  192  Mass.  491  (1906) 


the  state  is  a  tax  on  the  right  to  be  a 
corporation  and  to  do  business,  and  is 
not  a  tax  upon  the  franchise,  even 
though  the  tax  is  measured  by  the 
dividends  declared.  The  tax  is  legal 
although  the  corporation  owns  United 
States  bonds.  Home  Ins.  Co.  v.  New 
York,  134  U.  S.  594  (1890).  Where 
foreign  corporations  are  required  to 
report   stock,   bonds,   etc.,   owned   by 


'  Re   Opinion  of   the  Justices,    195    residents  for  taxation,  it  need  report 


Mass.  607  (1908) 

*  Liverpool  Ins.  Co.  v.  Massachu- 
setts, 10  Wall.  566  (1870) ;  s.  c,  Oliver 
V.  Liverpool,  etc.  Co.,  100  Mass.  531 
(1868).  The  capital  stock  of  a  for- 
eign corporation  is  not  within  the 
state  and  hence  cannot  be  taxed.     The 


only  such  as  its  books  disclose,  and 
is  not  to  be  held  liable  further.  Com- 
monwealth V.  N.  Y.  etc.  R.  R.,  145  Pa. 
St.  57  (1891).  Cf.  Commonwealth  v. 
American,  etc.  Teleph.  Co.,  129  Pa. 
St.  217  (1889).  Foreign  corporations 
doing    business    in    New    Jersey    are 


tangible  property  in  the  state  may  be  subject   to   taxation.     State  v.  Berry, 

taxed.     Foster,  etc.  Co.  v.  Caskey,  66  52   N.   J.    L.   308    (1890).     A   statute 

Kan.  600  (1903).  Goods  in  New  York  requiring  resident  owners  to  list  prop- 

for  sale,  also  money  on  deposit  in  New  erty  for  taxation  does  not  apply  to  a 

York,  also  other  property  in  the  state,  foreign    corporation.     Squire    &     Co. 

form  the  proper  basis  for  taxation  of  v.    City    of    Portland,    106    Me.    234 

such  part  of  the  capital  stock  of  for-  (1909).     Where  a  parent  corporation  of 

eign   corporations   as   is   employed   in  Massachusetts  owns  stock  in  a  branch 

the  state.     Taxation  for  such  part  of  corporation  of  New  York  and  collects 

the  capital  stock  as  sales  in  New  York  royalties,    etc.,    from    the    latter,    the 

bear  to  all  the  sales  is  unjust,  since  parent  corporation  is  not   subject    to 

many  sales  may  be  by  sample.     Peo-  taxation    in    New    York.     People    v 


pie  V.  Wemple,  133  N.  Y.  323  (1892). 
A  tax  on  foreign  manufacturing  cor- 
porations to  the  extent  of  the  business 
which  they  do  in  the  state  is  constitu- 
tional and  enforceable.  People  v. 
Wemple,  131  N.  Y.  64  (1892).  The 
New  York  statute  taxing  foreign  cor- 
porations doing  business  in  the  state 
on  the  same  basis  as  domestic  cor- 
porations is  constitutional.  Horn  Sil- 
ver, etc.  Co.  V.  New  York,  143  U.  S. 
305  (1892).  The  New  York  tax  upon 
the  business  of  all  foreign  and  do- 
mestic corporations  doing  business  in 


American,  etc.  Teleph.  Co.,  117  N.  Y. 
241  (1889).  Debts  due  to  a  foreign 
corporation  from  residents  cannot  be 
taxed  in  Louisiana.  Barber,  etc.  Co. 
V.  New  Orleans,  41  La.  Ann.  1015 
(1889).  The  New  York  statute  levy- 
ing a  tax  on  foreign  corporations  doing 
business  in  the  state,  the  tax  being 
upon  "the  amount  of  capital  stock 
employed  within  the  state,"  is  legal, 
and  a  New  Jersey  corporation  is  liable 
to  taxation  for  maintaining  a  sales 
agency  and  office  and  bank  account  in 
New  York  City,  even  though  its  fac- 


1696 


CH.   XXXIV. 


TAXATION    OF   STOCK   AND    CORPORATIONS. 


[§  572c. 


A  state  may  impose  on  foreign  insurance  companies  a  tax  equal 
to  the  tax  levied  by  the  state  creating  the  foreign  corporation  on  corpora- 
tions foreign  to  the  latter  state. ^  Where  a  railroad  corporation  is  in- 
corporated by  the  United  States,  a  state  cannot  tax  its  franchises ;   it 


tories,  books  of  account,  etc.,  are  in 
other  states.  Southern  Cotton  Oil 
Co.  V.  Weraple,  44  Fed.  Rep.  24  (1890). 
The  Pennsylvania  statute  imposing 
a  quarter  of  a  mill  license  tax  on  the 
capital  stock  of  foreign  corporations 
having  an  office  in  the  state,  and  pro- 
hibiting such  offices  unless  the  tax  is 
paid,  the  act  applying  to  all  foreign 
corporations  except  insurance  com- 
panies, is  constitutional.  A  state  may 
exclude  or  impose  conditions  upon 
foreign  corporations  unless  they  are 
engaged  in  interstate  or  foreign 
commerce,  or  are  employed  by  the  gov- 
ernment. Pembina  Min.  Co.  v.  Penn- 
sylvania, 125  U.  S.  181  (1888) ;  Black- 
stone  Mfg.  Co.  V.  Blackstone,  79  Mass. 
488  (1859) ;  State  v.  Lathrop,  10  La. 
Ann.  398  (1855) ;  State  v.  Fosdick,  21 
La.  Ann.  434  (1869);  Tatem  v. 
Wright,  23  N.  J.  L.  429  (1852) ;  State 
V.  Western  Union  Tel.  Co.,  73  Me.  518 
(1882) ;  Commonwealth  v.  Gloucester 
Ferry  Co.,  98  Pa.  St.  105  (1881) ;  Nor- 
folk, etc.  R.  R.  V.  Commonwealth,  114 
Pa.  St.  256  (1886) ;  Commonwealth  v. 
Milton,  12  B.  Mon.  (Ky.)  212,  218 
(1851);  Boston  Loan  Co.  v.  Boston, 
137  Mass.  332  (1884) ;  Singer  Mfg.  Co. 
V.  Coimty  Com'rs,  139  Mass.  266 
(1885) ;  Att'y-Gen.  v.  Bay  State,  etc. 
Co.,  99  Mass.  148  (1868) ;  Common- 
wealth V.  Texas,  etc.  R.  R.,  98  Pa.  St. 
90  (1881),  holding,  however,  that  a 
corporation  created  by  the  United 
States  congress  is  not  a  foreign  corpo- 
ration within  the  revenue  act  of  Penn- 
sylvania ;  Commonwealth  v.  Glouces- 
ter, etc.  Ferry  Co.,  98  Pa.  St.  105 
(1881) ;  People  v.  Equitable  Trust  Co., 
96  N.  Y.  387  (1884),  holding  that  a 
tax  may  be  imposed  upon  the  business 
done  by  a  foreign  corporation  in  New 
York,  but  not  upon  its  property  in 
other  states,  nor  upon  its  franchise.  A 
foreign  corporation  doing  business  in 
and  taxed  in  New  York  is  not  entitled 
to  a  deduction  for  its  debts.  People 
V.  Barker,  141  N.  Y.  118  (1894).  Other- 
wise   as    to    domestic    corporations. 


People  V.  Barker,  141  N.  Y.  196 
(1894).  Under  the  New  York  act  in 
arriving  at  the  basis  of  taxation  of 
corporations,  the  commissioners  are 
bound  to  take  the  statements  under 
oath  of  the  corporate  officers,  except 
that  they  may  call  for  further  in- 
formation. People  V.  Barker,  139 
N.  Y.  55  (1893).  A  foreign  corporation 
is  not  liable  to  taxation  in  New  York, 
where  its  business  is  conducted  in 
another  state,  and  all  the  parties  in- 
terested in  it  and  its  officers  reside  in 
another  state,  and  all  its  contracts 
made,  and  its  product  manufactured, 
sold,  and  delivered  in  another  state; 
and  where  it  transacts  none  of  its  cor- 
porate business  in  the  state,  but 
merely  has  an  office  there,  with  a 
salaried  agent,  as  a  convenient  place 
to  discuss  with  patrons  questions  pre- 
liminary to  the  making  of  contracts, 
the  contracts  themselves  being  ex- 
ecuted out  of  the  state,  and  the  com- 
pany having  no  bank  account  in  the 
state.  People  v.  Campbell,  139  N.  Y. 
68  (1893).  For  the  New  York  act 
which  applies  to  foreign  corporations, 
see  Parker  Mills  v.  Commissioners,  23 
N.  Y.  242  (1861) ;  People  v.  Horn,  etc. 
Co.,  105  N.  Y.  76  (1887).  They  are  to 
be  taxed  where  their  principal  offices 
in  the  state  are  situated.  People  v. 
McLean,  17  Hun,  204  (1879) ;  aff'd,  80 
N.  Y.  254.  A  corporation  chartered 
by  the  federal  government  is  not  such 
a  foreign  corporation  as  is  obliged  to 
pay  a  license  fee  under  the  Penn- 
sylvania statutes.  Commonwealth  v. 
Texas,  etc.  R.  R.,  98  Pa.  St.  90  (1881). 
Unless  a  statute  otherwise  provides,  a 
lien  upon  corporate  property  for 
state  taxes  attaches  in  preference  to 
pre-existing  judgments  or  decrees ;  it 
has  been  held  that  a  sale  under  a 
judgment  or  decree  will  not  avoid 
such  a  lien.  Osterburg  v.  Union  Trust 
Co.,  93  U.  S.  424  (1876). 

1  Home  Ins.  Co.  v.  Swigert,  104  111. 
6.53  (1882) ;  Phila.  Fire  Assoc,  v.  New 
York,  119  U.  S.  110  (1886). 


(107) 


1697 


§  572c. 


TAXATION    OF   STOCK   AND   CORPORATIONS. 


ICH.  XXXIV, 


may  tax  the  tangible  property,  but  not  the  franchise.^  A  franchise 
which  a  telegraph  company  has  from  the  Post  Road  Act  of  Congress 
of  July  24th,  1866,  cannot  be  taxed  by  a  state.^  But  even  though  a 
telegraph  company  has  a  franchise  from  Congress  under  the  Post  Road 
Act,  yet  it  also  exercises  a  franchise  from  the  state,  and  this  last  may  be 
taxed  by  a  city  for  the  use  of  the  streets.^  Where  an  assessment  of 
taxes  against  a  railroad  company  has  been  affirmed  by  the  supreme 
court,  mandamus  may  be  used  to  compel  payment  of  them,  if  there 
is  no  other  adequate  remedy.^  The  tax  lien  on  a  railroad  may  by  delay 
be  rendered  subordinate  to  a  mortgage.^ 

The  New  York  statute  requiring  foreign  corporations  before  doing 
business  in  that  state  to  pay  a  certain  license  tax  is  constitutional.^  But 
the  Kansas  statute  requiring  foreign  corporations  before  doing  business 
in  the  state  to  pay  a  specified  license  fee  is  not  valid  as  against  foreign 
corporations  engaged  in  interstate  commerce  where  such  fee  is  a  tax 
on  the  interstate  business  and  also  a  tax  on  the  company's  property 
outside  of  the  state ;  and  hence  a  judgment  of  the  state  court  ousting 
a  foreign  telegraph  corporation  from  doing  business  in  the  state  because 
it  did  not  pay  this  fee,  which  amounted  to  $20,000,  is  invalid.  The 
mere  fact  that  the  statute  recited  that  it  was  not  intended  to  burden  or 
regulate  interstate  commerce  is  immaterial.^    The  Alabama  statute 


1  California  v.  Pacific  R.  R.,  127 
U.  S.  1,  40  (1888).  A  county  ordinance 
requiring  a  railroad  chartered  by  the 
United  States  to  take  out  a  license  is 
void.  San  Benito  County  v.  Southern 
Pac.  R.  R.,  77  Cal.  518  (1888). 

2  Western  Union  T.  Co.  v.  Wright, 
185  Fed.  Rep.  250  (1910);  rev'g 
166  Fed.  Rep.  954. 

3  Postal  Tel.,  etc.  Co.  v.  City  of 
Los  Angeles,  128  Pac.  Rep.  19  (Cal. 
1912). 

*  Person  v.  Warren  R.  R.,  32  N.  J.  L. 
441  (1868);  Silverthorn  v.  Warren 
R.  R.  33  N.  J.  L.  173  (1868).  And 
the  party  making  retiirn  to  an  alter- 
native mandamus  must  show  that 
he  has  complied  with  the  order  to  the 
extent  of  his  ability  ;  want  of  funds  is 
not  a  sufficient  return  where  it  is  the 
result  of  the  voluntary  act  of  the  party. 

6  Cooper  V.  Corbin,  105  111.  224 
(1883) ;  Parsons  v.  East,  etc.  Co.,  108 
111.  380  (1884). 

6  New  York  State  v.  Roberts,  171 
U.  S.  658  (1898). 

'W.  U.  Tel.  Co.  V.  Kansas,  216 
U.   S.    1    (1910),   rev'g   75    Kan.   609. 


So  also  as  to  the  Arkansas  statute 
where  the  fee  amounted  to  $25,050. 
Ludwig  V,  W.  U.  Tel.  Co.,  216  U.  S. 
146  (1910).  So  also  as  to  the  Pullman 
Palace  Car  Company.  Pullman  Co. 
V.  Kansas,  216  U.  S.  56  (1910).  Cf. 
§  572d,  infra.  The  legislature  may 
increase  the  fees  required  from  cor- 
porations upon  increasing  the  capital 
stock,  even  though  the  corporation  is  a 
foreign  corporation,  doing  business  in 
the  state.  Cudahy,  etc.  Co.  v.  Denton, 
79  Kan.  368  (1908).  A  state  may 
compel  a  foreign  mining  company  do- 
ing business  in  the  state  to  pay  a 
privilege  tax  based  on  the  par  value 
of  its  capital  stock,  the  amount  in- 
volved being  $500.  Baltic,  etc.  Co. 
V.  Commonwealth,  207  Mass.  381 
(1911).  A  state  may  require  foreign 
interstate  railroad  corporations  to  pay 
an  annual  franchise  tax  based  on  the 
amount  of  their  capital  employed  in 
the  state  and  may  require  them  to  pay 
a  ftu-ther  tax  to  counties  equal  to  one 
half  of  the  former  tax.  Southern  Ry. 
Co.  V.  Greene,  160  Ala.  396  (1909). 
See  Chicago,  etc.  Ry.  v.  Swindlehurst, 


1698 


CH.  XXXIV.] 


TAXATION   OF   STOCK   AND   CORPORATIONS. 


[§  572c; 


levying  a  graduated  tax  on  the  capital  stock  of  foreign  corporations 
doing  business  in  the  state  is  unconstitutional  as  to  a  foreign  railroad 
company  already  doing  business  in  the  state,  especially  where  such  tax 
is  not  equally  levied  on  domestic  corporations.^  A  foreign  telegraph 
company  may  enjoin  prosecuting  attorneys  in  different  parts  of  the' 
state  from  instituting  suits  to  recover  illegal  penalties  based  on  an 
unconstitutional  statute  requiring  an  excessive  license  fee  from  the 
foreign  telegraph  corporation  before  it  does  business  in  the  state.^ 
The  California  statute  imposing  a  license  fee  on  foreign  corporations 
doing  business  in  the  state  based  on  the  total  capital  stock  of  the  cor- 
poration, is  illegal.^  The  inheritance  tax  in  New  York  on  stock  applies 
to  stock  in  a  consolidated  railroad  corporation  of  New  York  and  j\Ias- 
sachusetts,  but  the  valuation  will  be  such  part  of  the  actual  value 
as  the  value  of  the  corporate  property  in  the  state  bears  to  the  whole 
property.^ 


130  Pac.  Rep.  966  (Mont.  1913),  and 
cj.  572d,  infra. 

1  Southern  Ry.  Co.  v.  Greene,  216 
U.  S.  400  (1910). 

2W.  U.  Tel.  Co.  V.  Andrews,  216 
U.  S.  165  (1910). 

3Mulford  Co.  V.  Curry,  125  Pae. 
Rep.  236  (Cal.  1912).  In  this  case 
the  court  in  declaring  illegal  a  gradu- 
ated license  fee  on  the  capital  stock  of 
foreign  corporations  as  a  condition  of 
allowing  them  to  do  business  in  the 
state  said  that  the  recent  decisions  of 
the  supreme  court  of  the  United 
States  had  established  the  following : 
"The  admitted  power  of  the  state  to 
regulate  and  prescribe  terms  under 
which  a  foreign  corporation  may  en- 
gage in  infra-state  or  domestic  busi- 
ness is  subject  to  this  limitation,  that 
where  such  foreign  corporation  is  en- 
gaged in  inter-sta.te,  as  well  as  intra- 
state business,  no  such  term,  condi- 
tion or  requirement  will  be  constitu- 
tional if  it  imposes  any  burden  upon 
the  interstate  business  of  such  cor- 
poration, whatever  be  its  name  or 
form ;  a  license  or  privilege  tax,  for 
the  conduct  of  such  intra-sta,te  busi- 
ness, based  upon  the  total  capital  or 
the  total  capital  stock  of  such  corpora- 
tion without  just  relation  to  the  pro- 
portion which  the  capital  or  the  capital 
stock  used  in  the  state  bears  to  the 
whole  capital  or  capital  stock,  though 
in  terms  declared  to  be  directed  solely 


to  the  infra-state  business  of  said  cor- 
poration, is  unconstitutional  and  void, 
(a)  as  being  in  violation  of  the  com- 
merce clause  of  the  constitution  by 
the  imposition  of  an  illegal  biu-den 
upon  interstate  commerce,  and  (6)  be- 
cause violative  of  the  fourteenth  amend- 
ment of  the  constitution  and  its  equal 
protection  and  due-process-of-law 
clause,  as  an  effort  to  tax  the  property 
of  citizens  of  the  United  States,  which 
property  is  situated  beyond  the  juris- 
diction of  the  taxing  state  and  is  not 
amenable  to  its  revenue  laws."  In 
Massachusetts  it  is  held  that  a  state 
may  exact  from  a  foreign  manufaetm-- 
ing  company  as  a  condition  of  doing 
business  in  the  state,  the  payment 
annually  of  one  fiftieth  of  one  per 
cent,  of  the  par  value  of  its  authorized 
capital  stock,  such  tax  not  to  exceed 
$2,000  in  any  one  j'ear.  White,  etc. 
Co.  V.  Commonwealth,  98  N.  E.  Rep. 
10.56  (Mass.  1912).  See  130  Pac.  Rep. 
1131  (Oreg.  1913).  A  state  may  im- 
pose a  fee  as  a  condition  precedent 
to  granting  a  charter  to  a  domestic 
corporation.  Edward  Barron  Estate 
Co.  V.  Woodruff  Co.,  126  Pac.  Rep. 
351  (Cal.  1912). 

^Matter  of  Cooley,  186  N.  Y.  220 
(1906).  Kingsbury  v.  Chapin,  196 
Mass.  533  (1907).  An  Australian 
corporation  which  has  offices  in  Lon- 
don and  weekly  directors'  meetings 
and  stockholders'  meetings  in  London 


1699 


§  572d.]  TAXATION   OF   STOCK   AND   CORPORATIONS.  [cH.  XXXIV. 

§  572c?.  Taxation  must  not  interfere  with  interstate  commerce.  — 
"  It  is  not  and  cannot  be  doubted  that  each  state  of  the  Union  may 
(tax  all  property,  real  and  personal,  within  its  borders,  belonging  to 
persons  or  corporations,  although  employed  in  interstate  or  foreign 
commerce,  provided  the  rights  and  powers  of  the  national  government 
are  not  interfered  with."  ^  A  state  statute  taxing  a  corporation 
having  interstate  property  may  levy  the  tax  not  only  on  the  tangible 
property  within  the  state,  but  on  such  portion  of  the  earning  power  of 
the  property  as  the  property  in  the  state  bears  towards  the  whole 
property.  This  is  not  interfering  with  interstate  commerce  by  levy- 
ing a  tax  for  the  privilege  of  transacting  such  commerce.^  A  state 
through  which  a  railroad  runs  may  require,  upon  the  consolidation  of 
the  company  with  companies  in  other  states  so  as  to  make  an 
interstate  railroad,  the  payment  of  a  tax  on  the  whole  consolidated 
capital  stock.^ 

But  a  state  cannot  tax  corporations  so  as  to  interfere  with  interstate 
commerce.  The  Pennsylvania  license  fee  which  all  foreign  corporations 
keeping  an  office  in  the  state  are  required  to  pay,  with  a  few  exceptions, 
is  unconstitutional  as  regards  a  foreign  railroad  corporation  which  owns 
a  railroad  in  the  state,  such  railroad  being  part  of  an  interstate  system 
of  railroads."  The  supreme  court  of  the  United  States  may  not  ques- 
tion a  decision  of  the  supreme  court  of  a  state  that  a  license  tax  was 
imposed  on  domestic  business  only,  even  though  it  was  imposed  on  a 
foreign  corporation  doing  both  interstate  and  domestic  business.^ 
A  state  may  require  a  foreign  corporation  to  pay  a  tax  on  its  capital 
stock  as  a  privilege  of  doing  business  in  the  state,  and  this  is  not  a  re- 
striction or  regulation  of  interstate  commerce.  The  statute  is  not 
applicable  to  a  corporation  engaged  entirely  in  interstate  commerce, 
but  applies  to  a  corporation  which  has  a  place  of  business  in  the  state 
for  other  purposes,  as  well  as  interstate  commerce.^  A  state  may  levy 
a  tax  on  the  capital  stock  of  a  foreign  sleeping-car  company,  which  runs 
its  cars  through  the  state,  the  tax  being  on  such  part  of  the  capital  stock 

where  its  general  accounts  are  kept,  may  ^  Attorney-General  v.  Electric,   eto. 

be  subject  to  the  English  income  tax  Co.,   188  Mass.  239   (1905).     A  state 

levied  on  persons  residing  therein.     De  may  require  a  foreign  corporation  to 

Beers,  etc.  v.  Howe,  [1905]  2  K.  B.  612.  pay  a  license  fee  graduated  according 

1  Western  Union  Tel.  Co.  v.  Taggart,  to  its  capital  stock  before  doing  busi- 
163  U.  S.  1  (1896).     See  §  572a,  supra,  ness   in   the   state.     Such   license   tax 

2  Adams  Express  Co.  v.  Ohio  State  may  be  annual  and  is  not  a  tax  on 
Auditor,  166  U.  S.  185  (1897).  interstate  commerce,  even  though  im- 

3  Ashley  v.  Ryan,  153  U.  S.  436  posed  on  the  business,  and  even 
(1894).  though    only    a    part    of    the    capital 

*  Norfolk,  etc.  R.  R.  v.  Penn,  136  stock  is  employed  in  the  state.  Amer- 
U.  S.  114  (1890).  ican,  etc.  Co.  v.  People,  34  Colo.  240 

5  Armour,    etc.    Co.    v.    Lacy,    200     (1905). 
U.  S.  226  (1906).     Cf.  §  572c,  supra. 

1700 


CH.  XXXIV.]  TAXATION    OF   STOCK   AND    CORPORATIONS. 


[§  572d 


as  the  number  of  miles  which  its  cars  run  in  the  state  bears  to  the  whole 
number  of  miles  which  its  cars  run  in  all  the  states.^ 

A  tax  on  interstate  telegraph  messages  is  unconstitutional.^  But 
a  state  may  tax  a  foreign  telegraph  company  engaged  in  interstate 
telegraph  business,  the  tax  being  graded  according  to  the  amount 
and  value  of  the  company's  property  in  the  state  measured  by  miles, 
and  the  tax  being  in  place  of  taxes  levied  directly  on  the  property. 
Such  a  tax  is  a  franchise  tax.^  A  city,  under  authority  of  a  statute, 
may  compel  an  interstate  telegraph  company  to  pay  an  annual  license 
of  $500  for  the  privilege  of  doing  business  in  such  city.  This  is  a  tax, 
and  is  not  a  condition  or  restriction  on  the  privilege  of  doing  business 
in  the  state.^  A  license  fee  which  is  exorbitant  is  an  interference  with 
interstate  commerce  and  is  void.^  A  state  cannot  prohibit  the  agents 
of  foreign  express  companies  from  doing  business  in  the  state  except 
upon  obtaining  a  license.  Such  a  law  is  an  interference  with  interstate 
commerce.^  A  tax  may  be  levied,  based  on  the  gross  receipts,  and,  if 
the  road  is  but  partly  in  the  state,  on  a  proportion  of  the  gross  receipts 
determined  by  a  mode  prescribed  by  statute.^     The  entire  intrastate 


1  Pullman's  Car  Co.  i'.  Penn,  141 
U.S.  18  (1891),  the  court  holding  that  a 
tax  on  the  capital  stock  on  account  of 
the  property  owned  is  a  tax  on  the 
property  itself.  A  similar  decision 
was  made  concerning  a  tax  on  the 
capital  stock  of  a  foreign  telegraph 
company,  the  capital  stock  being 
valued  at  the  aggregate  value  of  aU 
its  shares  of  stock,  and  the  propor- 
tion of  its  lines  within  the  state  to 
those  outside  of  it  being  the  basis  of 
taxation.  Massachusetts  v.  Western 
Union  Tel.  Co.  141  U.  S.  40   (1890). 

2  Western  Union  Tel.  Co.  v.  Ala- 
bama, 132  U.  S.  472  (1889). 

3  Postal  Tel.  Cable  Co.  v.  Adams, 
155  U.  S.  688  (1895).  The  Post  Road 
Act  of  Congress  of  1866  does  not  pre- 
vent a  state  taxing  an  interstate  tele- 
graph company  on  the  value  of  its 
property  and  franchises  in  the  state. 
Such  value  may  be  ascertained  by 
taking  such  part  of  the  value  of  the 
entire  system  as  the  part  of  the  sys- 
tem in  the  state  bears  to  the  entire 
system.  State  v.  Western  Union  Tel. 
Co.,  165  Mo.  502  (1901).  Cf.  §  572a, 
supra. 

*  Postal  Tel.  Cable  Co.  v.  Charles- 
ton, 153  U.  S.  692  (1894).  Cf.  §  938, 
infra. 


5  Postal  Tel.  Cable  Co.  v.  New  Hope, 
192  U.  S.  55  (1904) ;  Postal  Tel.  Cable 
Co.  V.  Taylor,  192  U.  S.  64  (1904). 
See  also  Western  Union  Tel.  Co.  v. 
Kansas,  216  U.  S.  1  (1910),  and  §  572c, 
supra. 

«  Crutcher  v.  Kentucky,  141  U.  S. 
47  (1891). 

^  Maine  r.  Grand  Trunk,  etc.  Ry., 
142  U.  S.  217  (1891).  A  tax  of  one 
per  cent,  on  the  gross  receipts  of  a 
railroad  doing  interstate  business  is 
illegal  as  an  interference  with  inter- 
state commerce,  even  though  the  one 
per  cent,  applies  only  to  such  pro- 
portion of  the  gross  receipts  as  the 
length  of  the  road  in  the  state  bears  to 
the  whole  length.  Galveston,  etc.  Co. 
V.  Texas,  210  U.  S.  217  (1908).  The 
decision  in  State  Tax  on  Railway  Gross 
Receipts,  15  Wall.  284  (1872),  was  dis- 
tinguished in  Fargo  v.  Michigan,  121 
U.  S.  235  (1887),  on  the  ground  that 
the  gross  receipts  involved  in  the  former 
case  were  already  in  the  treasury  of 
the  railway  company  or  invested  in  its 
property  within  the  state.  In  the 
Fargo  case  a  state  tax  on  the  gross 
receipts  of  an  express  company  was 
declared  unconstitutional.  In  Phila- 
delphia Steamship  Co.  ;;.  Pennsylvania, 
122  U.  S.  326  (1887),  a  special  tax  on 


1701 


§  572rf. 


TAXATION   OF   STOCK  AND   CORPORATIONS. 


[cH.  XXXIV. 


receipts  of  an  express  company  may  be  taken  as  the  basis  of  the  value 
of  the  property  in  the  state  subject  to  taxation  in  Heu  of  all  other 
taxes.^  The  general  rule,  however,  has  long  been  established  that  a 
state  cannot  tax  gross  receipts  derived  from  interstate  commerce,  in- 
asmuch as  such  commerce  is  exclusively  within  the  jurisdiction  of  the 
federal  government.^  A  telephone  company  may  be  taxed  two  per 
cent,  of  its  gross  revenue  from  intrastate  business  and  such  tax  may  be 
levied  by  a  statute  enacted  under  the  "  initiative  "  plan.^  In  taxing  the 
intrastate  income  of  a  corporation  the  income  from  investments  in 
bonds  or  lands  outside  of  the  state  is  not  to  be  included.''  A  state  may 
tax  a  railroad  on  business  that  passes  out  of  the  state  into  another  state 
and  back  into  the  first  state  again.^  Various  other  decisions  on  taxation 
in  its  bearings  upon  interstate  commerce  are  given  in  the  notes  below  .^ 

State  V.  Illinois,  etc.  R.  R.,  246  111. 
188  (1910).  A  state  in  ascertaining 
and  fixing  tlie  valuation  of  telephone 
property  for  assessment  may  make 
the  tax  three  per  cent,  of  its  gross 
earnings,  and  such  gross  earnings 
may  include  a  proportional  charge  of 
interstate  earnings.  Moneys,  how- 
ever, paid  by  a  telephone  company  to 
other  telephone  companies  with  which 
it  has  traffic  contracts  are  not  a  part  of 
its  gross  earnings.  State  v.  North- 
western, etc.  Co.,  107  Minn.  390  (1909). 
A  tax  on  sleeping-car  companies  may 
be  illegal  as  interfering  with  inter- 
state commerce.  State  v.  Woodruff, 
etc.  Co.,  114  Ind.  155  (1888).  A  state 
tax  on  interstate  railroad  earnings  is 
unconstitutional.  Fargo  v.  Michigan, 
121  U.  S.  230  (1887) ;  Phila.  etc.  Co.  v. 
Pennsylvania,  122  U.  S.  326  (1887); 
Delaware,  etc.  Canal  Co.  v.  Common- 
wealth, 17  Atl.  Rep.  175  (Pa.  1888) ; 
Northern  Pac.  Ry.  v.  Raymond,  5  Dak. 
356  (1888).  A  state  may  tax  a  for- 
eign telegraph  company  on  such  a 
proportion  of  its  capital  as  its  lines  in 
the  state  bear  to  all  of  its  lines;  but 
the  state  cannot  enjoin  the  operation 
of  the  telegraph  until  the  tax  is  paid. 
Western  Union  Tel.  Co.  v.  Massachu- 
setts, 125  U.  S.  530  (1888) ;  Erie  Ry. 
V.  New  Jersey,  31  N.  J.  L.  531  (1864), 
holding  that  a  state  tax  upon  foreign 
corporations  transporting  passengers 
and  freight  through  the  state,  gradu- 
ated by  the  number  of  passengers  and 
weight  of  the  goods,  is  in  violation  of 
that  clause  of  the  United  States  con- 


specific  interstate  receipts  or  the 
amount  thereof  was  held  to  be  un- 
constitutional and  the  decision  in  15 
Wall.  284  referred  to  above  was  ques- 
tioned. A  tax  on  telegraph  receipts 
including  interstate  receipts  is  uncon- 
stitutional. Ratterman  v.  Western 
Union  Tel.  Co.,  127  U.  S.  411  (1888), 
as  is  a  tax  on  gross  receipts  in  the  state 
including  interstate  receipts.  West- 
ern Union  Tel.  Co.  v.  Alabama,  132 
U.  S.  472  (1889).  The  gross  receipts 
of  a  telegraph  company  are  not  a 
legal  basis  for  valuing  its  franchise, 
Western,  etc.  Co.  v.  City  of  Omaha, 
103  N.  W.  Rep.  84  (Neb.  1905), 
the  coiirt  holding,  however,  that  the 
right  to  do  telegraph  business  in  the 
state  by  reason  of  the  Post  Road  Act 
of  Congress  did  not  exempt  such 
intangible   right   from   state   taxation. 

1  United  States  Express  Co.  v. 
Minnesota,  223  U.  S.  335  (1912). 

2  See  cases,  supra. 

3  Pacific  States  Tel.  and  Tel.  Co. 
V.  Oregon,  223  U.  S.  118  (1912). 

*  Meyer,  etc.  v.  Wells,  Fargo  & 
Co.,  223  U.  S.  298  (1912). 

6  Lehigh  Valley  R.  R.  v.  Penn.,  145 
U.  S.  192  (1892). 

^  The  special  charter  of  1851 
granted  by  Illinois  to  the  Illinois 
Central  Railroad,  one  provision  of 
which  required  the  latter  to  pay  the 
state  seven  per  cent,  of  its  gross  re- 
ceipts in  lieu  of  taxes,  is  not  a  tax  on 
interstate  commerce  but  is  a  mode  of 
fixing  an  equivalent  for  a  tax,  and  the 
state    may     require     an     accounting. 


1702 


CH.   XXXIV.] 


TAXATION   OF   STOCK   AND    CORPORATIONS. 


[§  5720. 


§  572e.  Inheritance  and  income  taxes.  —  During  the  past  fifteen 
years  the  various  states  of  the  Union,  in  their  eager  search  for  new 
modes  of  taxation,  in  order  to  meet  the  lavish  expenditures  of  state 
and  municipal  governments,  have  found  a  rich  source  of  income  in  an 
inheritance  tax  levied  upon  the  wealth  of  the  dead.  Indeed,  so  fruit- 
ful and  easy  is  this  mode  of  taxation,  it  is  being  adopted  throughout 
the    Union    and    will    soon    become    almost    universal.     Pennsylvania 


led  the  way  some  sixty  years  ago.^    The  Pennsylvania  inheritance  tax 


stitution  giving  Congress  the  right 
to  regulate  commerce  between  the 
states ;  Indiana  v.  American  Exp.  Co., 
7  Biss.  227  (1876) ;  s.  c,  13  Fed.  Cas. 
24,  where  a  tax  upon  transportation 
through  a  state  was  held  to  be  an  in- 
terference with  interestate  commerce 
and  unconstitutional.  So  held  also  of 
a  tax  upon  locomotives,  cars,  etc.,  of 
a  foreign  railroad  company  in  Minot  v. 
Philadelphia,  etc.  R.  R.,  2  Abb.  (U.  S.) 
323  (1870) ;  s.  c,  17  Fed.  Cas.  458 ; 
aff'd,  18  Wall.  206.  As  to  an  inter- 
state bridge,  see  Anderson  v.  Chicago, 
etc.  R.  R.,  117  111.  26  (1886).  Pullman 
cars  operated  wholly  within  the  state 
may  be  taxed  as  a  privilege.  Gibson 
County  V.  Pullman,  etc.  Co.,  42  Fed. 
Rep.  572  (1890).  A  foreign  corpora- 
tion's rolling  stock  used  in  interstate 
commerce  is  not  taxable  by  the  state. 
Bain  v.  Richmond,  etc.  R.  R.,  105 
N.  C.  363  (1890).  Interstate  express 
companies  may  be  taxed  on  the  busi- 
ness which  they  do  within  the  state. 
Pacific  Express  Co.  v.  Seibert,  44  Fed. 
Rep.  310  (1890) ;  aff'd,  142  U.  S.  339. 
As  to  telegraph  companies,  see  also 
Western  Union  Tel.  Co.  v.  Lieb,  76  111. 
172  (1875) ;  Western  Union  Tel.  Co. 
V.  Mayer,  28  Ohio  St.  521  (1876).  As 
to  fees  required  of  foreign  corpora- 
tions before  doing  biisiness  in  the 
state,  see  §§  696-700,  infra.  An  ex- 
press company  may  be  taxed  on  its 
gross  receipts,  although  it  pays  a  part 
thereof  to  a  railroad,  and  the  railroad 
is  taxed  again  on  the  same.  A  statute 
against  double  taxation  does  not  ap- 
ply to  this.  Commonwealth  v.  U.  S. 
Express  Co.,  157  Pa.  St.  579  (1893). 
The  New  Jersey  annual  tax  of  one 
tenth  of  one  per  cent,  of  the  capital 
stock  is  not  unconstitutional  as  inter- 
fering with  interstate  commerce,  even 
as  affecting  a  bridge  company  which 

i: 


operates  a  bridge  connecting  two 
states.  Lumberville,  etc.  Co.  v.  State 
Board  of  Assessors,  55  N.  J.  L.  529 
(1893).  An  express  company  may  be 
compelled  to  pay  a  license  fee  wherever 
it  does  business.  Osborne  v.  State, 
33  Fla.  162  (1894).  A  state  may  tax 
the  rolling-stock  of  a  foreign  corpora- 
tion in  the  proportion  which  the  nimi- 
ber  of  miles  within  the  state  bears 
to  the  whole  number  of  miles  of  the 
road,  even  though  the  rolling-stock 
is  used  in  interstate  traffic.  Board  of 
Assessors  v.  Pullman's  Palace  Car 
Co.,  60  Fed.  Rep.  37  (1894). 

1  See  the  brief  yet  comprehensive 
and  clear  statement  of  the  history 
of  inheritance  taxation  statutes  in 
Magoun  v.  Illinois  T.  &  Sav.  Bank,  170 
U.  S.  283  (1898),  upholding  the  Illi- 
nois statute  on  this  subject.  The  tax 
for  that  state  varies  according  to  the 
size  of  the  estate,  and  in  case  it  is 
over  $50,000  the  tax  is  six  per  cent. 
The  Nebraska  inheritance  tax  applies 
to  stock  in  a  Nebraska  corporation 
owned  by  a  resident  in  Nebraska, 
even  though  prior  to  his  death  he  had 
transferred  the  stock  to  a  foreign 
trustee  to  pay  the  income  to  him  dur- 
ing life,  with  the  remainder  over  to 
others.  Douglas  County  t;.  Kountze, 
84  Neb.  506  (1909).  The  value  of 
stock  subject  to  the  inheritance  tax  in 
Wisconsin  is  arrived  at  by  considering 
the  business,  profit,  progress,  growth 
and  general  financial  results  of  the 
corporation.  State  v.  Pabst,  139  Wis. 
561  (1909).  Stock  owned  by  an  Eng- 
lish subject  in  a  New  Jersey  corpora- 
tion is  not  subject  to  the  New  Jersey 
inheritance  tax.  Neilson  i'.  Russell, 
76  N.  J.  L.  655  (1908).  Stock  owned 
by  a  foreigner  in  a  New  Jersey  cor- 
poration is  not  subject  to  the  New  Jer- 
sey inheritance  tax.  Astor  v.  State, 
'03 


§  572e.] 


TAXATION   OF   STOCK   AND   CORPORATIONS. 


[CH.  XXXIV. 


law,  like  the  New  York  law,  does  not  require  payment  of  the  tax  at 
once  where  the  property  is  left  to  trustees  for  a  life  estate  and  a  remainder 
to  certain  persons  who  may  survive.^  The  New  York  tax  on  inherit- 
ances attaches  to  shares  of  stock  held  by  residents  in  foreign  corpora- 
tions.^ In  valuing  for  collateral  inheritance  tax  purposes  the  stock  of 
a  consolidated  interstate  railroad  company,  the  value  should  be  on  a 
basis  of  such  part  of  the  property  as  is  within  the  state.^  The  fact  that 
a  non-resident's  certificates  of  stock  in  foreign  corporations  are  in  New 
York  state  does  not  render  them  subject  to  taxation  in  that  state .'^ 
The  New  York  inheritance  tax  formerly  applied  to  stock  in  domestic 
corporations  although  held  by  non-residents  at  the  place  of  their  resi- 
dence, but  not  to  bonds  issued  by  domestic  corporations  and  held  by 
non-residents  at  the  place  of  their  residence.^  This  statute  covers 
bonds  owned  by  a  non-resident,  but  kept  in  a  safe-deposit  vault  in  New 
York,  excepting  United  States  bonds.  The  statute  also  formerly  covered 
certificates  of  stock  of  domestic  corporations  owned  by  non-residents, 
but  deposited  in  New  York.^     In  1911   New   York  state,   however. 


72  Atl.  Rep.  78  (N.  J.  1909);  75 
N.  J.  Eq.  303.  Stocks  and  bonds  in  a 
domestic  company  even  though  owned 
by  a  non-resident  are  subject  to  the 
inheritance  tax  if  such  stocks  and  bonds 
are  inside  the  state.  People  v.  Grif- 
fith, 245  111.  532  (1910).  A  state  may 
tax  premiums  collected  in  the  state  by 
a  foreign  insurance  company.  New 
York,  etc.  Co.  v.  Bradley,  83  S.  C. 
418  (1909).  The  collateral  inheritance 
tax  of  Iowa  applies  to  stock  in  an 
Iowa  bank  held  by  the  deceased,  al- 
though the  latter  was  a  resident  of 
Kansas.  Re  Culver's  Estate,  145 
Iowa,  1  (1909).  Where  a  corporation 
refuses  to  transfer  stock  on  account  of 
the  state  inheritance  tax  not  having 
been  paid,  the  amount  of  the  tax  being 
less  than  $2,000,  the  United  States 
court  has  no  jurisdiction  of  a  suit  to 
compel  a  transfer.  Jessup  v.  Chicago, 
etc.,  Ry.,   188  Fed.   Rep.  931    (1911). 

1  In  re  Coxe's  Estate,  193  Pa.  St. 
100  (1899). 

2  Re  Merriam,  141  N.  Y.  479  (1894). 
As  to  the  constitutionality  of  a  pro- 
gressive inheritance  tax,  see  Guthrie 
on  the  Fourteenth  Amendment,  p.  122, 
and  cases  cited  in  note  1  on  that  page. 
In  estimating  the  value  of  stocks 
under  the  inheritance  tax  law  the 
stock  exchange  prices  therefor  may  be 


taken  as  the  basis.  Walker  v.  People, 
192  111.  106  (1901).  Cf.  Chicago,  etc. 
Co.  V.  State  Board  of  Equalization, 
112  Fed.  Rep.  607  (1901).  In  esti- 
mating the  value  of  stock  under  an 
inheritance  tax  statute,  the  earning 
capacity,  good-will,  and  income  of  the 
corporation  may  be  considered.  Mat- 
ter of  Brandreth,  28  Misc.  Rep.  468 
(1899) ;    s.  c,  169  N.  Y.  437. 

3  Kingsbiu-y  v.  Chapin,  196  Mass. 
533  (1907).  Matter  of  Cooley,  186 
N.  Y.  220  (1906). 

*  Re  James,  144  N.  Y.  6  (1894) ;  Re 
Whiting,  150  N.  Y.  27  (1896). 

6  Re  Bronson,  150  N.  Y.  1  (1896). 
Stock  in  a  domestic  corporation  was 
subject  to  the  inheritance  tax,  although 
owned  by  a  non-resident.  Matter  of 
Fitch,  160  N.  Y.  87  (1899).  Shares 
of  stock  held  by  a  resident  of  England 
in  a  New  Jersey  corporation  were  sub- 
ject to  the  inheritance  tax  of  New 
Jersey.  Neilson  v.  Russell,  76  N.  J.  L. 
27  (1908). 

«  Re  Whiting,  150  N.  Y.  27  (1896). 
The  former  New  York  inheritance  tax 
law  applied  to  shares  held  by  a  non- 
resident in  an  unincorporated  joint- 
stock  association  doing  business  in 
New  York,  but  the  tax  was  limited 
to  such  part  of  the  assets  in  the  state 
as   the  number  of  shares  of  the  non- 


1704 


CH.  XXXIV.]  TAXL\TION   OF   STOCK   AND   CORPORATIONS.  [§  572e. 

realizing  the  unfairness  of  the 'estate  of  a  deceased  stockholder  paying 
an  inheritance  tax  where  the  deceased  resided  and  another  inheritance 
tax  in  the  state  where  the  corporation  was  organized,  passed  a  statute 
exempting  from  the  inheritance  tax  all  stock  held  by  non-residents  in 
New  York  corporations/  and  such  is  the  rule  now  in  New  Jersey^  and 
Massachusetts.^ 

A  gift  of  stock,  the  donee  to  have  the  possession  and  management 
of  the  same,  but  the  donor  to  have  the  income  during  his  life,  makes 
the  donee  trustee  until  the  death  of  the  donor,  and  hence  such  gift  is 
taxable  under  the  New  York  statutes  as  a  transfer  to  take  effect  on 
his  death.'*  The  collateral  inheritance  tax  is  a  lien  on  stock  owned  by 
a  citizen  of  Connecticut  in  a  New  York  corporation.^  Under  the  Mas- 
sachusetts statute  imposing  a  tax  on  inheritances,  stock  owned  by  a 
citizen  of  New  York  in  a  Massachusetts  corporation  was  subject  to  such 
tax,  and  even  though  the  New  York  executor  transferred  such  stock, 
yet  upon  ancillary  administration  being  taken  out  in  Massachusetts 
the  title  of  the  New  York  executor  was  subordinate  to  the  title  of  the 
ancillary  administration.  The  court  said  that  the  statute  assumed  that 
in  such  cases  a  local  administrator  or  executor  would  be  appointed.^ 
The  New  York  inheritance  tax  on  stock  owned  by  a  citizen  of  Massa- 
chusetts in  a  company  incorporated  in  Massachusetts  and  New  York 
and  owning  property  in  both  states,  is  based  on  such  part  of  the  value  of 
the  stock  as  the  property  owTied  by  the  company  in  the  state  bears  to 
the  property  owned  by  it  out  of  the  state,  and  this  may  be  ascertained 
by  mileage  in  the  case  of  a  railroad  or  by  mileage  after  deducting  the 
value  of  grain  elevators  owned  outside  of  the  state. ^ 

Where  an  English  company  allows  the  American  executor  of  the 
estate  of  a  deceased  American  stockholder  to  transfer  the  stock  to 
himself  as  executor  on  the  company's  books  without  paying  the  Eng- 
lish succession  tax,  the  company  is  liable  to  the  English  government  for 

resident  bore  towards  the  total  number  ing  health  who  dies  in  July  is  in  con- 

of    shares.     Matter    of    Willmer,    153  templation   of    death   and    is   subject 

N.  Y.  App.  Div.  804  (1912).  to    the    inheritance    tax    of    Illinois, 

•  L.  1911,  Ch.  732,  §221,  p.  1959.  whether  it  is  considered  a  gift  causa 

2  Stock  owned  by  a  non-resident  in  mortis,  or  a  gift  i?iter  vivos.     Re  Ben- 
a  New  Jersey  corporation  is  not  sub-  ton's  Estate,  234  lU.  366  (1908). 
ject    to    the   New   Jersey    inheritance  ^  Matter  of  Fitch,  39  N.  Y.  App. 
tax.     Moss  V.  Edwards,  84  Atl.  Rep.  Div.  609  (1899). 

198  (N.  J.  1912).  6  Greeves  v.   Shaw,   173  Mass.  205 

3  Act  of  May  29,  1912.  (1899).     Stock  in  a  consolidated  inter- 
^  Matter  of  Cornell,  170  N.  Y.  423     state    railroad    holding    a    charter    in 

(1902).     A  sale  of  stock  in  consider-  Massachusetts  and  also  in  New  York 

ation  of  an  annuity  is  not  subject  to  is  subject  to  the  Massachusetts  inher- 

the  New  York  inheritance  tax.     Mat-  itance  tax.     Moody  v.  Shaw,  173  Mass. 

ter  of  Edgerton,  35  N.  Y.  App.  Div.  375  (1899). 

125  (1898) ;  aff'd,  158  N.  Y.  671.     A         ^  Matter  of  Thayer,  193  N.  Y.  430 

gift  of  stock  in  June  by  a  man  in  fail-  (1908). 

1705 


§  572c. 


TAXATION   OF   STOCK   AND   CORPORATIONS.  [cH.  XXXIV. 


such  tax.  The  court  held  that  such  is  the  law,  although  the  stat- 
utes do  not  expressly  render  the  company  liable  for  the  tax.^  Nego- 
tiable bonds  located  in  England  at  the  time  of  the  death  of  the  owner 
who  dies  in  England  although  an  American  citizen  with  a  domicile  in 
America,  is  subject  to  the  estate  duty  of  England.^  Even  though  an 
English  company  owns  all  the  stock  and  names  the  board  of  directors 
of  a  German  company,  yet  the  identity  of  the  two  companies  continues 
and  the  income  tax  in  England  does  not  apply  to  profits  of  the  German 
company,  which  are  transferred  to  its  patent-right  account.^  The 
state  in  ascertaining  the  value  of  stock  in  order  to  fix  an  inheritance 
tax  thereon,  cannot  compel  the  corporation  to  produce  its  books  and 
papers.'' 

In  England  an  income  tax  is  collected.^  Even  though  an  English 
holding  company  owns  the  entire  capital  stock  of  a  German  company 
and  controls  its  entire  business,  yet  the  profits  of  the  German  company 
are  not  considered  profits  of  the  English  company  under  the  income 
tax  law,  except  so  far  as  they  are  actually  received  by  the  English  com- 
pany. The  German  company  is  not  a  mere  alias  or  trustee  or  agent  for 
the  English  company.^     In  this  country  an  income  tax  may  legally 


1  Attorney-General  v.  New  York, 
etc.  Co.,  [1898]  1  Q.  B.  205;  aff'd, 
H.  of  L.  [1899]  A.  C.  62.  In  this  case  the 
court,  in  holding  that  an  English  cor- 
poration was  liable  for  an  inheritance 
tax  on  shares  of  stock  which  it  had 
allowed  to  be  transferred  on  its  books 
by  American  executors  of  the  estate 
of  a  deceased  American  owning  such 
stock,  said:  "The  American  wiU,  as 
regards  these  English  assets,  had  no 
validity  whatever  in  this  country,  nor 
had  the  American  executors  any  right 
under  it  to  receive  the  testator's 
assets  here.  Until  they  had  taken  out 
representation  to  their  testator  in  this 
country,  they  were  pure  strangers  to 
the  English  assets.  This  American 
will,  to  the  knowledge  of  all  parties, 
was  never  to  come  into  operation  as 
a  will  in  this  country ;  the  American 
executors  were  never  to  become  execu- 
tors in  this  country,  it  being  the 
express  intention  of  all  parties  that 
they  should  not." 

2  Winans  v.  Attorney-General, 
[1910]  A.  C.  27. 

'  Gramophone  and  Typewriter,  Ltd. 
V.  Stanley,  [1908]  2  K.  B.  89,  dis- 
tinguishing Apthorpe  v.  Peter,  etc. 
Co.,  80  L.  T.  Rep.  395. 


^  State  V.  Carpenter,  129  Wis.  180 
(1906). 

^  Where  there  is  a  parent  company 
with  minor  companies  abroad,  and 
dividends  are  paid  abroad  to  stock- 
holders there  without  the  money 
going  to  England,  the  English  income 
tax  does  not  apply  to  such  moneys. 
Bartholomew  Brewing  Co.  v.  Wyatt, 
[1893]  2  Q.  B.  499.  Where  an  insur- 
ance company  having  a  capital  stock 
divides  every  five  years  its  surplus 
among  its  policy  holders,  such  surplus 
is  "annual  profits  or  gains"  and  is 
subject  to  the  English  income  tax, 
although  the  company  is  an  American 
corporation.  Equitable,  etc.  Soc.  v. 
Bishop,  [1900]  1  Q.  B.  177,  aff'g  [1899] 
2  Q.  B.  439.  Even  though  an  Eng- 
lish corporation  owns  ninety-five  per 
cent,  of  the  stock  of  an  American 
corporation,  yet  the  separate  identity 
of  the  two  corporations  continues, 
and  the  income  of  the  American  cor- 
poration cannot  be  taxed  in  England 
as  the  income  of  the  English  corpo- 
ration. Kodak  Limited  v.  Clark, 
[1902]  2  K.  B.  450. 

^  Gramophone,  etc.,  Ltd.  v.  Stanley, 
95  L.  T.  Rep.  461  (1906).  For  the 
purposes  of  income  tax,  a  Cape  Colony 


1706 


CH.  XXXIV. 


TAXATION   OF   STOCK  AND   CORPORATIONS. 


[§  572e. 


be  levied  by  a  state,  but  could  not  be  imposed  by  the  federal  govern- 
ment, prior  to  the  constitutional  amendment  of  1913.^  Even  prior 
to  that  time,  however,  Congress  had  the  power  to  levy  an  excise  tax 
on  corporations.^ 


corporation  resides  in  England,  if  a 
majority  of  its  directors  reside  in 
England  and  the  important  business 
of  the  company  is  transacted  in  Eng- 
land, except  the  actual  mining  oper- 
ations. De  Beers,  etc.  Mines,  Ltd.  v. 
Howe,  [1906]  App.  Cas.  455. 

»  Pollock  V.  Farmers'  L.  &  T.  Co., 
158  U.  S.  601  (1895) ;  s.  c,  157  U.  S. 
429. 

2  The  act  of  Congress  of  1909 
imposing  an  excise  tax  on  cor- 
porations was  sustained  in  Flint  v. 
Stone  Tracy  Co.,  220  U.  S.  107  (1911), 
but  in  Zonne  v.  Minneapolis  Syndi- 
cate, 220  U.  S.  187  (1911),  the  court 
held  that  a  real  estate  corporation, 
holding  the  bare  title  to  a  single  piece 
of  property,  subject  to  a  one  hundred 
and  thirty  years'  lease,  and  merely  dis- 
tributing the  rentals  among  the  stock- 
holders and  doing  no  other  business, 
was  not  subject  to  the  tax.  ''Net 
income 'J  was  defined  as  follows  in  the 


act  of  Congress  of  August  5,  1909,  to 
collect  "a  special  excise  tax"  of  one 
per  cent,  on  the  "net  income"  (in 
excess  of  $5,000)  of  all  corporations 
and  associations  doing  business  in  the 
United  States.  From  the  gross  income 
there  are  to  be  deducted  ordinary  and 
necessary  expenses  paid  out  of  income 
in  maintaining  and  operating  the 
bjisiness  and  properties,  including 
rentals  or  franchise  payments ;  also 
all  losses  during  the  year  not  to  be  paid 
by  insurance  or  otherwise ;  also  a 
reasonable  allowance  for  deprecia- 
tion ;  also  interest  actually  paid  on 
debts  not  exceeding  paid-up  capital 
stock ;  also  taxes ;  also  dividends  on 
stock  in  companies  subject  to  this 
same  federal  tax.  An  unincorporated 
association  formed  in  a  state  where 
statutory  joint-stock  associations  are 
unknown,  is  not  subject  to  the 
corporation  tax  act  of  Congress. 
Eliot  V.  Freeman,  220  U.  S.  178  (1911). 


1707 


CHAPTER  XXXV. 


FORMS  OF  ACTIONS  AND  MEASURE  OF  DAMAGES  WHERE 
A  STOCKHOLDER  HAS  BEEN  DEPRIVED  OF  HIS  STOCK. 


573.  Pleading    and    practice    in    ac- 

tions relative  to  stock. 

574.  Assumpsit. 

575.  Trespass  on  the  case. 

576.  Trover. 

577.  Detinue  and  replevin. 

578.  Money    had     and    received  — 

Claim  and  delivery. 

579.  Bill  in  equity. 

580.  Pleading  under  the  codes. 

581.  Measure  of  damages  —  (a)  The 

first  rule  —  Value  how  shown 
when  there  is  no  market 
value. 


§  582.   (6)  The  second  rule. 

583.  (c)  The  third  rule. 

584.  Interest,  dividends,  and  accre- 

tions. 

585.  Nominal  damages. 

586.  Damages    for    failure    to    com- 

plete a  purchase  of  stock  or 
for  fraud  inducing  a  pur- 
chase of  stock. 

587.  In      actions      between      stock- 

brokers and  their  customers. 


§  573.  Pleading  and  practice  in  actions  relative  to  stock.  —  When 
an  owner  of  stock  who  is  out  of  possession  brings  an  action  for  its  re- 
covery, or  for  the  recovery  of  the  certificate,  or  for  damages  for  the 
detention  or  conversion  of  either  the  stock  or  the  certificate,  it  is  im- 
portant to  determine  what  action  wdll  he,  in  what  court  the  action  is 
to  be  prosecuted,  and  what  is  the  measure  of  damages.  Similar  ques- 
tions arise  when  suits  are  brought  for  breach  of  contract  to  subscribe 
for  stock,  or  of  contracts  to  sell  and  convey  stock.  There  are  certain 
well-settled  rules  as  to  the  form  of  action  in  these  cases  which  are  de- 
duced from  the  older  common-law  pleading  and  practice.  These  rules, 
even  in  the  code  states,  where  the  old  actions  have  been  abolished  in 
name,  are  still  partially  applicable.  Some  knowledge,  therefore,  of  the 
procedure  at  common  law  in  stock  cases  is  necessary.^ 

§  574.  Assumpsit.  —  An  action  of  assumpsit,  or  indebitatus  as- 
sumpsit at  common  law,  lies  against  a  corporation  for  unjustly  refus- 
ing to  register  a  transfer,  or  for,  refusing  to  issue  a  certificate  to  one 
entitled  to  it.^    So,  also,  assumpsit  lies  for  breach  of  contract  to  re- 

iQn  this  subject  the  author  refers  Co.,  62  Mass.  168  (1851);    Sargent  v. 

for   more    particular    information,    to  Franklin  Ins.  Co.,  25  Mass.  90  (1829) ; 

the    excellent    work,    Andrews'     Ste-  Hayden  v.  Middlesex  Turnp.  Co.,  10 

phen's  Pleadings,  especially  chapter  II.  Mass.  397  (1813) ;  Pinkerton  v.  Man- 

2  Rex  V.  Bank  of  England,  2  Doug.  Chester,    etc.    R.    R.,    42   N.    H.    424 

524  (1780);  Kortright  v.  Buffalo  Com-  (1861);  Hill  v.  Pine  River  Bank,  45 

mercial   Bank,   20  Wend.   91    (1838) ;  N.  H.  300  (1864).     Cf.  Foster  v.  Essex 

Arnold  v.  Suffolk  Bank,  27  Barb.  424  Bank,   17  Mass.  479   (1821);  Eastern 

(1857) ;  Wyman  v.  American  Powder  R.  R.  v.  Benedict,  76  Mass.  212  (1857). 

1708 


CH.   XXXV 


ACTIONS    AND   MEASURE    OF    DAMAGES. 


[§  575. 


turn  borrowed  bank  stock  on  demand.^  But  mandamus  is  not  a  proper 
remedy  in  these  cases,  and  it  generally  will  not  lie  to  compel  a  corpora- 
tion to  transfer  stock.^  The  form  of  a  complaint  or  declaration  in  an 
action  by  a  pledgor  against  a  pledgee  for  the  conversion  of  the  stock 
held  in  pledge  may  be  in  tort  or  in  assumpsit,  but  not  in  both,^  A  cor- 
poration may  sue  in  assumpsit  its  treasurer  who  has  illegally  issued 
excessive  stock  and  converted  the  proceeds  to  his  own  use.^  Assumpsit 
may  not  lie  against  a  corporation  for  not  fulfilling  its  contract  in  regard 
to  treasury  stock.^  In  a  suit  by  a  remainderman  to  recover  from  a 
corporation  the  value  of  stock  which  the  corporation  had  transferred 
to  the  life  tenant  absolutely  and  which  had  been  lost,  the  statute  of 
limitations  does  not  begin  to  run  until  the  death  of  the  life  tenant,  even 
though  the  trust  was  created  in  1854  and  the  life  tenant  died  in  1898.® 

§  575.  Trespass  on  the  case.  —  An  action  of  trespass  on  the  case 
may  be  brought  against  the  corporation  for  a  denial  to  a  stockholder  of 
a  certificate  of  stock, ^  and  an  action  on  the  case  lies  for  a  conversion  of 


Assumpsit  does  not  lie  against  a  cor- 
poration for  refusal  to  register  a 
transfer  of  stock.  Action  on  the  case 
is  the  remedy.  Telford,  etc.  Co.  v. 
Gerhab,   13  Atl.  Rep.  90   (Pa.   1888). 

1  McKenney  v.  Haines,  63  Me.  74 
(1873). 

2  See  §  390,  supra. 

3  Stevens  v.  Hurlbut  Bank,  31  Conn. 
146  (1862).     See  also  §  475,  supra. 

4  Rutland  R.  R.  v.  Haven,  62  Vt.  39 
(1889). 

^  An  agreement  between  the  cor- 
poration and  some  of  its  stockholders, 
by  which  the  latter  contribute  a  part 
of  their  stock  as  treasury  stock,  on 
condition  that  they  shall  continue  to 
be  directors  and  officers  for  a  certain 
time,  is  illegal  under  a  statute  requir- 
ing such  officers  to  be  elected  annually 
by  the  stockholders,  and  hence  even 
if  the  corporation  accepts  the  stock 
and  sells  it  and  does  not  retain  such 
persons  in  their  offices,  they  cannot 
hold  it  liable  in  damages,  nor  in  claim 
and  delivery,  nor  for  conversion,  nor 
on  contract.  Glass  v.  Basin,  etc.  Co., 
31  Mont.  21  (1904).  Even  though  a 
promoter  by  agreement  made  with  a 
foreign  corporation,  before  the  incor- 
poration of  a  mining  company,  was 
to  have  one  share  of  stock  for  his  serv- 
ices for  every  ten  shares  which  he 
obtained  subscriptions  for,  and  the 
company   accepted   the   subscriptions, 


yet  he  cannot  hold  it  liable  for  the 
value  of  the  stock  to  be  received  by 
him  as  commissions  where  he  merely 
demanded  it  by  letter  and  the  company 
offered  to  deliver  it  after  suit  was 
brought.  Teeple  v.  Hawkeye,  etc. 
Co.,  137  Iowa,  206  (1908). 

^  Wooten  V.  Wilmington,  etc.  R.  R., 
128  N.  C.  119  (1901).  Even  though 
the  corporation  allows  the  life  tenant 
to  sell  the  stock  outright,  yet  if  the 
remainderman  does  not  sue  within 
the  period  of  limitations,  after  knowl- 
edge of  the  facts,  the  corporation  is 
not  liable.  Yeager  v.  Bank  of  Ken- 
tucky, 127  Ky.  751  (1908). 

'  Bank  of  Ireland  v.  Evans's  Chari- 
ties, 5  H.  L.  Cas.  389  (1855) ;  Rex  v. 
Bank  of  England,  2  Doug.  524  (1780) ; 
Davis  V.  Bank  of  England,  2  Bing.  393 
(1824) ;  Coles  v.  Bank  of  England,  10 
Ad.  &  E.  437  (1839) ;  Gray  v.  Portland 
Bank,  3  Mass.  364,  381  (1807) ;  North 
America  Building  Assoc,  v.  Sutton,  35 
Pa.  St.  463  (1860)  •  Webster  v.  Grand 
Trunk  Ry.,  3  L.  Can.  Jur.  148  (1859) ; 
s.  c,  2  L.  Can.  Jur.  291  (construing 
the  judicature  act,  12  Vict.,  cap.  38, 
§  87) ;  Protection  Life  Ins.  Co.  v. 
Osgood,  93  111.  69  (1879) ;  Baker  v.  Was- 
son,  53  Tex.  150  (1880) ;  see  s.  c,  59 
Tex.  140.  Smith  v.  Poor,  40  Me.  415 
(1855) ;  Catchpole  v.  Ambergate,  etc. 
Ry.,  1  El.  &  B.  Ill  (1852);  Daly  v. 
Thompson,   10  M.  &  W.  309   (1842). 


1709 


§  576.] 


ACTIONS   AND   MEASURE    OF   DAMAGES. 


[CH.  XXXV. 


shares  of  stock.^  The  appropriate  remedy  of  a  purchaser  against  a 
corporation  for  refusal  to  register  a  transfer  to  himself  is  an  action  on 
the  case,  wherein  the  measure  of  damages  is  the  value  at  the  time  of 
refusal  to  transfer.^  A  transferee's  action  upon  the  case  for  damages, 
instead  of  in  trover  for  conversion,  against  the  corporation  for  refusal 
to  register  the  transfer,  entitles  him  to  nominal  damages  only,  unless 
he  proves  special  damage.^  A  count  in  case  may  be  joined  with  one  in 
trover.^  Trover  and  case  lie  against  a  tax  collector  for  selling  bank 
stock  for  an  illegal  tax.^ 

§  576.    Trover.  —  It  is  a  very  generally  accepted  rule  that  trover 
will  lie  for  the  conversion  of  shares  of  stock,^  and  in  certain  cases  the 


CJ.  Swan  V.  North  British,  etc.  Co.,  7 
H.  &  N.  60.3  (1862) ;  Kortright  v.  Buffalo 
Commercial  Bank,  20  Wend.  91 
(1838).  For  an  action  of  tort  with  a 
count  in  contract  for  refusal  to  trans- 
fer, see  Bond  v.  Mount  Hope  Iron  Co., 
90  Mass.  505  (1868). 

1  Daggett  V.  Davis,  53  Mich.  35 
(1884) ;  Bank  of  America  v.  McNeil, 
10  Bush  (Ky.),  54  (1873) ;  Parsons  v. 
Martin,  77  Mass.  Ill  (1858) ;  Nabring 
V.  Bank  of  Mobile,  58  Ala.  204  (1877). 
A  complaint  which,  after  stating  that 
shares  of  stock  had  been  pledged  to 
defendant,  avers  that  "defendant,  in 
consideration  of  the  premises,  then 
and  there  undertook  and  promised  to 
plaintiff"  to  hold  the  stock  only  as 
pledgee,  but  that,  in  violation  of  its 
promise,  defendant  sold  and  converted 
the  stock  to  its  own  use,  without  giv- 
ing plaintiff  notice  of  the  sale,  and  in 
which  plaintiff  seeks  to  recover  as 
damages  the  full  value  of  the  shares 
alleged  to  have  been  converted,  though 
informal,  is  good  as  a  complaint  in 
ease.  Sharpe  v.  Birmingham  Nat. 
Bank,  87  Ala.  644  (1888).  This  case 
discussed  also  the  difference  between 
assumpsit  and  case  in  such  an  action. 

2  German  Union,  etc.  Assoc,  v. 
Sendmeyer,  50  Pa.  St.  67  (1865) ;  Mor- 
gan V.  Bank  of  North  America,  8  Serg. 
&  R.  (Pa.)  73  (1822);  Presbyterian 
Cong.  V.  Carlisle  Bank,  5  Pa.  345 
(1847). 

Charles  Wright  Med. 
479   (1893).     See  also 


3  McLean  v. 
Co.,   96  Mich. 

§  585,    infra. 

*  Nabring    v. 
Ala.  204  (1877). 


Bank   of   Mobile,    58 


^Sprague    v.    Fletcher,    69    Vt.    69 
(1896). 

«  Jones  V.  Ortel,  114  Md.  205  (1910) ; 
Herrick  v.  Humphrey,  etc.  Co.,  73 
Neb.  809  (1905) ;  Hine  v.  Commercial 
Bank,  etc.,  119  Mich.  448  (1899); 
Ayres  v.  French,  41  Conn.  142  (1874) ; 
Payne  v.  Elliot,  54  Cal.  339  (1880); 
Kuhn  V.  McAllister,  1  Utah,  273 
(1875) ;  s.  c.  sub  nojn.  McAllister 
V.  Kuhn,  96  U.  S.  87  (1877) ;  Bank  of 
America  v.  McNeil,  10  Bush  (Ky.),  54 
(1873) ;  Boylan  v.  Huguet,  8  Nev.  345 
(1873);  Morton  v.  Preston,  18  Mich. 
60  (1869) ;  Jarvis  v.  Rogers,  15  Mass. 
389  (1819) ;  s.  c,  13  Mass.  105,  a  case 
where  trover  was  held  to  lie  for  the 
value  of  Mississippi  scrip,  represent- 
ing one  hundred  and  fifty  thousand 
acres  of  land.  Anderson  v.  Nicholas, 
28  N.  Y.  600  (1864) ;  Freeman  v.  Har- 
wood,  49  Me.  195  (1859);  Connor  v. 
HiUier,  11  Rich.  L.  (S.  C.)  193  (1857) ; 
eturges  V.  Keith,  57  111.  451  (1870); 
Budd  V.  Multnomah  Street  Ry.,  12 
Oreg.  271  (1885) ;  8.  c,  15  Oreg.  413. 
C/.  Atkins  v.  Gamble,  42  Cal.  86,  100 
(1871);  Maryland  F.  Ins.  Co.  v.  Dal- 
rymple,  25  Md.  242,  267  (1866).  The 
action  for  conversion  lies,  even  though 
the  plaintiff  uses  the  term  "shares 
of  stock"  and  "certificates  of  stock" 
interchangeably.  Godfrey  v.  Pell,  49 
N.  Y.  Super.  Ct.  226  (1883).  A  party 
whose  stock  has  been  converted  may 
sue  for  damages  instead  of  following 
the  stock.  Moore  v.  Baker,  4  Ind. 
App.  115  (1892).  For  the  allegations 
in  an  action  for  the  conversion  of  a 
bond,  see  Saratoga,  etc.  Co.  v.  Hazard, 
55  Hun,  251  (1889) ;  aff'd,  121  N.  Y. 


1710 


CH.  XXXV.] 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


[§  576. 


party  guilty  of  the  conversion  may  be  arrested.^  Trover  is  the  favorite 
remedy  when  the  stockholder  has  been  unjustly  deprived  of  his  stock ; 
and  it  is  nowhere  denied,  except  in  Pennsylvania,^  that  this  form  of 
action  is  proper.  But  even  there,  for  the  conversion  of  a  certificate 
of  stock,  trover  will  lie.^  For  the  maintenance  of  the  action  of  trover 
there  must  be  title  in  the  plaintiff  to  the  subject  of  the  action,  and  an 
actual  conversion  by  the  defendant.     If  either  of    these  elements  is 


677.  Where  defendant  purchased 
stock  for  the  plaintiff  and  accounted 
therefor,  but  refused  to  account  for 
dividends  received  while  he  held  the 
stock,  the  defendant  is  guilty  of  eon- 
version.  Shaughnessy  v.  Chase,  7 
N.  Y.  St.  Rep.  293  (1887).  There  are 
many  cases  in  the  lower  courts  of  New 
York  on  this  subject.  A  refusal  to 
return  a  pledge  after  payment  is  a 
conversion.  See  Roberts  v.  Berdell, 
52  N.  Y.  644  (1873) ;  s.  c,  15  Abb. 
P*r.  (N.  S.)  177.  As  to  conversion 
of  railway  shares  in  a  foreign  country, 
see  Northern  Ry.  v.  Carpentier,  13 
How.  Pr.  222  (1856).  A  certificate 
entitling  a  person  to  a  stock  certificate 
in  a  corporation  to  be  organized,  and 
reciting  that  such  stock  had  been  paid 
for  by  notes,  is  a  thing  of  value  and 
not  a  mere  receipt,  and  hence  may  be 
the  subject  of  an  action  of  trover. 
Reading,  etc.  Co.  v.  Harley,  186  Fed. 
Rep.  673  (1911). 

'  Trover  and  arrest  lie  for  conver- 
sion of  certificates  of  stock.  Barry  v. 
Calder,  48  Hun,  449  (1888) ;  aff'd.  111 
N.  Y.  684.  As  to  arrest  for  conver- 
sion, replevin  thereby  being  waived, 
see  Chappel  v.  Skinner,  6  How.  Pr. 
338  (1851);  Person  v.  Civer,  29  How. 
Pr.  432  (1865),  rev'g  28  How.  Pr. 
139;  Niver  v.  Niver,  43  Barb.  411 
(1864) ;  Dubois  v.  Thompson,  1  Daly, 
309  (1863);  Cousland  v.  Davis,  4 
Bosw.  619  (1859).  In  Butts  v.  Bur- 
nett, 6  Abb.  Pr.  (N.  S.)  302  (1869), 
involving  the  arrest  of  a  broker  who 
had  sold  the  pledge  before  the  note 
was  due,  the  court  said:  "It  is  very 
questionable,  I  think,  whether  a 
demand  after  a  default  in  payment  of 
the  debt  for  which  property  is  pledged 
as  security  will  render  a  refusal  to 
deliver  the  pledged  property  a  tor- 
tious conversion  of  it.  No  doubt  the 
pledgor  can  redeem  upon  a  tender  of 


the  debt,  or  he  may  recover  the  dif- 
ference between  the  value  of  the 
pledge  and  the  debt.  But  to  lay  the 
foundation  for  an  action  for  conver- 
sion, I  am  of  opinion  that  an  ofifer 
and  demand  must  be  made  on  the 
day,  and  is  not  sufficient  if  made 
after  the  day  on  which  the  debt  has 
become  payable."  See  also  §  457, 
supra.  Where  an  agent  writes  the 
stockholder's  name  on  the  back  of  the 
certificate  of  stock,  and  disposes  of  it 
without  authority,  he  is  guilty  of  eon- 
version  and  may  be  arrested.  Reig- 
ner  v.  Spang,  5  N.  Y.  App.  Div.  237 
(1896).  A  pledgee  of  bonds  may 
maintain  an  action  for  conversion 
thereof,  and  may  cause  the  arrest  of 
a  repledgee  who  has  disposed  of  such 
bonds.  Blanek  v.  Nelson,  39  N.  Y. 
App.  Div.  21  (1899). 

2  Sewall  V.  Lancaster  Bank,  17  S. 
&  R.  (Pa.)  285  (1828);  Neiler  v.  Kel- 
ley,  69  Pa.  St.  403  (1871).  Trover 
does  not  lie  in  Pennsylvania  by  one 
joint  speculator  against  the  other  for 
stock  which  the  former  hands  to  the 
latter  to  use  as  collateral  in  their 
speculations,  even  though  the  latter 
sold  the  stock  and  lost  the  proceeds  in 
speculations.  Martin  v.  Megargee,  212 
Pa.  St.  558  (1905). 

^Biddle  v.  Bayard,  13  Pa.  St.  150 
(18.50);  Neiler  v.  Kelley,  69  Pa.  St. 
403  (1871) ;  Sewall  v.  Lancaster  Bank, 
17  Serg.  &  R.  (Pa.)  285  (1828).  Cf. 
Aull  V.  Colket,  2  W.  N.  Cas.  322 
(1875).  So  in  Michigan.  Daggett  v. 
Davis,  53  Mich.  35  (1884).  In  trover 
the  goods  ought  to  be  set  out  with 
some  degree  of  certainty  of  descrip- 
tion ;  but  the  same  certainty  is  not 
required  as  in  detinue  and  replevin, 
damages  being  recovered  in  trover, 
the  very  articles  in  detinue  and  re- 
plevin. Neiler  v.  Kelley,  69  Pa.  St. 
403  (1871). 


1711 


§576. 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


CH.  XXXV. 


wanting  the  action  will  not  lie.^  Thus,  trover  will  not  lie  for  the  con- 
version of  a  certificate  where  the  title  to  the  shares  is  divested.^  Con- 
version is  based  on  detinet  and  not  on  cepit,  and  the  plaintiff  is  bound 
to  show  an  existing  right  to  immediate  possession,  and  hence  if  the  parties 
were  engaged  in  a  joint  venture,  and  the  defendant  had  pledged  the 
stock  in  accordance  therewith,  the  action  does  not  lie.^  Trover  cannot 
be  maintained  by  a  vendor  of  stock  even  though  he  claims  that  he  was 
fraudulently  induced  to  sell,  inasmuch  as  he  is  no  longer  the  owner  of 
the  stock  and  is  not  entitled  to  possession  thereof.''  In  a  suit  for  conver- 
sion of  stock  the  plaintiff  need  not  allege  that  she  ever  had  possession 
of  the  stock  or  that  it  was  taken  from  her  possession  or  control.^ 

And,  upon  the  other  hand,  withholding  possession  of  a  certificate  of 
stock  cannot  amount  to  a  conversion  of  the  stock  itself  so  long  as  a  cer- 
tificate is  not  indorsed  ;  but  it  may  amount  to  a  technical  conversion  of 
the  certificate.^  A  transfer  of  a  certificate  of  stock  in  the  usual  form 
may  constitute  a  transfer  of  the  right  to  bring  suit  for  the  conversion 
of  such  stock.^  It  is  well  established  that  a  refusal  of  a  corporation 
to  register  a  transfer  in  the  name  of  one  entitled  to  the  stock  is  a  con- 
version of  the  shares.^     In  New  York  a  transferee  may  try  his  right  to 


1  Quoted  and  approved  in  German- 
American  Bank  v.  Brunswig,  107  Mo. 
App.  401  (1904). 

2Broadbent  v.  Farley,  12  C  B. 
(N.  S.)  214  (1862).  Trover  does  not 
lie  against  a  person  to  whom  stock  is 
given  to  sell  and  use  the  proceeds  to 
start  in  business.  Borland  v.  Stokes, 
120  Pa.  St.  278  (1888).  Where  sev- 
eral shareholders  mutually  agree  to 
contribute  a  number  of  shares  each, 
to  be  sold  for  the  benefit  of  the  cor- 
poration, one  of  them  cannot,  after 
the  rest  have  contributed  their  pro- 
portion, refuse  to  allow  his  shares  to 
be  sold  as  agreed ;  and  if  the  corpora- 
tion takes  them  under  the  agreement 
and  sells  them,  he  cannot  have  an 
action  of  trover.  Conrad  v.  La  Rue, 
52  Mich.  83  (1883).  In  trover  for  a 
certificate  of  stock,  the  acceptance  by 
the  plaintiff  of  the  certificate  ends  the 
suit,  and  nothing  further  can  be 
recovered.  Collins  v.  Lowry,  78  Wis. 
329  (1890). 

3  Byrne  v.  Weidenfeld,  113  N.  Y. 
App.  Div.  4.51   (1906). 

«  Newman  v.  Mercantile  T.  Co.,  189 
Mo.  423  (1905). 

^Farwell  v.  Boody,  112  N.  Y.  App. 
Div.  493   (1906).     A  complaint  alleg- 


ing that  the  defendant  sold  or  con- 
verted securities  is  too  vague  and 
indefinite.  Sprague  v.  Currie,  133 
N.  Y.  App.  Div.  18  (1909). 

6  Daggett  V.  Davis,  53  Mich.  35 
(1884).  Cf.  Morton  v.  Preston,  18 
Mich.  60  (1869).  Where  an  admin- 
istrator sells  stock  pledged  to  the 
deceased  in  his  lifetime  as  seeiirity 
for  a  loan  of  money,  and  receives  the 
proceeds  and  properly  accounts  to  the 
estate,  this  is  not  a  conversion  of  the 
shares,  and  the  pledgor  cannot  have 
an  action  of  trover.  If  any  action  lies 
it  is  for  money  had  and  received.  Von 
Schmidt  v.  Bourn,  50  Cal.  616  (1875). 
For  an  example  of  an  insuflBcient 
complaint  in  trover  for  shares,  in 
that  there  was  no  sufficient  averment 
of  a  conversion  or  of  facts  from  which 
a  conversion  might  be  inferred,  see 
Edwards  v.  Sonoma  Valley  Bank,  59 
Cal.  136  (1881) ;  and  see  also  Cum- 
nock V.  Newburyport  Sav.  Inst.,  142 
Mass.  342  (1886). 

7  Mahaney  v.  Walsh,  16  N.  Y.  App. 
Div.  601   (1897). 

8  Quoted  and  approved  in  Lewis  v. 
BidweU  Electric  Co.,  141  111.  App.  33, 
35  (1908),  holding  that  the  transferee 
is  the  party  entitled  to  bring  the  suit. 


1712 


CH.  XXXV. 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


[§  576. 


registry  in  a  suit  for  dividends/  but  not  after  commencing  a  suit  for 
conversion.^  Where  the  corporation  has  been  held  Hable  for  conver- 
sion, it  cannot  then  tender  the  stock  back  to  the  stockholder  and  avoid 
the  payment  of  the  damages.^  A  failure  or  refusal  by  the  corporation 
to  issue  a  certificate  to  an  original  subscriber,  when  by  the  terms  of  the 
contract  of  subscription  it  ought  to  be  issued,  may  be  treated  as  a  con- 
version.^ So,  also,  in  certain  cases,  a  failure  to  deliver  stock  according 
to  a  contract  for  delivery,^  or  to  return  borrowed  stock  on  demand,  or 


Allen  V.  American  Building,  etc. 
Assoc,  49  Minn.  544  (1892);  North 
America  Building  Assoc,  v.  Sutton,  35 
Pa.  St.  463  (1860) ;  West  Branch,  etc. 
Canal  Co.'s  Appeal,  81*  Pa.  St.  -19 
(1870) ;  Baltimore,  etc.  Ry.  v.  Sewell, 
35  Md.  238  (1871);  McMurrich  v. 
Bond  Head  Harbor  Co.,  9  U.  C.  Q.  B. 
333  (1852).  Trover  lies  against  a 
corporation  for  the  wrongful  con- 
version of  stock  where  it  illegally 
refuses  a  transfer  of  the  same.  Her- 
riek  v.  Humphrey,  etc.  Co.,  73  Neb. 
809  (1905).  Trover  lies  against  a 
corporation  at  the  instance  of  a  pur- 
chaser of  certificates  of  stock  for 
refusal  to  transfer  the  stock  on  the 
books  of  the  company.  Ralston  v. 
Bank  of  California,  112  Cal.  208  (1896). 
But  see  New  London  Nat.  Bank  v. 
Lake  Shore,  etc.  Ry.,  21  Ohio  St. 
221,  232  (1871).  The  corporation 
may  interplead  in  certain  cases.  See 
§  387,  supra.  In  suing  for  damages 
for  conversion  against  the  corpora- 
tion for  depriving  a  person  of  his 
stock,  the  latter  need  not  tender  the 
certificates.  Carpenter  v.  American 
Bldg.  etc.  Assoc,  54  Minn.  403  (1893). 
Where  the  transferee  of  certificates  of 
stock  in  a  bank  presents  them  to  the 
cashier  of  the  bank  for  transfer,  and 
the  cashier  and  a  director  delay  trans- 
fer until  a  debt  of'  the  transferrer  to 
the  bank  becomes  due,  and  then  in 
behalf  of  the  bank  levy  an  attachment 
on  the  stock  for  such  debt,  the  trans- 
feree may  hold  the  bank  and  the 
cashier  and  such  director  liable  in 
trover  for  conversion  of  the  stock, 
and  it  is  no  defense  that  the  trans- 
fer of  the  certificate  was  made  to 
defraud  creditors.  Hine  v.  Commer- 
cial Bank,  etc.,  119  Mich.  448  (1899). 
Where   the  purchaser  of  a  certificate 


of  stock  sends  it  to  the  corporation 
for  transfer,  and  the  secretary  replies 
that  the  corporation  has  a  lien  on  the 
stock,  the  corporation  is  not  liable 
for  a  conversion  of  the  stock,  no 
demand  for  the  return  of  the  certifi- 
cate being  shown.  Cummins  v.  Peo- 
ple's etc.  Assoc,  61  Neb.  728  (1901). 

^  Robinson  v.  Nat.  Bank  of  New 
Berne,  95  N.  Y.  637  (1884). 

2  Hughes  V.  Vermont  Copper  Min. 
Co.,  72  N.  Y.  207  (1878). 

^  Carpenter  v.  American  Bldg.  etc. 
Assoc,  54  Minn.  403  (1893).  The 
purchaser  may  hold  the  corporation 
liable  in  damages  for  conversion  for 
a  refusal  to  transfer  the  stock  on 
books.  His  damage  is  the  value  of 
the  stock  at  the  time  of  demand  with 
interest  to  the  date  of  trial,  and  after 
suit  is  commenced  the  corporation 
cannot  stop  it  by  offering  to  transfer. 
Dooley  v.  Gladiator,  etc.  Co.,  134 
Iowa,  468  (1906).  Where  after  suit 
for  conversion  defendant  returns  the 
stock  to  the  plaintiff  and  the  plaintiff 
accepts  it,  he  can  recover  only  nominal 
damages.  Owen  v.  Williams,  38  Colo. 
79  (1906). 

■*  See  §  61,   supra. 

^  Huntingdon,  etc.  Coal  Co.  v.  Eng- 
lish, 86  Pa.  St.  247  (1878);  North 
V.  Phillips,  89  Pa.  St.  250  (1879); 
Noonan  v.  Ilsley,  17  Wis.  314  (1863) ; 
Pinkerton  v.  Manchester,  etc.  R.  R., 
42  N.  H.  424  (1861).  Trover  lies 
against  a  vendor  for  the  conversion 
of  stock,  even  though  the  certificate 
was  not  transferred.  Mahaney  v. 
Walsh,  16  N.  Y.  App.  Div.  601  (1897). 
A  person  entitled  to  stock  on  a  con- 
tract cannot  maintain  trover  for  fail- 
ure to  deliver.  Reid  v.  Caldwell,  114 
Ga.  676  (1902). 


(108) 


1713 


§  576. 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


CH.  XXXV. 


at  the  time  when  by  agreement  it  ought  to  be  returned/  and  an  unau- 
thorized sale  of  stock  by  a  pledgee  in  violation  of  the  terms  of  the  con- 
tract of  bailment,^  or  by  a  broker  in  violation  of  his  contract/  are  ex- 
amples of  conversion  of  stock.  In  Oregon  it  is  said  that  any  interfer- 
ence subversive  of  the  right  of  the  owner  of  stock  to  enjoy  and  control 
it  is  a  conversion.'*  A  suit  for  conversion  of  stock  by  a  pledgee,  with  a 
demand  for  judgment  for  the  difference  between  the  amount  due  on 
the  debt  and  the  value  of  the  stock,  plus  dividends,  without  asking  for 
a  redemption  of  the  stock  or  transfer  thereof,  is  at  law  and  not  in  equity.^ 
Trover  will  not  lie  by  a  trustee,  on  stock  which  stands  in  the  name  of 
the  cestui  que  trust,  against  a  person  taking  title  from  a  co-trustee. 
A  suit  in  equity  is  the  proper  remedy.^  Where  a  certificate  of  stock 
is  supposed  to  be  burned,  but  is  afterwards  found,  a  conversion  for  re- 

»  McKenney  v.  Haines,  63  Me.  74  pledgee  to  return  property,  the  action 

(1873) ;  Fosdick  v.  Greene,  27  Ohio  St.  of  pledgor  may  be  in  tort  or  contract. 

484   (1875) ;  Forrest  v.  Elwes,  4  Ves.  International   Bank   v.   Monteath,    39 

Jr.  492  (1799).     Where  a  person  loans  N.    Y.    297    (1868).     See    also    notes 

stock    to    another    to    borrow    money  pp.     1584,     1585,     supra.     Conversion 

upon,   conversion   does   not   lie   for   a  lies  for  an  unauthorized  sale  of  stock 

failure  to  retvirn  the  stock.     Barrow-  and  also  for  dividends  received  thereon, 

eliffe  V.  Oummins,  66  Hun,   1   (1892).  Shaughnessy   v.    Chase,    7   N.    Y.    St. 

Where  bonds  are  loaned  to  use  tern-  Rep.  293  (1887) 


porarily  upon  an  agreement  to  retiu-n 
them  when  called  for,  and  the  mem- 
ber of  the  firm  to  whom  they  are 
delivered  uses  them  for  his  own  piu-- 
poses,  he  converts  them.  Birdsall  v. 
Davenport,     43     Hun,     552     (1887) 


3  See  ch.  XXV,  supra.  Sadler  v. 
Lee,  6  Beav.  324  (1843). 

*  Budd  V.  Multnomah  Street  Ry.,  12 
Oreg.  271  (1885) ;  s.  c,  15  Oreg.  413. 

5  Brightson  v.  Claflin  Co.,  108  N.  Y. 
App.   Div.   284   (1905).     Where  dam- 


Where  a  stockholder  in  an  insolvent  ages  are  claimed  in  an  action  for  con- 
corporation  turns  over  his  stock  to  version  of  stock,  it  is  not  necessary 
another  person  to  deposit  under  a  to  allege  the  value  of  the  stock, 
reorganization  agreement,  the  latter  Humphreys  v.  Minnesota  Clay  Co.,  94 
agreeing  to  pay  the  assessment  on  the  Minn.  469  (1905).  In  a  suit  to  recover 
stock  and  to  deliver  to  the  stock-  certain  stock  even  though  the  plain- 
holder  the  new  securities  upon  repay-  tiff  alleges  conversion  and  asks  judg- 
ment of  such  assessment,  and  he  ment  for  the  value  of  the  stock,  yet  if 
refuses  so  to  do  thereafter,  he  is  he  makes  the  corporation  a  party 
guilty  of  a  conversion  and  of  a  fraud  defendant,  and  also  all  the  parties 
upon  the  stockholder.  Miller  v.  Miles,  interested  in  the  stock,  and  the  court 
58  N.  Y.  App.  Div.  103  (1901) ;  aff'd,  decrees  a  cancellation  of  the  out- 
171  N.  Y.  675.  standing  certificate,  and  the  issue  of 
2  Maryland  F.  Ins.  Co.  v.  Dalrymple,  a  new  one  to  plaintiff,  the  defeated 
25  Md.  242,  267  (1866) ;  Freeman  v.  party  cannot  complain  that  the  judg- 
Harwood,  49  Me.  195  (1859);  Fisher  ment  should  have  been  for  money 
V.  Brown,  104  Mass.  259  (1870).  An  damages.  Crawford  v.  Ft.  Dodge,  etc. 
illegal  sale  of  the  pledge  by  pledgee  Co.,  125  Iowa,  658  (1904). 
is  a  conversion,  and  a  complaint  for  «  Onondaga,  etc.  Co.  v.  Price,  87 
such  conversion  wiU  not  be  construed  N.  Y.  542  (1882) ;  s.  c,  in  a  court  of 
as  a  complaint  for  breach  of  contract,  equity,  as  White  v.  Price,  39  Hun, 
Smith  V.  Hall,  67  N.  Y.  48  (1876),  dis-  394  (1886) ;  aff'd,  108  N.  Y.  661 
tinguishing  Austin  v.  Rawdon,  44  (1888). 
N.     Y.     63     (1870).     For    refusal    of 

1714 


CH.  XXXV.]  ACTIONS   AND   MEASURE   OF   DAMAGES.  [§  577. 

fusal  to  deliver  dates  from  the  time  when  it  is  found.^  Proof  of  demand 
is  necessary  in  order  to  support  the  action  of  trover,  where  the  defendant 
came  into  lawful  possession  of  the  stock  and  had  an  interest  in  it." 
But  where  a  broker  has  converted  the  customer's  stock,  the  customer 
need  not  tender  the  balance  of  the  purchase  price  of  the  stock  nor 
make  demand  for  the  stock  before  commencing  suit.^  A  settlement 
between  a  principal  and  his  agent  is  no  bar  to  a  subsequent  suit 
by  the  principal  against  the  agent  for  conversion  of  stock  where 
the  principal  was  not  aware  of  the  facts  when  he  made  the  settle- 
ment.^ Even  though  the  corporation  allows  the  life  tenant  to  sell 
the  stock  outright,  yet  if  the  remainderman  does  not  sue  within  the 
period  of  limitations,  after  knowledge  of  the  facts,  the  corporation 
is  not  liable.^ 

§  577.  Detinue  and  replevin.  —  The  common-law  action  of  deti- 
nue will  lie  for  the  recovery  of  a  certificate  of  stock  unlawfully  detained.® 
In  this  action  the  judgment  is  conditional,  either  to  restore  the  thing 
detained,  or  pay  the  value  and  damages  for  the  detention.  The  more 
modern  action  of  replevin  or  its  equivalent  will  doubtless  lie  for  the  re- 
covery of  a  certificate,  the  same  as  for  any  other  tangible  personal 
property.  Replevin  lies  by  an  administrator  to  recover  a  certificate 
of  stock  which  he  had  illegally  pledged  as  administrator.^  Where  a 
stockholder  leaves  a  certificate  with  a  person  for  safe-keeping,  and  the 
latter  illegally  transfers  it  to  another  who  has  demanded  transfer  on 
the  corporate  books,  a  purchaser  from  the  original  stockholder  may 
maintain  a  suit  in  replevin,  under  the  New  York  practice,  even  though 
the  allegations  were  intended  to  sustain  an  injunction  and  obtain  a 
transfer  of  the  stock  itself,  and  even  though  the  corporation  was  joined 

1  McDonald  v.  Macldnnon,  104  son  v.  St.  Nicholas  Nat.  Bank,  1 13 
Mich.  428  (1895).  N.  Y.  325  (1889) ;  aff'd,  146  U.  S.  240. 

2  Moynahan  v.  Prentiss,  10  Colo.  Concerning  the  nature  of  stock  and  a 
App.  295  (1897).  certificate  of  stock,  and  as  to  whether 

3  Mullen    v.    Quinlan    &    Co.,    195  trover    or    replevin    will    lie,    see    1    ^ 
N.  Y.  109  (1909).  University  Law  Rev.  218  (1894).     Re- 

*  Ballard  v.  Beveridge,  171  N.  Y.  plevin  wall  lie  to  recover  back  a  certi- 
194  (1902).  ficate    of    stock.     Opperman    v.    Citi- 

*  Yeager  v.  Bank  of  Kentucky,  zens'  Bank,  44  Ind.  App.  401  (1908), 
127  Ky.  751  (1908).  Replevin  does  not  lie  for  a  certificate 

8  Williams  v.   Peel  River,  etc.   Co.,  of  stock  where  defendant  shows  that 

55  L.  T.  Rep.  689  (1886)  ;  Williams  v.  the  plaintiff  had  directed  him  to  divide 

Archer,  5  C.  B.  318  (1847),  where  it  the  shares  and  obtain  new  certificates 

was  held  that  detinue  lay  to  recover  and  deliver  some  of  them  to  specified 

two   hundred   and   fifty   scrip   certifi-  persons   and   plaintiff   had   prevented 

cates ;   Peters   v.   Heyward,   Cro.   Jac.  such    transfers    being    made    on    the 

682  (1624),  where  detinue  was  allowed  books.     Sulzner  v.  Cappeau,  etc.  Co., 

for  a  bond   detained.     As  to  replevin  223  Pa.  St.  87  (1909). 
in  cepit  for  bonds  wrongfully  received  ^  Parks  v.  Mockenhaupt,   133  Cal. 

in  pledge  from  a  pledgee,  see  Thomp-  424  (1901). 

1715 


§§  578,  579. 


ACTIONS   AND   MEASURE    OF   DAMAGES. 


[cH.  XXXV. 


as  a  party  defendant,  it  appearing  that  there  were  not  sufficient  grounds 
for  jurisdiction  in  a  court  of  equity.^ 

§  578.  Money  had  and  received  —  Claim  and  delivery.  —  A  pledgor 
whose  stock  has  been  wrongfully  sold  by  the  pledgee,  in  violation  of 
the  contract  of  bailment,  may  have  an  action  against  the  pledgee  for 
money  had  and  received.^  An  action  of  claim  and  delivery  does  not 
lie  to  recover  shares  of  stock.^ 

§  579.  Bill  in  equity.  —  A  bill  in  equity  may  be  maintained  by  a 
bona  fide  purchaser  of  stock  against  the  corporation  to  compel  a  transfer 
of  the  stock  upon  the  corporate  books.^  A  bill  in  equity  may  be  filed 
also  to  relieve  a  stockholder  from  an  unauthorized  forfeiture  ;  °  to  rescind 
a  subscription  obtained  by  fraud ;  ^  to  compel  a  specific  performance 
of  an  agreement  to  sell  stock ;  ^  to  remedy  a  purchase,  sale,  or  transfer 
of  stock  induced  by  fraud ;  ^  and  to  redeem  stock  held  in  pledge.^ 
Where  stock  has  been  illegally  forfeited  or  fraudulently  transferred 
the  claimant  may  maintain  a  bill  in  equity  against  the  corporation  and 
the  holder  of  the  certificates  to  have  the  stock  restored. ^°  A  prelimi- 
nary injunction  against  transferring  stock  is  also  frequently  granted. ^^ 

11  Heck  V.  Bulkley,  1  S.  W.  Rep.  612 
(Tenn.  1886),  holding  also  that  a  vio- 
lation of  the  injunction  is  a  bar  to 
damages  upon  a  dissolution  of  it.  The 
preliminary  injunction,  being  an  equi- 
table remedy,  is  not  granted  if  only 
legal  relief  is  sought  by  the  action.  See 
McHenry  v.  Jewett,  90  N.  Y.  58  (1882). 
A  principal  who  is  suing  an  agent  to 
obtain  shares  of  stock  may  enjoin  the 
agent  from  transferring  the  same 
pendente  lite.  Chedworth  v.  Edwards, 
8  Ves.  Jr.  46  (1802).  Where  a  pro- 
posed consolidation  is  attacked  by  a 
stockholder,  a  preliminary  injunction, 
granted  so  as  not  to  render  useless 
the.  whole  suit  in  case  it  is  successful, 
will  not  be  disturbed  by  the  coxu-t  of 
appeals.  Young  v.  Rondout,  etc.  Co., 
129  N.  Y.  57  (1891).  Where  a  stock- 
holder has  delivered  his  stock  to  the 
directors  to  be  divided  into  smaller 
certificates,  and  the  directors  claim 
that  it  was  agreed  that  a  part  of  the 
stock  should  be  sold  for  the  benefit 
of  the  corporation,  the  stockholder 
may  have  a  preliminary  injunction 
against  such  sale  pending  his  suit  to 
compel  delivery  of  the  stock.  Bed- 
ford V.  American,  etc.  Co.,  51  N.  Y. 
App.  Div.  537  (1900).  A  stockholder 
cannot  prevent  other  stockholders 
from  selling  their  stock  on  the  ground 


1  Sisson  V.  Bassett,  134  N.  Y.  App. 
Div.  53  (1909). 

2  Von  Schmidt  v.  Bourn,  50  Cal. 
616  (1875) ;  Marsh  v.  Keating,  1  Bing. 
N.  C.  198  (1834).  Cf.  Jones  v.  Brin- 
ley,  1  East,  1  (1800) ;  Rex  v.  St.  John 
Maddermarket,  6  East,  182  (1805). 
In  an  old  case  a  contrary  rule  is  laid 
down.  Nightingal  v.  Devisme,  5  Burr. 
2589  (1770).  In  a  suit  for  profits 
received  by  defendant  as  agent  for 
plaintiff  in  buying  and  selling  stock, 
the  value  of  the  stock  need  not  be 
alleged  with  any  particular  definite- 
ness.  Herrlich  v.  McDonald,  80  Cal. 
460  (1889).  Where  a  corporation 
repudiates  a  pledge  of  stock  made  by 
its  treasurer,  it  cannot  sue  the  pledgee 
for  the  money  received  by  the  pledgee 
upon  a  sale  of  the  stock  by  the  latter. 
Holden  v.  Metropolitan  Nat.  Bank, 
151  Mass.  112  (1890) ;  s.  c,  138  Mass. 
48. 

3BeU   V.   Bank   of   California,    153 
Cal.  234  (1908). 
*  See  §  391,  supra. 
^  See  §  134,  supra. 
®  See  §§  155,  156,  supra. 

7  See  §338,  supra. 

8  See  §  356,  supra. 
^  See  §  47.5,  supra. 

1"  New  York,  etc.  Co.  v.  Great  East- 
ern Tel.  Co.,  74  N.  J.  Eq.  221  (1908). 


1716 


CH.  XXXV.]  ACTIONS   AND   MEASURE   OF   DAMAGES.  [§  579. 

An  injunction  against  a  pledgee  disposing  of  stock  owned  by  a  certain 
party,  or  an  attachment  upon  the  interest  of  that  party,  does  not  pre- 
vent the  pledgee  selling  the  stock  if  such  stock  really  belonged  to  the 
wife  of  that  party. ^  A  stockholder  whose  stock  has  been  wrongfully 
pledged  may  enjoin  the  corporation  from  allowing  a  transfer  by  the 
pledgee  who  has  applied  for  the  same,  and  the  pledgor  need  not  allege  that 
the  pledgee  took  with  notice.  It  is  for  the  pledgee  to  intervene  and  prove 
that  the  pledge  was  bona  fide.^  Even  though  a  corporation  obeys  the 
decree  of  a  court  and  transfers  stock  in  accordance  with  such  decree, 
yet  if  thereafter  the  decree  is  reversed  on  appeal  and  the  original  party 
is  held  entitled  to  the  stock,  such  original  party  may  hold  the  corporation 
liable  for  allowing  the  transfer.^  A  court  will  enjoin  a  party  from  voting 
upon  or  disposing  of  his  stock  in  a  corporation  pendente  lite  where 
the  plaintiffs  show  that  they  transferred  the  stock  to  the  defendant  on 
the  latter's  agreement  not  to  sell  the  same,  except  with  the  consent  of 
the  former,  and  that  when  he  did  sell  the  stock  three  fourths  of  the 
proceeds  should  belong  to  the  former,  and  it  appearing  further  that 
the  defendant  had  given  the  stock  to  his  sister  without  consideration." 
Where  an  injunction  against  the  sale  of  stock  is  dissolved  the  damages 
recoverable  on  the  bond  may  include  a  decline  in  the  price  at  which 
the  stock  might  have  been  sold.^  A  bill  in  equity  is  the  proper  remedy 
to  obtain  possession  of  certificates  of  stock. ^    A  bill  in  equity  filed  by 

that  the  purchaser  may  manage  the  cent,   etc.   Co.,   52   S.   W.   Rep.    1021 

company  to  the  detriment  of  minor-  (Tenn.  1897). 

ity  stockholders  ;  and  the  fact  that  the  ^  Reynolds  v.  Touzalin  Imp.  Co., 
plaintiff's  stock  was  on  deposit  Tvith  62  Neb.  236  (1901).  In  a  suit  by  a 
the  trust  company  and  that  he  cannot  stockholder  against  a  foreign  corpo- 
get  the  stock  and  thus  accept  the  ration  to  enjoin  alleged  illegal  sales 
order  to  purchase  his  stock  also,  is  no  of  property  the  court  has  power  to 
ground  for  an  injunction.  Ingraham  v.  enjoin  the  sale  of  property  within  the 
National  Salt  Co.,  72  N.  Y.  App.  Div.  jurisdiction  and  also  to  enjoin  resi- 
582  (1902) ;  appeal  dismissed,  172  dent  directors  from  illegally  selling 
N.  Y.  644.  A  corporation  by  the  the  property,  but  cannot  enjoin  the 
action  of  its  board  of  directors  and  corporation  from  exercising  its  char- 
consent  of  all  its  stockholders  may  ter  powers  generally.  Mqneuse  v. 
agree  that  a  certain  percentage  of  its  Riley,  40  N.  Y.  Misc.  Rep.  110  (1903). 
profits  shall  be  paid  annually  to  a  3  Miller  t;.  Doran,  245  111.  200  (1910). 
person  for  services  already  rendered  ''Weston  v.  Goldstein,  39  N.  Y. 
by  him.  In  a  suit  by  him  to  enforce  App.  Div.  661  (1899). 
such  agreement  and  asking  an  injunc-  »  Slack  v.  Stephens,  19  Colo.  App. 
tion  against  any  sales  of  stock,  except  538  (1904).  If  an  attachment  on 
with  notice  of  such  agreement,  stock-  stock  is  vacated  the  depreciation  in 
holders  are  necessary  parties  defend-  its  value  between  the  time  when  it 
ant.  Such  an  agreement  is  not  an  was  levied  and  the  time  when  it  was 
exclusion  of  future  boards  of  direc-  vacated  is  collectible  under  the  under- 
tors  from  the  management  of  the  com-  taking  given  in  the  attachment  pro- 
pany.  Dupignac  v.  Bernstrom,  76  ceeding.  McCarthy  v.  Boothe,  2  Cal. 
N.  Y.  App.  Div.  105  (1902).  App.  170  (1905).  See  also  §363,  supra. 
1  Fourth  Nat.   Bank,   etc.   v.   Cres-  «  This   rule   of   law   has   frequently 

1717 


§579. 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


[CH.  XXXV. 


a  partner  to  hold  his  co-partners  and  third  persons  liable  for  a  mis- 
appropriation of  stock  owned  by  the  firm  cannot  be  sustained  where 
it  is  not  alleged  that  the  third  persons  knew  of  such  misappropriation 
at  the  time  of  such  misappropriation.^  In  a  suit  by  a  claimant  of 
stock  to  obtain  the  stock  from  another  person,  the  corporation  is  a 
proper  but  not  a  necessary  party .^  In  a  suit  by  a  stockholder  to  hold 
a  corporation  liable  for  his  stock  and  dividends,  by  reason  of  its  allow- 
ing a  transfer  by  an  unauthorized  agent  of  the  stockliolder,  the  subse- 
quent owners  of  the  stock  are  not  necessary  parties.^  A  suit  by  the 
purchaser  of  a  certificate  of  stock  to  compel  delivery  may  be  brought 
at  the  place  where  the  certificate  is,  and  absent  defendants  may  be 
served  by  publication.^     In  a  suit  against  a  corporation  to  compel  it 


been  applied  in  actions  by  a  pledgor 
to   obtain   from   a   pledgee   the   stock 
which    has    been    pledged.     The    rule 
itself    is    well    established.     White    v. 
Price,  39  Hun,  394  (1886) ;  aff'd,  108 
N.    Y.    661 ;    Hasbrouek    v.    Vander- 
voort,  4  Sandf.  74   (1850);  Bryson  v. 
Rayner,  25  Md.  424  (1866) ;  Conyng- 
ham's  Appeal,  57  Pa.  St.  474  (1868) ; 
Koons  V.  First  Nat.  Bank,  89  Ind.  178 
(1883).     Where   a   stockholder   trans- 
fers the  certificate  on  the  back  to  a 
person,  and  leaves  it  in  his  own  safe- 
deposit    box,    and    writes    a    letter    to 
such  person  directing  him  to  distribute 
it  among  a  list  of  charitable  corpora- 
tions, but  no  list  is  attached,  the  latter 
takes  no  title,  and  the  executors  may 
compel  him  to  transfer  the  certificate 
to   them.     Bliss   v.   Fosdick,   76  Hun, 
508   (1894).     In  the  ease    Lamb,  etc. 
Co.  V.  Lamb,   119  Mich.  568   (1899), 
where  a  party  claiming  to  be  the  real 
owner  of  stock  filed  a  bill  to  compel 
the  holder  of  such  stock  to  deliver  up 
the   same,   but   it   appeared   that   the 
defendant    had    already    disposed    of 
the   stock   before   the   commencement 
of  the  suit,  the  court  refused  to  grant 
relief,  even  though  it  further  appeared 
that  the  defendant  had  other  stock  in 
the  same  corporation  equal  in  amount 
to   the   stock   in   issue.     In   a   suit   to 
recover   stock   an   injunction   is   more 
readily    granted    than    in    a    suit    to 
recover  other  kinds  of  personal  prop- 
erty.    Currie  v.  Jones,  138  N.  C.  189 
(1905).     A  suit  in  equity  does  not  lie 
to  recover  the  value  of  bonds  which  a 
depository   refuses    to   give    up,    even 


though  the  bonds  are  not  dealt  with 
on  the  market  and  are  obligations  of 
a  corporation  which  has  been  fore- 
closed. The  remedy  is  trover  or 
replevin.  Sawyer  v.  Atchison,  129 
Fed.  Rep.  100  (1904). 

"Wall  V.  Old  Colony,  etc.  Trust  Co., 
174  Mass.  340  (1899).  Where  in  a 
partnership  dissolution  it  is  adjudged 
that  one  of  the  partners  is  entitled  to 
certain  stock,  and  in  the  event  of  the 
others  failing  to  transfer  it,  he  shall 
have  its  value,  he  is  entitled  to  a 
transfer  unless  the  others  are  unable 
to  transfer  it.  Reilly  v.  Freeman,  109 
N.  Y.  App.  Div.  4  (1905) ;  aff'd,  184 
N.  Y.  610. 

2  Williamson  v.  Krohn,  66  Fed.  Rep. 
655  (1895) ;  Johnson  v.  Kirby,  65  Cal. 
482  (1884).  Cf.  Rogers  v.  Van  Nort- 
wick,  45  Fed.  Rep.  513  (1891).  In  a 
suit  between  stockholders  as  to  the 
title  to  stock  the  corporation  is  a 
proper  party  defendant,  but  is  a  nom- 
inal party,  and  is  not  considered  in 
determining  whether  the  suit  is  remov- 
able to  the  United  States  court. 
Higgins  V.  Baltimore,  etc.  R.  R.,  99 
Fed.  Rep.  640  (1900).  And  see  §§  338, 
356,  361,  supra. 

3  St.  Romes  v.  Levee,  etc.  Co.,  127 
U.  S.  614  (1888).  In  this  case  the 
biU  of  a  claimant  of  stock  against  the 
company  to  hold  it  liable  for  allowing 
a  transfer  of  the  stock  in  fraud  of 
his  rights  was  barred  by  laches,  the 
suit  having  been  brought  thirty-five 
years  after  the  cause  of  action  had 
accrued.     Cf.  §  392,  supra. 

*  Ryan   v.  Seaboard,  etc.  R.  R.,  83 


1718 


CH.  XXXV.] 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


[§  579. 


to  issue  stock  to  the  plaintiff  or  else  pay  the  value  thereof,  the  proper 
form  of  judgDient  is  an  order  to  issue  the  stock.  A  money  judgment 
should  be  entered  only  after  proof  of  the  corporation's  failure  to  comply 
with  the  main  order.^ 

Where  a  pledgee  brings  suit  to  obtain  possession  of  the  pledge, 
which  had  been  wrongfully  diverted,  and  during  the  suit  the  pledge 
becomes  worthless,  a  supplemental  complaint  may  be  served  alleging 
that  fact  and  demanding  the  value  of  the  pledge  at  the  time  demand 
was  made  therefor.^  Where  stock  is  deposited  with  one  trust  company 
as  additional  security  for  a  mortgage  given  to  another  trust  company, 
and  upon  default  the  former  company  refuses  to  deliver  the  stock,  and 
the  latter  trust  company  then  commences  a  suit  in  equity  to  compel 
the  former  trust  company  to  deliver  the  stock,  and  during  that  suit 
the  stock  declines  in  value,  a  bondholder  secured  by  such  mortgage  can- 
not hold  liable  the  trust  company  holding  the  stock,  on  account  of  the 
decline  in  value,  inasmuch  as  the  suit  in  equity  determined  all  questions, 
including  the  amount  of  damage.^     Where  for  fifty  years  a  claimant  of 


Fed.    Rep.    889     (1897).     A    suit    in 
equity    does    not    lie    in    the    United 
States  court  in  Nevada,  at  the  instance 
of  a  resident  of  that  state,  to  recover 
stock   owned    by  non-residents  in  an 
Arizona     corporation     where     service 
upon   them   is  made  only   upon   pub- 
lication.    The    stock    is    not    within 
that     district,     within     the     meaning 
of    the    federal   statute.     McKane    v. 
Burke,    132    Fed.    Rep.    688    (1904). 
In  the  case  Wait  v.  Kern  River,  etc. 
Co.,   157  Cal.   16   (1909),  it  was  held 
that  a  promoter  who  is  entitled  to  a 
portion  of  certain  unissued  stock  in  an 
Arizona   mining   company,   which   did 
all    its   business    in    California,    which 
company     had     contracted     to     issue 
such  stock  to  another  promoter,  who 
had  not  yet  actually  received  it,  might 
by  a  bill  in  equity  in  California  against 
the  corporation  and  the  other  promoter 
obtain  a  decree  that   the  corporation 
issue  to  him  the  stock  to  which  he  is 
entitled,    even   though   jurisdiction   of 
the  other  promoter  was  obtained  only 
by  publication.     The  court  held  also 
that   the  remedy   at  law  was  insuffi- 
cient when  the  stock  had  no  market 
value,  and  the  property  of  the  com- 
pany consisted  merely  of  mining  claims 
of  unknown  value.     See  also  eases  in 
§  363,  supra. 

1  Consolidated,  etc.  Co.  v.  Huff,  62 


Kan.  405  (1901).  Where  a  transac- 
tion is  adjudged  to  be  a  loan  and  not  a 
sale,  and  the  defendant  is  ordered  to 
return  the  stock,  it  is  error  to  add  an 
alternative  money  judgment  for  the 
value  of  the  stock.  Fanny  Rawlings 
Min.  Co.  V.  Tribe,  29  Colo.  302 
(1902). 

2  Central  T.  Co.  v.  West  India,  etc. 
Co.,  109  N.  Y.  App.  Div.  517  (1905). 
Where  the  pledgee  knows  at  the  time 
of  the  pledge  that  the  securities  should 
have  been  placed  under  a  mortgage  he 
is  liable  to  the  mortgagee,  and  if  the 
pledgee  sells  his  security,  he  is  liable 
to  the  mortgagee  to  the  amount 
realized,  even  though  thereafter  the 
securities  became  valueless.  Central 
T.  Co.  V.  West,  etc.  Co.,  144  N.  Y. 
App.  Div.  560  (1911). 

3  Bracken  v.  Atlantic  T.  Co.,  167 
N.  Y.  510  (1901).  Where  stock  is  tied 
up  by  an  injunction  which  is  after- 
wards vacated,  and  in  the  meantime 
the  stock  depreciates  in  value,  the  loss 
can  be  recovered  from  the  enjoining 
party  if  the  stocks  could  and  would 
have  been  sold  before  the  depreciation 
if  they  had  not  been  so  tied  up.  But 
if  such  stocks  are  in  pledge,  and  the 
pledgor  does  not  pay  the  loan  while 
the  stocks  are  so  tied  up,  no  damages 
can  be  recovered.  Fourth  Nat.  Bank, 
etc.  V.  Crescent,  etc.  Co.,  52  S.  W.  Rep. 


1719 


§§  580,  581. 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


[CH.  XXXV. 


Stock  takes  no  proceedings  to  ebtain  it,  and  during  that  time  other  per- 
sons claim  the  stock  and  have  possession  of  it  and  have  received  divi- 
dends upon  it,  laches  is  a  bar  to  a  suit  by  the  former  to  recover  the  stock. ^ 

§  580.  Pleading  under  the  codes.  —  In  general,  a  pleading  under 
the  code  is  not  a  safe  pleading,  unless  it  conforms  substantially  to 
the  rules  of  pleading  at  common  law.  Some  verbiage  may  be  omitted, 
but  the  relief  granted  by  the  various  common-law  actions  cannot  be 
obtained  even  under  the  code  without  the  necessary  averments  enti- 
tling the  plaintiff  to  that  relief.  It  is  the  allegation  of  the  facts,  and 
not  the  method  of  alleging  them,  that  constitutes  a  sufficient  pleading 
under  the  code.- 

§  581.  The  measure  of  damages  —  (a)  The  first  rule  —  Value  how 
shown  when  there  is  no  market  value.  —  Great  difficulty  has  been 
experienced  in  determining  what  shall  be  the  measure  of  damages 
for  the  conversion  of  stock.  As  the  manner  and  conditions  of  the 
conversion  vary,  so  also  will  the  measure  of  damages  vary  from  nominal 
damages  to  the  highest  value  of  the  stock  with  dividends  and  interest, 
and  also  any  special  damages  which  the  plaintiff  can  establish.     In 


1021  (Tenn.  1897).  See  also  §§363, 
388,   supra. 

1  Livingston  v.  Proprietors',  etc.,  15 
Fed.  Cas.  691  (1879) ;  s.  c,  16  Blatchf. 
549. 

"Burrall  v.  Bushwick  R.  R.,  75 
N.  Y.  211  (1878).  Cf.  Tockerson  v. 
Chapin,  52  N.  Y.  Super.  Ct.  16  (1885). 
In  Nevada  there  is  a  statutory  action 
of  claim  and  delivery.  Bercich  v. 
Marye,  9  Nev.  312  (1874).  See  Web- 
ster V.  Grand  Trunk  Ry.,  3  L.  Can. 
Jur.  148  (1859) ;  8.  c,  2  L.  Can.  Jur. 
291,  for  a  construction  of  that  pro- 
vision of  the  judicature  act  (12  Vict., 
c.  28,  §  87)  which  governs  actions  of 
this  nature  in  the  Canadian  provinces. 
In  Kuhn  v.  McAllister,  1  Utah,  273 
(1875),  it  is  held  that  the  language 
used  in  the  pleadings  in  these  actions 
is  not  material,  or  that  the  language 
is  that  of  one  form  of  action  or  another, 
or  of  no  form,  but  that  the  question 
is  whether  the  facts  entitle  the  plain- 
tiff to  recover.  A  declaration  in  an 
action  for  the  wrongful  conversion  of 
the  shares  of  the  capital  stock  of  a 
corporation  is  sufficient  for  the  pur- 
poses of  pleading  if  it  states  the  ulti- 
mate facts  to  be  proven.  The  circum- 
stances which  tend  to  prove  those 
facts  may  be  used  for  the  purpose  of 


evidence,  but  they  have  no  place  in 
the  pleadings.  McAllister  v.  Kuhn,  96 
U.  S.  87  (1877),  affirming  Kuhn  v. 
McAllister,  1  Utah,  273  (1875).  As 
to  a  misjoinder  of  causes  of  action 
under  the  California  code,  where  the 
plaintiff  sues  to  recover  certain  stock, 
see  Johnson  v.  Kirby,  65  Cal.  482 
(1884).  Upon  the  question  of  what 
is,  in  New  York,  a  sufficient  pleading 
in  an  action  to  compel  delivery  of 
stock,  see  Burrall  v.  Bushwick  R.  R., 
75  N.  Y.  211  (1878).  See  also  2 
Chitty,  Pleadings,  p.  618;  Lowell, 
Transfers,  §  11.  Where  a  stockholder 
leaves  a  certificate  with  a  person  for 
safe-keeping,  and  the  latter  illegally 
transfers  it  to  another  who  has 
demanded  transfer  on  the  corporate 
books,  a  purchaser  from  the  original 
stockholder  may  maintain  a  suit  in 
replevin,  under  the  New  York  prac- 
tice, even  though  the  allegations  were 
intended  to  sustain  an  injunction  and 
obtain  a  transfer  of  the  stock  itself, 
and  even  though  the  corporation  was 
joined  as  a  party  defendant,  it  appear- 
ing that  there  were  not  sufficient 
grounds  for  jurisdiction  in  a  court  of 
equity.  Sisson  v.  Bassett,  134  N.  Y. 
App.  Div.  53  (1909). 


1720 


CH.  XXXV.] 


ACTIONS   AND   MEASURE    OF   DAMAGES. 


[§  581. 


general,  the  courts  incline  to  the  rule  that  the  true  measure  of  damages 
is  the  value  of  stock  at  the  time  of  conversion/  or  a  reasonable  time 
after.-     By  the  phrase  "  the  value  of  the  stock  "  is  usually  to  be  under- 


1  Re  Bahia,  etc.  Ry.,  L.  R.  3  Q.  B. 

584  (1868) ;  Williams  v.  Archer,  5 
C.  B.  318  (1847) ;  Tempest  v.  Kilner,  3 
C.  B.  249  (1846) ;  Shaw  v.  Holland,  15 
M.  &  W.  136  (1846) ;  Pott  v.  Flather, 
5  Railw.  &  Can.  Cas.  85  (1847) ;  David- 
son r.  Tulloeh,  6  Jur.  (X.  S.)  543 
(1860) ;  Wells  v.  Abernethy,  5  Conn. 
222  (1824) ;  Layman  v.  Slocomb  & 
Co.,  7  Penn.  (Del.),  403  (1909); 
O'Meara  v.  North  American  Min. 
Co.,  2  Nev.  112  (1866);  Ormsby  ;;. 
Vermont  Copper  Min.  Co.,  56  N.  Y. 
623  (1874) ;  Pinkerton  v.  Manchester, 
etc.  R.  R.,  42  N.  H.  424  (1861); 
McKenney  v.  Haines,  63  Me.  74 
(1873);  Sturges  v.  Keith,  57  111.  451 
(1870);  Noonan  v.  Ilsley,  17  Wis. 
314  (1863) ;  Bull  v.  Douglas,  4  Munf. 
(Va.)  303  (1814) ;  Enders  v.  Board  of 
Public  Works,  1  Gratt.  (Va.)  364 
(1845) ;  White  v.  Salisbury,  33  Mo. 
150  (1862) ;  Connor  v.  HilUer,  11  Rich. 
L.  (S.  C.)  193  (1857);  Eastern  R.  R. 
V.  Benedict,  76  Mass.  212  (1857); 
Boylan  v.  Huguet,  8  Nev.  345  (1873) ; 
Bercich  v.  Marye,  9  Nev.  312  (1874) ; 
Sargent  v.  Franklin  Ins.  Co.,  25  Mass. 
90  (1829) ;  Fisher  v.  Brown,  104  Mass. 
259  (1870) ;  Wyman  v.  American 
Powder  Co.,  62  Mass.  168  (1851); 
North  I'.  Phillips,  89  Pa.  St.  250  (1879) ; 
Huntingdon,  etc.  Coal  Co.  t;.  English, 
86  Pa.  St.  247  (1878) ;  Neiler  v.  Kelley, 
69  Pa.  St.  403  (1871);  Randall  v. 
Albany  City  Nat.  Bank,  1  N.  Y.  St. 
Rep.  592  (1886) ;  Douglas  v.  Merceles, 
25  N.  J.  Eq.  144  (1874).  See  also 
Eicholz  V.  Fox,  12  Phila.  (Pa.)  382 
(1878) ;  Larrabee  v.  Badger,  45  111. 
440  (1867);  Barned  v.  Hamilton,  2 
Railw.  &  Can.  Cas.  624  (1841).  Cf. 
Moody  V.  Caulk,  14  Fla.  50  (1872); 
Orange,  etc.  R.  R.  v.  Fulvey,  17  Gratt. 
(Va.)  366  (1867) ;  Jefferson  v.  Hale,  31 
Ark.  286  (1876) ;  Third  Nat.  Bank  v. 
Bovd,  44  Md.  47  (1875);  Thomas  v. 
Sternheimer,  29  Md.  268  (1868).  The 
measure  of  damages  to  a  customer  by 
reason  of  a  broker  illegally  selling  his 
stock,  the  broker  having  become 
bankrupt,  is  the  value  of  the  stock  on 


the  day  of  filing  the  petition  in  bank- 
ruptcy, the  exact  time  of  the  sale  not 
being  ascertainable.  In  re  Graff,  117 
Fed.  Rep.  343  (1902).  The  measure 
of  damages  in  trover  for  conversion  of 
stock  is  the  value  at  the  time  of  the 
conversion  with  interest  from  that 
date.  Durham  v.  Commercial  Nat. 
Bank,  45  Greg.  385  (1904).  A  minor 
who  is  entitled  to  stock  in  an  estate 
may  upon  his  majority  sue  the  corpo- 
ration for  having  allowed  a  transfer 
ten  years  prior  thereto.  The  measure 
of  damages  is  the  value  of  the  stock 
at  the  time  of  the  transfer  with  inter- 
est. Lem-ey  v.  Bank  of  Baton  Rouge, 
58  S.  Rep.  1022  (La.  1912). 

-  Quoted  and  approved  in  White 
V.  Jouett,  147  Ky.  197  (1912).  Colt 
V.  Owens,  90  N.  Y.  368  (1882) ;  Baker 
V.  Drake,  53  N.  Y.  211  (1873);  s.  c, 
66  N.  Y.  518  (1876) ;  Gruman  v.  Smith, 
81  N.  Y.  25  (1880) ;  Douglas  v.  Merce- 
les, 25  N.  J.  Eq.  144  (1874) ;  Brewster 
V.  Van  Liew,  119  111.  554  (1886) ;  Budd 
V.  Multnomah  Street  Ry.,  15  Oreg. 
413  (1887) ;  Mullen  v.  Quinlan  &  Co., 
195  N.  Y.  109  (1909).  See  §§460, 
475,  supra.  Upon  what  is  reasonable 
time  herein  in  transactions  on  the 
stock  exchanges,  see  Stewart  v.  Cauty, 
8  M.  &  W.  160  (1841) ;  Field  t-.  Lelean, 
6  Hurl.  &  N.  617  (1861).  A  customer 
whose  stock  has  wrongfully  been  sold 
by  a  broker  need  not  repurchase  it  at 
once  on  discovering  conversion  in 
order  to  measure  the  loss,  but  may 
recover  the  difference  between  the 
price  of  the  sale  and  the  highest  price 
within  three  weeks  of  the  time  of  sale. 
Miller  &  Co.  v.  Lyons,  74  S.  E.  Rep. 
194  (Va.  1912).  In  a  suit  bj^  a  person 
against  another  for  selling  stock,  in 
which  they  were  jointly  interested, 
and  converting  the  proceeds,  the 
measure  of  damage  is  the  highest 
value  of  the  stock  between  the  time  of 
conversion  and  a  reasonable  time  for 
replacing  it,  if  the  purchase  price  has 
not  been  paid,  but  if  it  has  been  paid, 
then  the  highest  value  between  the 
time   of  conversion   and   the   time  of 


1721 


f  581.] 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


CH.  XXXV. 


stood  the  market  value. ^  The  fact  that  the  shares  of  stock  have  no 
known  market  value  will  not  prevent  recovery,  where  the  actual  value 
is  ascertainable,  in  an  action  to  recover  damages.  The  value  may  be 
proven  by  showing  the  value  of  the  property  and  business  of  the  cor- 
poration,^  less  the  amount  of  the  liabilities.^     Where  the  officers  of  a 

V.  Clark,  146  Iowa,  436  (1909).  If 
stock  has  no  actual  value  the  value  of 
the  corporate  assets  may  be  shown. 
Peek  V.  Steinberg,  124  Pac.  Rep.  834 
(Cal.  1912).  The  value  of  stock  may 
be  shown  by  the  testimony  of  experts 
as  to  the  value  of  the  corporate  prop- 
erty over  its  debts.  Markle  v.  Burgess, 
95  N.  E.  Rep.  308  (Ind.  1911).  Where 
there  is  no  market  value  to  stock  the 
debts  of  the  corporation  and  the  value 
of  its  assets  may  be  shown.  White  v. 
Jouett,  147  Ky.  197  (1912).  Where 
stock  has  no  market  value  its  value 
may  be  determined  from  the  assets 
and  liabilities.  Leurey  v.  Bank  of 
Baton  Rouge,  58  S.  Rep.  1022  (La. 
1912).  Where  there  is  no  market 
value  to  stock  its  value  may  be  shown 
by  showing  the  value  of  the  property 
of  the  corporation  as  compared  with 
the  liabilities.  Beaty  v.  Johnston,  66 
Ark.  529  (1899).  In  determining  the 
value  of  stock  which  has  no  market 
value,  the  actual  value  of  the  assets 
of  the  corporation  is  considered,  but 
not  the  good-will,  where  the  com- 
pany never  did  a  profitable  business. 
Even  though  the  assets  are  subse- 
quently sold,  yet,  if  the  sale  was  a 
forced  sale,  the  price  realized  is  not 
admissible  to  prove  such  actual  value. 
Feige  v.  Burt,  124  Mich.  565  (1900). 
In  estimating  the  value  of  stock  under 
an  inheritance  tax  statute,  the  earn- 
ing capacity,  good-will,  and  income  of 
the  corporation  may  be  considered. 
Matter  of  Brandreth,  28  Misc.  Rep. 
468  (1899);  s.  c,  169  N.  Y.  437. 
Where  the  stock  has  no  market  value, 
the  value  of  the  property  of  the  cor- 
poration in  excess  of  its  debts  is  ad- 
missible. McDonald  v.  Danahy,  196 
111.  133  (1902).  The  value  of  stock 
may  be  ascertained  by  comparing  the 
corporate  assets  with  the  liabilities. 
Nelson  v.  First  Nat.  Bank,  69  Fed. 
Rep.  798  (1895).  The  value  of  stock 
may  be  shown  "by  proof  of  the  value 
of  the  property  and   business  of   the 


bringing  the  suit,  if  the  suit  is  brought 
within  a  reasonable  time,  with  divi- 
dends and  interest  on  the  dividends. 
Doyle  V.  Burns,  123  Iowa,  488  (1904). 

1  The  measure  of  damages  for  the 
conversion  of  corporate  stock  is  the 
fair  market  value  of  the  stock  at  the 
time  of  the  conversion.  Hagar  v. 
Norton,  188  Mass.  47  (1905).  By 
the  "market  value  of  stock"  is  meant 
the  actual  price  at  which  it  is  com- 
monly sold.  That  price  may  be  fixed 
hy  sales  of  the  stock  in  market  at  or 
about  a  given  time.  If  no  sales  can 
be  shown  on  the  precise  day,  recourse 
may  be  had  to  sales  before  or  after  the 
day,  and  for  that  inquiry  a  reasonable 
range  in  point  of  time  is  allowable. 
Douglas  V.  Merceles,  25  N.  J.  Eq. 
144  (1874).  Cf.  Stewart  v.  Cauty, 
8  M.  &  W.  160  (1841);  Sturges  v. 
Keith,  57  111.  451  (1870);  Seymour 
V.  Ives,  46  Conn.  109  (1878).  The 
measure  of  damages  for  non-delivery 
of  stock  at  a  certain  date  is  presump- 
tively the  par  value.  The  defendant 
is  obliged  to  prove  differently  if  this 
price  is  incorrect.  Harris's  Appeal, 
12  Atl.  Rep.  743  (Pa.  1888).  If  there 
is  no  market  value  of  stock,  proof  of 
a  few  sales  is  competent.  Brown  v. 
Lawton,   6   N.   Y.   Supp.    137    (1889). 

2  Quoted  and  approved  iji  Cabbie  v. 
Cabbie,  111  N.  Y.  App.  Div.  426,  433 
(1906). 

^  Quoted  and  approved  in  White 
V.  Jouett,  147  Ky.  197  (1912).  Vail  v. 
Reynolds,  118  N.  Y.  297  (1890); 
Patterson  v.  Plummer,  10  N.  Dak.  95 
(1901).  The  value  of  stock  subject 
to  the  inheritance  tax  in  Wisconsin  is 
arrived  at  by  considering  the  busi- 
ness, profit,  progress,  growth,  and 
general  financial  results  of  the  cor- 
poration. State  V.  Pabst,  139  Wis. 
561  (1909).  Where  stock  has  no 
market  value  a  witness  who  has  exam- 
ined the  corporate  property  and 
knows  about  sales  of  its  stock,  may 
give  his  opinion  as  to  its  value.     Aken 


1722 


CH.  XXXV. 


ACTIONS   AND   MEASURE    OF   DAMAGES. 


[§  581. 


company,  which  has  paid  from  nine  to  fourteen  per  cent.,  "  freeze  out 
minority  stockholders  by  reducing  the  dividends  and  increasing  their 


corporation,  its  good-will  and  divi- 
dend-earning capacity."  State  v.  Car- 
penter, 51  Ohio  St.  83  (1894).  The 
value  of  stock  in  a  company  which 
owns  land  and  nothing  else  may  be 
shown  by  proving  the  value  of  the 
land.  Collins  v.  Denny,  etc.  Co.,  41 
Wash.  136  (1905).  The  value  may  be 
ascertained  by  the  corporate  contracts 
and  business  and  dividends,  etc.  But- 
ler V.  Wright,  103  N.  Y.  App.  Div.  463 
(1905) ;  rev'd  on  another  point  in  186 
N.  Y.  259.  A  jury  may  be  warranted 
in  finding  that  one  thousand  shares 
of  sLx  per  cent,  preferred  stock  is 
worth  seventy-five  thousand  dollars. 
JuUa  V.  Critchfield,  137  Fed.  Rep.  969 
(1905) ;  aff'd,  147  Fed.  Rep.  65.  The 
value  of  bonds  which  have  no  market 
value  may  be  proved  by  proving  the 
value  of  the  property.  Industrial,  etc. 
i;.  Tod,  180  N.  Y.  215  (1904).  If  there 
is  no  market  value,  the  value  may  be 
shown  by  the  assets  and  liabilities. 
Goodwin  v.  Wilbur,  104  111.  App.  Rep. 
45  (1902).  Where  the  vendee  pays 
for  bonds,  but  the  vendor  does  not 
deliver,  the  measure  of  damages  is 
not  necessarily  the  market  value  of 
the  bonds,  but  they  may  be  shown  to 
be  worth  more  or  less  than  the  market 
value.  If  there  is  no  market  value  the 
real  value  can  be  proved  by  other  facts. 
Henry  v.  North  American,  etc.  Co., 
158  Fed.  Rep.  79  (1907).  The  value 
of  the  stock  may  be  determined  "from 
all  the  facts  and  circumstances  of  the 
case."  McCloy  v.  Cox,  12  Ind.  App. 
27  (1895).  "In  the  absence  of  better 
evidence,  the  market  value  of  all  the 
property  of  the  corporation  may  be 
shown,  -with  the  ^'iew  to  arriving  at  the 
proportional  value  of  the  shares  in 
controversy."  Hewitt  v.  Steele,  118 
Mo.  463  (1893).  Where  there  is  no 
market  value,  value  may  be  shown 
by  past  dividends,  the  value  of  the 
corporate  assets,  and  the  price  of 
individual  sales  not  under  compul- 
sion. If  there  is  no  market  value,  it 
is  presumed  to  be  worth  par.  Brinker- 
hofif-Farris,  etc.  Co.  v.  Home  Lumber 
Co.,  118  Mo.  447  (1893).  The  value  of 
stock  may  be  shown  by  its  dividend- 


paying  qualities.  Greer  v.  Lafayette 
County  Bank,  128  Mo.  559  (1895). 
The  actual  value  of  the  tangible  prop- 
erty of  the  corporation  cannot  be  re- 
sorted to,  to  ascertain  the  value  of 
the  stock,  if  there  is  any  better  e\n- 
dence  of  the  value  of  stock.  State  v. 
Sattley,  131  Mo.  464  (1895).  Where 
stock  has  no  market  value  its  actual 
value  may  be  shown,  and  proof  may 
be  given  of  the  value  of  the  corporate 
assets  and  dividends  paid,  and  the 
character  and  permanency  of  the  busi- 
ness, and  the  control  of  the  stock,  and 
other  circumstances.  A  sale  of  a 
single  share  of  stock  which  carries 
the  control  does  not  fix  the  market 
value,  but  a  sale  two  years  prior  may 
be  shown.  If  there  is  no  evidence  the 
par  value  is  presumed  to  be  the  actual 
value.  Moffitt  v.  Hereford,  132  Mo. 
513  (1896).  The  value  of  the  stock 
for  four  years  afterwards,  without  a 
showing  as  to  the  relative  condition 
of  the  company  on  the  two  dates,  is 
not  admissible.  Jones  v.  Ellis,  68  Vt. ' 
544  (1896).  The  fact  that  there  is  no 
market  value  for  stock  does  not  show 
that  the  stock  is  without  value. 
Pabst,  etc.  Co.  v.  Montana,  etc.  Co.,  19 
Mont.  294  (1897).  In  ascertaining 
the  value  of  stock  in  a  corporation 
owning  undeveloped  property,  where 
the  stock  has  no  market  value,  par- 
ticular sales,  prices,  and  options  on 
the  stock  may  be  shown.  Moynahan 
V.  Prentiss,  10  Colo.  App.  295  (1897). 
In  ascertaining  the  value  of  stock  for 
the  purposes  of  taxation,  the  amount 
paid  in  on  the  stock  may  be  taken  as 
the  value  if  there  have  been  no  sales 
of  the  stock,  and  if  there  is  no  other 
evidence  as  to  its  value.  Common- 
wealth V.  People's,  etc.  Co.,  183  Pa.  St. 
405  (1898).  In  the  taxation  of  stock 
if  it  has  no  market  value  its  actual 
worth  may  be  shown.  Morril  v. 
Bentley,  126  N.  W.  Rep.  155  (Iowa, 
1910).  "In  actions  for  conversion  of 
personal  property,  such  as  these  shares 
are,  the  damages  are  not  limited  to 
the  market  value  of  the  stock.  Its 
actual  value,  to  be  determined  under 
all  the  circumstances,  such  as  the  di\'i- 


1723 


§  581.] 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


[CH.  XXXV. 


salaries  and  misrepresenting  the  condition  of  the  company,  and  then 
after  buying  the  minority  stock  increase  the  dividend,  the  minority 
stockholders  may  hold  them  liable  by  an  action  on  the  case  for  damages, 
even  though  they  might  have  brought  suit  in  behalf  of  the  corporation. 
If  the  stock  has  no  market  value,  the  value  may  be  proved  by  estimating 
the  good-will,  as  shown  by  the  net  profits,  and  it  is  for  the  jury  to  decide 
how  many  years'  net  profits  shall  be  considered  in  obtaining  the  average. 
The  balance  sheets  are  also  admissible.^  Where  there  have  been  no 
sales  of  stock  the  opinion  of  the  treasurer  as  to  what  would  be  a  fair 
market  price  is  admissible."  In  proving  the  value  of  stock,  the  books 
of  the  corporation  may  be  used  to  show  that  there  was  a  surplus.* 


dend-making  capacity,  the  good-will, 
etc.,  is  the  measure  of  damages." 
Freon  v.  Carriage  Co.,  42  Ohio  St.  30, 
38  (1884).  In  Hitchcock  v.  McEb-ath, 
72  Cal.  565  (1887),  the  court  allowed 
evidence  to  be  given  showing  the 
market  value  of  all  the  property  of 
the  corporation,  there  being  no  other 
method  of  ascertaining  the  value  of  the 
stock.  See  also  McGuffey  v.  Humes, 
85  Tenn.  26  (1886).  The  value  of 
stock  may  be  shown  by  showing  the 
value  of  the  property  of  the  corpora- 
tion, the  amount  of  capital  stock,  and 
the  amount  of  debts.  It  may  be  shown, 
also,  by  proving  how  much  could  be 
borrowed  on  the  stock  at  the  place 
where  the  company's  headquarters 
were.  Smith  v.  Traders'  Nat.  Bank, 
82  Tex.  368  (1891).  See  also  Simpkins 
V.  Low,  54  N.  Y.  179  (1873).  Where  a 
vendor  of  stock  in  a  corporation  which 
has  a  franchise,  but  nothing  else,  is 
entitled  to  two  thousand  shares  of  full- 
paid  stock  at  a  later  date,  according  to 
the  contract  of  sale,  his  measure  of 
damages  for  failure  of  the  vendee  to 
deliver  the  two  thousand  shares  is 
nominal  damages,  where  there  was  no 
market  or  actual  value  for  the  stock. 
Barnes  v.  Brown,  130  N.  Y.  372  (1892). 
The  value  of  stock  may  be  shown  by 
the  value  of  its  assets,  where  there  is  no 
known  market  value.  Redding  v. 
Godwin,  44  Minn.  355  (1890).  The 
president  and  managing  agent  renders 
his  corporation  liable  for  a  bonus  of 
stock  in  another  corporation  which  he 
gives  secretly  and  corruptly  to  the 
agent  of  the  latter  corporation  in  or- 
der to  get  a  contract  for  the  former 


corporation.  Grand  Rapids,  etc.  Co.  v. 
Cincinnati,  etc.  Co.,  45  Fed.  Rep.  671 
(1891),  holding  the  former  corporation 
liable  for  the  par  value  of  the  stock, 
inasmuch  as  it  was  the  original  issue 
of  that  stock.  Not  the  nominal 
but  the  true  value  of  the  shares  is 
what  the  plaintiff  is  entitled  to  re- 
cover. Bull  V.  Douglas,  4  Munf.  (Va.) 
303  (1814) ;  Enders  v.  Board  of  Public 
Works,  1  Gratt.  (Va.)  364  (1845). 
Where  a  railroad  is  sold  to  be  paid 
for  in  bonds,  a  failure  to  deliver  the 
bonds  enables  the  vendor  to  recover 
their  par  value  from  the  vendee. 
Texas  Western  Ry.  v.  Gentry,  69  Tex. 
625  (1888). 

1  Von  Au  V.  Magenheimer,  126  N.  Y. 
App.  Div.  257  (1908) ;  aff'd,  196  N.  Y. 
510. 

2  Aldrich  v.  Bay  State,  etc.  Co.,  186 
Mass.  489  (1904).  The  value  of  stock 
which  is  owned  by  a  family  may  be 
shown  by  the  testimony  of  persons 
connected  with  the  business  and  hav- 
ing personal  knowledge  of  its  affairs, 
and  its  value  may  be  based  on  the 
probable  market  value  on  liquidation, 
and  experts  having  no  knowledge  of 
the  corporate  affairs  may  not  testify 
on  hypothetical  questions.  Cabbie  v. 
Cabbie,  ill  N.  Y.  App.  Div.  426 
(1906).  In  an  action  by  the  vendee  of 
stock  against  the  vendor  because  of 
misrepresentations,  the  value  of  the 
stock  may  be  proved  by  a  person  in- 
terested in  the  company,  there  being 
no  market  value.  Steele  v.  Kellogg, 
163  Mich.  132  (1910). 

^Gilboa  V.  Kimball,  69  Atl.  Rep. 
765  (R.  I.  1908). 


1724 


CH.   XXXV.] 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


[§  581. 


Where  stock  has  a  regular  market  value  its  value  cannot  be  proved 
by  showing  the  value  of  its  property  or  assets.^  "  Wash  "  or  fictitious 
sales  are  not  evidence  of  value.^  The  question  of  what  was  the  market 
value  at  the  time  of  the  conversion  is  generally  a  question  for  the  jury ;  ^ 
and  it  may  be  shown  by  tables  of  prices  current  published  in  the  news- 
papers or  otherwise  at  the  time  of  the  conversion,  and  these  may  be 
read  in  evidence.'*  But  market  quotations  are  evidence  of  the  value 
of  stock  only  when  such  quotations  are  based  on  actual  sales.  Where 
there  have  been  no  sales,  evidence  of  a  bid  for  the  stock  is  not  admissible, 
unless  it  is  shown  under  what  circumstances  the  bid  was  made,  and 
whether  it  was  in  good  faith  and  with  intent  to  fulfill.'^     In  valuing  an 


iSpinks  V.  Clark,  147  Cal.  439 
(1905).  The  value  may  be  proved  by 
other  sales.  Kuhn  v.  McKay,  7  Wyo. 
42  (1897). 

2  A  broker's  contract  to  deliver 
certain  bonds  "when,  as  and  if  issued" 
is  valid,  and  the  measure  of  damages 
for  breach  thereof  is  the  difference 
between  the  contract  price  and  the 
value  of  the  bonds  in  the  best  available 
market  for  the  bonds  at  the  time  of  the 
breach,  and  fictitious  sales  on  the 
New  York  market  will  not  be  regarded. 
Zimmermann  v.  Timmermann,  193 
N.  Y.  486  (1908). 

*  1  Sedgw.  Damages  (7th  ed.),  585, 
and  cases  cited ;  Dos  Passos,  Stock- 
brokers, 801.  See  Cameron  v.  Durk- 
heim,  55  N.  Y.  425  (1874) ;  Fowler  v. 
New  York  Gold  Exch.  Bank,  67  N.  Y. 
138  (1876) ;  Harris  v.  Tumbridge,  83 
N.  Y.  92  (1880),  and  notes  supra. 
Where  there  is  no  evidence  that  the 
stock  is  worthless,  the  question  of 
value  should  be  submitted  to  the 
jury ;  the  rule  of  damages  in  a  case 
for  fraud  as.  to  representations  as  to 
the  value  of  the  stock  being  the  differ- 
ence between  the  value  of  the  stock 
as  represented,  and  what  it  was  in 
fact  worth.  Maxted  v.  Fowler,  94 
Mich.  106  (1892). 

*  Cliquot's  Champagne,  3  Wall.  114 
(1865);  Whelan  v.  Lynch,  60  N.  Y. 
469  (1875).  A  price-current  or  mar- 
ket report  is  admissible  in  certain 
cases  to  prove  the  fluctuations  and 
value  of  stock.  Seligman  v.  Rogers, 
113  Mo.  642  (1893).  In  North  Caro- 
lina the  market  reports  of  such  news- 
papers as  the  commercial  world  relies 
upon  as  to  the  value  of  stocks  are  ad- 


missible as  evidence  of  the  market 
value.  Moseley  v.  Johnson,  144  N.  C. 
274  (1907).  Newspaper  quotations  of 
stock  are  not  admissible  unless  it  is 
proved  that  the  newspaper  is  accepted 
by  the  trade  as  trustworthy  and  reli- 
able as  to  quotations,  or  it  is  proved 
how  the  newspaper  obtained  the  quota- 
tions. Jones  V.  Ortel,  114  Md.  205 
(1910). 

5  Wildes  V.  Robinson,  50  N.  Y.  App. 
Div.  192  (1900).  The  value  of  stock 
for  taxation  cannot  be  shown  by  an 
offer  to  buy.  Morril  v.  Bentley,  150 
Iowa,  677  (1911).  Actual  offers  for 
stock  are  evidence  of  the  value  of  the 
same.  State  v.  Dickson,  213  Mo.  66 
(1908).  In  estimating  the  value  of 
stocks  under  the  inheritance  tax  law 
the  stock  exchange  prices  therefor 
may  be  taken  as  the  basis.  Walker 
V.  People,  192  111.  106  (1901).  In 
the  case  Chicago,  etc.  Co.  v.  State 
Board  of  EquaHzation,  112  Fed. 
Rep.  607  (1901),  the  court,  in  speak- 
ing about  the  unreliability  of  quota- 
tions of  stock  as  a  basis  for  its  intrinsic 
value,  said  (p.  612):  "The  court 
knows  by  experience  and  observation 
that  railroad  properties  when  sold  as 
an  entirety,  almost  without  exception, 
yield  nothing  to  the  stockholder,  al- 
though the  stock  may  have  been  sold 
in  share  lots  upon  the  stock  exchange 
for  years  previously  at  advanced  fig- 
ures. The  court  knows  also,  from  ob- 
servation, that  these  stock  quotations 
are  frequently  advanced  by  contend- 
ing interests  for  control,  or  by  short 
interests  in  the  market,  such  as  ran 
the  Northern  Pacific  within  a  year  to 
quotations     almost     tenfold     its     real 


1725 


§581. 


ACTIONS   AND    MEASURE   OF   DAMAGES. 


[CH. 


XXXV. 


obscure  stock  for  inheritance  tax  purposes  small  sales  are  not  proof  of 
the  actual  value. ^  Secret  sales  of  stock  at  extraordinary  prices  to  rival 
interests  are  not  evidence  to  show  the  market  value  of  the  stock.^ 
Where  stock  has  no  market  value  a  bona  fide  sale  may  be  proved.^ 
In  a  suit  for  conversion  of  stock  proof  of  the  par  value  is  insufficient.* 
It  has  been  held,  however,  that  the  par  value  of  stock  is  presumed  to 
be  the  actual  value  of  the  stock. '^ 

A  conversion  arises  at  the  time  when  the  stockholder,  being  entitled 
to  the  immediate  possession  or  delivery  of  the  stock  or  the  certificate, 
makes  a  demand  for  it  which  is  refused.^  Accordingly,  where  a  demand 
has  been  made  and  refused,  the  measure  of  damages  is  the  value  of  stock 
on  the  day  of  the  demand  and  refusal.^ 


value.  The  court  also  knows  from  ob- 
servation that  the  speculative  public, 
dealing  in  stock  sales,  and  making  its 
quotations,  are  governed  largely  by 
the  prospect  of  present  dividends,  and 
not  by  any  general  conception  of  per- 
manent earning  capacity.  These,  and 
other  considerations  that  could  be 
mentioned,  make  stock  quotations  an 
indicia,  but  an  unstable  indicia,  of  the 
real  value  of  the  capital  stock  as  an 
entirety." 

1  Matter  of  Curtice,  111  N.  Y.  App. 
Div.  230  (1906) ;   aff'd,  185  N.  Y.  543. 

estate  V.  Dickson,  213  Mo.  66 
(1908). 

^  Humphreys  v.  Minnesota,  etc.  Co., 
94  Minn.  469  (1905). 

*  Warren  v.  Stikeman,  84  N.  Y.  App. 
Div.  610  (1903). 

6  Walker  v.  Bement,  94  N.  E.  Rep. 
339  (Ind.  1911).  In  a  suit  for  damages 
by  the  transferee  against  the  corpora- 
tion for  refusal  to  transfer,  the  pre- 
sumption is  that  the  stock  is  worth 
par,  but  if  the  plaintiff  alleges  it  is 
worth  less  than  par  he  must  prove  the 
actual  value.  Uncle  Sam  Oil  Co.  v. 
Forrester,  79  Kan.  861  (1909).  In  a 
suit  for  the  value  of  stock  its  value  is 
presumed  to  be  par.  It  may  be  shown 
to  be  less  by  proof  of  the  value  of  its 
property  and  its  liabilities  and  financial 
condition.  Tevis  v.  Ryan,  13  Ariz. 
120  (1910).  See  also  cases  supra.  In 
a  suit  for  damages  by  the  transferee 
of  stock  against  the  corporation  for 
refusal  to  transfer  the  stock  on  the 
corporate  books,  plaintiff  must  prove 
his  damages  even  though  he  has  al- 


leged that  the  stock  is  worth  only 
twenty  cents  on  the  dollar.  Uncle 
Sam  Oil  Co.  v.  Forrester,  79  Kan.  610 
(1909). 

6  Blair  Co.  v.  Rose,  26  Ind.  App.  487 
(1901). 

'  So  when  stock  held  as  collateral 
is  improperly  sold  by  the  pledgee,  the 
value  on  the  day  when  the  pledgor 
pays  his  debt  and  demands  his  stock 
is  to  be  taken.  Fisher  v.  Brown,  104 
Mass.  259  (1870).  In  Freeman  v.  Har- 
wood,  49  Me.  195  (1859),  shares  of 
stock  standing  in  the  name  of  the  de- 
fendant as  collateral  security  for  a 
debt  which  had  been  paid  were  sold 
for  non-payment  of  an  assessment 
and  bought  by  defendant.  It  was  held 
that  the  defendant  was  liable  in 
trover  for  the  value  of  the  shares  at 
the  time  of  the  sale,  with  interest,  and 
all  dividends  received  thereon,  de- 
ducting the  amount  of  the  assessment 
and  the  expenses  of  the  sale.  In 
Sturges  V.  Keith,  57  111.  451  (1870), 
it  is  held  that  where  the  demand  and 
refusal  constitute  the  conversion,  or 
afford  presumptive  evidence  of  it, 
the  date  of  such  demand  and  refusal 
is  the  proper  time  for  estimating  the 
value.  Again,  where  the  corporation 
wrongfully  refuses  to  register  a  trans- 
fer and  to  issue  a  certificate,  the 
measure  of  damages  is  the  value  of 
the  stock  on  the  day  when  the  trans- 
fer was  demanded  and  refused.  Wy- 
man  v.  American  Powder  Co.,  62  Mass. 
168  (1851) ;  Eastern  R.  R.  v.  Benedict, 
76  Mass.  212  (1857);  West  Branch, 
etc.  Canal  Co.'s  Appeal,  81*  Pa.  St.  19 


1726 


CH.  XXXV.]  ACTIONS   AND   MEASURE   OF    DAMAGES.  [§  581. 

Where  the  pledgee  of  stock  wrongfully  sells  it,  the  injured  party 
may  recover  the  highest  market  price  between  the  time  of  notice  of 
sale  and  a  reasonable  time  within  which  he  might  have  bought  the 
stock  elsewhere.^  In  a  suit  against  a  corporation  for  refusal  to  trans- 
fer stock  on  its  books,  "  the  rule  of  damages  is  the  highest  intermediate 

(1870) ;  Baltimore  Ry.  v.  Sewell,  35  Flather,  5  Railw.  &  Can.  Cas.  85 
Md.  238  (1871);  McMurrich  v.  Bond  (1847);  Barned  v.  Hamilton,  2  Railw. 
Head  Harbor  Co.,  9  Up.  Can.  Q.  B.  333  &  Can.  Cas.  624  (1841) ;  Shaw  v.  Hol- 
(1852),  where  it  is  said  that  while  land,  15  Mees.  &  W.  136  (1846) ; 
the  rule  as  announced  above  is  the  Tempest  v.  Kilner,  2  C.  B.  300  (1845) ; 
proper  one,  yet,  when  the  jury  allows  s.  c,  3  C.  B.  249  (1846) ;  Gainsford 
a  larger  sum,  the  question  of  the  v.  Carroll,  2  Barn.  &  C.  624  (1824). 
measure  of  damages  not  having  been  Williams  v.  Peel  River,  etc.  Co.,  55 
pressed  at  the  argument,  the  court  L.  T.  Rep.  689  (1886),  holds  that  suit 
will  not  reduce  the  verdict.  So  also  for  damages  for  wrongful  detention 
where  there  is  a  failure  to  return  lies  against  a  party  who  has  wrong- 
borrowed  stock  on  demand,  or  accord-  fully  obtained  possession  of  stock, 
ing  to  the  terms  of  the  bailment,  the  and  that  the  measure  of  damages, 
value  on  the  day  of  demand,  or  on  the  where  the  defendant  afterwards  aban- 
day  when  the  stock  ought  by  contract  dons  his  claim,  is  the  intervening 
to  have  been  returned,  is  the  measure  fall  in  the  value  of  the  stock.  Bankers 
of  damages.  McKenney  v.  Haines,  63  of  trustees  wrongfully  sold  out  stock 
Me.  74  (1873) ;  Fosdick  v.  Greene,  27  and  applied  the  proceeds  to  their 
Ohio  St.  484  (1875);  Day  v.  Perkins,  own  piirposes.  The  measure  of  their -^ 
2  Sandf.  Ch.  359  (1845).  Cf.  Cortel-  liability  is  the  amount  paid  in  replac- 
you  V.  Lansing,  2  Caines'  Cas.  200  ing  the  stock.  Sadler  v.  Lee,  6 
(1805) ;  West  v.  Wentworth,  3  Cow.  82  Beav.  324  (1843).  As  to  damages  in 
(1824) ;  Clark  v.  Pinney,  7  Cow.  681  cases  of  trust,  see  Story's  Eq.  (13th 
(1827);  Wilson  v.  Mathews,  24  Barb,  ed.),  §§  1263,  1264. 
295  (1857);  2  Sedgwick,  Damages  i  Wright  t).  Bank  of  Metropolis,  110 
(7th  ed.),  141,  365,  n.  In  an  old  case,  N.  Y.  237  (1888) ;  Galigher  v.  Jones, 
where  borrowed  stock  was  not  re-  129  U.  S.  193  (1889),  the  court  saying 
turned,  the  plaintiff  was  allowed  to  re-  in  the  latter  decision  that  the  meas- 
cover  the  value  at  the  time  of  the  ure  of  damages  is  "the  highest  inter- 
transfer  to  the  borrower,  no  account  mediate  value  of  the  stock  between 
being  taken  of  an  increase  in  value,  the  time  of  its  conversion  and  a  rea- 
Forrest  v.  Elwes,  4  Ves.  Jr.  492  (1799).  sonable  time  after  the  owner  has  re- 
See  also  McKenney  v.  Haines,  63  ceived  notice  of  it  to  enable  him  to  re- 
Me.  74  (1873).  In  Mc Arthur  v.  place  the  stock."  For  an  illegal  sale 
Seaforth,  2  Taunt,  258  (1810),  it  was  the  pledgor  may  recover  the  "highest 
held  that,  upon  the  failure  to  replace  price  which  his  stock  reached  within 
stock,  the  measure  of  damages  was  a  reasonable  time  after  its  illegal  sale 
the  price  on  the  day  of  such  failure  by  defendants."  Smith  v.  Savin,  141 
or  the  price  on  the  day  of  the  trial,  N.  Y.  315  (1894),  where  five  weeks 
at  plaintiff's  option.  Upon  a  failure  were  held  to  be  reasonable,  the 
to  deliver  stock  according  to  contract  pledgor  not  having  discovered  the 
or  on  demand,  the  value  at  the  time  sale  for  some  time.  The  measure  of 
of  the  demand  is  the  value  to  be  damages  in  a  suit  against  a  pledgee 
taken.  Noonan  v.  Ilsley,  17  Wis.  314  for  selling  stock  illegally  is  the  high- 
(1863) ;  Pinkerton  v.  Manchester,  etc.  est  market  price  between  the  time  of 
R.  R.,  42  N.  H.  424  (1861) ;  North  v.  default  and  a  reasonable  time  after 
Phillips,  89  Pa.  St.  250  (1879) ;  Hunt-  notice  to  the  pledgor.  In  re  Swift,  114 
ingdon,  etc.  Coal  Co.  v.  English,  86  Fed.  Rep.  947  (1902). 
Pa.     St.     247     (1878).     Cf.     Pott     v. 

1727 


§  581.]  ACTIONS   AND    MEASURE    OF   DAMAGES.  [cH.  XXXV. 

value  of  the  stock  between  the  time  of  conversion  and  a  reasonable  time 
after  the  owner  has  received  notice  of  the  conversion  to  enable  him  to 
replace  the  stock."  ^  A  bondholder  who  has  agreed  to  sell  his  bonds 
to  a  reorganizer  in  exchange  for  new  bonds  and  stock  may  sue  for  the 
value  of  the  new  bonds  and  stock  if  the  reorganizer  refuses  to  perform, 
and  the  measure  of  damages  is  the  highest  value  of  the  new  bonds  for 
a  reasonable  time  after  the  breach  of  contract.- 

The  Xew  York  court  of  appeals,  after  many  variations,  has  settled 
on  the  rule  that  "  in  the  absence  of  special  circumstances,  in  an  action 
for  conversion  of  personal  property  as  well  as  one  for  failure  to  deliver 
it  in  performance  of  a  contract,  where  consideration  has  been  received, 
the  value  of  the  property  at  the  time  of  such  conversion  or  default, 
with  interest,  is  the  measure  of  compensation."  ^  In  a  customer's 
suit  against  a  broker  for  conversion  of  the  stock,  the  highest  price  of  the 
stock  within  periods  varying  from  a  few  days  to  within  two  months  of 
the  conversion  may  be  shown,  and  the  court  may  determine  as  a  matter 
of  law,  what  is  a  reasonable  time  within  which  such  value  may  be 
shown.'*  Where  directors  have  issued  stock  to  themselves  at  a  price 
less  than  the  market  price,  they  may  be  held  liable  at  the  instance  of 
a  stockholder  suing  for  the  benefit  of  the  corporation,  for  the  difference 
between  the  price  they  paid,  and  the  price  of  the  stock  when  it  was  issued 
to  them.  The  highest  market  price  since  that  day  for  small  amounts  of 
stock  is  no  basis  for  the  measure  of  damages.^    ^^^lere  promoters  are 

1  And  a  general  allegation  of  dam-  value  of  the  stock  at  the  time  of  de- 
age  is  sufficient,  inasmuch  as  the  mand  \sith  interest  to  the  date  of  trial, 
plaintiff  is  entitled  to  nominal  dam-  and  after  suit  is  commenced  the  cor- 
ages  anyway.  Blair  Co.  r.  Rose,  26  poration  cannot  stop  it  by  offering  to 
Ind.  App.  487  (1901).  Where  the  cor-  transfer.  Dooley  v.  Gladiator,  etc. 
poration  illegally  refuses  a  transfer  it  Co.,  134  Iowa,  468  (1906). 
is  liable  for  the  value  of  the  stock  at  -  Turner  r.  Jackson,  63  S.  W.  Rep. 
the  time  of  the  demand  and  refusal.  511  (Tenn.  1899). 

Bank  of  CuUoden  v.  Bank  of  Forsyth,  ^  Barnes  r.  Brown,   130  N.  Y.  372 

120  Ga.  575  (1904).     Where  the  presi-  (1892).     In  Maryland  a  pledgee  of  a 

dent  representing   a   majority   of   the  certificate  of  stock  from  a  broker  is 

directors  refuses  to  allow  a  transfer  of  bound  to  take  notice  of  the  rights  of  the 

stock  because  it  would   cause   him  to  broker's  customer,   and   the  customer 

lose  control  of  the  company,  the  appli-  may  sue  the  broker  and  pledgee  jointly 

cant  for  the  transfer  by  pro^'ing  that  he  for   conversion   of   the   stock   but   the 

had  sold  a  portion  of  the  stock  at  a  defendants     may    deduct     any     sums 

certain  price  subject  to  transfer  may  actually  due,  and  the  damages  in  trover 

collect  that  price  from  the  corporation  are  the  value  of  the  stock  at  the  time  of 

but  cannot  collect  anything  as  to  the  the   conversion   with   interest    to    the 

remainder  of  the  stock  unless  he  proves  date  of  the  verdict.     Merchants'  Nat. 

that  he  was  actuallv  damaged.     Hilton  Bank  v.  Williams,  110  Md.  334  (1909). 

V.  Sylvania,  etc.   Co.,  8  Ga.  App.   10  *  MuUen  f.  Quinlan  &  Co.,  195  N.  Y. 

(1910).     The  purchaser  may  hold  the  109    (1909).    See  §§  460,  475  and  note 

corporation  liable  in  damages  for  con-  2,  p.  1721,  supra. 

version  for  a  refusal  to  transfer  the  ^  g^^aw  i:  Holland,  [1900]  2  Ch.  305. 
stock  on   books.     His   damage  is   the 

1728 


CH.   XXXV. 


ACTIONS   AND   ME.\SURE    OF   DAMAGES. 


[§§  582,  583. 


liable  to  the  corporation  for  stock  illegally  issued  to  them,  the  stock  is 
to  be  valued  not  by  the  first  sale,  but  by  its  value  after  it  acquired  a 
recognized  market  value,  with  interest  from  that  date.^  In  a  suit 
by  one  promoter  against  another  for  breach  of  contract  for  failing  to 
organize  a  corporation  and  issue  to  the  plaintiff  certain  paid-up  stock, 
the  possible  value  of  the  stock,  which  was  never  issued,  is  no  basis  for 
the  measure  of  damages.- 

§  582.  (6)  The  second  rule.  —  In  another  line  of  cases  the  true 
measure  of  damages  in  these  actions  is  said  to  be  the  value  of  the  stock 
on  the  day  of  the  trial.^  In  an  English  case  it  is  said  that  this  is  a  sound 
rule  in  the  ordinary  cases  of  conversion  of  stock,  but  that  in  cases  of 
failure  to  deliver  stock  the  true  measure  of  damages  is  the  value  when 
the  demand  is  made  and  refused.^  This  second  rule  has  found  little 
favor,  and  there  is  believed  to  be  no  sound  reason  for  its  adoption. 

§  583.  (c)  The  third  I'ule.  —  It  has  been  held  in  still  another  class 
of  decisions  that  the  measure  of  damages  for  the  conversion  of  stock 
is  the  liiarhest  market  value  of  the  stock  between  the  date  of  the  con- 


'  East  Tennessee,  etc.  Co.  v.  Lee- 
son,  1S3  Mass.  37  (1903),  being  the 
same  case  as  Havward  i.  Leeson,  176 
Mass.  310. 

-  Eisenmayer  v.  Leonardt,  148  Cal. 
596  (1906).  '  Where  by  contract  be- 
tween promoters  one  was  to  give  the 
other  a  certain  amount  of  preferred 
stock  in  a  company  to  be  organized, 
and  he  fails  to  do  so  because  he  has 
not  caused  the  corporation  to  issue 
any  preferred  stock,  the  former  is  lia- 
ble in  damages  for  such  value  as  the 
preferred  stock  would  have  had  if  it 
had  been  issued.  Crichfield  v.  Julia, 
147  Fed.  Rep.  65  (1906).  One  pro- 
moter suing  another  for  damages  for 
breach  of  contract  by  which  a  company 
was  to  be  organized  to  take  over  min- 
eral rights,  and  the  former  was  to  be 
repaid  his  disbursements  and  to  be 
given  one  half  the  stock  in  addition, 
cannot  recover  the  value  of  such  stock 
unless  he  proves  the  value  of  the 
mineral  rights.  Eisleben  v.  Brooks, 
179  Fed.  Rep.  86  (1910).  Where  by 
a  promoter's  contract  one  of  them  was 
to  construct  a  pipe  line  for  water  for 
a  city  and  for  irrigation,  and  the 
stock  was  to  be  divided  between  them, 
and  he  does  not  proceed,  the  measure 
of  damages  will  include  the  amount 
expended  by  the  other  after  the  con- 
(109)  1 


tract  was  made  and  in  reliance  upon 
it,  but  not  damages  for  the  stock,  be- 
cause that  would  be  for  anticipated 
profits,  which  are  tmcertain.  specula- 
tive, and  doubtful,  especially  where 
the  cost  of  the  line  would  have  been 
largeh'  in  e.xcess  of  the  estimates. 
Curran  v.  Smith,  149  Fed.  Rep.  945 
(1906).     See  also  §§  705-7,   infra. 

'Owen  r.  Routh,  14  C.  B.  327 
(1S54) ;  Shepherd  r.  Johnson,  2  East, 
211  (1802) ;  Bercich  r.  Marye.  9  Nev. 
312  (1874).  Cf.  Williams  v.  Archer, 
5  C.  B.  318  (1847) ;  and  see  Wilson  v. 
Little,  2  X.  Y.  443.  450  (1849).  wherein 
there  is  a  quere  as  to  whether  this  may 
not  be  the  better  rule.  In  Fowle  ;•. 
Ward,  113  Mass.  548  (1873).  it  is  held 
that  the  measure  of  damages  is  the 
value  of  the  stock  upon  the  daj-  when 
the  bill  in  equity  is  filed,  it  being  an 
equitable  action  by  a  pledgor  against  a 
pledgee.  The  measiire  of  damages 
may  be  the  price  at  which  the  defend- 
ant sold  the  securities,  if  already  sold, 
and.  if  not  sold,  then  the  amount  of 
depreciation  in  value  since  plaintiff 
demanded  them,  together  with  inter- 
vening dividends.  Simmons  v.  London 
Joint  Stock  Bank,  [1891J  1  Ch.  270. 
'  Shaw  V.  HoUand,  15  M.  &  W.  136, 
145  (1846). 


729 


§583. 


ACTIONS   AND   MEASURE    OF   DAMAGES. 


[CH.  XXXV. 


version  and  the  day  of  the  trial.  This  is  the  rule  in  California  in  some 
cases.^  So,  also,  in  South  Carolina,-  Georgia,^  and  it  was  formerly  the 
rule  in  New  York  *  and  Pennsylvania.^  The  New  York  courts  have, 
however,  in  later  cases  wholly  receded  from  this  position ;  and  the  rule 
is  now  established,  in  such  actions,  that  the  measure  of  damages  is  not 
the  highest  price  of  the  stock,  but  the  value  at  the  date  of  the  conversion. 
There  are  also  Pennsylvania  decisions  to  the  same  effect.^     Pennsyl- 


1  Cal.  Code,  §  3336,  is  as  follows : 
"The  detriment  caused  by  the  wrong- 
ful conversion  of  personal  property  is 
presumed  to  be:  1.  The  value  of  the 
property  at  the  time  of  the  conver- 
sion, with  the  interest  from  that  time ; 
or,  where  the  action  has  been  prose- 
cuted with  reasonable  diligence,  the 
highest  market  value  of  the  property 
at  any  time  between  the  conversion 
and  the  verdict,  without  interest,  at 
the  option  of  the  injured  party."  This 
is  held  to  apply  to  the  conversion  of 
the  shares  of  stock.  Fromm  v.  Sierra 
Nevada,  etc.  Co.,  61  Cal.  629  (1882) ; 
Dent  V.  Holbrook,  54  Cal.  145  (1880). 
Cf.  Thompson  v.  Toland,  48  Cal.  99 
(1874).  The  courts  have  held  that 
this  section  of  the  code  applies  to  the 
conversion  of  shares  of  stock,  but  they 
have  not  worked  out  a  very  consistent 
rule  on  the  subject.  In  Douglass  v. 
Kraft,  9  Cal.  562  (1867),  the  "highest 
value"  rule  is  adopted,  but  in  later 
cases  the  coiirt  seems  to  incline 
toward  the  modern  New  York  rule. 
Hamer  v.  Hathaway,  33  Cal.  117 
(1867);  Page  v.  Fowler,  39  Cal.  412 
(1870) ;  Dent  v.  Holbrook,  54  Cal.  145 
(1880) ;  TuUey  v.  Tranor,  53  Cal.  274 
(1878) ;  Thompson  v.  Toland,  48  Cal. 
99  (1874) ;  Fromm  v.  Sierra  Nevada, 
etc.  Co.,  61  Cal.  629  (1882).  In  a 
suit  for  conversion  of  stock  the  measure 
of  damages  is  the  market  value  of  the 
stock  with  interest  and  incidental 
damages  incurred.  Myers  v.  Chittyna 
Exploration,  129  Pac.  Rep.  469  (Cal. 
1912). 

2  Kid  V.  Mitchell,  1  Nott  &  M. 
(S.  C.)  334  (1818). 

3  Central  R.  R.  etc.  Co.  v.  Atlantic, 
etc.  R.  R.,  50  Ga.  444  (1873).  For 
failm-e  to  deliver  bonds  as  called  for 
by  a  contract,  the  vendee  may  recover 
the  highest  market  price  between  the 
date  of  the  breach  of  the  contract  and 


the  date  of  the  trial.  San  Antonio, 
etc.  Ry.  V.  Wilson,  4  Tex.  Civ.  App.  178 
(1893). 

«  Markham  v.  Jaudon,  41  N.  Y.  235 
(1869);  Romaine  v.  Van  Allen,  26 
N.  Y.  309  (1863).  In  an  action  to  re- 
cover damages  for  the  unlawful  con- 
version of  grain,  the  rule  in  New 
York  was  held  to  be  the  highest  price 
up  to  the  time  of  trial.  Lobdell  v. 
Stowell,  51  N.  Y.  70  (1872).  To  same 
effect,  Kent  v.  Ginter,  23  Ind.  1 
(1864).  See  1  Sedgwick,  Damages 
(7th  ed.),  578,  and  note  (a).  Cf.  Burt 
V.  Dutcher,  34  N.  Y.  493  (1866) ;  Scott 
V.  Rogers,  31  N.  Y.  676  (1864) ;  Devlin 
V.  Pike,  5  Daly  (N.  Y.),  85  (1874). 
For  the  modern  rule  in  New  York, 
see  §  581,  supra. 

5  Bank  of  Montgomery  v.  Reese,  26 
Pa.  St.  143  (1856) ;  Musgrave  v.  Beck- 
endroff,  53  Pa.  St.  310  (1866) ;  Reiten- 
baugh  V.  Ludwiek,  31  Pa.  St.  131,  141 
(1858).  In  Pennsylvania,  where  one 
was  accountable  for  stock  as  trustee, 
and  converted  it,  he  was  held  charge- 
able with  the  highest  market  value. 
Reitenbaugh  v.  Ludwiek,  31  Pa.  St. 
131  (1858) ;  North  v.  PhilUps,  89  Pa. 
St.  250  (1879).  Cf.  Bates  v.  Wiles,  1 
Handy  (Ohio),  532  (1855).  Where, 
upon  a  reorganization,  an  old  stock- 
holder is  wrongfully  refused  his  stock 
in  the  new,  he  may  recover  the  highest 
market  price  of  the  same  up  to  the 
time  of  the  insolvency  of  the  corpora- 
tion. Reading  Trust  Co.  v.  Reading 
Ironworks,  137  Pa.  St.  282  (1890). 

«  North  V.  Phillips,  89  Pa.  St.  250 
(1879) ;  Huntingdon,  etc.  Coal  Co.  v. 
English,  86  Pa.  St.  247  (1878) ;  Work 
V.  Bennett,  70  Pa.  St.  484  (1872); 
Neiler  v.  Kelley,  69  Pa.  St.  403  (1871). 
Cf.  Wilson  V.  Whitaker,  49  Pa.  St.  114 
(1865).  So  also  in  the  later  New  York 
cases.  Baker  v.  Drake,  53  N.  Y.  211 
(1873);    8.   c,  66  N.  Y.  518   (1876); 


1730 


CH.  XXXV. 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


[§584. 


vania  still,  however,  in  part  at  least,  adheres  to  the  old  rule.^  Where 
an  agent  conceals  from  his  principal  the  amount  of  stock  received  by 
the  agent  for  property,  and  keeps  a  part  of  the  stock,  the  principal 
may  hold  him  liable  for  the  highest  market  value  of  the  stock  reached 
between  the  act  and  a  reasonable  time  after  discovery  of  the  act  by  the 
principal." 

§  584.  Interest,  dividends,  and  special  damages.  —  It  is  settled 
law  that,  in  addition  to  the  value  of  the  stock  at  the  date  of  conversion, 
the  plaintiff  may  recover  legal  interest  upon  such  valuation  from  the 
date  of  the  conversion  to  the  day  of  the  trial.  It  follows  as  of  course 
that,  if  the  plaintiff  has  been  damaged  in  an  ascertained  sum,  he  may, 
in  an  action  for  damages,  recover  not  only  that  sum,  but  interest  thereon 
in  the  meantime.^     In  Iowa  he  may  recover  dividends  and  interest 


White  V.  Smith,  54  N.  Y.  522  (1874) ; 
Harris  i-.  Tumbridge,  83  N.  Y.  92 
(1880) ;  Colt  V.  Owens,  90  N.  Y.  368 
(1882) ;  Randall  v.  Albany  City  Nat. 
Bank,  1  N.  Y.  St.  Rep.  592  (1886). 
C/.  Suydam  v.  Jenkins,  3  Sandf.  (N.  Y.) 
614  (1850);  Matthews  v.  Coe,  49 
N.  Y.  57  (1872) ;  Bryan  v.  Baldwin,  52 
N.  Y.  232  (1873).  See  also  Seymour 
V.  Ives,  46  Conn.  109  (1878);  Mc- 
Guffey  V.  Humes,  85  Tenn.  26  (1886). 
It  is  now  held  in  Pennsylvania  that 
where  a  corporation,  through  inno- 
cent mistake,  permits  a  transfer  on 
its  books  of  shares  of  stock  under  a 
forged  power  of  attorney,  the  owner's 
measure  of  damages  is  the  value  of 
the  stock  at  the  time  of  the  transfer, 
with  interest  from  the  date  of  the 
verdict,  and  not  the  highest  price 
reached  by  the  stock  between  the  date 
of  the  conversion  and  the  time  of 
bringing  suit,  with  the  dividends 
since  declared.  Pennsylvania  Co.  v. 
Philadelphia,  etc.  R.  R.,  153  Pa.  St. 
160  (1893). 

1  Where  a  broker  illegally  sells  out 
his  customer's  stocks  which  he  is  car- 
rying as  pledgee,  he  is  liable  for  the 
highest  price  of  the  stock  in  the  mar- 
ket up  to  date  of  the  trial  in  a  suit 
for  conversion,  the  court  saying  that 
this  was  by  reason  "of  the  shifting 
character  of  the  prices  of  stock  in  our 
stock  exchanges."  Learock  v.  Paxson, 
208  Pa.  St.  602  (1904).  The  court 
said:  "The  foundation  of  this  rule 
rests  upon  the  changing  character  of 
the   value   of    such   property    as    evi- 


denced by  the  varying  quotations  in 
the  different  stock  markets,  and 
sometimes  the  advances  in  valuation 
are  made  with  astonishing  rapidity. 
Political  action  or  material  or  finan- 
cial combinations  often  are  the  occa- 
sion of  such  exceptional  advances. 
The  very  nature  of  such  property, 
with  its  constantly  changing  valua- 
tions, indicates  the  necessity  of  a 
measure  of  damages  shifting  in  char- 
acter, and  hence  it  has  been  made  to 
differ  from  that  in  the  case  of  ordi- 
nary chattels,  where  it  is  based  upon 
their  valuation  at  the  time  of  the 
conversion,  because  such  value  is  not 
so  changeable." 

2McKinley  v.  Williams,  74  Fed. 
Rep.  94  (1896).  Where  a  person  holds 
land  for  himself  and  a  partner,  and 
transfers  the  same  to  a  corporation 
for  stock  and  conceals  all  the  facts 
from  his  partner,  the  latter  may  re- 
cover the  value  of  his  share  of  the 
stock,  and  the  measure  of  the  value  is 
the  highest  value  between  the  day  of 
receiving  the  stock  and  the  day  when 
the  plaintiff  received  notice  thereof. 
Morris  v.  Wood,  35  S.  W.  Rep.  1013 
(Tenn.  1896). 

^  O'Meara  v.  North  American  Min. 
Co.,  2  Nev.  112  (1866);  Boylan  v. 
Huguet,  8  Nev.  345  (1873) ;  Fisher  v. 
Brown,  104  Mass.  259  (1870) ;  Sargent 
V.  Franklin  Ins.  Co.,  25  Mass.  90 
(1829) ;  Seymour  v.  Ives,  46  Conn.  109 
(1878) ;  McKenney  v.  Haines,  63  Me. 
74  (1873) ;  Freeman  v.  Harwood,  49 
Me.  195  (1859) ;    Ormsby  v.  Vermont 


1731, 


§  584.] 


ACTIONS   AND   MEASURE    OF   DAMAGES. 


[CH.   XXXV. 


thereon/  and  there  are  other  authorities  to  the  effect  that  in  addition  to 
interest  the  plaintiff  may  recover  also  all  dividends  paid  upon  the  stock 
between  the  date  of  the  conversion  and  the  day  of  the  trial ;  ^  but,  aside 
from  unusual  cases,  the  rule  would  seem  to  be  a  harsh  one,  except  in 
those  jurisdictions  where  the  measure  of  damages  is  the  value  at  the 
time  of  the  trial.  The  better  rule  is  that  the  plaintiff  may  also  recover 
any  special  damages  which  he  has  sustained  by  reason  of  the  detention 
of  his  stock. ^ 


Copper  Min.  Co.,  56  N.  Y.  623  (1874) ; 
White  V.  Smith,  54  N.  Y.  522  (1874) ; 
Sturges  V.  Keith,  57  111.  451  (1870); 
Baltimore,  etc.  Ry.  v.  Sewell,  35  Md. 
238,  257  (1871) ;  Pinkerton  v.  Man- 
chester, etc.  R.  R.,  42  N.  H.  424 
(1861);  North  v.  Phillips,  89  Pa.  St. 
250  (1878) ;  Huntingdon,  etc.  Coal  Co. 
V.  English,  86  Pa.  St.  247  (1878); 
North  America  Building  Assoc,  v. 
Sutton,  35  Pa.  St.  463  (1860) ;  Noonan 
V.  Ilsley,  17  Wis.  314  (1863) ;  Forrest 
V.  Elwes,  4  Ves.  Jr.  492  (1799);  Re 
Bahia,  etc.  Ry.,  L.  R.  3  Q.  B.  584 
(1868) ;  Blyth  v.  Carpenter,  L.  R.  2 
Eq.  501  (1866) ;  McMurrieh  v.  Bond 
Head  Harbor  Co.,  9  Up.  Can.  Q.  B.  333 
(1852).  In  the  Civil  Code  of  Cali- 
fornia, §  3336,  interest  in  these  cases 
is  expressly  provided  for.  Fromm  v. 
Sierra  Nevada,  etc.  Co.,  61  Cal.  629 
(1882);  2  Sedgwick,  Damages  (7th 
ed.),  391.  The  measure  of  damages 
is  the  market  value  at  the  time  of 
conversion  with  interest.  Darling  v. 
Potts,  118  Mo.  506  (1893).  For  refusal 
of  the  corporation  to  deliver  stock 
which  the  plaintiff  bought  of  it,  the 
measure  of  damages  is  the  value  at  the 
time  of  such  refusal,  with  interest. 
Salt,  etc.  Co.  v.  Hickey,  4  Ariz.  240 
(1894).  Where  the  measure  of  dam- 
ages is  based  upon  the  market  value 
of  stock,  interest  may  be  added. 
Kuhn  V.  McKay,  7  Wyo.  42  (1897). 

1  Doyle  V.  Burns,  123  Iowa,  488 
(1904). 

2  Bull  V.  Douglas,  4  Munf.  (Va.) 
303  (1814) ;  Baltimore,  etc.  Ry.  v. 
Sewell,  35  Md.  238  (1871) ;  Bercich  v. 
Marye,  9  Nev.  312  (1874) ;  Bank  of 
Montgomery  v.  Reese,  26  Pa.  St.  143 
(1856).  Cf.  Boston,  etc.  R.  R.  v. 
Richardson,  135  Mass.  473,  477  (1883). 
Where  a  party  holding  stock  in  es- 
crow   refuses     to     deliver    when     he 


should,  and  in  a  suit  for  conversion, 
instead    of    depositing    the    stock    in 
court,  sets  up  a  defense  which  is  with- 
out merit,  the  value  of  the  stock  and 
dividends  and  interest  may  be  recov- 
ered.    Clarke  v.  Eureka,  etc.  Bank,  123 
Fed.  Rep.  922  (1903) ;    aff'd,  130  Fed. 
Rep.  325.     Where  a  broker,  a  gratui- 
tous bailee  of  corporate  stock,  delivers 
the    same    to    the    company    without  . 
authority,  and  the  stock  is  converted  to 
the  use  of  the  company,  the  bailee  is 
liable    for    its    value,    irrespective    of 
what  his  intentions  were  in  the  prem- 
ises.    In    such    case    the    bailor    may 
recover  the  value  of  the  stock  at  the 
time  of  conversion,  with,  all  dividends 
paid    from   the   time  of    delivery,   to- 
gether with  interest  on  the  value  of 
the  stock  from  date  of  conversion,  and 
on  the  dividends  from  date  of  respect- 
ive payments.     Hubbell  v.  Blandy,  87 
Mich.     209     (1891).     Where     several 
years  elapse  between   the  commence- 
ment  of   the   suit   and   the   trial,   the 
case  not  having  been  prosecuted  with 
reasonable  diligence,  the  value  at  the 
time  of  the  conversion,  with  interest, 
is  the  measure  of  damages.     Dividends 
are  not  to  be  added  unless  a  separate 
demand    for    them    is    alleged    and    a 
separate  cause  of  action  therefor  set 
forth.     Ralston  v.  Bank  of  California, 
112  Cal.  208  (1896).     In  an  action  for 
the  conversion  of  stock  the  measure 
of  damages  is  the  highest  intermedi- 
ate value  between  the  time  of  conver- 
sion and  a  reasonable  time  after  the 
owner  has  received  notice  of  the  con- 
version to  enable  him  to  replace  the 
stock.     Dividends   accruing   after   the 
conversion  are  not   added,  nor  inter- 
est on  such  dividends.     Citizens',  etc. 
R.  R.  V.  Robbins,  144  Ind.  671  (1896). 
3  Boylan    v.    Huguet,    8    Nev.    345 
(1873) ;     2    Sedgwick,    Damages    (7th 


1732 


CH.   XXXV. 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


[§§  585,  580. 


§  585.  Nominal  damages.  —  In  certain  cases,  where  the  plaintiff 
has  been  guilty  of  laches,  or  where  the  stock  is  of  no  actual  value,  or 
where  the  stock  could,  for  a  reasonable  time  after  the  conversion,  have 
been  purchased  in  the  market  for  the  same  or  a  lower  price,  or  in  any 
other  case  where  the  plaintiff  has  suffered  only  a  technical  conversion 
without  any  actual  pecuniary  loss,  only  nominal  damages  can  be  re- 
covered.^ Thus,  the  measure  of  damages  for  the  conversion  of  a  mere 
certificate  of  stock  cannot  be  placed  at  the  value  of  the  shares  themselves 
which  the  certificate  represents,  if  the  ownership  of  the  shares  is  not 
affected.-  Wliere  a  pledgee's  debt  has  really  been  paid  and  he  retains 
the  stock,  and  by  reason  thereof  the  pledgor  is  unable  to  enter  a  reor- 
ganization, the  pledgor  may  recover  the  actual  damages  sustained,  but 
the  value  of  the  stock  must  be  shown  by  him,  otherwise  it  will  be  in- 
ferred that  it  had  little  or  no  value.^ 

§  586.  Damages  for  failure  to  complete  a  purchase  of  stock  and 
for  fraud  inducing  a  purchase  of  stock.  —  The  measure  of  damages 
for  the  failure  of  a  purchaser  of  stock  to  complete  his  contract  is  con- 
sidered elsewhere ;  ^  as  is  also  the  purchaser's  measure  of  damages  for 
a  refusal  of  the  vendor  to  deliver.^    The  measure  of  damages  for  fraud 


ed.),  391 ;  Bodley  v.  Reynolds,  8  Q.  B. 
779  (1846) ;  Davis  v.  Oswell,  7  Car.  & 
P.  804  (1837).  Cf.  Seymoiir  t'.  Ives, 
46  Conn.  109  (1878). 

1  Thus,  where  a  borrower  of  shares 
fails  to  return  them  until  after  the 
corporation  is  dissolved,  the  lender 
having  made  no  demand  during  the 
existence  of  the  company,  the  meas- 
ure of  damages,  in  an  action  to  re- 
cover the  shares,  will  be  the  market 
value  of  them  at  the  time  the  cause 
of  action  accrued ;  that  is,  at  the  time 
of  demand.  And  if  at  that  time  the 
stock  is  worthless,  only  nominal 
damages  are  recoverable.  Fosdick  v. 
Greene,  27  Ohio  St.  484  (1875).  See 
Cameron  v.  Durkheim,  55  N.  Y.  425 
(1874) ;  Hope  v.  Lawrence,  50  Barb. 
258  (1867).  In  an  action  by  a  vendee 
on  a  contract  for  the  sale  of  specific 
stock,  which,  without  the  knowledge 
of  the  vendor,  had  already  been  sold  to 
another  by  his  agent,  the  plaintiff  may 
be  able  to  recover  only  nominal  dam- 
ages. Wilson  V.  Whitaker,  49  Pa.  St. 
114  (1865);  Skinner  v.  City  of  Lon- 
don, etc.  Corp.,  L.  R.  14  Q.  B.  D.  882 
(1885).  See  Fowler,  t;.  New  York  Gold 
Exch.  Bank,  67  N.  Y.  138  (1876).  A 
transferee's  action  upon  the  case  for 


damages  instead  of  in  trover  for  con- 
version, against  the  corporation  for 
refusal  to  register  the  transfer,  en- 
titles him  to  nominal  damages  only, 
unless  he  proves  special  damage.  Mc- 
Lean V.  Charles  Wright  Med.  Co.,  96 
Mich.  479  (1893).  See  also  Blair  Co. 
V.  Rose,  26  Ind.  App.  487  (1901). 

2  Daggett  V.  Davies,  53  Mich.  35 
(1884),  by  Cooley,  C.  J. 

3  Griggs  V.  Day,  158  N.  Y.  1  (1899). 
This  preceding  case  arose  out  of  a 
controversy  between  a  contractor  in 
the  construction  of  a  railroad  and  the 
chief  stockholder  and  promoter  who 
advanced  money  on  the  security  of 
stock  and  corporate  notes.  It  was 
many  years  in  the  courts. 

*  See  §  336,  supra.  Where  a  person 
agrees  to  buy  stock  for  $8,000  and  gives 
his  note  for  $1,500  to  secure  perform- 
ance, that  amount  to  be  credited  if 
the  balance  is  paid,  this  is  liquidated 
damages  if  the  balance  is  not  paid, 
and  may  be  collected.  Moyses  v. 
Schendorf,  238  111.  232  (1909). 

^  See  §  336,  supra.  Where  the  ven- 
dor has  been  paid  and  fails  to  deliver 
for  thirty  days  and  the  stock  declines, 
the  vendee  can  recover  damages,  even 
though   he   accepted    delivery   at   the 


1733 


586. 


ACTIONS  AND   MEASURE   OF   DAMAGES. 


CH.   XXXV. 


inducing  the  purchase  of  stock  "  is  the  difference  between  the  value  of 
the  stock  at  the  time  it  was  purchased  and  the  price  paid  for  it."  ^    A 


end  of  thirty  days.  Chapman  v. 
Fowler,  132  N.  Y.  App.  Div.  251 
(1909).  Where  the  vendor  of  stock, 
who  takes  a  note  in  payment,  agrees 
that  he  will  renew  it  until  the  divi- 
dends should  pay  it,  but  sells  the  note 
and  it  is  enforced  against  the  vendee, 
the  vendee's  damage  is  nominal  unless 
he  proves  that  the  stock  is  worth  less 
than  the  amount  of  the  note,  the  stock 
being  retained  by  him.  Troutwine 
V.  Hoff,  126  N.  Y.  App.  Div.  556 
(1908);  aff'd,  198  N.  Y.  536.  The 
vendor  for  failure  to  deliver  is  liable  in 
damages  for  the  difference  between  the 
contract  price  and  the  highest  market 
value  of  the  stock  between  the  date 
fixed  for  delivery  and  a  reasonable 
time  thereafter  as  determined  by 
the  jury.  Vos  v.  Child,  etc.  Co., 
137  N.  W.  Rep.  209  (Mich.  1912). 

1  Redding  v.  Godwin,  44  Minn.  355 
(1890).  In  an  action  for  damages  for 
fraud  inducing  the  plaintiff  to  pur- 
chase stock,  the  measure  of  damages 
is  "not  the  difference  between  the 
contract  price  and  the  reasonable  mar- 
ket value  if  the  property  had  been  as 
represented  to  be,  even  if  the  stock 
had  been  worth  the  price  paid  for  it; 
nor,  if  the  stock  were  worthless,  could 
the  plaintiff  have  recovered  the  value 
it  would  have  had  if  the  property  had 
been  equal  to  the  representations. 
What  the  plaintiff  might  have  gained 
is  not  the  question,  but  what  he  had 
lost  by  being  deceived  into  the  pur- 
chase.' '  The  defendant ' '  was  bound  to 
make  good  the  loss  sustained,  such  as 
the  moneys  the  plaintiff  had  paid  out 
and  interest,  and  any  other  outlay 
legitimately  attributable  to  defend- 
ant's fraudulent  conduct ;  but  this  lia- 
bility did  not  include  the  expected 
fruits  of  an  unrealized  speculation." 
Smith  V.  BoUes,  132  U.  S.  125  (1889). 
The  true  measure  of  the  damages  suf- 
fered by  one  who  is  fraudulently  in- 
duced to  make  a  contract  of  sale,  pur- 
chase, or  exchange  of  property  is  the 
difference  between  the  actual  value  of 
that  which  he  parts  with  and  the 
actual  value  of  that  which  he  receives 
under     the   contract.     Rockefeller    v. 

r 


Merritt,  76  Fed.  Rep.  909  (1896).  In 
Smith  V.  Duffy,  57  N.  J.  L.  679  (1895), 
the  measure  of  damages  for  fraud  in 
the  sale  of  stock  was  held  to  be  the 
actual  loss  suffered  by  the  vendee,  ir- 
respective of  the  market  price  of  the 
stock.  As  to  the  measure  of  damages 
in  an  action  against  a  broker  for 
fraud  inducing  the  plaintiff  to  invest 
in  "Grant  and  Ward"  securities,  see 
James  v.  Work,  70  Hun,  296  (1893). 
The  measure  of  damages  in  an  action 
by  a  vendee  for  fraud  in  the  sale  of 
stock  is  the  difference  between  the 
selling  price  and  the  real  value  at 
the  time  of  the  sale.  High  v.  Berret, 
148  Pa.  St.  261  (1892).  Where,  in  an 
action  by  a  vendee  of  stock  for  fraud 
in  inducing  purchase,  the  jury  find 
that  the  stock  had  no  value  whatever 
and  render  a  verdict  for  the  purchase 
price,  it  is  immaterial  that  the  court 
erred  in  regard  to  the  measure  of 
damages.  Honsucle  v.  Ruffin,  172 
Mass.  420  (1899).  The  vendee  may 
bring  an  action  for  damages  for  deceit 
even  where  he  has  paid  part  of  the 
price  and  given  security  for  the  bal- 
ance. He  may  recover  damages  to 
the  extent  only  that  the  representa- 
tions were  false.  Weaver  v.  Shriver, 
79  Md.  530  (1894).  If  a  director  mis- 
represents the  financial  condition  of 
the  company  and  this  induces  a  stock- 
holder to  sell  his  stock  to  him,  he  is 
liable  to  the  vendor  for  the  difference 
between  the  actual  value  of  the  stock 
and  the  price  paid.  Hume  v.  Steele, 
59  S.  W.  Rep.  812  (Tex.  1900).  The 
measure  of  damages  is  the  difference 
between  the  actual  value  of  the  stock 
and  the  value  it  would  have  had  if  the 
representations  as  to  the  financial 
condition  of  the  company  had  been 
true.  Drake  v.  Holbrook,  66  S.  W. 
Rep.  512  (Ky.  1902).  And  where  one 
with  intent  to  cheat  and  defraud  in- 
duces another,  by  false  and  fraudu- 
lent representations,  to  purchase 
shares  for  value  which  he  knows  to 
be  worthless,  he  is  liable  for  the  dam- 
ages sustained,  whether  the  purchase 
was  made  from  him  or  from  another 
at  his  instance.  Hubbell  v.  Meigs,  50 
'34 


CH.  XXXV.] 


ACTIONS   AND   MEASURE   OF   DAMAGES. 


[§  586. 


misrepresentation  by  promoters  as  to  the  amount  of  money  they  paid 
to  the  corporation  for  stock  may  sustain  an  action  by  the  purchaser  of 
such  stock  from  them  for  damages.^  The  measure  of  damages  for  deceit 
in  inducing  a  party  to  purchase  stock  is  the  difference  between  the  price 
and  the  real  value  at  the  lime  of  the  purchase.  Subsequent  events 
growing  out  of  the  then  existing  condition  of  things  may  be  introduced 
in  evidence.^  The  measure  of  damages  for  fraud  in  inducing  a  person 
to  sell  stock  at  less  than  its  real  value  is  the  difference  between  the 
value  of  the  stock  as  represented  and  the  actual  value.^    At  common 


N.  Y.  480  (1872).  The  misrepresen- 
tation that  certain  property  had  al- 
ready been  purchased  by  the  corpora- 
tion is  not  cured  by  the  fact  that  the 
corporation  did  acquire  such  property 
thereafter.  McConnel  v.  Wright, 
[1903]  1  Ch.  546.  The  court  in  this 
case  discussed  at  length  the  principle 
on  which  damages  should  be  assessed. 

1  Honsucle  v.  Ruffin,  172  Mass.  420 
(1899). 

2  Hindman  v.  First  Nat.  Bank,  112 
Fed.  Rep.  931  (1902).  Where  a  pur- 
chase of  stock  induced  by  fraud  is 
affirmed  and  suit  is  brought  for  de- 
ceit, the  damage  is  the  same  as  for 
breach  of  warranty  in  a  contract  of 
sale,  namely,  the  difference  between 
what  the  property  was  worth  and 
what  it  would  have  been  worth  if  the 
representations  had  been  true.  Beare 
V.  Wright,  14  N.  Dak.  26  (1905).  The 
measure  of  damages  in  a  suit  by  the 
purchaser  of  stock  from  the  secretary 
and  treasurer  for  fraudulent  represen- 
tations as  to  the  debts  of  the  corpora- 
tion, is  the  difference  between  the 
value  of  the  stock  on  the  actual  finan- 
cial condition  and  its  value  had  the 
condition  been  as  represented.  Drake 
V.  Holbrook,  92  S.  W.  Rep.  297  (Ky. 
1906). 

^  Potter  V.  Necedah,  etc.  Co.,  105 
Wis.  25  (1899).  Where  there  is  no 
market  value  for  stock  the  measure  of 
damages  in  an  action  for  deceit,  caus- 
ing a  party  to  purchase  the  stock,  is 
the  difference  between  the  value  of 
the  stock  and  its  value  if  the  corpora- 
tion had  had  the  amount  of  property 
represented,  that  being  the  subject 
of  the  misrepresentation.  Boddy  v. 
Henry,  113  Iowa,  462  (1901).  In  a 
suit  by  a  vendor  of  stock  for  fraud 


inducing  the  sale,  the  value  of  the 
stock  should  include  a  proportionate 
part  of  the  good-will,  and  the  good- 
will may  be  valued  by  multiplying  the 
average  profits  by  a  number  of  years 
depending  upon  the  nature  and  char- 
acter of  the  business,  all  of  which  is 
a  question  for  the  jury.  Von  Au  v. 
Magenheimer,  115  N.  Y.  App.  Div.  84 
(1906) ;  8.  c,  126  N.  Y.  App.  Div. 
257.  In  a  suit  by  a  purchaser  of 
stock  to  hold  the  directors  liable  for 
a  false  annual  report  which  caused 
him  to  purchase,  the  measure  of  dam- 
ages is  the  difference  between  the 
value  of  the  stock  as  it  is  and  as  it 
would  have  been  had  the  annual  re- 
port been  true.  Parsons  v.  Johnson, 
28  N.  Y.  App.  Div.  1  (1898).  The 
measure  of  damages  for  fraud  in  the 
sale  of  stock  is  the  difference  between 
the  real  value  of  the  stock  at  the  time 
of  sale  and  what  the  value  would  have 
been  had  the  representations  been 
true.  The  market  value  may  be 
shown  as  bearing  upon  the  real  value, 
Warner  v.  Benjamin,  89  Wis.  290 
(1895);  Titus  v.  Poole,  73  Hun,  383 
(1893) ;  aff'd,  145  N.  Y.  414.  A  person 
who  purchases  bank  stock  from  the 
bank  itself  may  hold  the  bank  liable 
for  damages,  where  the  public  state- 
ment of  the  bank  which  he  relied  on 
in  purchasing  was  false.  The  measure 
of  damages  is  the  difference  between 
the  value  of  the  stock  if  the  statement 
had  been  true  and  its  actual  value. 
Exchange  Bank  v.  Gaitskill,  37  S.  W. 
Rep.  160  (Ky.  1896).  In  an  action  for 
damages  for  deceit  inducing  the  plain- 
tiff' to  purchase  stock,  the  measure  of 
damages  is  "a  sum  of  money  equal 
to  the  difference  between  the  value  of 
the  property  as  it  was  in  fact  and  the 


1735 


§  587.]  ACTIONS   AND   MEASURE   OF   DAMAGES.  [cH.  XXXV. 

law  an  action  to  recover  back  the  whole  of  the  purchase-money  upon  a 
rescission  for  fraud  is  virtually  a  suit  for  money  had  and  received.^ 
In  a  decree  that  certain  stock  given  away  by  a  bankrupt  shall  be  re- 
turned to  his  trustee  in  bankruptcy,  damages  may  also  be  awarded  for 
depreciation  in  the  stock  in  the  meantime.^ 

§  587.  Damages  in  actions  between  stock-brokers  and  their  cus- 
tomers. —  This  subject  is  considered  elsewhere.^ 

value   as   it   would   have  been   if   the  measiu-e    of    damages,    in    an    action 

representations    had    been    true."     In  against   the   vendor,  is    the  dififerenee 

this  kind  of  action  no  tender  of  the  between    the    value    of    the    stock    as 

stock  is  necessary   or  proper.     Testi-  represented  and  the  actual  value.     Mil- 

mony  as  to  the  value  of  the  property  ler  v.  Barber,  66  N.  Y.  558,  568  (1876). 
of   the   corporation   and   of  a  sale  of  ^  Gassett  v.  Glazier,  165  Mass.  475 

stock  by  a  witness  is  admissible.     Vail  (1896). 

V.    Reynolds,    118  N.    Y.   297    (1890).  ^  Wasey  v.  Holbrook,  65  N.  Y.  Misc. 

Where    one     has     been     induced     by  Rep.  84  (1909). 
fraudulent  representations   to  buy  or  '  See  §§  460-462,  supra. 

subscribe    for    shares    of    stock,    the 


1736 


CHAPTER   XXXVI. 

STOCKHOLDERS'   MEETINGS— CALLS,  TIME,   PLACE,  AND 
CLASSES  OF  MEETINGS. 


!  588.  Introductory. 

589.  The  place  of  meeting  of  stock- 

holders must  be  within  the 
state  creating  the  corpora- 
tion. 

590,  591.    First     meeting     under  a 

special  charter. 

592.  Meetings    of    directors  —  Place 

—  Notice  —  Action  without 
meeting  —  Quorum. 

593.  By  whom  and  when  meetings 

of  stockholders  are  to  be 
called  — -  Mandamus  —  Fraud 
in  the  call. 

594.  When  the  stockholders  are  en- 


titled to  notice  of  corporate 
meetings. 
§  595.  The  essential  elements  of  a  no- 
tice of  a  meeting   are   time, 
place,  and  business. 

596.  Service  of  the  notice. 

597.  Notice  must  be  served  a  rea- 

sonable     time      before      the 
meeting. 

598.  The  division  of  meetings   into 

ordinary  and  extraordinary. 

599.  Waiver  of  notice. 

600.  Notice    is    presumed    to    have 

been  regularly  given. 

601.  Adjourned  meetings. 


§  588.  Introductory.  —  The  stockholders  of  a  corporation  consti- 
tute the  origin,  existence,  and  continuance  of  the  corporation  itself. 
They  elect  the  directors,  control  the  general  policy  through  them, 
and  within  the  charter  limits  may  prolong  or  dissolve  the  corporate 
existence  at  their  pleasure.  All  these  vital  powers  of  the  stockholders 
can  be  exercised  by  them  only  in  corporate  meetings,  duly  convened 
and  properly  organized  for  the  transaction  of  business.  Accordingly, 
the  method  of  calling  together  a  corporate  meeting,  the  time  and  place 
of  that  meeting,  the  notice  to  be  given  to  the  stockholders,  and  the  vari- 
ous incidents  relative  to  a  proper  convening  of  the  members  of  the  cor- 
poration, are  of  great  importance.  They  constitute  the  subject  of  this 
chapter. 

§  589.  The  place  of  meeting  of  stockholders  must  be  within  the 
state  creating  the  corporation.  —  The  first  and  most  general  rule  as 
to  the  place  where  stockholders  may  hold  corporate  meetings  is  that 
the  place  of  meeting  should  be  within  the  boundaries  of  the  state  which 
created  the  corporation,  although  through  its  agents,  of  course,  the 
corporation  may  make  contracts,  carry  on  business,  sue  and  be  sued, 
and  buy  and  sell  property  in  another  state.^ 

There  is  a  difference  of  opinion  as  to  the  effect  of  business  trans- 
acted at  a  stockholders'  meeting  held  beyond  the  borders  of  the  state 
creating  the  corporation.     Upon  the  one  hand,  it  is  held  that  all  the 

1  See  chs.  XIII,  §§  237-240,  supra,  and  XLI,  §§  696-700,  infra. 

1737 


589.1 


stockholders'    meetings  —  CALLS. 


[CH.  XXXVI. 


acts  and  proceedings  of  such  a  meeting  are  wholly  invaHd  and  void; 
that  the  corporation  is  not  bound  thereby,  and  that  the  meeting  is  as 
though  it  had  never  been  held.^ 

But  it  is  the  sounder  view  to  regard  the  votes  and  proceedings  at 
such  a  meeting  as  voidable  rather  than  void.  The  corporation  itself 
cannot  allege  that  such  proceedings  are  void.  It  is  estopped  from  so 
doing.2     go  also  are  the  stockholders  who  participate   in   the   meet- 


1  Craig  Silver  Co.  v.  Smith,  163 
Mass.  262  (189.5),  citing  the  above 
text.  The  treasurer  is  not  protected 
in  turning  the  funds  over  to  another 
treasurer  who  was  elected  at  a  stock- 
holders' mseting  held  outside  of  the 
state.  Kent  v.  Honsinger,  167  Fed. 
Rep.  619  (1909).  Directors  elected  at 
a  stockholders'  meeting  held  out  of  the 
state,  and  to  which  all  did  not  agree, 
are  not  du-ectors.  The  old  board  holds 
over.  Hodgson  v.  Duluth,  etc.  R.  R., 
46  Minn.  454  (1891) ;  Miller  v.  Ewer, 
27  Me.  509  (1847),  where  a  mortgage 
executed  by  the  authority  of  directors 
who  were  elected  at  the  organization 
meeting  of  corporators  held  outside 
of  the  state  which  granted  the  charter 
was  declared  void.  Cited  and  followed 
in  Freeman  v.  Machias  Water,  etc.  Co., 
38  Me.  343  (1854),  where  a  forfeiture 
of  stock  was  declared  illegal ;  Ormsby 
V.  Vermont  Copper  Min.  Co.,  56  N.  Y. 
623  (1874),  where  it  was  held  that 
a  forfeiture  of  stock  by  authority  of 
a  by-law  adopted  by  stockholders  of 
a  Vermont  corporation  at  a  meeting 
held  in  New  York  was  not  valid; 
Mitchell  V.  Vermont  Copper  Min.  Co., 
40  N.  Y.  Super.  Ct.  406  (1876) ;  aff'd, 
67  N.  Y.  280;  Smith  v.  Silver  Valley 
Min.  Co.,  64  Md.  85  (1885),  the  organi- 
zation being  held  out  of  the  state; 
Camp  V.  Byrne,  41  Mo.  525  (1867),  to 
the  same  effect.  Stockholders  cannot 
legally  meet  out  of  the  state.  Hard- 
ing V.  American,  etc.  Co.,  182  111.  551 
(1899).  In  Copp  V.  Lamb,  12  Me.  312 
(1835),  thirty  years'  user  was  held 
to  have  cured  any  defect.  A  Virginia 
corporation  cannot  be  organized  by 
an  organization  meeting  in  New  York. 
Nor  can  the  charter  be  assigned  by  a 
blank  assignment  after  an  organiza- 
tion in  Virginia.  The  assignment 
must  be  of  the  stock.     The  corpora- 


tion is  neither  de  facto  nor  de  jure. 
Suits  against  it  fail.  Welch  v.  Old 
Dominion,  etc.  Ry.,  10  N.  Y.  Supp.  174 
(1890).  Stockholders'  meetings  held 
out  of  the  state  are  voidable  if  not 
void,  and  at  the  instance  of  minority 
stockholders  may  be  good  ground  for 
an  injunction.  Jones  v.  Pearl  Min, 
Co.,  20  Colo.  417  (1894).  Where  a 
charter  is  taken  out  in  one  state  and 
the  organization  meetings  are  held  in 
another  state,  the  presumption  is  that 
no  corporation  is  organized ;  and  un- 
less proof  is  given  that  the  statutes 
of  the  first-named  state  authorized  the 
holding  of  the  organization  meeting  in 
another  state,  the  stockholders  are 
liable  as  partners.  Duke  v.  Taylor, 
37  Fla.  64  (1896).  Where  parties  take 
out  a  charter  in  Tennessee,  but,  in- 
stead of  holding  their  organization 
meetings  in  Tennessee,  hold  them  in 
Florida,  where  they  do  all  their  busi- 
ness, they  are  liable  in  Florida  as 
partners.  Taylor  v.  Branham,  35  Fla. 
297  (1895).  The  dicta  in  this  decision 
as  to  the  liability  of  stockholders 
generally  in  foreign  corporations  do- 
ing business  in  Florida  are  startling, 
to  say  the  least. 

2  Heath  v.  Silverthorn,  etc.  Co.,  39 
Wis.  146  (1875),  holding  that  the  cor- 
poration may  be  estopped  to  deny  the 
validity  of  acts  done  outside  the  state, 
when  the  rights  of  third  parties  inter- 
vene, even  though  that  meeting  was 
the  organization  meeting.  The  legisla- 
ture may  validate  the  acts  passed  at 
such  a  meeting.  Graham  v.  Boston, 
etc.  R.  R.,  118  U.  S.  161,  176  (1886), 
aff'g,  s.  c,  14  Fed.  Rep.  753  (1883). 
Cf.  Grenada  County  v.  Brodgen,  112 
U.  S.  261  (1884),  and  the  various 
cases  of  municipal  subscriptions,  ch. 
VI,  §  94,  n.,  supra.  The  fact  that  an 
Arizona    company    was    organized    in 


1738 


CH.  XXXVI.I 


STOCKHOLDERS     MEETINGS 


CALLS. 


[§  589. 


ing.^  As  to  the  creditors  of  the  corporation  the  authorities  differ.-  If 
the  corporation  has  been  incorporated  in  two  or  more  states,  it  is  lawful 
to  hold  meetings  of  the  stockholders  in  either  state.^     And  proceedings 

California   and    held    all    meetings    in    represented  by  proxy  at  the  meeting 


California,  cannot  be  raised  col 
laterally,  but  only  in  a  proceeding 
instituted  by  Arizona  itself.  McKee 
V.  Title  Ins.,  etc.  Co.,  159  Cal.  206 
(1911). 

1  A  bona  fide  holder  of  a  note  given 
by  a  stockholder  in  payment  of  his 
subscription  may  enforce  it,  even 
though  the  organization  and  all  other 
meetings  of  the  company  were  held 
out  of  the  state.  Camp  v.  Byrne,  41 
Mo.  525  (1867).  In  Ohio,  etc.  R.  R.  v. 
McPherson,  35  Mo.  13  (1864),  the 
charter  declared  the  directors  to  be 
the  corporation.  They  met  out  of  the 
state  and  organized  and  made  a  call 
on  subscriptions.  The  court  upheld 
the  call.  But  the  mere  neglect  on  the 
part  of  a  stockholder,  who  did  not  at- 
tend a  meeting  of  this  kind,  or  a 
mere  failure  to  take  affirmative  action 
for  a  period  of  time  short  of  that  pre- 
scribed by  the  statute  of  limitations, 
wiU  not  deprive  that  stockholder  of 
his  right  to  attack  the  proceedings  as 
irregular  and  in  fraud  of  his  rights. 
Ormsby  v.  Vermont  Copper  Min.  Co., 
56  N.  Y.  623  (1874).  A  stockholders' 
meeting  held  outside  of  the  state  can- 
not be  attacked  by  those  who  partici- 
pate in  it  or  receive  the  benefits  of  it. 
A  statute  against  holding  elections 
out  of  the  state  does  not  prevent  stock- 
holders' meetings  for  other  purposes. 
Handley  v.  Stutz,  139  U.  S.  417  (1891). 
An  increase  of  capital  stock  which 
is  voted  at  a  stockholders'  meeting 
held  out  of  the  state  is  valid  if  all 
the  stockholders  assent.  "No  valid 
objection  can  be  made  to  a  stockhold- 
ers' meeting  held  in  a  foreign  juris- 
diction provided  all  the  shareholders 
give  their  consent  to  such  meeting  or 
ratify  its  action."  Stutz  v.  Handley, 
41  Fed.  Rep.  531,  538  (1890).  Rev'd 
on  other  grounds  in  Handley  v.  Stutz, 
139  U.  S.  417.  By-laws  enacted  by  a 
board  of  directors  of  a  Texas  corpora- 
tion at  a  meeting  of  stockholders  held 
in  Paris  are  void,  and  a  stockholder 
may  disregard  them,  although  he  was 


The  directors  are  not  even  de  facto. 
Franco-Texan  Land  Co.  v.  Laigle,  59 
Tex.  3.39  (1883).  A  special  charter 
must  be  accepted  before  the  corpora- 
tion exists,  and  such  acceptance  can- 
not be  at  a  meeting  held  out  of  the 
state.  Hence  a  bill  by  a  stockholder 
to  set  aside  a  forfeiture  of  his  stock 
was  dismissed  by  the  court.  Smith 
V.  Silver  Valley  Min.  Co.,  64  Md.  85 
(1885).  A  stockholders'  meeting  out 
of  the  state  is  "irregular,  if  not  void." 
Mack  V.  De  Bardeleben,  etc.  Co.,  90 
Ala.  396  (1890).  A  stockholder  in 
a  limited  partnership  who  is  repre- 
sented by  proxy  at  a  meeting  held  out- 
side of  the  state  cannot  object  there- 
to, and  he  cannot  object  to  meetings 
of  the  directors  being  held  outside 
of  the  state,  where  he  presented  a 
claim  at  one  of  such  meetings.  Strad- 
ley  V.  Cargill,  etc.  Co.,  135  Mich.  367 
(1904). 

2  Where  a  meeting  of  stockholders 
other  than  the  first  organization  meet- 
ing is  held  out  of  the  state,  and  di- 
rectors are  elected,  the  acts  of  those 
directors  cannot  be  attacked  by  corpo- 
rate creditors  on  the  ground  that  the 
election  was  illegal.  Wright  v.  Lee,  2 
S.  Dak.  596  (1892) ;  s.  c,  4  S.  Dak.  237. 
For  cases  to  the  contrary  see  notes, 
supra.  Where  a  person  takes  title  to 
land  for  a  corporation  to  be  formed, 
and  thereafter  he  joins  in  the  forma- 
tion of  the  corporation,  he  cannot  de- 
fend an  action  against  the  corporation 
to  obtain  title  by  setting  up  that  its 
organization  meetings  were  held  out- 
side of  the  state.  Tuckasegee  Min. 
Co.  V.  Goodhue,  118  N.  C.  981  (1896). 
Creditors  of  a  Delaware  corporation 
cannot  defeat  its  mortgage  on  the 
ground  that  it  held  its  organization 
meetings  outside  of  the  state.  Has- 
brouck  V.  Rich,  113  Mo.  App.  389 
(1905). 

'  Graham  v.  Boston,  etc.  R.  R.,  118 
U.  S.  161  (1886) ;  Covington,  etc.  Co. 
V.  Mayer,  31  Ohio  St.  317  (1877).  See 
also  Ohio,  etc.  Ry.  v.  People,  123  111. 


1739 


§§  590,  591.] 


STOCKHOLDERS     MEETINGS  —  CALLS. 


[CH.  XXXVI. 


at  a  meeting  in  any  one  of  the  states  are  valid  in  respect  to  the  property 
of  the  corporation  in  all  of  them,  without  a  repetition  of  the  meeting 
in  any  other  of  those  states.^  Where  the  statute  allows  elections  to  be 
held  at  a  place  fixed  by  the  by-laws,  the  election  need  not  be  held  at  the 
city  where  the  principal  place  of  business  is,  but  may  be  held  at  any 
other  place  in  the  state.^ 

§§  590,  591.  First  meeting  under  a  special  charter.  —  Where  an. 
act  incorporates  three  specified  persons  and  their  "  associates,"  those 
three  alone  organize  the  company  and  are  entitled  to  subscribe  the 
capital  stock  or  to  allow  others  to  subscribe.^    Where  in  a  special  act 


467  (1888) ;  and  ch.  LIU,  §  910,  infra. 
In  the  case  PoUitz  v.  Wabash,  etc.  Co., 
167  Fed.  Rep.  145  (1909),  where  a 
consolidated  road  ran  into  five  states 
the  court  said:  "The  several  consoli- 
dated corporations  remain  intact,  and 
each  is  subject  to  the  laws  of  its  crea- 
tion ;  but  the  consolidated  company 
may  hold  its  meetings  for  the  trans- 
action of  business,  election  of  directors, 
etc.,  in  any  one  of  the  states,  even  if 
the  laws  of  a  particular  state  require 
the  meetings  of  the  corporation  to  be 
held  within  the  state,  and  its  acts  are 
legal  and  binding  upon  all." 

1  Same  cases. 

2  Union,  etc.  Bank  v.  Scott,  53  N.  Y. 
App.  Div.  65  (1900).  Where  by  reso- 
lution of  the  stockholders  all  the  prop- 
erty of  an  embarrassed  corporation  is 
transferred  to  trustees  to  sell  and 
pay  the  debts  and  reconvey  the  re- 
mainder to  the  corporation,  and  the 
trustees  proceed  to  do  so,  the  trans- 
action is  legal,  even  though  the  stock- 
holders' meeting  is  not  held  at  its' 
principal  office,  and  proxies  were 
irregular  and  unauthorized,  and  the 
directors  took  no  action,  and  the  con- 
veyances were  irregular.  Kessler  & 
Co.  V.  Ensley  Co.,  141  Fed.  Rep.  130 
(1905) ;    aff' d,  148  Fed.  Rep.   1019. 

3  Lechmere  Bank  v.  Boynton,  65 
Mass.  369  (1853) ;  Hughes  v.  Parker, 
20  N.  H.  58  (1849).  A  special  char- 
ter running  to  individuals  cannot  be 
assigned  by  them.  Neither  can  the 
charter  be  sold  in  insolvency  proceed- 
ings. Jennings  v.  Dark,  175  Ind.  332 
(1910).  See  also  p.  663,  supra.  The 
grant  of  corporate  powers  to  one 
person  and  his  associates  and  suc- 
cessors    does     not     require     of     such 


person  that  he  should  take  associates 
before  the  act  can  take  effect  or  cor- 
porate powers  be  exercised,  but  con- 
fers upon  him  alone  the  powers  of 
the  corporation,  and  his  acts  within 
the  grant  of  such  powers  become  the 
acts  of  the  corporation.  Penobscot 
Boom  Corp.  v.  Lamson,  16  Me.  224 
(1839).  Where  a  special  charter 
named  the  incorporators  and  commis- 
sioners, and  the  notice  called  for  by 
the  charter  of  the  opening  of  the 
books  of  subscription  was  given,  and 
all  incorporators  attended  the  meet- 
ing and  verbally  subscribed  for  stock, 
and  gave  checks  to  apply  on  the  same, 
and  a  meeting  of  the  stockholders 
was  held  and  directors  elected,  and 
the  directors  held  their  meeting  and 
elected  officers,  and  annual  meetings 
were  held  thereafter  for  five  years, 
when  the  company  was  practically 
abandoned,  and  the  checks  were  never 
used,  —  all  this  amounted  to  a  legal 
organization  of  the  corporation.  More- 
over, the  corporation  existed  by  the 
charter  itself,  without  action  on  the 
part  of  the  incorporators.  A  company 
thus  organized  may  enjoin  from  ex- 
ercising its  franchises  a  subsequent 
attempted  organization  of  the  com- 
pany made  sixteen  years  thereafter, 
the  subsequent  organization  having 
been  made  by  part  only  of  the  in- 
corporators. The  incorporators  cease 
to  have  any  powers  after  the  first 
organization  meeting.  The  remedy 
may  be  in  equity,  and  need  not  be  in 
quo  warranto.  Union  Water  Co.  v. 
Kean,  52  N.  J.  Eq.  Ill  (1893).  Where 
the  incorporators  named  in  a  special 
charter  organize  by  subscribing  one 
share  each  and  allowing  another  per- 


1740 


CH.  XXXVI.]  stockholders'   meetings  —  CALLS.  [§§  592,  593. 

of  incorporation  thirteen  incorporators  are  named  and  they  organize 
and  elect  directors,  and  the  latter  accept  subscriptions,  and  all  the  in- 
corporators are  given  opportunity  to  subscribe,  those  who  do  subscribe 
may  sell  all  their  stock  and  thereby  transfer  the  entire  corporation, 
and  those  incorporators  who  do  not  subscribe  are  not  entitled  to  any 
part  of  the  price. ^ 

Statutory  provisions  as  to  notice  of  the  first  meeting  are  directory. 
They  need  not  be  observed  if  the  stockliolders  acquiesce.' 

Where  several  persons,  their  associates  and  successors,  are  declared 
to  be  a  corporation,  one  of  them  with  new  parties  may  meet,  organize, 
and  adopt  by-laws,  without  the  capital  being  first  subscribed  and  with- 
out the  others  if  they  do  not  object.^  As  to  an  over-subscription  for 
stock,  the  rules  that  govern  the  subject  are  considered  elsewhere.^ 
The  survivors  of  those  who  by  special  act  are  made  a  corporation  may 
call  the  first  meeting  many  years  after  the  act  was  passed,  and  may 
open  books  for  subscription  to  the  stock.^  But  where  a  company  is 
chartered  in  1860,  and  does  not  organize  until  1884,  an  exemption  from 
taxation  contained  in  the  charter  is  lost  by  reason  of  a  constitutional 
provision  enacted  in  1870  forbidding  such  exemptions.^ 

§  592.  Directors'  meetings.  —  The  various  questions  connected 
with  directors'  meetings,  the  place  where  such  meetings  may  be  held, 
the  notice  that  is  required,  the  question  of  whether  the  directors  may 
act  without  meeting,  and  the  requirements  as  to  a  quorum,  are  dis- 
cussed elsewhere."  Where  a  statute  provides  that  the  charter  may 
be  amended  in  certain  respects  upon  the  directors  or  a  majority  of 
them  making  and  signing  a  certificate,  such  making  and  signing  need 
not  be  at  a  meeting  of  the  directors.     No  meeting  is  required.^ 

§  593.  By  whom  and  when  stockholders'  meetings  are  to  he  called 
—  Mandamus  —  Fraud  in  the  call.  —  Where  the  time  and  place  of  a 
meeting  and  the  business  to  be  transacted  at  that  meeting  are  not  so 

son    to   subscribe   for   the   remainder,  127    (1908).     The    same    rule    applies 

he  at  the  same  time  entering  into  a  to  promoters  who  assist  in  obtaining 

personal  contract  with  them  that  he  the  charter.     Dobbins  v.  Peabody,  199 

■would    construct    the    street    railway  Mass.  141  (1908). 

called    for    by    the    charter    within    a  ^  Braintree,   etc.    Co.    v.   Braintree, 

certain    time,    and    for    failure    so    to  146  Mass.  482  (1888). 
do   he  was   to   "return   the   charter,"  '  McGinty  v.  Athol,   etc.   Co.,    155 

a   suit   by    the   original   incorporators  IMass.  183  (1892). 
to  cancel  his  subscription  and  to  ob-  ^  See  §§  57,  58,  supra. 

tain  control  of  the  board  of  directors         ^  Marmora,  etc.   Co.  v.  Murney,   1 

•wiU  not  lie,  inasmuch  as  the  contract  C.  P.  Rep.  (Can.)  29  (1850). 
was  an  attempt  to  transfer  the  eorpo-  ^  Planters'    Ins.    Co.    v.    Tennessee, 

rate     franchise.       Simonds     v.     East  161  U.  S.  193  (1896). 
Windsor,     etc.     Ry.,     73    Conn.     513  '  See  §  713a,  infra. 

(1901).  «  Burden  v.  Burden,  159  N.  Y.  287 

1  Roosevelt  v.   Hamblin,   199  Mass.  (1899). 

1741 


§  593.] 


STOCKHOLDERS     MEETINGS  —  CALLS, 


CH.  XXXVI. 


fixed  by  the  charter  or  otherwise  that  the  stockholders  are  bound  to 
take  notice  of  them,  it  is  necessary  that  the  meeting  be  called  in  ac- 
cordance with  the  by-laws,  or,  in  the  absence  of  a  by-law,  by  the  highest 
existing  corporate  authority.^ 

In  the  absence  of  any  special  authority  to  any  particular  person 
to  call  meetings,  it  has  been  held  that  the  general  agent  of  the  corporation 
may  make  the  call,^  but  that  the  secretary  cannot ;  ^  yet  even  though 
the  secretary  calls  a  stockholders'  meeting  without  authority  of  the 
board,  nevertheless,  if  the  next  day  the  board  ratifies  the  proceedings, 
the  notice  is  good.^  The  president  and  secretary  have  no  power  to 
call  a  stockholders'  meeting.^  The  board  of  directors  may  always  call 
a  meeting  of  the  stockholders.^  Although  a  meeting  of  the  board  of 
directors  at  which  a  quorum  is  not  present  calls  a  stockholders'  meeting, 
and  the  stockholders'  meeting  takes  action,  yet  where  no  stockholders 
object  until  six  months  thereafter  the  court  will  not  interfere.^  And 
even  though,  on  account  of  vacancies  in  the  board  of  directors,  it  can- 
not act,  yet  the  remaining  directors  may  call  a  stockholders'  meeting 
to  hold  an  election.^ 


1  Evans  v.  Osgood,  18  Me.  213 
(1841),  holding  that,  where  a  propri- 
etors' meeting  could  be  eaUed  "by  a 
petition  signed  by  twelve  of  them  at 
least, "  it  was  not  a  legal  call  if  eleven 
signed,  although  they  owned  twelve 
shares ;  Congregational  Soc.  of  Beth- 
any V.  Sperry,  10  Conn.  200  (1834); 
State  V.  Pettineli,  10  Nev.  141  (1875), 
where  the  by-laws  of  a  corporation 
provided  that  meetings  of  the  stock- 
holders should  be  called  by  the  trus- 
tees, and  it  was  held  that  any  other 
mode  of  calling,  such  as  by  the  presi- 
dent, was  insufficient.  In  Johnston  v. 
Jones,  23  N.  J.  Eq.  216  (1872),  the 
charter  provided  for  annual  elections, 
but  no  by-laws  had  been  made  fixing 
the  time.  The  authority  to  call  an 
election  being  in  the  directors,  it  was 
held  not  sufficient  for  a  majority  of 
these  to  sign  the  notice  without  stat- 
ing that  it  was  given  by  order  of  the 
board,  and  without  designating  them- 
selves as  directors.  See  also  Stevens 
V.  Eden  Meeting-house  Soc,  12  Vt.  688 
(1839),  holding  that  notices  of  meet- 
ings could  not  be  proved  by  parol 
where  there  was  a  by-law  requiring 
the  clerk  to  post  written  notice. 

^Stebbins  v.  Merritt,  64  Mass.  27 
(1852). 


2  The  secretary  and  a  person  hold- 
ing proxies  on  stock  owned  by  the 
state  cannot  call  a  meeting  to  elect 
officers ;  nor  can  a  statute  order  an 
election  in  a  brief  time.  Cassell  v. 
Lexington,  etc.  Co.,  9  S.  W.  Rep.  502, 
710  (Ky.  1888).  The  secretary  has  no 
inherent  right  to  call  a  meeting  of 
the  stockholders,  especially  where  the 
statute  provides  that  the  directors 
may  call  a  stockholders'  meeting.  Re 
State  of  Wyoming  Syndicate,  [1901] 
2  Ch.  431. 

*  Hooper  v.  Kerr,  etc.  Co.,  83  L.  T. 
Rep.  729  (1900). 

^  Dusenbery  v.  Looker,  110  Mich.  58 
(1896). 

^  Cassell  V.  Lexington,  etc.  Co.,  9 
S.  W.  Rep.  502, 701  (Ky.  1888).  Paringa 
Mines  Ltd.  v.  Blair,  [1906]  2  Ch.  193. 
The  board  of  directors  may  fix  the 
time  if  the  charter  or  by-laws  do  not. 
Commonwealth  v.  Smith,  45  Pa.  St. 
59  (1863).  A  de  facto  board  of 
directors  may  call  a  meeting  of  the 
stockholders.  Sherwood  v.  Wallin,  154  :\ 
Cal.  735  (1908). 

^  Southern,  etc.  Bank  v.  Rider,  73 
L.  T.  Rep.  374  (1895). 

8  Toronto,  etc.  Co.  ;;.  Blake,  2  Ont. 
Rep.  (Can.)  175  (1882).  Cf.  §  713a, 
infra. 


1742 


CH.   XXXVI. 


STOCKHOLDERS     MEETINGS 


CALLS. 


[§  593. 


Statutory  provisions  as  to  who  shall  call  the  meeting,  whether  it 
be  the  first  and  organization  meeting,  or  a  subsequent  one,  may  be 
w^aived  by  unanimous  consent  of  the  incorporators  or  stockholders.^ 

If,  upon  the  organization  of  a  corporation,  a  majority  of  the  sub- 
scribers refuse  to  proceed  in  calling  a  meeting,  the  minority  may  call 
it,  and  bind  the  corporation. - 

Where  the  statute  requires  due  notice  to  be  given,  it  need  not  be 
given  by  any  particular  person  nor  in  any  particular  form.^  A  charter 
provision,  or  by-law,  authorizing  the  calling  of  a  meeting  in  a  certain 
way  does  not  necessarily  prevent  the  meeting  being  called  in  a  different 
way,  but  unless  waived  the  rule  is  otherwise,  where  the  charter  or  by- 
law is  peremptory.'*    The  president  and  cashier  of  a  bank  have  no  au- 


1  See  §  234,  notes,  supra,  also  §§  590, 
599,  infra;  Angell  &  Ames,  Corp., 
§  491,  to  the  effect  that  "want  of 
authority  may  be  waived  by  the  pres- 
ence and  consent  of  all  who  have  a 
right  to  vote."  Although  the  charter 
prescribes  that  the  commissioners 
who  receive  the  subscriptions  shall 
call  the  first  meeting  by  publishing 
a  notice,  yet  this  call  may  be  waived, 
and  the  stockholders  may  meet  and 
organize  without  a  call,  if  all  assent. 
Judah  V.  American,  etc.  Co.,  4  Ind. 
333  (1853) ;  Chamberlain  v.  Paines- 
viUe,  etc.  R.  R.,  15  Ohio  St.  225 
(1864),  where  the  statute  provided 
that,  as  soon  as  ten  per  cent,  on  the 
capital  stock  should  be  subscribed,  the 
persons  named  in  the  certificate  of 
incorporation,  or  any  three  of  them, 
might  give  notice  of  an  election  of 
directors.  It  was  held  simply  direc- 
tory, and  not  indispensable  to  an  elec- 
tion, that  the  notice  be  so  given.  In 
Newcomb  v.  Reed,  94  Mass.  362 
(1866),  the  court  declared  the  pur- 
pose of  such  statutes  to  be  to  avoid 
such  difficulty  as  would  arise  where 
two  parties  should  attempt  to  organ- 
ize separately  under  the  same  charter. 
It  was  there  held  that  persons  elected 
officers  at  a  meeting  held  in  variance 
wth  such  statutory  direction  were 
directors  nevertheless,  and  were  sub- 
ject to  the  statutory  liability  for  cor- 
porate debts.  Where  three  persons 
are  appointed  to  make  a  call,  and  one 
of  them  calls  the  meeting  of  incorpo- 
ration, the  other  two  making  no  ob- 
jection, the  organization  of  the  com- 


pany at  the  meeting  so  called  is  valid, 
Walworth  v.  Brackett,  98  Mass.  98 
(1867)  ;  Hardenburgh  v.  Farmers',  etc. 
Bank,  3  N.  J.  Eq.  68  (1834),  holding 
that  if  the  call  for  the  meeting  to 
elect  the  first  directors  be  signed  by 
the  commissioners  authorized  to  make 
the  call  individually,  and  not  by  vir- 
tue of  a  formal  order  of  the  commis- 
sioners, or  if  their  names  be  signed 
to  such  a  call  by  the  secretary  with- 
out objection  by  them,  these  irregu- 
larities will  not  affect  the  validity  of 
the  proceedings  at  the  meeting. 

2  Busey  v.  Hooper,  35  Md.  15 
(1871). 

^  West  Koshkonong  Cong.  v.  Otte- 
sen,  80  Wis.  62  (1891). 

*  Where  a  by-law  provides  that  spe- 
cial meetings  may  be  called  by  the 
president,  or  in  his  absence  by  the 
secretary,  on  application  made  by  ten 
members  in  writing,  the  directors 
may  call  a  special  meeting  without 
such  an  application.  Citizens'  Mut. 
F.  Ins.  Co.  V.  Sortwell,  90  Mass.  217 
(1864).  But  where  a  by-law  author- 
izes the  trustees  to  call  a  meeting,  a 
meeting  called  by  the  president  is  ir- 
regular. State  V.  Pettineli,  10  Nev. 
141  (1875).  When  the  by-laws  re- 
quire a  call  to  be  posted  in  writing, 
a  call  by  parol  is  insufficient.  Stevens 
V.  Eden  Meeting-house  Soc,  12  Vt.  688 
(1839).  The  manner  of  making  the 
call  may  be  prescribed  by  by-law  ;  and 
when  so  prescribed,  provided  the  by- 
law is  reasonable,  calls  made  in  that 
way  are  valid,  even  though  the  char- 
ter said  that  three  stockholders  might 


1743 


§  593.] 


STOCKHOLDERS     MEETINGS  —  CALLS. 


CH.  XXXVI. 


thority  to  call  a  stockholders'  meeting,  where  the  charter  provides  that 
stockholders'  meetings  may  be  called  by  the  board  of  directors  or  any 
three  stockliolders.^  The  officers  or  agents  of  a  corporation  whose  duty 
it  is  to  call  meetings  may,  in  case  they  neglect  or  refuse  to  issue  the  call, 
be  compelled  by  mandamus  to  call  a  meeting  at  the  instance  of  a  stock- 
holder.^   Courts  have  no  power  to  call  corporate  meetings  except  by 


call   a  meeting.     Taylor   v.   Griswold, 
14  N.  J.  L.  222  (1834). 

1  Matthews  v.  Columbia  Nat.  Bank, 
79  Fed.  Rep.  558  (1897). 

2  People  V.  Cummings,  72  N.  Y.  433 
(1878) ;  State  v.  Wright,  10  Nev.  167 
(1875) ;  People  v.  Governors  of  Al- 
bany Hospital,  61  Barb.  397  (1871); 
McNeely  v.  Woodruff,  13  N.  J.  L.  352 
(1833) ;  Regina  v.  Aldham,  etc.  Soe., 
6  Eng.  L.  &  Eq.  365  (1851).  Where 
an  Arizona  corporation  has  no  place 
of  business  or  ofSce  or  property  or 
business  in  Arizona,  but  has  appointed 
a  person  on  whom  service  may  be 
made,  stockholders  may  obtain  manda- 
mus, calling  a  corporate  meeting  which 
has  not  been  held,  and  service  may  be 
on  the  resident  agent  and  by  mail 
on  the  non-resident  board  of  directors, 
and  if  they  do  not  appear  the  court 
may  appoint  a  commissioner  to  hold 
the  stockholders'  meeting  and  direct 
him  to  give  notice  to  the  stockholders, 
and  such  an  election  is  valid.  Poto- 
mac Oil  Co.  V.  Dye,  14  Cal.  App.  674 
(1911).  Mandamus  lies  at  the  in- 
stance of  stockholders  to  compel  the 
holding  of  the  annual  election,  the 
officers  having  failed  and  refused  to 
call  a  meeting  for  that  purpose,  and 
even  though  the  court  decides  that 
they  are  only  de  facto  directors,  yet 
the  court  may  require  the  holding 
of  an  election.  The  defendants  may 
be  the  corporation  itself  and  the  de 
facto  officers.  O'Hara  v.  Williamstown, 
etc.  Co.,  133  Ky.  828  (1909).  Even 
though  a  Wisconsin  corporation  owns 
a  majority  of  the  stock  of  another 
Wisconsin  corporation,  and  the  latter 
owns  nearly  all  the  stock  of  a  Maine 
corporation,  and  the  latter  operates 
a  telephone  system  in  Minnesota  and 
owns  a  majority  of  the  stock  of  another 
Wisconsin  corporation,  such  first- 
named  Wisconsin  corporation  cannot 
maintain   a    mandamus   in   Minnesota 

17 


to  compel  the  secretary  of  the  second 
corporation  to  call  a  meeting  of  the 
stockholders  to  vote  on  an  amendment 
to  the  charter  and  for  other  purposes, 
both  parties  being  foreign  corporations.  ,  / 
State  V.  De  Groat,  109  Minn.  168  *^ 
(1909).  Mandamus  or  a  mandatory 
injunction  lies  to  compel  a  corporation 
to  transfer  stock  and  hold  an  election 
of  officers.  Sheppard  v.  Rockingham, 
etc.  Co.,  150  N.  C.  776  (1909). 
Under  the  English  statute  it  is  a  penal 
offense  punishable  by  a  fine  of  not 
over  £50  for  the  directors  or  other 
corporate  officers  not  to  call  a  stock- 
holders' meeting  during  the  year,  and 
there  is  a  fine  of  not  over  £5  for  every 
day  for  not  filing  a  list  of  the  stock- 
holders, addresses,  etc.,  within  a  cer- 
tain time  after  such  meeting.  Park 
V.  Lawton,  [1911]  1  K.  B.  588.  Man-  k- 
damus  does  not  lie  in  Ohio  to  compel  the 
officers  of  an  Arizona  corporation  to  call 
the  annual  stockholders'  meeting. 
State  V.  Mining  Co.,  32  Ohio  Ct. 
60  (1910).  Where  an  election  has  not 
been  held  at  the  proper  time,  as 
required  by  statute,  a  stockholder 
may  by  mandamus  compel  the 
directors  to  call  a  meeting  for 
that  purpose,  a  request  to  that 
effect  having  been  first  made  to  the 
board  of  directors.  Sylvania,  etc. 
R.  R.  V.  Hoge,  29  Ga.  734  (1907).  A 
mandamus  to  compel  the  calling 
of  a  meeting  of  the  stockholders 
to  elect  directors  should  be  against 
the  board  of  directors  and  not  against 
the  president  and  secretary.  Dusen- 
bury  V.  Looker,  110  Mich.  58  (1896). 
Mandamus  lies  to  compel  the  calling 
of  a  special  stockholders'  meeting 
in  accordance  with  the  by-laws.  Bas- 
sett  V.  Atwater,  65  Conn.  355  (1895). 
The  court  will  not  order  the  directors 
to  call  a  meeting  for  business  other 
than  an  election  when  they  or  a 
certain  proportion  of  the  stockholders 
44 


CH.  XXXVI.] 


stockholders'   meetings  —  CALLS. 


593. 


mandamus}  But  where  the  minority  have  a  right  to  cumulate  their 
votes,  and  the  majority  adjourn  the  annual  election  for  the  sole  purpose 
of  continuing  in  office  the  previous  directors,  the  minority  may  enjoin 
further  adjournments  and  may  compel  an  election  to  be  held,  and  may 
have  a  decree  that  the  hold-over  president  and  treasurer,  who  have 
been  re-elected  by  the  directors  after  a  new  election  should  have  been 
held,  are  not  re-elected  for  the  entire  year.- 

If  there  is  any  fraud  in  the  calling  of  the  meeting,  the  proceedings 
of  the  meeting  may  be  attacked  in  the  courts.  The  fraud  may  consist 
in  concealing  the  notice,^  or  in  changing  the  time  of  the  meeting,^  or  in 
misstating  the  business.^  A  court  of  equity  may  restrain  the  directors 
from  fixing  the  time  for  an  annual  meeting  at  a  date  when  many  mem- 
bers are  in  the  country,  the  purpose  being  to  prevent  them  from  exer- 
cising their  right  to  vote.® 


may  call  it.  MaeDougall  v.  Gardi- 
ner, L.  R.  10  Ch.  App.  606  (1875). 
In  Goulding  v.  Clark,  34  N.  H.  148 
(1856),  it  is  held  that,  where  there 
is  no  officer  competent  to  call  a 
meeting,  there  is  no  way  of  con- 
vening except  by  reorganization  of 
the  company  or  a  published  notice 
given  under  the  statutes.  All  the 
stockholders,  of  course,  could  convene 
and  thereby  waive  notice.  See  §  599, 
infra.  The  proper  officer  may  be  com- 
manded by  mandamus  to  send  out 
notices  of  the  annual  election.  People 
V.  Hart,  11  N.  Y.  Supp.  670,  673 
(1890).  Mandamus  lies  to  compel  a 
meeting  of  vestrymen.  People  v.  Wi- 
nans,  9  N.  Y.  Supp.  249  (1890).  Where 
those  who  have  the  right  to  call  a 
meeting  of  the  shareholders  refuse 
to  exercise  that  right,  for  the  express 
purpose  of  preventing  the  share- 
holders from  duly  assembling,  the  court 
wiU,  if  n^ecessary,  interfere  to  pro- 
tect the  shareholders  against  an  abuse 
of  power  on  the  part  of  those  intrusted 
with  the  management  of  the  affairs 
of  the  company.  Foss  v.  Harbottle, 
2  Hare,  461  (1843);  Isle  of  Wight 
R.  Co.  V.  Tahourdin,  L.  R.  25  Ch.  D. 
320  (1883).  Mandamus  lies  to  compel 
the  annual  election  of  the  entire 
body  of  directors  or  trustees.  Com- 
monwealth V.  Keim,  38  Leg.  Int. 
32  (1881);  People  v.  Fairbury,  51  111. 
149  (1869).  Dictum  that  mandamus 
lies  to  compel  election.  Re  Union  Ins. 
Co.,  22  Wend.  591  (1840). 


1  The  fact  that  foreclosure  proceed- 
ings are  pending  and  a  receiver  is  in 
possession  does  not  give  the  court 
jurisdiction  to  eaU  a  stockholders' 
meeting  to  hold  an  election.  Taylor 
I'.  Philadelphia,  etc.  R.  R.,  7  Fed.  Rep. 
381  (1881). 

2  West  Side  Hospital  of  Chicago  v. 
Steele,  124  lU.  App.  Rep.  534  (1906). 

^  See  §  596,  infra. 

*  In  a  stockholder's  suit  to  enjoin 
a  consolidation  the  court  will  consider 
the  legality  of  an  election,  the  time  of 
holding  which  was  illegally  changed 
by  the  board  of  directors.  Nathan  v. 
Tompk-ins,  82  Ala.  437  (1887). 

^  If  directors  convene  a  meeting  to 
pass  resolutions  favorable  to  them- 
selves on  questions  in  which  the  in- 
terests of  the  directors  are  opposed  to 
those  of  the  shareholders,  by  a  circu- 
lar which  is  misleading,  and  which 
contains  statements  calculated  to  ob- 
tain proxies  in  their  favor  without 
giving  the  shareholders  the  informa- 
tion necessary  to  enable  them  to  form 
a  just  judgment  as  to  who  are  the 
proper  persons  to  whom  to  intrust 
their  votes,  the  court  will  grant  an 
injunction  to  restrain  the  holding  of 
the  meeting  or  to  restrain  the  direc- 
tors from  laying  such  resolutions 
before  the  meeting.  Jackson  v.  Mun- 
ster  Bank,  13  L.  R.  Ir.  118  (1884). 

«  Cannon  v.  Trask,  L.  R.  20  Eq.  669 
(1875).  A  majority  of  the  board  of 
directors  cannot  lengthen  their  term 
of  office  by  shortening  the  time  of  the 


(110) 


1745 


§  594.] 


STOCKHOLDERS     MEETINGS  —  CALLS. 


[CH. 


§  594.  When  the  stockholders  are  entitled  to  notice  of  corporate 
meetings.  —  If  the  time  and  place  at  which  a  corporate  meeting  is  to 
be  held  and  the  business  to  be  transacted  are  distinctly  fixed  in  the 
charter  or  by  a  by-law,  this  is  of  itself  sufficient  notice  to  all  the  stock- 
holders, and  no  further  call  or  notice  of  that  meeting  is  necessary,  un- 
less the  charter  or  by-laws  require  it.^  But  an  annual  meeting  of  the 
stockholders  has  no  power  to  change  the  by-laws  by  increasing  the  num- 
ber of  directors,  where  no  notice  of  such  proposed  change  was  given, 
the  change  itself  being  of  vital  importance  and  outside  the  usual  busi- 
ness transacted  at  an  annual  meeting.^  A  by-law  which  fixes  the  day 
of  meeting  without  also  fixing  the  hour  and  place  is  insufficient  as  a 
notice  of  the  meeting.^    And  it  is  a  general  and  settled  rule  of  law  that 


annual  meeting  of  the  stockholders, 
in  violation  of  the  stockholders' 
by-laws,  so  that  the  election  is  held 
when  they  control  the  stock.  Nathan 
V.  Tompkins,  82  Ala.  437  (1887). 

1  Warner  v.  Mower,  11  Vt.  385,  393 
(1839) ;  State  v.  Bonnell,  35  Ohio  St. 
10,  15  (1878).  If  the  charter  or  by- 
laws of  a  corporation  fix  the  time  and 
place  at  which  regular  meetings  shall 
be  held,  this  is  itself  sufficient  notice 
to  stockholders,  and  no  further  notice 
is  necessary.  Morrill  v.  Little  Falls 
Mfg.  Co.,  53  Minn.  371  (1893).  No- 
tice of  the  time  and  place  of  a  stock- 
holders' meeting  must  be  given  unless 
the  stockholders  are  present  in  person 
or  by  proxy,  or  unless  the  time  and 
place  are  fixed  by  statute,  charter,  or 
usage.  HiU  v.  Atlantic,  etc.  R.  R., 
143  N.  C.  539  (1906).  As  to  whether 
notice  is  necessary  of  the  annual 
meeting,  where  the  corporation  has 
long  been  defunct,  see  Morrill  v. 
Little  FaUs  Mfg.  Co.,  60  Minn.  405 
(1895).  Where  the  by-laws  fix  the 
time  and  place  for  the  annual  meet- 
ing no  notice  is  necessary,  and  even  if 
a  notice  was  misleading,  yet  if  a  ma- 
jority met  and  elected  a  trustee,  a 
suit  instituted  by  the  corporation 
under  control  of  such  trustee  is  legally 
instituted.  Jones  v.  Hilldale,  etc. 
Soc,  65  S.  W.  Rep.  838  (Ky.  1901). 
Where  the  by-laws  of  a  membership 
corporation  not  having  any  capital 
stock,  state  the  regular  time  and  place 
for  the  annual  meeting  for  election, 
no  other  notice  to  the  members  is 
necessary.     Matter  of  New  York,  etc. 


Union  r.  Sullivan,  122  N.  Y.  App.  Div. 
764  (1907).  Where  the  day  fixed  by 
the  by-laws  for  the  meeting  of  the 
board  of  directors  is  on  a  holiday,  the 
meeting  cannot  be  held  the  next  day, 
no  notice  being  given  and  no  adjourn- 
ment taken,  and  hence  an  assessment 
on  stock  levied  at  such  a  meeting  is 
not  binding  and  a  sale  for  non-pay- 
ment may  be  set  aside.  Cheney  v. 
Canfield,  158  Cal.  342  (1910).  Notice 
need  not  be  given  of  the  time,  of  the 
meeting  of  the  board  of  directors  where 
it  is  specified  in  the  by-laws.  Seal 
of  Gold  Mining  Co.  v.  Slater,  161  Cal. 
621  (1911). 

2  Bagley  v.  Reno,  etc.  Co.,  201  Pa. 
St.  78  (1902). 

3  The  fact  that  one  of  the  by-laws 
of  the  corporation  fixes  the  day  upon 
which  the  annual  meeting  of  the  cor- 
poration shall  be  held  is  not  of  itself 
a  sufficient  notice  of  the  hour  and 
place  at  which  the  meeting  is  to  be 
held.  There  must  be  an  express 
notice  of  the  hour  and  place  of  meet- 
ing. Otherwise,  unless  all  the  stock- 
holders are  present  and  consent, 
either  in  person  or  by  proxy,  the 
meeting  cannot  legally  be  held.  San 
Buenaventura,  etc.  Co.  v.  V^issault,  50 
Cal.  534  (1875).  Though  the  by-laws 
of  a  corporation  fix  the  date  of  the 
annual  meeting,  that  of  itself  will  not 
be  notice  of  the  meeting.  Notice  must 
be  given  of  the  place  of  the  meeting ; 
and  a  provision  of  the  charter  for  the 
calling  of  all  meetings  is  a  mandatory 
provision,  applicable  alike  to  general 
and     special     meetings.      U.     S.      v. 


1746 


CH.   XXXVI 


STOCKHOLDERS     MEETINGS 


CALLS. 


[§  595. 


notice,  in  some  way  or  other,  must  be  given  to  every  person  entitled  to 
be  present  at  a  corporate  meeting.^  When,  therefore,  no  sufficient 
notice  is  given  by  charter  or  statute  or  by-law,  each  stockholder  is  en- 
titled to  an  express  notice  of  every  corporate  meeting.^  No  usage  can 
operate  to  excuse  a  failure  to  give  such  a  notice.^  These  rules  are 
based  on  the  necessity  of  protecting  the  rights  of  stockholders,  and  es- 
pecially of  the  minority.  A  stockholder  who  takes  part  in  a  meeting 
cannot  raise  the  objection  that  other  stockholders  were  not  notified 
of  the  meeting.'' 

§  595.  The  essential  elements  of  a  notice  of  a  meeting  are  time, 
place,  and  business.  —  The  contents  of  the  notice  depend  upon  the 
character  of  the  meeting.  There  are  three  matters  concerning  every 
corporate  meeting  of  which  the  members  are  entitled  to  notice,  namely : 
the  time,  the  place,  and  the  business  proposed  to  be  transacted.  Some 
or  all  of  these  may  be  known  to  him  by  virtue  of  a  charter  provision  or 
a  by-law  or  a  statute.  But  if  any  one  of  them  is  not  known  in  that 
way,  the  stockholders  are  entitled  to  an  actual  notice  thereof.  Accord- 
ingly, it  is  the  rule  that,  in  the  absence  of  other  valid  notice,  the  call 
must  specify  the  time  and  place  of  meeting  and  the  business  to  be  con- 


McKelden,  11  MacArthiir  &  M.  162 
(D.  C.  1879). 

1 .' '  To  support  the  validity  of  corpo- 
rate acts,  each  member  must  be  actu- 
ally summoned."  Angell  &  Ames, 
Corp.,  §  492.  A  member  who  is 
expelled  at  a  meeting  of  which  he  had 
no  notice  may  cause  the  proceedings 
to  be  set  aside.  Medical,  etc.  Soc.  v. 
Weatherly,  75  Ala.  248  (1883).  ."Due 
notice  of  the  time  and  place  of  a 
corporate  meeting  is,  by  the  English 
law,  essential  to  its  validity,  or  its 
power  to  do  any  act  which  shall  bind 
the  corporation."  Dillon,  Mun.  Corp., 
§  200.  Where  persons  desirous  of 
carrying  on  a  berry-packing  business 
try  to  do  so  by  holding  an  election  of 
an  existing  corporation  and  voting 
themselves  into  office,  but  the  elec- 
tion was  illegal  on  account  of  some  of 
the  stockholders  not  being  notified, 
the  court  may  distribute  the  profits 
earned  by  these  indi\aduals  the  same 
as  though  they  had  formed  a  partner- 
ship. Smith  V.  Schoodoe,  etc.  Co.,  84 
Atl.  Rep.  268  (Me.  1912). 

2  Stow  V.  Wyse,  7  Conn.  214  (1828), 
the  court  saying,  in  a  dictum  :  "  If  no 
particular  mode  of  notifying  the  stock- 
holders   be    provided,    either    in    the 


charter  or  in  any  by-law,  yet  personal 
notice  might  be  given ;  and  this,  in 
such  ease,  would  be  indispensable." 
Wiggin  V.  Freewill  Baptist  Church,  49 
Mass.  301  (1844),  a  dictum;  Jackson 
I'.  Hampden,  20  Me.  37  (1841);  Rex 
t'.  Langhorn,  4  Ad.  &  El.  538  (1836) ; 
s.  c,  6  Nev.  &  M.  203  (1836) ;  Smyth 
V.  Darley,  2  H.  L.  Cas.  789  (1849),  the 
last  four  cases  being  municipal  corpo- 
ration cases.  See  also  Stebbins  v. 
Merritt,  64  Mass.  27  (1852),  where  a 
meeting  called  by  a  general  agent  in 
the  absence  of  a  statute  or  by-law  was 
upheld  though  one  member  was  men- 
tally incapable  of  receiving  notice. 
Even  though  every  stockholder  is  not 
notified  of  a  meeting  to  authorize  a 
mortgage,  yet  if  the  majority  authorize 
it  and  it  is  executed,  it  is  valid.  Drewry 
V.  Columbia,  etc.  Co.,  87  S.  C.  445 
(1911). 

^  Wiggin  I'.  Freewill  Baptist  Church, 
49  Mass.  301  (1844);  Rex  v.  Hill,  4 
Barn.  &  C.  426  (1825),  where  an 
ancient  custom  of  calling  a  meeting 
for  an  election  of  burgesses  by  ring- 
ing a  beU  was  held  not  to  be  siifficient 
notice. 

^  See  §  599,  infra. 


1747 


§  595.] 


STOCKHOLDERS     MEETINGS  —  CALLS. 


[CH.  XXXVI. 


sidered.  Although  the  time  of  a  meeting  is  fixed  by  charter,  never- 
theless the  meeting  may  be  held  at  a  subsequent  time  and  be  valid. ^ 
The  precise  hour  at  which  the  meeting  is  to  be  held  must  be  stated  in 
the  notice.^  Notice  of  a  meeting  mailed  according  to  a  by-law,  need 
not  be  dated  .^ 

In  general,  the  notice  need  not  specify  the  business  to  be  consid- 
ered where  the  meeting  is  one  prescribed  by  charter,  or  where  the 
business  is  prescribed  by  charter  or  statute  or  by-law,  and  no  other 
business  is  to  be  transacted.*  But  if  the  meeting  is  to  be  held  at  a 
time  not  provided  by  the  charter,  the  call  must  specify  particularly 
the  time  and  also  the  business ;  ^    and  the  better  rule  is  that,  where 


»  People  V.  Cummings,  72  N.  Y.  433 
(1878);  Hughes  v.  Parker,  20  N.  H. 
58  (1849).  Elections  need  not  be  held 
on  the  day  fixed  by  the  by-laws.  They 
may  be  held  at  any  subsequent  time. 
Beardsley  v.  Johnson,  121  N.  Y.  224 
(1890),  aff'g  s.  c,  1  N.  Y.  Supp.  608 
(1888). 

2  San  Buenaventura,  etc.  Co.  v.  Vas- 
sault,  50  Cal.  534  (1875). 

3  Clark  V.  Wild,  81  Atl.  Rep.  536 
(Vt.   1911). 

■*  Quoted  and  approved  in  Bagley  v. 
Reno,  etc.  Co.,  201  Pa.  St.  78  (1902). 
Notice  need  not  be  given  of  special 
business  to  be  transacted  at  the  regu- 
lar annual  meeting  of  the  stock- 
holders. Chicago,  etc.  Ry.  v.  Union 
Pac.  Ry.,  47  Fed.  Rep.  15  (1891); 
Sampson  v.  Bowdoinham  Steam  Mill 
Co.,  36  Me.  78  (1853),  holding  that 
the  notice  of  the  annual  meeting 
need  not  specify  that  the  officers  are 
to  be  elected,  even  though  the  by- 
laws require  the  notice  to  state  the 
business;  Warner  v.  Mower,  11  Vt. 
385  (1839),  where  a  provision  of  the 
by-laws  relating  to  notices  was  con- 
sidered as  not  affectiag  those  for  stated 
meetings,  and  holding  that  a  notice 
of  a  stated  annual  meeting  need  not 
specify  the  business  to  be  transacted, 
there  being  nothing  in  the  by-laws 
limiting  or  specifying  the  business.  It 
is  believed,  however,  that  the  rights 
of  stockholders  will  be  best  preserved 
by  requiring  notice  to  be  given  of  any 
extraordinary  business  that  may  come 
before  an  annual  meeting. 

6  Re  Bridport  Old  Brewery  Co.,  L.  R. 
2  Ch.   191    (1866) ;    Re  Silkstone    Fall 


Colliery  Co.,  L.  R.  1  Ch.  D.  38  (1875). 
Cf.  Wright's  Case,  L.  R.  12  Eq.  335, 
n.,  345,  n.  (1868) ;  Tuttle  v.  Michigan 
Air  Line,  35  Mich.  247  (1877),  holding 
that    at    common   law   all   notices    of 
meetings    for    special    or    exceptional 
purposes   were  required    to   state   the 
object  of  the  call.     Citing  Ang.  &  A., 
Corp.,    §  492.     A  meeting  to  organize 
and   elect   directors   is   invalid   where 
no    notice   of    the    business    is    given. 
Re  London,  etc.  Co.,  L.  R.  31  Ch.  D. 
223  (1885) ;  Shelby  R.  R.  Co.  v.  Louis- 
ville,  etc.   R.   R.,   12  Bush   (Ky.),  62 
(1876),  in  which  a  sale  of  a  railroad 
was   set   aside   because   authorized   at 
a   meeting   of   stockholders   called   by 
a  notice  not  sufficient  in  point  of  time, 
and  defective  in  not  stating  the  object 
of  the  meeting  ;  Zabriskie  v.  Cleveland, 
etc.  R.  R.,  23  How.  381,  400  (1859), 
holding   that,   though   the  notice  was 
insufficient,   yet   one   who   was   repre- 
sented by  proxy  cannot  object,  espe- 
cially where  he  delayed  a  long   time 
in  complaining.     A  notice  of  a  meet- 
ing of  a  benevolent  society  called  to 
dissolve  must  state  the  object  of  the 
meeting.     St.    Mary's,    etc.    Assoc,    v. 
Lynch,  64  N.  H.  213  (1886).     A  reso- 
lution   passed     at     an    extraordinary 
meeting,  upon  a  matter  for  the  con- 
sideration of  which  it  was  not  avow- 
edly called,  or  which  was  not  specified 
in  the  notice  convening  the  meeting, 
is  altogether  inoperative.     Imp.  Bank 
of  China  v.  Bank  of  Hindustan,  L.  R. 
6    Eq.    91    (1868) ;    Anglo-Californian 
Gold  Min.   Co.   v.   Lewis,  6  H.  &  N. 
174  (1860) ;  Stearic    Acid  Co.,    9  Jur. 
(N.    S.)    1066    (1863).     Notice    of    a 


1748 


CH.  XXXVI. 


STOCKHOLDERS     MEETINGS  —  CALLS. 


[§  595. 


unusual  business  is  to  be  transacted,  even  at  a  regular  meeting,  the 
notice  of  that  meeting  should  state  the  unusual  business.^  Thus, 
at  a  meeting  called  to  alter  the  by-laws  and  transact  other  business, 
an  election  cannot  lawfully  be  held.-  Nor  can  an  assessment  be  levied 
at  a  special  meeting  when  the  stockholders  were  not  duly  notified  that 
that  matter  would  come  up  for  consideration.^  A  notice  of  a  meeting 
to  increase  stock  need  not  specify  what  the  money  is  to  be  used  for.^ 
\Miere  a  special  meeting  is  called  to  rescind  the  by-laws  and  adopt 
others  in  their  place,  the  notice  of  the  meeting  may  state  that  a  copy 
of  the  proposed  by-laws  can  be  inspected  at  the  company's  office  and 
will  be  submitted  at  the  meeting.^  At  a  special  meeting  which  has  been 
called  for  a  particular  purpose,  only  the  business  specified  in  the  call 
can  lawfully  be  transacted.^    The  transaction,  however,  of  business 


meeting  to  consider  the  giving  of  a 
mortgage  is  sufficient  to  enable  the 
meeting  to  authorize  a  mortgage. 
Evans  v.  Boston  Heating  Co.,  157 
Mass.  37  (1892).  One  and  the  same 
meeting  may  be  both  ordinary  and 
extraordinary ;  ordinary  for  the  pur- 
pose of  transacting  the  usual  business 
of  the  company,  and  extraordinary 
for  the  transaction  of  some  particular 
business  of  which  special  notice  may 
have  been  given.  See  Cutbill  v. 
Kingdom,  1  Exeh.  494  (1847) ;  Graham 
V.  Van  Diemen's  Land  Co.,  1  H.  & 
N.  541  (1856). 

'  An  annual  meeting  of  the  stock- 
holders has  no  power  to  change  the 
by-laws,  increasing  the  number  of 
directors,  where  no  notice  of  such  pro- 
posed change  was  given,  the  change 
itself  being  of  vital  importance  and 
outside  of  the  usual  business  trans- 
acted at  an  annual  meeting.  Bagley 
f;.  Reno,  etc.  Co.,  201  Pa.  St.  78  (1902), 
citing  the  above  text.  The  annual 
meeting  cannot  vote  an  increase  of 
the  capital  stock  unless  special  notice 
of  that  business  has  been  given,  even 
though  the  by-laws  provide  that  any 
business  may  be  transacted  at  the 
annual  meeting  without  special  notice ; 
the  statute,  however,  prescribing  that 
an  increase  of  capital  stock  may  be  at 
"any  meeting  called  for  the  purpose." 
Jones  V.  Concord,  etc.  R.  R.,  67  N.  H. 
234  (1892).  By  custom  anj'  business 
may  be  transacted  at  the  annual  meet- 
ing without  special  notice  thereof 
being  given,  but  any  specific  restric- 


tion as  to  any  particular  business 
modifies  such  rule.  Mutual  F.  Ins. 
Co.  V.  Farquhar,  86  Md.  668  (1898). 
A  consolidated  company  may  main- 
tain a  suit  against  a  director  of  one 
of  the  constituent  companies  for 
fraudulently,  at  the  time  of  consolida- 
tion, causing  an  issue  of  a  large  amount 
of  stock  to  him  out  of  the  treasury 
stock  for  past  services,  which  stock  was 
thereupon  exchanged  for  stock  in  the 
constituent  company,  especially  where 
such  director  as  trustee  of  the  treasury 
stock  of  both  companies  controlled 
them  and  voted  such  stock  for  the  con- 
solidation, and  also  voted  proxies 
obtained  on  a  notice  of  the  meeting, 
which  did  not  state  that  his  compen- 
sation was  to  be  voted  upon.  United, 
etc.  Co.  t'.  Smith,  44  N.  Y.  Misc.  Rep. 
567  (1904). 

2  People's  Ins.  Co.  v.  Westcott,  80 
Mass.  440  (1860).  Nor  an  amotion 
made.  Rex  v.  Liverpool,  2  Burr.  723 
(1759) ;  Rex  v.  Doneaster,  2  Burr. 
738  (1759). 

'  Atlantic  De  Laine  Co.  v.  Mason, 
5  R.  I.  463  (1858). 

*  Jones  V.  Concord,  etc.  R.  R.,  67 
N.  H.  119  (1891)  ;  s.  c.  67  N.  H,  234. 

^  Young  V.  South  African,  etc. 
Synd.,  [1896]  2  Ch.  268.  Although  a 
notice  of  a  corporate  meeting,  and 
proxies  given  for  a  corporate  meeting, 
add  to  the  name  of  the  corporation 
the  place  where  it  is  located,  this  is 
immaterial.  Langan  v.  Francklyn,  20 
N.  Y.  Supp.  404  (1892). 

«  Warner  v.  Mower,  11  Vt.  385  (1839). 


1749 


§  595.] 


STOCKHOLDERS     MEETINGS 


CALLS. 


[CH.   XXXVI. 


other  than  that  for  which  the  meeting  was  called  will  not  invalidate  the 
entire  proceedings  at  that  meeting.  There  is  only  an  invalidity  pro 
tanto}  The  notice  of  a  special  meeting  to  elect  directors  must  state 
that  purpose.^  Even  though  the  annual  meeting  is  held  later  than  the 
time  fixed  in  the  by-laws,  yet  it  is  not  necessary  in  the  notice  to  call  it 
a  special  meeting.^ 

The  notice  of  the  business  to  be  transacted  must  "  be  a  fair  notice, 
intelligible  to  the  minds  of  ordinary  men.  .  .  .  The  court  does  not 
scrutinize  these  notices  with  a  view  to  excessive  criticism  to  find  out 
defects,  but  it  looks  at  them  fairly."  ^  An  explanatory  circular  accom- 
panying a  notice  may  be  considered  a  part  of  it.'^     Where  the  directors 


1  Re  British  Sugar  Ref.  Co.,  3  Kay 
&  J.  408,  413  (1857);  Re  Irrigation 
Co.  of  France,  L.  R.  6  Ch.  176  (1871). 
But  it  is  held  that  at  a  special  meeting, 
all  the  members  being  present  and  con- 
senting, business  other  than  that 
specified  in  the  call  may  lawfully 
be  transacted.  Rex  v.  Theodorick,  8 
East,  543  (1807). 

2  Dunster  v.  Bernards,  etc.  Co.,  65 
Atl.  Rep.  123  (N.  J.  1906). 

^  Paringa  Mines,  Ltd.  v.  Blair, 
[1906]  22  Ch.  193. 

■*  Henderson  v.  Bank  of  Austral- 
asia, 62  L.  T.  Rep.  869  (1890),  reversed 
on  another  point  in  L.  R.  45  Ch.  D. 
330;  South  School  District  v.  Blakes- 
lee,  13  Conn.  227  (1839).  A  notice 
that  in  case  certain  things  happen  a 
meeting  will  be  held  is  not  good.  It 
is  conditional  and  not  absolute.  Alex- 
ander V.  Simpson,  L.  R.  43  Ch.  D.  139 
(1889).  Where  one  company  buys  out 
another,  the  former  may  agree  to  pay 
a  certain  sum  to  the  directors  and  sec- 
retary of  the  latter  "as  compensation 
for  loss  of  office."  This  agreement 
is  legal  if  the  stockholders  of  the  sell- 
ing company  ratify  the  same.  The 
notice  of  a  meeting  of  the  stock- 
holders, however,  to  ratify  such  an 
agreement  must  specify  such  pay- 
ment, in  addition  to  stating  that  the 
object  of  the  meeting  is  to  ratify  the 
agreement  generally.  A  circular  sub- 
sequently sent  to  the  stockholders 
referring  to  the  payment  to  the  direc- 
tors and  secretary  is  not  sufficient, 
even  though  it  was  sent  before  the 
meeting  was  held.  Kaye  v.  Croydon, 
etc.  Co.,  [1898]  1  Ch.  358.     A  resolu- 


tion relative  to  directors'  pay  passed 
at  a  special  stockholders'  meeting 
may  differ  from  the  resolution  speci- 
fied in  the  notice  of  the  meeting ;  but 
if  the  meeting  adjourns  and  such 
resolution  is  confirmed  at  the  adjourned 
meeting,  it  must  not  differ  from  the 
resolution  as  first  passed.  Torbock  v. 
Lord  Westbury,  [1902]  2  Ch.  871. 
Where  the  by-laws  provide  that  they 
can  be  amended  only  after  notice  to 
the  shareholders  of  the  general  nature 
of  the  amendment,  it  is  insufficient 
to  merely  state  in  the  notice  that  new 
by-laws  are  to  be  adopted,  copies  of 
which  can  be  seen  at  the  office  or  will 
be  sent  to  those  who  apply  therefor, 
it  appearing  that  the  new  by-laws 
provided  for  compensating  retiring 
directors  and  ratifying  past  compen- 
sations to  directors  and  increasing 
their  remuneration  and  appointing 
some  of  them  directors  for  life  and 
relieving  others  from  responsibility 
for  loss,  and  authorizing  the  borrow- 
ing of  S750,000.  Normandy  v.  Ind., 
etc.  Co.  Ltd.,  [1908]  1  Ch.  84.  Where 
the  by-laws  require  notice  of  any 
special  business  to  be  transacted  at 
the  annual  meeting,  the  court  may  con- 
sider the  notice  in  connection  with  the 
minute  book  of  the  meeting,  even 
though  the  by-laws  provide  that  the 
minute  book  shall  be  conclusive. 
Betts  &,  Co.  Ltd.  v.  MacNaghten, 
[1910]  1  Ch.  430. 

^  "There  is  no  inconvenience,  irreg- 
ularity or  impropriety  in  supplement- 
ing, as  is  often  done,  a  notice  by  an 
explanatory  circular ;  and  the  share- 
holder,    though    perhaps    strictly    he 


1750 


CH.  XXXVI. 


STOCKHOLDERS     MEETINGS 


CALLS. 


[§  596. 


think  it  wise  to  extend  the  business,  as  allowed  by  charter,  they  may  use 
the  funds,  machinery,  and  officers  of  the  company  to  circulate  their  rec- 
ommendations among  the  shareholders,  and  need  not  circulate  the 
opposing  arguments  of  dissenting  shareholders.^  A  notice  of  a  stock- 
liolders'  meeting  to  approve  of  the  sale  of  the  property  of  the  company 
for  stock  in  another  company  should  disclose  the  fact  that  the  directors 
of  the  selling  company  are  to  receive  a  personal  advantage  in  the  new 
company  for  underwriting  its  debentures,  if  such  is  a  part  of  the  agree- 
ment.^ Action  taken  at  a  stockholders'  meeting  not  legally  called  may 
be  ratified  at  a  subsequent  meeting  which  is  legally  called.^  In  a  meet- 
ing called  to  affirm  the  action  of  a  prior  meeting  such  action  may  be 
affirmed  in  part  and  rejected  in  part.'* 

§  596.  Service  of  the  notice.  —  If  the  particular  form  of  the  no- 
tice or  the  manner  in  which  it  shall  be  served  is  prescribed  by  char- 
ter or  by-law  or  by  statute,  the  notice  must  be  given  in  that  manner, 
unless  notice  is  waived  by  unanimous  consent ;  otherwise  all  the  pro- 
ceedings of  the  meeting  are  invalid.''  Under  a  statute  requiring  "  four- 
teen days'  public  notice  at  the  least  ...  by  advertisement,"  it  has 
been  held  that  fourteen  clear  days'  notice  must  be  given.®    The  New 


might  say,  'Why  trouble  me  with  the 
circular?  What  I  am  entitled  to  is  a 
notice,'  still  I  think  ought  fairly  to 
look  at  the  two  as  one  document,  and 
he  has  both  before  him  for  his  con- 
sideration." Tiessen  v.  Henderson, 
[1899]  1  Ch.  861. 

1  Campbell  v.  Australian,  etc.  Soc, 
99  L.  T.  Rep.  3  (1908). 

2  Tiessen  v.  Henderson,  [1899]  1  Ch. 
861. 

3  Hill  V.  Atlantic,  etc.  R.  R.,  143 
N.  C.  539  (1906). 

^  Re  Trench,  etc.  Co.  Ltd.,  [1900] 
1  Ch.  408. 

*  Shelbv  R.  R.  v.  Louisville,  etc. 
R.  R.,  12  Bush  (Ky.),  62  (1876),  where 
there  was  no  such  publication  as  was 
required  by  statute,  and  there  was 
BO  waiver ;  Tuttle  v.  Michigan  Air 
Line,  35  Mich.  247  (1877),  where  a 
consolidated  company  sued  a  sub- 
scriber to  stock  in  one  of  the  old  com- 
panies, and  he  defeated  the  action 
by  showing  that  the  statutory  notice 
of  the  proposed  consolidation  had  not 
been  given ;  Reilly  v.  Oglebay,  25 
W.  Va.  36  (1884),  where  a  notice  by  the 
secretary,  when  the  statute  required 
it  to  be  given  by  the  board  of  directors 
or    by    stockholders    holding    one    tenth 


of  the  capital,  was  held  insufficient, 
although  it  was  shown  that  he  had 
the  authority  from  stockholders  hold- 
ing the  required  amount  of  stock ; 
Stevens  v.  Eden  Meeting-house  Soc, 
12  Vt.  688  (1839),  holding  that,  where 
a  by-law  required  notice  to  be  posted, 
parol  proof  of  such  posting  was  incom- 
petent unless  the  written  notice  was 
shown  to  have  been  lost ;  Swansea 
Dock  Co.  V.  Levien,  20  L.  J.  (Exch.) 
447  (1851),  where  a  notice  was  held 
bad  because  the  statute  declared  it 
should  be  printed  in  a  newspaper 
circulating  in  the  district  of  the  prin- 
cipal place  of  business,  while  in  this 
case  there  was  no  proof  that  the  paper 
selected  ever  circulated  there.  Hence 
the  removal  of  directors  at  such  a 
meeting  was  illegal.  Swansea  Dock 
Co.  V.  Levien,  20  L.  J.  (Exch.)  447 
(1851).  As  to  waiver,  see  §  599,  infra, 
6  Re  Railway  Sleepers  Supply  Co., 
L.  R.  29  Ch.  D.  204  (1885),  holding 
that  where  by  statute  a  second  meet- 
ing to  confirm  the  action  of  a  first 
meeting  must  be  held  "at  an  interval 
of  not  less  than  fourteen  days,"  both 
of  the  days  on  which  the  meetings 
were  held  must  be  excluded ;  Reg.  v. 
Aberdare   Canal   Co.,    14    Q.    B.    854 


1751 


§  596.] 


STOCKHOLDERS     MEETINGS  —  CALLS. 


[cH.  XXXVI. 


York  statutes,  on  the  contrary,  exclude  the  day  of  pubUcation  and  in- 
clude the  day  of  the  event.^  Where  notice  of  a  meeting  is  not  mailed 
thirty  days  before  the  meeting,  as  required  by  the  by-laws,  a  stockholder 
who  does  not  attend  may  have  an  election  held  at  such  meeting  set 
aside,  even  though  his  vote  would  not  have  changed  the  result.  He  is 
entitled  to  be  present  to  argue  with  the  other  stockholders,  or  to  buy 
their  stock,  if  he  can  and  wishes  to  do  so.  The  fact  that  his  attorney 
at  law  was  present  is  immaterial,  no  proxy  having  been  given.^  In  the 
absence  of  an  express  provision  as  to  the  manner  of  serving  a  notice  of  a 
meeting,  it  is  the  common-law  rule  that  each  member  of  the  corporation 
is  entitled  to  notice,  either  personal  or  by  a  writing,  actually  received.^ 
Notice  of  a  call  for  the  payment  of  a  subscription  must  be  served  per- 
sonally, and  service  by  mail  is  insufficient,  unless  the  by-laws  authorize 
service  in  that  manner.*  The  physical  or  mental  incapacity  of  one  of 
the  stockholders  will  not  excuse  a  failure  to  give  him  notice  of  a  meeting ; 
but  it  is  very  clear  that  the  meeting  may  lawfully  convene  and  transact 
business,  although  one  of  the  members  is  incapable,  by  reason  of  im- 
becility, of  receiving  the  notice.^  The  absence  of  a  stockholder  from 
home  does  not  excuse  a  failure  to  leave  the  notice.^  And  where  one  of 
the  stockholders  dies  after  notice  of  a  meeting,  but  before  the  meeting 


(1850),  holding  that  where  notice  must 
be  published  "at  least  sixteen  days 
before  such  meeting"  in  condemna- 
tion proceedings,  a  notice  published 
January  27th  for  a  meeting  February 
12th  was  insufficient ;  Reg.  v.  Justices 
of  Shropshire,  8  Ad.  &  E.  173  (1838), 
not  a  corporation  case,  but  holding 
that  notice  of  appeal  to  be  "fourteen 
days  at  least"  before  the  opening  day 
must  be  fourteen  days  exclusive  of 
the  day  of  serving  notice  and  of  the 
day  of  the  event.  To  same  effect, 
Norton  v.  Salisbury  Town  Clerk,  4 
C.  B.  32  (1846).  A  notice  for  four 
weeks  successively,  once  a  week,  next 
preceding  the  time,  requires  publica- 
tion for  four  full  weeks  once  a  week, 
and  such  publication  must  begin  four 
weeks  next  before  such  time,  and  four 
full  weeks  must  elapse  between  the 
first  publication  and  such  time.  Hodge 
V.  United  States  Steel  Corp.,  64  N.  J. 
Eq.  807    (1903). 

1  L.  1892,  ch.  677,  §  27 ;  Code  Civ. 
Proc,  §  787. 

2  Matter  of  Keller,  116  N.  Y.  App. 
Div.  58  (1906). 

^  Notice  to  non-residents  by  letter 


Was  upheld  in  Stebbins  v.  Merritt,  64 
Mass.  27  (1852).  For  dicta  to  the 
effect  that  the  notice  must  be  per- 
sonal, see  Tuttle  v.  Michigan  Air  Line, 
35  Mich.  247  (1877);  Stow  v.  Wyse, 
7  Conn.  214  (1828).  See  also  §  713a, 
infra,  as  to  the  kind  of  notice  required 
of  directors'  meetings.  See  also  §  594, 
supra,  and  notes. 

^  North,  etc.  Co.  v.  Bishop,  103  Wis. 
492  (1899). 

5  Stebbins  v.  Merritt,  64  Mass.  27 
(1852). 

^  Jackson  v.  Hampden,  20  Me.  37 
(1841).  In  Porter  v.  Robinson,  30 
Hun,  209  (1883),  it  is  held  that  notice 
need  not  be  given  to  a  member  of  a 
board  of  school  trustees,  the  board 
being  a  body  corporate,  who  is  absent 
from  the  state  and  cannot  attend  the 
meeting,  and  that  a  failure  to  notify 
such  a  member  will  not  render  the 
proceedings  at  the  meeting  irregular 
or  invalid.  Members  of  English  joint- 
stock  companies  residing  abroad  are 
not  entitled  to  any  notice  of  corporate 
meetings.  Re  Union  Hill  Silver  Co., 
22  L.  T.  Rep.  400  (1870). 


1752 


CH.  XXXVI.] 


STOCKHOLDERS     MEETINGS  —  CALLS. 


[§  597. 


convenes,  and  no  administrator  is  appointed  in  time  to  act  at  that 
meeting,  there  is  on  this  accomit  no  ground  to  impeach  the  regularity 
of  the  meeting.^  A  by-law  that  no  representative  of  a  deceased  stock- 
holder shall  have  a  right  to  notice  of  meetings,  unless  the  stock  has  been 
registered  in  his  name,  is  valid.-  Even  though  a  stockholder  has  died, 
the  corporation  may  continue  to  send  notices  to  him  at  his  registered 
address,  the  administrator  not  having  requested  a  change.^  It  has  been 
held  that  a  pledgee  of  shares  is  not  entitled  to  a  notice  of  corporate 
meetings  if  the  pledgor  receives  notice.^  Where  stock  is  owned  by  a 
firm,  notice  to  one  of  the  firm  is  sufficient.^  If  the  notice  is  fraudulently 
concealed  from  the  owner  of  a  majority  of  the  stock,  even  where  the 
notice  is  published  in  accordance  with  statute,  the  election  will  be  set 
aside. ^  The  expense  of  publishing  the  notice  of  a  special  stockholders' 
meeting  is  properly  chargeable  against  the  company.^ 

§  597.  Notice  must  he  served  a  reasonable  time  before  the  meet- 
ing. —  The  notice  must  be  served  upon  the  stockholders  at  such  time 
as  is  prescribed  by  the  statutes,  or  if  the  statutes  are  silent,  by  the  by- 
laws, or  if  both  are  silent  on  the  subject,  a  reasonable  time  before  the 
day  of  meeting.^     Even  though  a  notice  of  a  meeting  of  the  stock- 


1  Freeman's  Nat.  Bank  v.  Smith,  13 
Blatchf.  220  (1875) ;  s.  c,  9  Fed.  Cas. 
760. 

2  Allen  V.  Gold  Reefs,  etc.  Limited, 
[1900]  1  Ch.  656,  rev'g  [1899]  2  Ch. 
40. 

^  Dana  t'.  American,  etc.  Co.,  72 
N.  J.  Eq.  44  (1907). 

*  McDaniels  t-.  Flower  Brook  Mfg. 
Co.,  22  Vt.  274  (1850).  An  unre- 
corded pledgee  of  stock  is  not  entitled 
to  be  notified  of  proceedings  for  a  con- 
solidation with  another  company.  A 
corporation  is  not  liable  to  an  unre- 
corded pledgee  of  its  stock,  even  though 
a  consolidation  is  brought  about  and 
the  new  stock  issued  to  the  pledgor, 
thereby  depriving  the  pledgee  of  the 
value  of  the  stock  held  in  pledge,  the 
corporation  having  acted  in  good  faith. 
Cleveland  City  Ry.  v.  First  Nat.  Bank, 
68  Ohio  St.  582  (1903).  Even  though 
stock  standing  in  the  name  of  a  per- 
son belongs  to  another,  yet  if  the 
former  is  notified  of  a  meeting  no 
notice  need  be  sent  to  the  latter. 
Wright  V.  Tacoma,  etc.  Co.,  53  Wash. 
262  (1909). 

^  Kenton     Furnace,     etc.      Co.     v, 

McAlpin,  5  Fed.  Rep.  737,  747  (1880). 

*  Where,    in   addition   to   irregular- 


ities, the  notice  of  the  election  at  a 
deferred  day,  which  is  published  in 
accordance  with  the  charter,  is  con- 
cealed from  the  leading  stockholder, 
the  court  will  set  the  election  aside. 
Johnston  v.  Jones,  23  N.  J.  Eq.  216 
(1872). 

'  Lawyers',  etc.  Co.  v.  Consolidated, 
etc.  Co.,  187  N.  Y.  395  (1907).  The 
board  of  directors  may  at  the  expense 
of  the  corporation  publish  and  also 
issue  to  the  stockholders  notice  of  a 
proposed  scheme  of  consolidation  or 
for  an  exchange  of  the  stock  for  stock 
in  another  corporation,  even  though 
the  plan  is  not  consummated.  Ras- 
cover  V.  American,  etc.  Co.,  135  Fed. 
Rep.  341   (1905). 

8  Re  Long  Island  R.  R.,  19  Wend. 

37  (1837).     See  also  Covert  v.  Rogers, 

38  Mich.  363  (1878),  where  a  similar 
rule  is  declared  as  to  notice  to  direc- 
tors of  their  meetings.  The  legis- 
lature cannot  unreasonably  shorten 
the  time  of  the  next  meeting.  Cassell 
V.  Lexington,  etc.  Co.,  9  S.  W.  Rep. 
502  and  701  (Ky.  1888).  Where  by 
statute  it  is  provided  that  thirty  days' 
notice  shall  be  given  of  certain  corpo- 
rate meetings,  that  length  of  time 
may  apply  to  notices  of  other  meet- 


1753 


f  598,  599.] 


STOCKHOLDERS     MEETINGS 


CALLS. 


CH.  XXXVI. 


holders  in  an  English  corporation  is  so  short  as  not  to  reach  American 
stockholders  in  time  for  the  meeting,  yet  if  such  notice  was  in  accordance 
with  the  English  law  and  was  not  in  violation  of  the  charter  or  by-laws, 
it  is  legal, ^  Where  action  by  one  meeting  must  be  confirmed  by  another 
meeting,  notices  of  both  meetings  may  be  sent  out  at  the  same  time,  the 
second  to  be  contingent  upon  a  resolution  being  passed  by  the  first.^ 

§  598.  The  division  of  meetings  into  ordinary  and  extraordinary. 
—  Corporate  meetings  of  stockholders  are  frequently  divided,  both 
by  the  judges  and  the  text-writers,  into  two  classes  —  the  first  being 
special  or  extraordinary,  and  the  second  being  ordinary,  regular,  stated, 
or  general.  By  reason  of  this  attempt  at  classification  much  confusion 
has  been  introduced  into  the  law  without  any  corresponding  advantage. 
The  terms  employed  to  distinguish  the  various  kinds  of  meetings  are 
used  in  different  senses  by  different  writers,  so  that  it  is  difficult  to  define 
them  in  such  a  way  as  to  avoid  confusion.^ 

§  599.  Waiver  of  notice.  —  A  stockholder  may  expressly  or  by 
his  acts  waive  his  right  to  have  a  notice  of  a  corporate  meeting  duly 
served   upon   him.*    For   instance,   an   admission   at   a   stockholders' 


ings  of  the  same  corporation.  Shelby 
R.  R.  V.  Louisville,  etc.  R.  R.,  12  Bush 
(Ky.),  62  (1876). 

1  Republican,  etc.  Mines  v.  Brown, 
58  Fed.  Rep.  644  (1893),  rev'g  Brown 
V.  Republican,  etc.  Mines,  55  Fed. 
Rep.  7. 

2  Re  North,  etc.  Co.,  Ltd.,  [1905]  2 
Ch.  15,  rev'g  [1905]  1  Ch.  609. 

'  For  instance,  in  England,  all 
meetings  of  stockholders  are  called 
"general"  meetings,  and  are  either 
"  ordinary"  {i.e.,  regular)  or  "extraor- 
dinary" (i.e.,  special).  In  England 
the  same  meeting  may  be  both  ordi- 
nary and  extraordinary.  See  Lindley 
on  Companies,  pp.  425,  426  (6th  ed.). 

*  Quoted  and  approved  in  In  re 
Hammond,  139  Fed.  Rep.  898  (1905). 
The  acts  of  a  meeting  are  valid, 
though  held  without  notice,  if  all  are 
present  or  subsequently  ratify  and 
approve  of  the  action.  Stutz  v.  Hand- 
ley,  41  Fed.  Rep.  531  (1890) ;  affirmed 
as  to  this  point,  but  reversed  as  to 
others,  in  Handley  v.  Stutz,  139  U.  S. 
417  (1891).  A  party  accepting  the 
benefit  of  a  contract  for  a  long  time 
cannot  repudiate  it  on  the  ground 
that  the  calls  for  the  meetings  of  the 
executive  committee  and  of  the  stock- 
holders which  authorized  the  contract 


were  insufficient ;  nor  can  he  set  up 
in  such  a  case  that  the  directors  had 
not  authorized  the  contract.  Union 
Pac.  Ry.  V.  Chicago,  etc.  Ry.,  51  Fed. 
Rep.  309  (1892).  A  stockholder  who 
takes  part  in  a  meeting  cannot  after- 
wards object  that  it  was  not  properly 
called.  Weinburgh  v.  Union,  etc.  Co., 
55  N.  J.  Eq.  640  (1897).  Germer  v. 
Triple-State,  etc.  Co.,  60  W.  Va.  143 
(1906).  Objections  to  the  regularity 
of  the  notice  which  was  given  are 
waived  if  all  are  present  at  the  meeting 
and  do  not  object  to  such  irregularity. 
Stebbins  v.  Merritt,  64  Mass.  27 
(1852) ;  Richardson  v.  Vermont,  etc., 
44  Vt.  613  (1872),  holding  that  objec- 
tions to  the  proceedings  of  a  meet- 
ing called  by  a  notice  which  did  not 
state  what  its  object  was,  had  been 
waived  by  a  ratification  at  a  later 
meeting;  Jones  v.  Milton,  etc.  Turnp., 
7  Ind.  547  (1856),  where  the  stock- 
holders not  notified  appeared  and  voted 
by  proxy ;  Kenton  Furnace  Co.  v. 
McAlpin,  5  Fed.  Rep.  737  (1880). 
See  also  §  606,  infra.  Where  several 
persons,  their  associates  and  succes- 
sors, are  declared  to  be  a  corporation, 
one  of  them  with  new  parties  may 
meet,  organize,  adopt  by-laws,  etc., 
without   the   capital   being   first   sub- 


1754 


CH.  XXXVI.]  stockholders'    meetings  —  CALLS.  [§  599. 

meeting  of  the  validity  of  a  claim  against  the  company  is  valid,  even 
though  the  meeting  was  not  called  in  accordance  with  the  statutes, 
it  not  appearing  that  any  stockliolder  has  ever  objected.^  Although 
a  stockholder  is  present  at  a  meeting  at  which  an  increase  in  capital 
stock  is  voted,  yet  he  may  object  thereto  on  the  ground  that  special 
notice  was  not  given  that  the  question  of  the  increase  would  be  voted 
on  at  that  meeting,  inasmuch  as  if  such  notice  had  been  given,  other 
stockholders  might  have  attended  and  changed  the  result.^  But  the 
court  will  refuse  to  set  aside  an  election  where  every  share  of  stock  was 
represented  at  the  election,  even  though  the  minority  refused  to  vote 
on  the  ground  that  the  meeting  had  been  called  on  less  than  ten  days' 
notice,  required  by  the  statute.^ 

Difficulty  as  to  waivers  has  been  encountered  where  by  statute  or  by 
charter  the  notice  must  be  published  or  must  be  given  a  specified  length 
of  time  before  the  meeting  is  held.  This  question  arises  often  in  regard 
to  the  first  and  organization  meeting  of  the  company,  or  in  regard  to  a 
meeting  to  increase  the  capital  stock,  or  to  issue  bonds,  or  to  give  a 
mortgage,  or  to  effect  a  consolidation.  The  rule,  however,  is  now  well 
established  that  such  statutory  notice  is  for  the  benefit  of  the  stock- 
holders themselves,  and,  if  they  waive  it,  the  meeting  and  all  the  pro- 
ceedings are  as  valid  as  they  would  be  had  the  full  statutory  notice  been 
given."* 

Participation  as  an  officer  in  issuing  the  call  is  a  waiver  by  him  of 

scribed    and    without    the    others,    if  168    (1898);   aff'd,    63   N.    J.    L.    357 

they     do     not     object.     McGinty     v.  (1899). 

Athol,  etc.  Co.,  155  Mass.  183  (1892).  <  Even  though  the  statute  requires 

Notice    may    be    waived.     People    v.  ten  days'   notice   of   the   organization 

Twaddell,  18  Hun,  427  (1879).     If  all  meeting  to  the  subscribers  to  the  capi- 

the  stockholders  are  present  or  repre-  tal   stock,    and    that   a   copy   of   such 

sented  at  a  meeting  a  defect  in  the  notice   be   included   in   the   report   to 

notice    is    immaterial.     Tompkins     v.  the  secretary  of  state,  yet  the  stock- 

Sperry,  etc.  Co.,  96  Md.  560  (1903).  holders  may  unanimously  waive   this 

A    stockholders'    meeting    held    under  provision.     Butler,  etc.  Co.   v.  Cleve- 

waivers   of   notice   is   legal.     Gray   v.  land,     220     111.     128     (1906).     Even 

Bloomington  &  N.  Ry.,  120  111.  App.  though  the  constitution  and  statutes 

159  (1905).  require    that    the    capital    stock    shall 

^  Clark  V.   Warwick,   etc.   Co.,    174  not     be     increased,     except     upon    a 

Mass.  4.34   (1899).  majority  vote  of  the  stockholders  at  a 

'  Jones  V.  Concord,  etc.  R.   R.,  67  meeting    called    for    the    purpose,    on 

N.  H.  119  (1891);  aff'd,  67  N.  H.  234  sixty    days'    public    notice,    yet    the 

(1892).     A    stockholder    who    attends  stockholders  may  unanimously  waive 

a    meeting    cannot    object    to    a    sale  such  notice  and  the  expiration  of  such 

authorized    at    such    meeting    on    the  time.     State    v.    Cook,    178   Mo.    189 

ground  that  the  notice  of  the  meeting  (1903).     If   all    the    stockholders    are 

did    not    mention    it,    where   his   only  present   in   person   or   by   proxy   at   a 

objection  at  the  meeting  was  the  price,  meeting,  the  statutory  publication  of 

Smith   V.    Stone,    128   Pac.    Rep.    612  notice     of     the     meeting     is     thereby 

(Wyo.   1912).  waived.     In  re  Mathiason  Mfg.   Co., 

3 /n  re  Griffing  Iron  Co.,  63  N.  J.  L.  122    Mo.    App.    437    (1907).     A   con- 

1755 


§  599.] 


STOCKHOLDERS     MEETINGS  —  CALLS. 


[CH.  XXXVI. 


informalities  as  to  that  call ;  ^  and  recognition  of  an  agent  appointed  at 
a  certain  meeting,  by  dealing  and  offering  to  deal  with  him  as  the  agent 


stitutional  and  statutory  requirement 
that  bonded  debt  shall  only  be 
incurred,  when  voted  at  a  meeting 
called  on  sixty  days'  notice,  does  not 
prevent  a  waiver  of  such  notice  by  all 
the  stockholders  either  by  express 
waiver  or  by  attendance  without  such 
notice.  Riesterer  v.  Horton,  etc.  Co., 
160  Mo.  141  (1901).  A  provision  that 
notice  must  be  given  to  stockholders 
thirty  days  before  they  vote  in  favor 
of  a  mortgage  may  be  waived  by  them, 
and  a  waiver  may  be  by  failure  to 
object.  Bridgeport  Electric,  etc.  Co. 
V.  Meader,  72  Fed.  Rep.  115  (1895). 
Even  though  the  statutory  notice  of  a 
stockholders'  meeting  is  not  given,  a 
mortgage  authorized  by  the  board  of 
directors  elected  at  such  a  meeting  is 
legal,  where  the  corporation  receives 
the  benefit  therefrom,  without  any 
stockholder  objecting.  Atlantic  Trust 
Co.  V.  The  Vigilancia,  73  Fed.  Rep.  452 
(1896).  Where  a  mortgage  is  approved 
by  the  representatives  of  all  the  stock 
except  two  shares,  it  is  good  as  an 
equitable  mortgage,  even  though  the 
meeting  of  stockholders  authorizing 
it  was  not  called  by  advertisement, 
as  required  by  statute.  Central  Trust 
Co.  V.  Bridges,  57  Fed.  Rep.  753  (1893). 
A  statutory  provision  that  a  certain 
notice  must  be  given  of  a  meeting  to 
authorize  a  mortgage  may  be  waived. 
Central  Trust  Co.  v.  Condon,  67  Fed. 
Rep.  84  (1895).  Although  the  statutes 
of  Montana  require  that  a  mortgage 
may  be  given  only  after  a  stockholders' 
meeting  convened  by  publication  of 
notice,  etc.,  has  voted  it,  yet  all  the 
stockholders,  by  voting  therefor,  waive 
the  required  notice,  and  no  one  can 
complain.  The  mortgage  is  valid. 
Campbell  v.  Argenta,  etc.  Co.,  51  Fed. 
Rep.  1  (1892).  Although  the  con- 
stitution provides  that  there  shall  be 
sixty  days'  notice  of  the  meeting  to 


authorize  the  issue  of  bonds,  yet  where 
all     the     stockholders     assemble    and 
authorize     the    issue     without     any 
notice,  and  the  bonds  pass  into  bona 
fide    hands,     they    may    be    enforced. 
The  absence  of  a  nominal  stockholder 
whose  stock  is  really   owned   by  one 
of  those  present  is  immaterial.     Wood 
V.  Corry,  etc.  Co.,  44  Fed.   Rep.   146 
(1890).     A  constitutional  provision  in 
regard  to  notice  being  given  of  a  meet- 
ing for  increasing  the  stock  or  bonds 
of  a  corporation  is  for  the  benefit   of 
the  stockholders  and  may  be  waived 
by  them,  or  the  omission  of  it  may  be 
ratified  by  them.     Nelson  v.  Hubbard, 
96   Ala.    238    (1892).     The   voluntary 
dissolution   of  a   company   under   the 
statute,    but    without    the    ten    days' 
notice  required  by  the  charter,  is  not 
such  a  dissolution  as  to  prevent  cred- 
itors from  attaching  the  property  of 
the  company  as  though  no  dissolution 
had    been    had.     Cleveland,    etc.    Co. 
V.  Taylor,  etc.  Co.,  54  Fed.   Rep.  82 
(1893).     But    the    dissolution    cannot 
be  enjoined  by  creditors  in  the  absence 
of     fraud.     Cleveland,     etc.     Co.     v. 
Taylor,    etc.    Co.,    54    Fed.    Rep.    85 
(1893).     In     general,     see     Columbia 
Nat.   Bank's  Appeal,   16  W.   N.   Cas. 
(Pa.)  357   (1885);    s.  c,  42  Leg.   Int. 
226;    Manhattan    Hardware    Co.     v. 
Phalen,  128  Pa.  St.  110  (1889);  Ken- 
ton Furnace  Co.   v.  McAlpin,  5  Fed. 
Rep.    737     (1880),    where    no    notice 
was  given,  although  prescribed  by  the 
charter    and    by-laws.     It    was    held 
to  have  been  waived  by  the  presence 
of  all  the  stockholders  at  the  meeting 
and  their  participation  in  its  action; 
Re  British  Sugar  Ref.  Co.,  3  Kay  &  J. 
408  (1857),  where  it  was  adjudged  that 
a    shareholder    who    had    received    a 
circular    notice    of    the    meeting    and 
was   present   could    not   question    the 
legality  of  the  meeting  on  the  ground 


1  Bucksport,  etc.  R.  R.  v.  Buck,  68 
Me.  81  (1878);  Schenectady,  etc. 
Plank  Road  Co.  v.  Thatcher,  11  N.  Y. 
102  (1854).  The  stockholder  who,  as 
a  director,   votes   to   call   the   annual 


meeting  at  an  irregular  time  cannot 
question  the  acts  of  such  meeting. 
Christopher   v.   Noxon,    4   Ont.    Rep. 

(Can.)  672  (1883). 


1756 


CH.   XXXVI. 


STOCKHOLDERS     MEETINGS 


CALLS. 


[§  599. 


of  the  company,  is  a  waiver  of  the  right  to  notice  of  that  meeting.^ 
One  stockholder  cannot  avail  himself  of  the  neglect  of  the  corporate 
officers  to  give  due  notice  to  another  stockholder  who  does  not  himself 
complain.^    But  the  failure  of  a  stockliolder  to  attend  a  stockholders' 


that  the  charter  required,  in  addition 
to  the  circular,  publication  in  a  news- 
paper, which  was  not  made. 

A  person  who  takes  part  in  a  meet- 
ing cannot  object  that  it  was  held 
on  five  days'  notice  instead  of  four- 
teen, as  required  by  the  charter. 
Bucksport,  etc.  R.  R.  v.  Buck,  68  Me. 
81  (1878) ;  Chamberlain  v.  Paines- 
viUe,  etc.  R.  R.,  15  Ohio  St.  225  (1864). 
A  failure  to  give  the  statutory  notice 
of  the  first  meeting  is  immaterial 
where  all  but  one  stockholder  were 
present  and  he  afterwards  ratified  all 
that  was  done.  Babbitt  v.  East,  etc. 
Co.  (N.  J.,  1876) ;  Stew.  Dig.,  p.  208, 
§  13.  To  same  effect,  p.  663,  supra, 
and  §593,  supra;  also  §288,  supra. 
A  stockholder  who  knows  of  and 
approves  of  a  proposed  sale  of  a  rail- 
road by  a  stockholders'  vote  as  allowed 
by  statute  cannot  have  the  sale  set 
aside  on  the  ground  that  he  was  not 
notified  of  nor  present  at  the  meeting 
voting  such  sale,  but  he  must  be  paid 
the  value  of  his  stock.  ■  Young  v. 
Toledo,  etc.  R.  R.,  76  Mich.  485  (1889). 
The  constitutional  provision  that  bonds 
or  stock  shall  not  be  increased  except 
in  a  certain  way  does  not  apply  to  an 
original  issue  of  bonds.  Union,  etc. 
Co.  V.  Southern,  etc.  Co.,  51  Fed.  Rep. 
840  (1892).  Directors  elected  at  a 
meeting  called  on  thirteen  days'  notice 
instead  of  fourteen,  as  required  by 
statute,  may  make  calls,  where  their 
election  has  been  confirmed  by  a 
subsequent  annual  general  meeting. 
Briton,  etc.  Assoc,  v.  Jones,  61  L.  T. 
Rep.  384  (1889);  People  v.  Peek,  11 
Wend.  604  (1834),  holding  that  a 
failure  to  comply  with  a  statutory 
requirement  regarding  notice  will  not 
affect  the  proceedings  of  a  meeting 
of  a  religious  corporation  where  there 
is  no  claim  that  every  voter  was  not 
present,  or  that  evil  resulted  from  the 
omission,  and  no  fraud  was  involved. 
If  all  parties  attended,  they  thereby 
admitted    notice.      See    also    Stebbins 


V.  Merritt,  64  Mass.  27  (1852);  Rex 
V.  Chetwynd,  7  Barn.  &  C.  695  (1828), 
where  the  election  of  a  burgess  at  a 
meeting  of  which  no  notice  was  given 
was  held  valid,  because  it  appeared 
that  all  the  members  of  the  electing 
body  were  present ;  Rex  v.  Theodo- 
rick,  8  East,  543  (1807).  C/.  U.  S.  v. 
McKelden,  11  MacArthur  &  M.  162 
(D.  C.  1879),  where  it  was  held  that, 
although  the  date  for  the  annual  meet- 
ing is  fixed  by  a  by-law,  the  notice  by 
publication  provided  for  by  the  char- 
ter is  necessary.  See  also  Re  Long 
Island  R.  R.,  19  Wend.  37  (1837), 
in  which  it  was  said  in  a  dictum  that 
a  notice  regulated  by  statute  "of 
course  cannot  be  modified,  or  dis- 
pensed with."  If  all  the  incorpo- 
rators meet  and  organize,  a  statutory 
requirement  as  to  notice  is  waived 
and  is  not  necessary.  Ratification 
afterwards  by  one  who  was  not  present 
is  equally  sufficient.  Benbow  v.  Cook, 
115  N.  C.  324  (1894).  A  corporation 
cannot  defend  a  mortgage  on  the 
ground  that  the  consent  of  the  stock- 
holders was  not  obtained,  as  required 
by  statute.  Atlantic  T.  Co.  v.  Crystal 
Water  Co.,  72  N.  Y.  App.  Div.  539 
(1902).     See  also  §  808,  infra. 

'  Bryant  v.  Goodnow,  22  Mass.  228 
(1827). 

2  Nickum  v.  Burckhardt,  30  Oreg. 
464  (1897) ;  Schenectady,  etc.  Plank 
Road  Co.  V.  Thatcher,  11  N.  Y.  102 
(1854).  Hill  V.  Atlantic,  etc.  R.  R., 
143  N.  C.  539  (1906).  In  this  case 
the  court  said:  "The  coiu-t  rejected 
the  offer  of  the  defendant  to  prove 
that  no  notice  had  been  given  of  the 
first  election  of  directors.  I  think 
this  was  properly  rejected,  on  the 
ground  that  the  defendant  could  not 
avail  himself  of  a  neglect  to  give  notice 
to  any  other  stockholder.  The  de- 
fendant himself  was  present  at  that 
meeting  and  voted,  and  was  elected  a 
director.  He  has  not  suffered  by  an 
omission   to   serve   notice,    and   he   is 


1757 


§  600.]  stockholders'  meetings  —  CALLS.  [cH.  xxxvr. 

meeting  is  not  a  waiver  of  his  right  to  object  to  the  acts  of  the  meeting 
as  ultra  vires,  even  though  the  notice  of  the  meeting  stated  what  was 
to  be  done.^  A  stockholder  in  a  corporation  may  be  estopped  from  ques- 
tioning the  vahdity  of  a  stockholders'  meeting  by  reason  of  his  partici- 
pation in  the  proceedings  by  proxy,  where  his  agent  was  authorized 
to  act  at  lawful  meetings.-  The  waiver  of  all  the  stockholders  is 
essential  in  order  to  validate  an  election  held  at  a  meeting  not 
properly  called.^  But  where  the  treasurer  has  acted  as  such  for 
several  months  without  objection,  notes  signed  by  the  treasurer 
cannot  be  repudiated  on  the  ground  that  his  election  was  invalid 
because  the  stockholders'  meeting  was  not  properly  called.^  He 
is  a  de  facto  officer.^  A  creditor  cannot  object  that  proper  notice 
was  not  given  of  a  stockholders'  meeting  which  authorized  an  as- 
signment for  the  benefit  of  creditors.®  Action  taken  at  a  stock- 
holders' meeting  not  legally  called  may  be  ratified  at  a  subsequent 
meeting  which  is  legally  called.^  A  stockholder  may  object  to  a 
vote  being  taken  by  mail.^ 

§  600.  Notice  is  presumed  to  have  been  regularly  given.  —  It  is  a 
presumption  of  law  that  proper  and  valid  notice  of  a  corporate  meet- 
ing has  been  duly  given  to  every  stockholder,  and  that  the  meeting 
itself  was  regularly  and  lawfully  held.     The  burden  of  proof  is  there- 

not    in    a    situation    to    object    as    to  the  action  taken  at  a  special  meeting^ 

others."     A  stockholders'  meeting  held  is  broader  than  as  specified  in  the  notice 

without    notice    or    call     cannot    be  of  the  meeting,  yet  if  a  proxy  votes 

objected  to  by  those  who  participate  and  the  stockholder  delays  for  over  a 

or  receive  the  benefits  of  it.     Handley  year  in  objecting,   the  stockholder  is 

V.    Stutz,    139   U.    S.    417    (1891).     A  bound.     Synnott  v.  Cumberland,  etc. 

stockholder   who   is   represented   at   a  Assoc,  117  Fed.  Rep.  379  (1902). 

meeting    by    proxy    cannot    complain  ^  State    v.    Pettineli,    10    Nev.    141 

that  no  notice  was  given   to   others.  (1875). 

Foote  V.  Greilick,  166  Mich.  636  (1911).  ^  Merchants'  Nat.  Bank  v.  Citizens' 

A  stockholder  who  takes  part  cannot  Gas  Light  Co.,  159  Mass.  505  (1893). 

object   that   another   stockholder   had  *  See  §  623,  infra. 

no  notice.     Re  Union  Hill  Silver  Co.,  « State,    etc.    Bank    v.    Merchants' 

22  L.  T.  Rep.  400  (1870) ;  Re  British,  Bank,  83  Miss.  610  (1904).     A  creditor 

etc.  Co.,  3  Kay  &  J.  408  (1857).     A  cannot  attack  a  corporate  act  on   the 

party  who  did  not  attend  the  meeting  ground  that  notice  of  a  stockholders' 

cannot  object  that  the  inspectors  were  meeting  authorizing  it  was  not  given 

not   sworn.     Re   Mohawk   &   Hudson  to    all    the    stockholders    where    the 

R.  R.,  19  Wend.  135  (1838).     See  also  only  stockholder  not   receiving  notice 

§  620,    infra.  assented     subsequently     to     the     act. 

1  McFadden  v.  Leeka,  48  Ohio  St.  Vrooman  v.  Vansant,  etc.  Co.,  215  Pa. 
513(1891).  Failure  to  attend  a  eorpo-  St.  75  (1906).  Cf.  §§808,  809,  infra, 
rate  meeting  is  not  a  waiver  of  objec-  '  Hill  v.  Atlantic,  etc.  R.  R.,  143 
tions     thereto.     Matter     of     Empu-e  N.  C.  539  (1906). 

State,  etc.,  53  N.  Y.  Misc.  Rep.  344  «  McMillan  y.  Le  Roi,  etc.  Co.,  Ltd., 

(1907).  [1906]    1    Ch.    331.     See    also    §625, 

2  Columbia  Nat.  Bank  v.  Matthews,  infra. 
85  Fed.  Rep.  934  (1898).     Even  though 

1758 


CH.    XXXVI 


STOCKHOLDERS     MEETINGS 


CALLS. 


[§  601. 


fore  upon  him  who  alleges  want  of  notice  or  insufficiency  of  notice,  or 
attacks  the  regularity  and  validity  of  the  proceedings.^ 

§  601.  Adjourned  meetings.  — An  adjourned  meeting  is  but  a  con- 
tinuation of  the  meeting  which  has  been  adjourned,  and  when  that 
meeting  was  regularly  called  and  convened  and  duly  adjourned,  the 
stockholders  may,  at  the  adjourned  meeting,  consider  and  determine 
any  corporate  business  that  might  lawfully  have  been  transacted  at 
the  original  meeting.^ 

But  where  there  is  an  absence  of  good  faith,  and  an  adjourned  meet- 
ing is  held  in  such  a  way  as  to  prevent  certain  of  the  stockholders  from 
knowing  of  it,  the  proceedings  are  invalid.^    Where  the  original  meeting 


'  McDaniels  v.  Flower  Brook  Mfg. 
Co.,  22  Vt.  274  (1850) ;  Foote  v.  Grei- 
lick,  166  Mich.  636  (1911).  Hill  v. 
Atlantic,  etc.  R.  R.,  143  N.  C.  539 
(1906).  Porter  v.  Robinson,  30  Hun, 
209  (1883);  Sargent  v.  Webster,  54 
Mass.  497  (1847)  ;  South  School,  etc. 
V.  Blakeslee,  13  Conn.  227,  235  (1839) 
Lane  v.  Brainerd,  30  Conn.  565  (1862) 
Pitts  V.  Temple,  2  Mass.  538  (1807) 
WeUs  V.  Rodgers,  60  Mich.  525  (1886), 
holding  that  notice  is  presumed,  and 
the  burden  of  proof  in  attacking  the 
legality  of  the  meeting  is  on  the  plain- 
tiff. See  also  §  606,  infra.  All  the 
stockholders  are  presumed  to  have  had 
notice  of  a  meeting  that  has  been  held. 
Beardsley  v.  Johnson,  121  N.  Y.  224 
(1890).  Cf.  Wiggin  v.  Freewill,  etc. 
Church,  49  Mass.  301,  312  (1844). 
Notice  of  the  meeting  and  participa- 
tion therein  is  presumed.  Synnott 
V.  Cumberland,  etc.  Assoc,  117  Fed. 
Rep.  379  (1902).  It  is  presumed  that 
seasonable  notice  of  a  meeting  was 
given.  Clark  v.  Wild,  81  Atl.  Rep. 
536  (Vt.   1911). 

2  Quoted  and  approved  in  In  re 
Hammond,  139  Fed.  Rep.  898  (1905). 
Synnott  v.  Cumberland,  etc.  Assoc, 
117  Fed.  Rep.  379  (1902),  and  in 
State  V.  Cronan,  23  Nev.  437  (1897) ; 
Granger  v.  Grubb,  7  Phila.  350  (1870) ; 
Farrar  v.  Perley,  7  Me.  404  (1831); 
Scadding  v.  Lorant,  3  H.  L.  Cas.  418 
(1851).  Cf.  People  v.  Batchelor,  22 
N.  Y.  128  (1860),  where  the  New 
York  city  board  of  aldermen  appointed 
a  day  for  the  election  of  a  city  oflBcer. 
At  a  subsequent  stated  meeting  this 
resolution  was  rescinded,  and  then  an 


election  was  thereupon  held.  Held 
that  the  election  was  void,  as  some 
members  were  absent  from  the  former 
meeting  and  had  no  notice  of  the  elec- 
tion. A  board  of  aldermen  cannot 
elect  an  assessor  and  then  at  an 
adjourned  meeting  reconsider  and  elect 
some  one  else.  State  v.  Phillips,  79 
Me.  506  (1887).  See  also  Harden- 
burgh  V.  Farmers',  etc.  Bank,  3  N.  J. 
Eq.  68  (1834),  where  the  stockholders 
at  the  first  meeting  proceeded  to  an 
election  in  spite  of  an  adjournment  by 
the  commissioners,  and  the  election 
was  upheld.  A  meeting  adjourned 
for  want  of  a  quorum  may  at  the 
adjourned  meeting  proceed  to  busi- 
ness, if  a  quorum  is  present,  and  no 
notice  of  the  adjourned  meeting  is 
necessary  Avhere  the  charter  or  by- 
laws provided  for  such  adjournment. 
Smith  V.  Law,  21  N.  Y.  296  (1860), 
involving  a  meeting  of  the  board  of 
directors.  Any  stockholder  may  vote 
at  a  postponed  meeting,  even  though 
he  was  not  present  at  the  original 
meeting.  Bridgers  v.  Staton,  150  N.  C. 
216  (1909). 

^  Quoted  and  approved  in  Western, 
etc.  Co.  V.  Burrows,  144  111.  App. 
350,  372  (1908)  holding  that 
where  all  the  stockholders  leave  the 
room  the  meeting  is  deemed  to  have 
been  adjourned,  even  though  there 
was  no  vote  to  that  effect.  See 
also  in  general  State  v.  Bonnell,  35 
Ohio  St.  10  (1878).  Where  an  election 
is  held,  after  many  adjoiirnments,  and 
a  minority  are  present  and  elect  direc- 
tors, who  repudiate  a  contract  which 
exists  with  the  holder  of  a  majority 


1759 


§  601.] 


STOCKHOLDERS     MEETINGS  —  CALLS. 


CH.  XXXVI. 


was  duly  called  and  convened,  the  stockholders  are  not  entitled  to  any 
other  notice  of  the  adjourned  meeting  than  that  which  is  implied  in  the 
adjournment.^  But  nothing  can,  without  notice,  be  transacted  at  an 
adjourned  meeting  except  the  business  which  might  have  been  transacted 
at  the  first  meeting  if  a  quorum  had  been  present.-  Even  though  notice 
of  an  adjourned  meeting  is  unnecessary,  yet  if  one  is  given  and  it  is  less 
broad  as  to  the  business  to  be  transacted  than  the  original  notice,  the 
second  notice  governs.^  Where  the  president  and  a  portion  of  the 
members  of  an  unincorporated  association  withdraw  from  a  meeting, 
the  remaining  members  may  adjourn  the  meeting  and  at  the  adjourned 
meeting  may  take  action,  a  quorum  being  present.*  The  president 
may  adjourn  a  meeting  which  has  been  enjoined  if  all  the  stockholders 
are  present,  and  a  vote  on  the  adjournment  is  not  called  for,  and  hence 
a  meeting  held  later  in  the  day  by  the  minority  is  illegal.^  A  minority 
of  an  unincorporated  voluntary  association  may  adjourn  from  time  to 
time,  even  if  a  majority  of  all  the^  members  is  necessary  to  constitute 
a  quorum  in  order  lawfully  to  transact  business.^  A  board  of  directors 
have  no  power  to  postpone  a  stockholders'  meeting  by  sending  out  notices 


of  the  stock,  the  latter  being  ignorant 
of  the  intent  to  elect  officers,  equity 
will  enjoin  the  repudiation  of  the  con- 
tract. New  York,  etc.  Co.  v.  Parrott, 
36  Fed.  Rep.  462  (1888). 

1  Quoted  and  approved  in  /n  re 
Hammond,  139  Fed.  Rep.  898  (1905). 
Smith  V.  Law,  21  N.  Y.  296  (1860); 
Warner  v.  Mower,  11  Vt.  385  (1839). 
No  notice  of  an  adjourned  meeting 
is  necessary,  the  original  meeting 
having  been  held  on  a  valid  call. 
Clark  V.  Wild,  81  Atl.  Rep.  536  (Vt. 
1911).  No  notice  of  an  adjourned 
meeting  is  necessary  where  the  stock- 
holder is  estopped  from,  denying  the 
validity  of  the  original  meeting.  Cal- 
lahan V.  Chilcott,  etc.  Co.,  37  Col.  331 
(1906).  In  U.  S.  V.  McKelden,  11 
MacArthur  &  M.  162  (D.  C.  1879), 
it  was  held  that  the  proceedings  of  an 
original  meeting  being  invalid  by 
reason  of  insufficient  notice,  the 
adjourned  meetings  were  invalid  also, 
they  being  merely  continuations  of 
the  original.  To  same  effect,  Wiggin 
V.  Freewill,  etc.  Church,  49  Mass.  301 
(1844).  Notice  need  not  be  given  of  an 
adjourned  meeting  of  the  directors, 
the  adjournment  being  in  accordance 
with  the  by-laws.  Seal  of  Gold  Mining 
Co.  V.  Slater,  161  Cal.  621  (1911). 


2  Regina  v.  Grimshaw,  10  Q.  B.  747 
(1847).  No  business  can  be  done  at 
an  adjourned  meeting  that  could  not 
have  been  done  at  the  original  meet- 
ing. Christopher  v.  Noxon,  4  Ont. 
Rep.  (Can.)  672  (1883).  Where  a 
meeting  of  the  board  of  directors 
could  not  authorize  suit  to  collect 
assessments  because  the  assessments 
were  not  yet  due,  an  adjourned 
meeting  of  that  meeting  cannot  au- 
thorize such  suit,  all  of  the  direc- 
tors not  being  present  at  the  ad- 
journed meeting  and  no  new  notice 
thereof  having  been  given.  Bank  of 
National  City  v.  Johnston,  133  Cal. 
185  (1901). 

3  Sjmnott  V.  Cumberland,  etc.  Assoc, 
117  Fed.  Rep.  379  (1902). 

*  Ostrom  V.  Greene,  161  N.  Y.  353 
(1900). 

5  Haskell  v.  Read,  68  Neb.  107 
(1903).     See   also    §606,    infra. 

«  Ostrom  V.  Greene,  161  N.  Y.  353 
(1900),  the  court  saying  in  regard  to 
the  adjourned  meeting:  "Personal 
notice  to  every  member  was  unnec- 
essary, for  it  was  the  same  in  effect  as 
if  the  association  had  sat  in  continu- 
ous session  and  had  adjourned  each 
day  to  the  next." 


1760 


CH.  XXXVI.]  stockholders'   meetings  —  CALLS.  [§601. 

to  that  effect.^  Where  the  voting  of  certain  stock  is  enjoined  and  the 
meeting  adjourns,  the  minority  cannot  insist  on  continuing  the  meetmg 
and  electing  directors  .^ 

1  Paringa    Mines,     Ltd.     v.     Blair,  ^  Schmidt  v.   Pritchard,   135  Iowa, 

[1906]  2  Ch.  193.  240  (1907). 


(HI) 


1761 


CHAPTER  XXXVII. 


ELECTIONS  AND   OTHER  CORPORATE  MEETINGS. 


§  602.     Scope  of  the  subject. 

603.  Elections    are    to    be    by    the 

stockholders,  and  may  be 
compelled  by  mandamus. 

604.  The  meeting  must  be  held  at 

the  prescribed  hour,  which 
must  be  reasonable. 

605.  Inspectors  of  election  —  Con- 

ducting and  closing  elec- 
tions. 

606.  Conducting  and  closing  meet- 

ings generally  —  Irregulari- 
ties and  informalities  — 
Minutes  of  meeting. 

607.  The  quorum  —  A  majority  of 

the  stockholders  attending  a 
meeting  may  transact  busi- 
ness. 

608.  The  majority  of  votes  cast  con- 

stitutes an  election. 

609.  Is    every    share   of    stock   en- 

titled to  one  vote  ? 
609a.  Cumulative  voting. 

610.  Proxies. 

611.  The  stock-book  as  evidence  of 

a  right  to  vote. 

612.  The       right       of        trustees, 

pledgees,  administrators, 
etc.,  to  vote. 

613.  The   corporation   cannot  vote 

upon  shares  of  its  own  stock. 

614.  Issuing  stock  in  order  to  carry 

an  election. 

615.  Where  one  corporation  owns  a 

majority  of  the  stock  of  a 
rival  company,  may  it  vote 
the  stock  and  control  the 
latter  company  ? 

616.  Illegal  or  fraudulent  elections 

—  The  remedy  of  injunction 
against  elections  and  against 
voting  particular  stock. 

617.  Illegal  or  fraudulent  elections 

—  The  remedies  of  quo  war- 
ranto and  mandamus. 

618      Illegal  or  fraudulent  elections 

—  The  remedy  by  injunction 
against  directors  acting,  and 
the  remedy  of  a  suit  in  equity 
where  the  validity  of  the 
election    arises    incidentally 

—  Receivers  and  masters  in 
chancery  at  elections. 

619.     Illegal     or     fraudulent     elec- 
tions —  Statutory  remedy  by 

1762 


petition  to  a  court  of 
equity. 
§  620.  Who  may  complain  of  an  il- 
legal election  —  A  new  elec- 
tion is  not  granted  if  the 
result  will  be  the  same. 

621.  "Corners"  instock — "Pools." 

622.  Voting  trusts  and  pooling 
agreements  —  Restrictions 
on  right  to  vote  or  sell  stock 
—  Contracts  as  to  voting, 
elections,  directors,  and  con- 
trol. 

(o)  Contracts  between  stock- 
holders to  vote  together  — 
Contracts  involving  changes 
of  officers  and  payment  of 
salaries  —  Restrictions  by 
by-law  or  contract  as  to 
amendments  to  charter,  etc. 

(6)  Restrictions  on  the  right  to 
vote. 

(c)  Contracts  between  stock- 
holders not  to  sell  their 
stock,  except  to  each  other  or 
on  condition  that  the  pur- 
chaser will  purchase  all  of 
the  stock. 

(d)  Charter  provisions  and  by- 
laws restricting  the  right  to 
sell  stock. 

(e)  Irrevocable  proxies. 
(/)  Deposit     of    certificates    of 

stock   with    trustees,    either 

with  or  without  a  transfer 

of  same  to  the  trustees. 
ig)  One  corporation  owning  and 

holding   the  stock   of  other 

corporations. 
(h)  Voluntary     associations     to 

acquire,      hold,     and      vote 

shares  of  stock. 

623.  Who  may  be  a  director  or  cor- 
porate officer  —  Qualification 
shares. 

624.  Acceptance  and  resignation  of 
office  and  failure  to  elect 
directors  —  Removal  of  di- 
rectors. 

625.  Stockholders  can  act  only  at 
corporate  meetings. 

626.  627.  Stockholders  cannot  carry 
on  the  business  of  or  enter 
into  contracts  for  the  corpo- 
ration. 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE   MEETINGS.  [§§602,603. 

§  602.  Scope  of  the  subject.  —  The  business  which  the  stockholders 
of  a  corporation  in  meeting  assembled  have  the  power  to  transact  is 
not  extensive,  but  it  is  of  great  importance.  They  elect  the  directors, 
pass  upon  amendments  to  the  charter,  determine  whether  any  increase 
of  the  capital  stock  shall  be  made,  make  the  by-laws,  and  dissolve  or 
continue  the  corporation.  These  constitute  the  chief  functions  of  a 
stockholders'  meeting.  They  are  extraordinary  in  their  character, 
and  although  they  are  exercised  at  long  intervals  are  of  vital  importance. 
This  chapter  treats  of  the  business  which  may  be  transacted  at  stock- 
holders' meetings  and  of  the  methods  of  its  transaction. 

§  603.  Elections  are  to  be  by  the  stockholders,  and  may  be  com- 
pelled  by  mandamus.  —  At  common  law  the  directors  of  a  corpora- 
tion are  to  be  elected  by  the  stockholders  in  corporate  meeting 
assembled.^  Generally  this  is  declared  to  be  the  law  by  charter  or 
statutory  provisions.  A  contract  and  by-law  giving  a  voting  power 
to  bondholders  at  corporate  elections  is  void  as  against  public  policy 
and  the  statutes,  where  the  statutes  prescribe  that  the  directors  shall 
be  elected  by  the  stockholders  and  shall  not  be  elected  in  any  other 
manner.^  In  most  corporations  the  president,  and  also  the  vice-presi- 
dent, secretary,  treasurer,  and  agents  of  the  corporation,  are  elected  or 
appointed  not  by  the  stockholders,  but  by  the  directors.  All  these 
matters,  however,  are  generally  regulated  by  the  charter  or  a  statute. 
Even  though  the  statute  provides  that  each  stockholder  shall  have  as 
many  votes  as  he  owns  shares  of  stock,  a  by-law  and  contract  that  cer- 
tain persons  shall  name  two  out  of  five  directors  are  legal.^ 

At  common  law  mandamus  lies  to  compel  an  election  of  corporate 
officers.^  There  being  nothing  in  the  English  statutes  requiring  direc- 
tors, it  is  legal  for  an  English  corporation  to  have  no  directors,  but  to 

1  It  has  been  held  that  stockholders  annual  election  for  the  sole  purpose 
cannot  fill  vacancies  in  the  board  of  of  continuing  in  office  the  previous 
directors  at  a  special  meeting,  when  directors,  the  minority  may  enjoin 
elections  can  only  be  at  annual  meet-  further  adjournments  and  may  com- 
ings. Moses  V.  Tompkins,  84  Ala.  613  pel  an  election  to  be  held,  and  may 
(1887).  The  soundness,  however,  of  have  a  decree  that  the  hold-over  pres- 
this  decision  may  well  be  doubted,  ident  and  treasurer,  who  have  been 
The  by-laws  may  and  generally  do  re-elected  by  the  directors  after  a  new 
give  this  power  to  the  directors.  And  election  should  have  been  held,  are 
see  dictum  in  Re  Union  Ins.  Co.,  22  not  re-elected  for  the  entire  year. 
Wend.  591  (1840),  and  §  624,  infra.  West  Side  Hospital  of  Chicago  v. 
'  ^Durkee  v.  People,  155  111.  354  Steele,  124  111.  App.  534  (1906). 
(1895) ;  aff'g  53  111.  App.  396.  Under  the  English  statute  it  is  a  penal 

^  Colonist,  etc.  Co.  v.  Dunsmuir,  32  offense    punishable   by   a   fine    of    not 

Can.  S.  C.  Rep.  679  (1902).     See  also  over   £50   for   the   directors   or   other 

§  622a,  infra.     Cf.  161  Fed.  Rep.  3.  corporate  officers  not  to  call  a  stoek- 

^  See  §  593,  supra.     Where  the  mi-  holders'  meeting  during  the  year,  and 

nority  have  a  right  to  cumulate  their  there  is  a  fine  of  not  over  £5  for  every 

votes,  and  the  majority  adjourn  the  day  for  not  filing  a  list  of  the  stock- 

1763 


§  604.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.   XXXVII. 


have  managers,  and  another  corporation  may  be  one  of  the  directors 
or  may  be  one  of  the  managers.^ 

All  corporations  for  profit  have  power  to  elect  a  board  of  directors.^ 

The  legislature  may  amend  the  charter  so  as  to  increase  the  num- 
ber of  directors ;  ^  but  it  cannot  deprive  the  members  of  the  corpo- 
ration of  the  privilege  of  electing  its  directors.^  Neither  a  by-law  nor 
an  unauthorized  provision  in  the  certificate  of  incorporation  can  provide 
that  the  first  directors  shall  continue  to  be  directors  until  they  become 
incapacitated,  resign,  or  die.^ 

Although  the  corporation  is  not  a  going  concern,  nevertheless  it  may 
have  an  election  of  directors.^ 

§  604.  The  meeting  must  he  held  at  the  prescribed  hour,  which 
must  he  reasonahle.  —  The  particular  time  at  which  corporate  meet- 
ings shall  be  held  is  often  prescribed  in  the  charter  or  a  statute  or  in 
the  by-laws  of  the  corporation.     When  not  so  prescribed  it  is  fixed  by 


holders,  addresses,  etc.,  within  a 
certain  time  after  such  meeting. 
Park  V.  Lawton,   [1911]  1   K.  B.  588. 

1  Re  Bulawayo,  etc.  Co.,  Ltd., 
[1907]  2  Ch.  458. 

2  A  bank  may  have  directors  though 
the  statute  does  not  provide  for  them. 
All  private  corporations  may  have 
directors.  Hurlbut  v.  Marshall,  62 
Wis.  590  (1885).  "The  power  inheres 
in  the  corporation  to  hold  an  election," 
where  the  charter  or  statutes  are 
silent.  Wright  v.  Commonwealth,  109 
Pa.  St.  560  (1885).  "The  power  of 
electing  both  officers  and  members  is 
an  incident  to  every  corporation.  It 
is  not  necessary  that  such  a  power 
should  be  expressly  conferred  by 
the  charter."  Commonwealth  v.  Gill, 
3  Whart.  (Pa.)  228,  247  (1837). 
Authority  in  a  charter  to  a  cemetery 
corporation  to  do  aU  things  incident  to 
a  corporation  does  not  give  power 
to  issue  stock,  and  hence  an  election 
by  so-called  stockholders  is  not  legal. 
Cooke  V.  MarshaU,  196  Pa.  St.  200 
(1900). 

'Mower  v.  Staples,  32  Minn.  284 
(1884).  See  also  Gray  v.  Coffin,  63 
Mass.  192  (1852);  Longley  v.  Little, 
26  Me.  162  (1846) ;  Payson  v.  Withers, 
5  Biss.  269  (1873) ;  s.  c,  19  Fed.  Cas. 
29;  Joy  v.  Jackson,  etc.  Co.,  11  Mich. 
155  (1863) ;  Lincoln,  etc.  Bank  v. 
Richardson,  1  Me.  79  (1820);  Green- 
ville, etc.   R.   R.  V.  Johnson,  8  Baxt. 


(Tenn.)  332  (1874);  FaU  River  Iron 
Works  V.  Old  Colony,  etc.  R.  R.,  87 
Mass.  221  (1862).  See  also  §§499, 
500,   supra. 

^  The  legislature  cannot  arbitrarily 
name  and  appoint  trustees  of  an  edu- 
cational corporation,  the  charter  pro- 
viding that  vacancies  shall  be  filled  by 
the  remaining  trustees.  Sheriff  v. 
Lowndes,  16  Md.  357  (1860).  It  can- 
not give  to  the  city  of  Louisville  the 
power  to  elect  the  trustees  of  the 
University  of  Louisville,  an  educa- 
tional corporation.  Louisville  v.  Presi- 
dent, etc.,  15  B.  Mon.  (Ky.)  642 
(1855).  It  cannot  vest  the  govern- 
ment of  an  incorporated  academy 
in  a  new  board  of  trustees.  Norris  v. 
Trustees,  etc.,  7  Gill  &  J.  (Md.)  7 
(1834).  Under  the  reserved  power  to 
amend  or  repeal  a  charter  the  legisla- 
ture may  amend  the  charter  of  an 
agricultural  college  which  has  pri- 
vate stockholders,  but  to  which  the 
state  contributes  funds,  so  that, 
instead  of  the  state  having  four  direc- 
tors out  of  eleven,  the  state  shall  have 
seven  out  of  twelve.  Jackson  v. 
Walsh,  75  Md.  304  (1892).  But  see 
Sage  V.  Dillard,  15  B.  Mon.  (Ky.)  340, 
357  (1854),  and  §§500,  501,  notes, 
supra.     See  108  L.  T.  Rep.  665. 

*  State  V.  Anderson,  31  Ind.  App.  34 
(1903). 

^  Beardsley  v.  Johnson,  121  N.  Y. 
224  (1890). 


1764 


CH.   XXXVII 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  605. 


the  officers  who  call  together  the  corporate  meeting.  But  in  whatever 
way  it  is  decided  upon,  the  meeting  must  be  convened  at  the  time  de- 
cided upon,  or  within  a  reasonable  time  thereafter.'  Accordingly 
if  a  meeting  is  convened  before  the  hour  at  which  it  is  called  and  business 
is  transacted,  the  proceedings  will  be  invalid.-  A  meeting  called  to 
order  at  sun  time  and  then  postponed  to  standard  time,  before  any  pro- 
ceedings are  had,  is  legal .^ 

Frequently  the  particular  office  or  place  for  meeting  within  the  state 
is  specified  in  the  charter  or  by-laws  of  the  corporation.  In  that  event 
a  meeting  held  at  a  different  place  will  be  irregular,  and  the  proceedings 
at  such  a  meeting  void  and  ineffectual,  if  objected  to.'* 

§  605.  Inspectors  of  election  —  Conducting  and  closing  elections. 
—  Ordinarily  a  chairman  and  inspectors  of  election  are  elected  or  ap- 
pointed by  the  stockholders.^    The  presiding  officer  at  a  stockholders' 


1  Where  a  meeting  was  held  by  a 
minority  of  the  stockholders  several 
hours  after  the  time  fixed  in  the 
notice,  and  an  adjournment  made  until 
the  foUomng  day,  at  which  adjourned 
meeting,  without  the  knowledge  of 
the  other  members,  an  election  was 
held,  the  election  was  unfair  and  in- 
valid. State  V.  Bonnell,  3.5  Ohio  St.  10 
(1878).  But  a  delay  of  an  hour  and 
five  minutes  after  the  time  specified 
in  the  notice  is  not,  as  a  matter  of  law, 
an  unreasonable  delay  which  will 
vitiate  the  proceedings.  South  School 
District  v.  Blakeslee,  13  Conn.  227,  235 
(1839).  The  court  will  not  sustain 
an  election  where  the  majority  were 
given  to  understand  that  the  election 
would  go  over  to  a  later  hour  in  the 
day,  even  though  no  formal  adjourn- 
ment was  had.  State  t'.  Smalley,  7 
Ohio  C.  C.  400  (1893). 

2  So,  where  a  meeting  was  called  for 
twelve  o'clock,  but  was  called  to  order 
and  organized  fifteen  minutes  before 
twelve,  it  was  held  to  be  a  surprise 
and  a  fraud  upon  such  of  the  stock- 
holders as  were  not  actually  present 
at  that  hour,  and  that  in  consequence 
the  proceedings  were  irregular  and 
void.  People  v.  Albany,  etc.  R.  R.,  55 
Barb.  344  (1869) ;  aff'd,  57  N.  Y.  161. 
Where  commissioners,  after  calling  a 
meeting  of  subscribers,  ordered  the 
election  postponed,  but  the  sub- 
scribers nevertheless  refused  to  post- 
pone and  proceeded  with  the  election. 


the  election  is  not  void,  unless,  in  the 
opinion  of  the  court,  a  postponement 
was  clearly  necessary.  Hardenburgh 
t'.  Farmers',  etc.  Bank,  3  N.  J.  Eq.  68 
(1834).  Qucere,  in  this  case,  whether 
the  election  might  not  have  been 
avoided  if  any  considerable  number  of 
the  stockholders  were  deprived  of 
their  election  franchise  by  the  failure 
to  postpone.     See  also  §  605,  infra. 

3  Proctor,  etc.  Co.  v.  Finley,  98  Ky. 
405  (1895). 

*  Where  the  customary  place  of 
meeting  of  a  corporation  is  aban- 
doned, and  a  new  place  fixed  upon  in 
a  regular  and  lawful  manner,  a  meet- 
ing at  the  old  place  is  irregular,  and 
the  proceedings  at  such  a  meeting  are 
invalid.  Miller  t-.  English,  21  N.  J.  L. 
317  (1848).  The  meeting  must  be 
held  at  the  usual  place.  American 
Primitive  Soc.  v.  Pilling,  24  N.  J.  L. 
653  (1855).  Cf.  McDaniels  v.  Flower 
Brook  Mfg.  Co.,  22  Vt.  274  (1850), 
holding  that  a  meeting  at  a  residence 
is  good,  if  all  assent,  even  though 
the  statute  requires  the  meetings  to 
be  at  the  counting-room  of  the  com- 
pany. 

^  Where  the  statute  gives  each 
share  a  vote,  a  by-law  of  the  directors, 
prescribing  who  shall  preside  and  pass 
upon  the  qualification  of  voters  at  the 
annual  meeting,  will  not  be  presumed 
to  be  in  -violation  of  the  statute,  the 
directors  Laving  power  to  make  the 
by-laws.     Hence,    an    injunction    will 


1765 


§  605. 


ELECTIONS 


CORPORATE    MEETINGS. 


[CH. 


meeting  need  not  be  a  stockholder/  and  he  need  not  be  elected  with 
any  particular  formality.^ 

The  inspectors  of  elections  need  not  be  stockholders.^  Where  by 
statute  the  president  is  made  inspector  of  elections,  his  decision  cannot 
be  reversed  by  the  meeting,  but  only  by  the  courts,  and  if  he  is  violently 
interfered  with  he  may  withdraw.'*  If  inspectors  are  provided  for  by 
the  charter,  and  they  do  not  act  or  are  enjoined  from  acting,  the  stock- 
holders may  appoint  others  to  take  their  place. ^  The  duties  of  the 
inspectors  are  ministerial  and  not  judicial.  Their  discretion  and  powers 
of  investigation  are  very  limited.^  Even  though  by  the  by-laws  the 
decision  of  the  inspectors  of  election  is  made  final  and  conclusive,  yet 


not  be  granted  at  the  instance  of  a 
stockholder  against  the  by-law  being 
carried  out.  Mitchell  v.  Colorado, 
etc.  Co.,  117  Fed.  Rep.  723  (1902). 
The  same  transaction  was  involved 
in  Bartlett  v.  Gates,  118  Fed.  Rep.  66, 
and  a  different  conclusion  was  reached. 

1  Stebbins  v.  Merritt,  64  Mass.  27 
(1852). 

2  Acquiescence  in  a  person's  assuming 
to  act  as  chairman  of  [a  stockholders' 
meeting  validates  his  acting  as  such. 
Re  Argus  Printing  Co.,  1  N.  Dak. 
434  (1891).  The  vice  president  has 
no  right  to  designate  some  one  else 
to  preside,  the  president  being  absent 
but  the  second  vice  president  being 
present.  De  Zavala  v.  Daughters, 
etc.,  124  S.  W.  Rep.  160  (Tex.  1909). 

^  People  V.  Albany,  etc.  R.  R.,  55 
Barb.  344,  373  (1869) ;  aflf'd,  57  N.  Y. 
161,  holding  also  that,  although  an 
inspector  is  required  by  by-law  to  be 
a  stockholder,  yet  the  election  of  one 
who  is  not  a  stockholder  is  voidable 
and  not  void.  An  inspector  may  be  a 
candidate  for  directorship.  Ex  'parte 
Willcocks,  7  Cow.  402  (1827).  A 
stockholder  may  be  an  inspector,  but 
it  is  better  to  have  an  outside  dis- 
interested person.  Dickson  v.  McMur- 
ray,  28  Grant's  Ch.  Rep.  (Can.)  533 
(1881).  Where  the  scrutineers  or 
inspectors  are  also  candidates  for  elec- 
tion as  directors  and  they  pass  upon 
an  instrument  which  affects  the  right 
to  vote  a  majority  of  the  stock,  such 
stock  being  in  the  name  of  another  per- 
son, but  they  claiming  the  right  as 
beneficial  owners  to  vote  it,  their  deci- 
sion practically  controls  the  election, 
and  if  they  decide  in  their  own  favor 

17 


the  court  may  set  the  election  aside. 
Dickson  v.  McMurray,  28  Grant's 
Ch.  Rep.  (Can.)  533  (1881).  Even 
though  the  inspectors  of  election  are 
named  by  the  directors  and  are  merely 
employees,  the  court  will  not  appoint 
a  master  to  conduct  the  election. 
Bache  v.  Central,  etc.  Co.,  78  N.  J. 
Eq.  484  (1911). 

*  Umatilla,  etc.  Assoc,  v.  Irvin, 
56  Oreg.  414  (1910). 

^  People  V.  Albany,  etc.  R.  R.,  55 
Barb.  344,  357  (1869) ;  aff'd,  57  N.  Y. 
161.  See  also  Re  Wheeler,  2  Abb.  Pr. 
(N.  S.)  361  (1866).  The  failure  of 
the  inspector  so  appointed  to  take  the 
prescribed  oath  will  not  invalidate  the 
election.  Re  Mohawk,  etc.  R.  R.,  19 
Wend.  135  (1838) ;  Re  Chenango,  etc. 
Ins.  Co.,  19  Wend.  635  (1839).  Where 
by  statute  an  election  is  to  be  con- 
ducted by  "inspectors,"  one  inspector 
is  insufficient.  Re  Lighthall,  etc.  Co., 
47  Hun,  258  (1888) ;  but  see  N.  Y.  L.  J., 
June  29,  1889. 

8  See  §  611,  infra;  Re  Mohawk,  etc. 
R.  R.,  19  Wend.  135  (1838).  The 
office  of  the  inspectors  is  ministerial 
rather  than  judicial.  Commonwealth 
V.  Woelper,  3  Serg.  &  R.  (Pa.)  29 
(1817).  Inspectors  at  elections  having 
once  accepted  a  vote  and  declared  the 
result  cannot  then  reject  it  and  declare 
a  different  result.  Hartt  v.  Har- 
vey, 32  Barb.  55  (1860).  The  presid- 
ing officer  at  an  election  of  a  religious 
corporation,  having  decided  who  is 
elected,  cannot  ten  days  later  change 
his  decision  on  the  ground  that  some 
of  the  voters  were  disqualified.  Mat- 
ter of  WilUams,  57  N.  Y.  Misc.  Rep. 
327  (1908). 
66 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE    MEETINGS.  [§  60G. 

their  decision  may  be  attacked  for  fraud  in  rejecting  proxies.^  The 
exclusion  of  a  vote  at  an  election  may  be  upheld  by  the  court  on  grounds 
different  from  those  given  at  the  election  itself.^  The  subject  of  re- 
ceivers and  masters  in  chancery  at  elections  is  considered  elsewhere.' 

A  requirement  that  the  election  shall  be  by  ballot  does  not  invalidate 
an  election  by  show  of  hand  if  no  one  objects.*  The  chairman  of  the 
meeting  may  be  elected  by  a  viva  voce  vote.^  Where  a  ballot  contains 
the  names  of  both  candidates,  one  in  print  and  one  in  writing,  it  is  de- 
fective and  is  not  counted  for  either  candidate.^  A  vote  at  an  election 
of  the  directors  which  does  not  have  opposite  the  names  the  number 
of  shares  voted  may  be  void  and  not  to  be  counted. '^  After  the  ballot 
has  been  counted  and  announced,  it  is  too  late  to  permit  the  ballot  to 
be  opened  to  receive  the  votes  of  any  w^ho  have  not  voted. ^ 

Where  no  time  is  specified  by  law  during  which  the  polls  must  be 
kept  open,  it  rests  within  the  sound  discretion  of  the  inspectors  to  say 
when  the  polls  shall  close.^  So  also  it  is  held  that  holding  the  polls  open 
after  the  hour  specified  in  the  notice  for  them  to  close  will  not,  where 
the  inspectors  exercise  a  reasonable  discretion,  invalidate  an  election. ^^ 
Failure  to  file  in  the  office  of  the  county  clerk  the  oath  of  the  inspectors 
of  election,  as  required  by  statute,  does  not  invalidate  the  election.^^ 

§  606.  Conducting  and  closing  meetings  generally  —  Irregular- 
ities and  informalities  —  Minutes  of  meeting.  —  The  form  or  mode 
of  conducting  an  election  is  in  general  not  material,  provided  it  vio- 
lates no  positive  provision  of  the  charter  or  of  a  statute  regulating  it, 
is  orderly  and  in  good  faith,  and  is  conducted  by  authorized  or  proper 
persons.^^  And  as  a  general  rule  of  law,  where,  in  the  election  of  cor- 
porate officers,  no  particular  mode  of  proceeding  is  prescribed  by  law, 
if  the  wishes  of  the  stockholders  have  been  fairly  expressed,  and  the 
election  was  conducted  in  good  faith,  it  will  not  be  set  aside  on  account 

»  Triesler   v.    Wilson,    89   Md.    169  ^  Forsyth  v.  Brown,  2  Pa.  Dist.  765 

(1899).  (1893).     See  131  Pae.  Rep.  335. 

2  Christopher  v.  Noxon,  4  Ont.  Rep.  '  Re  Chenango  County  Ins.  Co.,  19 
(Can.)  672  (1883).  Wend.  634   (1839). 

3  See  §  618,  infra.  lo  Re  Mohawk  &  Hudson  R.  R.,  19 

*  Christ  Church  v.  Pope,  74  Mass.  Wend.  135  (1838).  An  election  is  not 
140  (1857).  It  is  not  necessary  that  vitiated  by  the  fact  that  the  polls  are 
the  voting  be  by  ballot,  even  though  kept  open  after  the  designated  hour 
the  statute  so  prescribes.  San  Joa-  and  votes  received.  Rudolph  v. 
quin  Land,  etc.  Co.  v.  Beeeher,  101  Southern,  etc.  League,  23  Abb.  N.  Cas. 
Cal.  70  (1894).  199    (1889) ;     People    v.  Albany,    etc. 

<*  Commonwealth  v.  Vandegrift,  232  R.  R.,  55  Barb.  344,  356,  360  (1869) ; 

Pa.  St.  53  (1911).  aff'd,  57  N.  Y.  161. 

*  People  V.  Pangburn,  3  N.  Y.  App.  "  Union,  etc.  Bank  v.  Scott,  53 
Div.  456  (1896).  N.  Y.  App.  Div.  65  (1900). 

^  In  re  Mathiason  Mfg.  Co.,  122  ^^  -pox  v.  Allensville,  etc.  Turnp. 
Mo.  App.  437  (1907).  Co.,  46  Ind.  31  (1874). 

1767 


§  606. 


ELECTIONS  —  CORPOKATE   MEETINGS. 


[CH.  XXX  VII. 


of  any  informality  in  the  manner  of  conducting  it.^  Even  though  a 
by-law  requires  candidates  for  directors  to  be  nominated,  yet  a  person 
may  be  elected  without  an  oral  nomination  being  made.^  The  legality 
of  an  election  and  the  regularity  of  its  procedure  as  well  as  the  qualifica- 
tions of  its  directors  cannot  be  attacked  collaterally  by  a  stockholder 
trying  to  enjoin  a  proposed  sale  of  property  by  such  directors.^ 

In  the  transaction  of  the  business  of  a  corporation  the  motions  should 
be  put  in  an  intelligible  way  and  then  voted  upon.''  Nevertheless,  even 
though  no  formal  resolutions  are  passed  or  record  made,  yet  if  all  the 
stockholders  and  directors  are  present,  and  it  is  agreed  that  certain  things 
shall  be  done,  this  may  bind  the  corporation.^ 

The  parliamentary  usages  are  the  same  as  in  other  bodies,  and  mere 
irregularities  in  the  manner  of  conducting  the  business  are  immaterial 
if  the  sense  of  the  meeting  has  been  fairly  expressed.^ 

After  the  meeting  is  organized  the  majority  cannot  withdraw  and 


1  Quoted  and  approved  in  Titusville, 
etc.  Dissolution,  8  Pa.  Sup.  Ct.  304, 
309  (1898).  Philips  v.  Wickham,  1 
Paige,  590  (1829). 

2Wirth  V.  Fehlberg,  30  R.  I.  536 
(1910). 

*  Jones  V.  Bonanza,  etc.  Co.,  32 
Utah,  440  (1907). 

*  A  general  understanding  or  assent 
or  want  of  dissent  is  not  equivalent  to 
a  question  being  put  and  voted  upon. 
The  statement  by  a  minister  of  what 
salary  he  wished  and  the  failure  of 
members  to  object  is  not  a  sufficient 
expression  of  the  meeting.  Landers  v. 
Frank,  etc.  Church,  114  N.  Y.  626 
(1889). 

6  Burke  v.  Sidra  Bay  Co.,  116  Wis. 
137  (1902),  where  it  was  agreed  that 
a  stockholder  should  loan  money  to 
the  company.  The  stockholders  may 
agree  among  themselves  informally 
to  distribute  a  certain  sum  as  dividends 
without  going  through  the  form  of 
corporate  action.  No  formal  decla- 
ration is  necessary  either  by  the  stock- 
holders or  board  of  directors,  and  a 
distribution  of  profits  by  unanimous 
consent  without  corporate  action  is 
legal.  Groh's  Sons  v.  Groh,  80  N.  Y. 
App.  Div.  85  (1903) ;  rev'd  on  another 
point  in  177  N.  Y.  8.  See  also  §  534, 
supra.  A  corporation  cannot  collect 
the  full  amount  of  a  subscription, 
which  by  unanimous  consent  of  the 
stockholders   at   an  informal   meeting 


has  been  canceled  in  part.  Sheldon 
Canal  Co.  ;;.  Miller,  40  Tex.  Civ.  App. 
460  (1905).     See  also  §714,  infra. 

6  Philips  V.  Wickham,  1  Paige,  590 
(1829);  Re  Wheeler,  2  Abb.  Pr. 
(N.  S.)  361  (1866) ;  Downing  v.  Potts,  23 
N.  J.  L.  66  (1851),  in  which  it  was  held 
that  non-compliance  with  a  statute 
requiring  a  list  of  stockholders  entitled 
to  vote  to  be  made  out  ten  days 
before  an  election  will  not  of  itself 
make  void  an  election,  such  provision 
being  only  directory.  A  motion  may 
be  put  by  the  chairman,  although  it 
has  neither  been  made  nor  seconded. 
Re  Horbury,  etc.  Co.,  L.  R.  11  Ch.  D. 
109  (1879).  Although  the  meeting 
has  voted  down  two  motions  to  make 
calls,  it  may  then  pass  another  motion 
for  a  larger  one.  Re  British,  etc.  Co., 
3  Kay  &  J.  408  (1857).  In  England, 
by  statute,  any  five  stockholders  may 
demand  a  pool.  Re  Phoenix,  etc.  Co., 
48  L.  T.  Rep.  260  (1883) ;  HurreU  & 
Hyde,  Directors  and  Officers,  78.  In 
general  see  also  Gorham  v.  Campbell, 
2  Cal.  135  (1852);  Hardenbiirgh  v. 
Farmers',  etc.  Bank,  3  N.  J.  Eq.  68 
(1834);  People  v.  Peck,  11  Wend.  604 
(1834).  See  also  §  605,  supra.  In 
State  V.  Pettineli,  10  Nev.  141  (1875), 
the  cotu-t  held  that  an  election  was 
illegal  wfciere  there  was  no  presiding 
officer  and  no  inspectors.  Although 
the  notice  of  a  special  stockholders' 
meeting  states  that  the  resolution  will 


1768 


CH.   XXXVII. 


ELECTIONS 


CORPORATE   MEETINGS. 


[§  606. 


organize  another  meeting.^  Where  a  part  of  the  stockliolders  secede 
from  the  meeting,  and  hold  another  on  the  pretext  of  disorder,  but  in 
fact  by  reason  of  a  previously  devised  plan,  the  election  by  the  seceders 
is  not  legal.-  The  chairman  cannot  adjourn  a  meeting  against  the  will 
of  the  stockholders.  The  stockholders  may  proceed  to  hold  the  meeting 
without  him.^  Where  the  voting  of  certain  stock  is  enjoined  and  the 
meeting  adjourns,  the  minority  cannot  insist  on  continuing  the  meeting 
and  electing  directors.^  Where  all  the  stockholders  leave  the  room  the 
meeting  is  deemed  to  have  been  adjourned,  even  though  there  was  no 
vote  to  that  effect.^ 

Where  the  chairman  refuses  to  entertain  an  amendment,  the  party 
proposing  it  need  not  object  to  the  ruling  or  leave  the  meeting,  and 
even  though  he  then  votes  against  the  main  question,  he  does  not 
waive  his  right  to  object  to  the  resolution  as  passed.^    Although  the 

be  presented  and  passed  upon,  to  give    Where  a  statute  requires  a  majority 

fr.    oanV,    cViQro   <^no   irrkfo     r>^•r.^rir^o^l    ciir.V>       of    all     the    StOCk     tO    be    present    at     aU 

election,  an  election  is  illegal  if  in  the 
midst  of  the  meeting  some  of  the 
stockholders  withdraw  leaving  less 
than  a  majority  present.  Bridgers 
V.  Staton,   150  N.   C.  216   (1909). 

2  Quoted  and  approved  in  Common- 
wealth V.  Vandegrift,  232  Pa.  St.  53 
(1911).  Langdon  v.  Patterson,  158 
Pa.  St.  476  (1893). 

estate  V.  Cronan,  23  Nev.  437 
(1897),  holding  also  that  if  the  presi- 
dent illegally  adjourns  the  meeting 
and  excludes  the  stockholders  from 
the  room,  they  may  adjourn  to  another 
room  and  hold  the  meeting.  Arbi- 
trary action  by  the  president  in  declar- 
ing a  stockholders'  meeting  adjourned 
is  void  and  the  meeting  may  proceed 
without  him.  Chicago,  etc.  Co.  v. 
Boggiano,  202  lU.  312  (1903).  The 
president  may  adjourn  a  meeting 
which  has  been  enjoined  if  all  the 
stockholders  are  present,  and  a  vote 
on  the  adjournment  is  not  called  for, 
and  hence  a  meeting  held  later  in  the 
day  by  the  minority  is  illegal.  Haskell 
V.  Read,  68  Neb.  107  (1903).  Cf. 
§  601,   supra. 

*  Schmidt  v.  Pritchard,  135  Iowa, 
240  (1907). 

^  Western,  etc.  Co.  v.  Burrows,  144 
111.  App.  350  (1908). 

^  Henderson  v.  Bank  of  Austral- 
asia, 45  Ch.  D.  330  (1890),  reversing 
the    court    below.     Where    a    special 


to  each  share  one  vote,  provided  such 
share  has  been  held  by  the  party  for 
six  months  prior  to  an  election,  an 
amendment  proposed  at  the  meeting 
striking  out  the  latter  part  of  the 
resolution  must  be  considered  and  put 
to  a  vote  by  the  chairman.  Hender- 
son V.  Bank  of  Australasia,  L.  R.  45 
Ch.  D.  330  (1890).  A  provision  in 
the  charter  to  the  effect  that  the  rights 
of  preferred  stockholders  may  be  modi- 
fied by  a  three  fourths  vote  in  interest 
at  a  meeting  of  the  preferred  stock- 
holders only,  is  strictly  construed,  and 
where  the  statute  provides  for  the 
mode  of  holding  such  meeting  the 
procedure  must  be  strictly  observed. 
Hemans  v.  Hotehkiss,  etc.  Co.,  [1899] 
1  Ch.  115.  Where  a  voluntary  unin- 
corporated association  has  no  consti- 
tution or  by-laws  or  rules,  the  conduct 
of  its  meetings  may  be  in  accordance 
with  the  ordinary  parliamentary  rules 
of  deliberative  assemblies.  Ostrom 
V.  Greene,  161  N.  Y.  353  (1900). 

1  Re  Argus  Printing  Co.,  1  N.  Dak. 
434  (1891).  Even  though  the  by-laws 
require  a  majority  in  interest  of  the 
stockholders  to  constitute  a  quorum, 
yet  if  a  majority  is  present  when  the 
meeting  is  organized  the  meeting  may 
proceed  to  an  election  even  though 
enough  stockholders  withdraw  from 
the  meeting  to  leave  less  than  a  major- 
ity remaining.  Commonwealth  v. 
Vandegrift,    232    Pa.    St.    53    (1911). 


1769 


606. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  xxxvir. 


chairman  declares  a  resolution  duly  carried,  yet  the  court  may  review 
his  decision.^  Where  the  chairman  refuses  to  poll  the  vote  and  declares 
the  meeting  adjourned,  the  courts  will  not  necessarily  interfere.^  If 
any  fraud,  surprise,  or  deceit  has  been  practiced  in  conducting  the  meet- 
ing a  different  rule  prevails.^  There  should  be  applied  to  stockholders' 
meetings  the  rule  in  directors'  meetings  that  the  majority  cannot  exclude 
the  minority  from  being  heard,  by  delegating  power  to  a  committee ; 
and  "  even  if  the  minority  had  a  voice  given  to  them,  still  if  there  existed 
a  combination  among  the  majority,  before  that  voice  was  heard,  to 
overbear  it,"  the  acts  of  such  a  body  would  be  illegal.^  The  chairman 
may  terminate  the  discussion  after  a  reasonable  time  when  the  majority 
vote  so  to  do.^  The  right  to  object  to  an  informality  may  be  waived, 
and  a  failure  upon  the  part  of  those  members  not  present  to  protest 
promptly,  upon  learning  of  the  informality,  is  a  waiver.^    Failure  to 


meeting  is  called,  under  the  English 
statutes,  to  confirm  or  reject  a  resolu- 
tion that  had  been  adopted  by  a  pre- 
vious meeting,  no  amendment  is  in 
order.  Wall  v.  London,  etc.  Corpora- 
tion, [1898]  2  Ch.  469. 

1  Yoimg  V.  South  African,  etc.  Synd., 
11896]  2  Ch.  268.  In  England  by 
statute  the  decision  of  the  chairman 
as  to  a  vote  is  conclusive,  imless  shown 
to  be  fraudulent.  Wall  v.  London, 
etc.  Corporation,  [1899]  1  Ch.  550. 
Where  the  chairman  declares  a  motion 
carried  and  there  is  no  demand  to 
poU  the  votes,  the  court  will  not  inquire 
into  the  question  of  whether  it  was 
carried.  Arnot  v.  United,  etc.  Lands, 
11901]  1  Ch.  518.  A  decision  of  the 
chair  as  to  whether  a  vote  was  carried 
or  not  is  not  binding  where  on  the  face 
of  his  statement  his  conclusion  was 
incorrect.  Re  Caratal  Mines,  [1902] 
2  Ch.  498. 

^  The  courts  will  not  interfere 
although  the  chairman  of  the  meet- 
ing refused  to  poll  the  vote  on  a  motion 
to  adjourn,  but  declared  the  meeting 
adjourned  on  a  viva  voce  vote  and  left. 
In  regard  to  the  right  to  be  heard  the 
court  refused  to  sustain  a  bill  "for  the 
purpose  of  enabling  one  particular 
member  of  the  company  to  have  an 
opportunity  of  expressing  his  opinion 
viva  voce  at  a  meeting  of  the  share- 
holders." MacDougall  v.  Gardiner, 
L.  R.  1  Ch.  D.  13  (1875);  National 
Dwellings  Soc.  v.  Sykes,  [1894]  3  Ch.  159. 


3  Johnston  v.  Jones,  23  N.  J.  Eq.  216 
(1872) ;  People  v.  Albany,  etc.  R.  R., 
55  Barb.  344  (1869) ;  aff'd,  57  N.  Y. 
161.  State  V.  Pettineli,  10  Nev.  141 
(1875) ;  Commonwealth  v.  Woelper,  3 
Serg.  &  R.  (Pa.)  29  (1817).  See  also 
§§  596,  604,  605,  supra. 

*  Great  Western  Ry.  v.  Rushout,  5 
De  G.  J.  &  Sm.  290,  310  (1852).  Cf. 
MacDougall  v.  Gardiner,  L.  R.  1  Ch.  D. 
13  (1875). 

*  Wall  v.  London,  etc.  Corporation, 
[1898]  2  Ch.  469. 

estate  v.  Lehre,  7  Rich.  L.  (S.  C.) 
234,  325  (1854);  Re  Mohawk,  etc. 
R.  R.,  19  Wend.  135  (1838) ;  Rex  v.  Tre- 
venen,  2  B.  &  Aid.  339  (1819).  Stock- 
holders who  receive  reports  of  what 
takes  place  at  meetings,  and  who  do 
not  object  to  what  is  being  done,  will 
be  considered  as  acquiescing  therein 
if  what  is  done  might  have  been  validly 
sanctioned  by  them  if  present ;  but  not 
if  what  is  done  is  altogether  illegal, 
and  beyond  the  power  of  even  all  the 
stockholders.  See  Re  Phoenix  Life 
Ass.  Co.,  2  J.  &  H.  441  (1862) ;  Irvine 
V.  Union  Bank  of  Australia,  L.  R.  2 
App.  Cas.  366  (1877).  Compare  Evans 
V.  Smallcombe,  L.  R.  3  H.  L.  249 
(1868);  aff'g  L.  R.  3  Eq.  769;  Spack- 
man  v.  Evans,  L.  R.  3  H.  L.  171  (1868) ; 
Houldsworth  v.  Evans,  L.  R.  3  H.  L. 
263  (1868) ;  Phosphate  of  Lime  Co.  v. 
Green,  L.  R.  7  C.  P.  43  (1871).  See 
also  §  607,  infra.  A  ratification  by 
the  stockholders  of  directors'  acts  can- 


1770 


CH.   XXXVII. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  606. 


attend  a  corporate  meeting  is  not  a  waiver  of  objections  thereto.*    The 
presumption  is  that  all  the  proceedings  were  regular  and  lawful.^ 

The  minutes  of  a  meeting  duly  signed  are  the  best  evidence  of  what 
the  meeting  did.'^  Where  no  written  minutes  are  kept  of  the  proceed- 
ings of  stockholders  they  may  be  proved  by  parol.*  Although  the 
record  does  not  show  that  certain  stock  was  voted,  yet  it  may  be  proved 
by  parol  evidence  that  it  was  voted. ^  Oral  evidence  of  a  discussion  at 
a  stockholders'  meeting  is  inadmissible  to  vary  or  explain  a  resolution 
actually  adopted.^  But  minority'  stockholders  may  prove  b}'  parol 
evidence  that  the  minutes  of  a  meeting  are  not  correct  and  are  the  very 
contrary  of  what  took  place."  The  secretary's  record  as  to  the  amount 
of  stock  voted  in  favor  of  a  mortgage  may  be  contradicted  by  proof 
taken  from  the  stock-book.^  In  a  meeting  called  to  affirm  the  action 
of  a  prior  meeting,  such  action  may  be  affirmed  in  part  and  rejected  in 
part.^  Stockholders  may  at  a  meeting  called  for  that  purpose  amend 
the  by-laws  so  as  to  increase  the  number  of  directors,  and  may  at  the 
same  meeting  elect  such  additional  directors. *°  If  a  stockholder  is 
violently  ejected  he  may  recover  damages  for  assault.**     Stockholders 


not  be  made  by  a  general  resolution 
ratifying  "all  of  the  acts  of  the  offi- 
cers." Farmers'  L.  &  T.  Co.  v.  San 
Diego,  etc.  St.  Ry.,  45  Fed.  Rep.  518 
(1891). 

^  Matter  of  Empire  State,  etc.,  53 
N.  Y.  Misc.  Rep.  344  (1907).  See  also 
§  599,  supra,  and  §  733,  infra. 

^Blanchard  v.  Dow,  32  Me.  557 
(1851),  where  it  was  presumed  that 
the  election  was  by  ballot ;  Ash- 
tabula, etc.  R.  R.  V.  Smith,  15  Ohio 
St.  328  (1864),  where  it  was  pre- 
sumed that  the  requisite  amount  of 
stock  was  subscribed  before  the  elec- 
tion took  place.  See  also  §§  599,  600, 
supra. 

3  Harrison  v.  Morton,  83  Md.  456 
(1896).  See  also  §  714,  irifra.  The 
failure  of  incorporators  or  stockhold- 
ers to  make  a  record  of  their  proceed- 
ings at  that  time  does  not  invalidate 
their  action.  Benbow  v.  Cook,  115 
N.  C.  324  (1894).  The  corporate 
minutes  may  be  signed  after  the  meet- 
ing has  been  held.  Miles  v.  Bough,  3 
Q.  B.  845  (1842) ;  Southampton,  etc. 
Co.  V.  Richards,  1  M.  &  Gr.  448  (1840) ; 
Lindley,  Partn.  551.  Concerning  the 
mode  of  proving  the  corporate  min- 
utes, see  §  714,  infra. 

*  Birmingham,  etc.  Co.  v.  Birming- 


ham Traction  Co.,  128  Ala.  110  (1900). 
A  by-law  may  be  proved  by  oral  evi- 
dence where  there  was  no  written 
entry  of  the  same  in  the  corporate 
records.  Masonic,  etc.  Assoc,  v.  Sever- 
son,  71  Conn.  719  (1899). 

*  Franklin  T.  Co.  v.  Rutherford,  etc. 
Co.,  57  N.  J.  Eq.  42  (1898). 

« Lipsett  V.  Hassard,  158  Mich.  509 
(1909).  "In  interpreting  the  action 
of  the  stockholders  in  passing  the 
resolution,  the  facts  and  circumstances 
surrounding  them  may  legitimately  be 
looked  to."  Zeckendorf  v.  Steinfeld, 
225  U.  S.  445,  457  (1912). 

^  Just  V.  Idaho,  etc.  Co.,  16  Idaho, 
639  (1909). 

*  Middleton  v.  Arastraville,  etc.  Co., 
146  Cal.  219  (1905). 

9  Re  Trench,  etc.  Co.,  Ltd.,  [1900]  1 
Ch.  408.  A  resolution  that  a  pre- 
vious election  was  illegal  is  ineffective 
if  it  was  legal.  Clark  v.  WUd,  81  Atl. 
Rep.  536  (Vt.  1911). 

i»  In  re  Griffing  Iron  Co.,  63  N.  J.  L. 
168  (1898);  aff'd,  63  N.  J.  L.  357 
(1899).  Gold  Bluflf,  etc.  Co.  i;.  Whit- 
lock,  75  Conn.  669  (1903). 

'1  A  person  holding  a  certificate  of 
stock  issued  by  order  of  the  court 
after  an  execution  sale,  is  entitled  to 
attend    meetings,    and    his    transferee 


1771 


§607. 


ELECTIONS 


CORPORATE   MEETINGS. 


CH.  XXXVIl. 


are  privileged  In  their  debates.^  A  stockholder  in  telegraphing  to 
another  stockholder,  in  regard  to  a  contested  corporate  election,  is  not 
liable  for  libel,  even  though  he  reflects  on  the  competency  of  the  former 
manager.  Both  parties  being  interested  in  the  communication,  it  is 
privileged,  where  it  is  in  good  faith.-  But  while  a  stockholder  at  a 
meeting  of  a  private  corporation  may  charge  fraud  against  another 
stockholder  or  officer  in  connection  with  the  corporate  affairs,  yet  a 
newspaper  has  no  right  to  report  such  charge  and  may  be  held  liable 
for  libel  in  doing  so.^ 

§  607.  The  quorum  —  A  majority  of  the  stockholders  attending 
a  meeting  may  transact  business.  —  The  right  of  the  majority  to 
rule  in  the  management  of  the  affairs  of  a  private  corporation  is  fully 
established.^    They  may  control    the  company's  business,   prescribe 


who  has  presented  the  stock  for  trans- 
fer, and  who  also  was  a  proxy  from 
the  transferrer,  is  entitled  to  attend 
the  meetings  and  may  recover  damages 
for  assault  if  he  is  ejected  from  the 
meeting.  The  company  cannot  defend 
on  the  ground  that  the  execution  sale 
was  invalid,  and  that  the  stock  had 
been  canceled.  Noller  i;.  Wright,  138 
Mich.  416  (1904). 

1  Kimball  v.  Post  Pub.  Co.,  199 
Mass.  248  (1908). 

2  Ashcroft  V.  Hammond,  197  N.  Y. 
488  (1910). 

3  Kimball  v.  Post  Pub.  Co.,  199 
Mass.  248  (1908),  the  court  saying: 
"No  doubt  a  stockholder  at  such  a 
meeting,  speaking  to  stockholders, 
may  with  impunity  say  things  deroga- 
tory to  an  officer  or  the  manager  of 
the  company  provided  that  what  he 
says  be  pertinent  to  the  matter  in  hand 
and  he  speaks  in  good  faith  and  with- 
out malice.  His  justification  rests 
upon  the  fact  that  he  is  speaking  to  the 
stockholders  upon  a  subject  in  which 
he  and  they  have  an  interest." 

"  Durfee  v.  Old  Colony,  etc.  R.  R., 
87  Mass.  230  (1862);  Covington  v. 
Covington,  etc.  Bridge  Co.,  10  Bush 
(Ky.,  69,  76  (1873) ;  East  Tennessee, 
etc.  R.  R.  V.  Gammon,  5  Sneed 
(Tenn.),  567  (1859);  McBride  v.  Por- 
ter, 17  Iowa,  203  (1864);  Faulds  v. 
Yates,  57  111.  416  (1870) ;  Leo  v.  Union 
Pacific  R.  R.,  19  Fed.  Rep.  283  (1884) ; 
8.  c,  17  Fed.  Rep.  273  (1883) ;  Barnes 
V.  Brown,  80  N.  Y.  527  (1880) ;  Gifford 
V.  New  Jersey  R.  R.,  10  N.  J.  Eq.  171 


(1854);  Dudley  v.  Kentucky  High 
School,  9  Bush  (Ky.),  576  (1873). 
See  also  Livingstone  v.  Lynch,  4 
Johns.  Ch.  573  (1820),  in  which  Chan- 
cellor Kent  clearly  states  that  the 
right  of  the  majority  to  rule  is  one 
of  the  chief  differences  between  a  cor- 
poration and  a  partnership.  The  ma- 
jority rule  at  common  law.  Com- 
monwealth t'.  Niekerson,  10  Phila. 
(Pa.)  55  (1875);  New  Orleans,  etc. 
R.  R.  V.  Harris,  27  Miss.  517,  537 
(1854).  A  majority  of  the  stockhold- 
ers control  the  policy  of  the  corpora- 
tion, and  regulate  and  govern  the  law- 
ful exercise  of  its  franchise  and  busi- 
ness, even  though  the  management 
may  not  seem  to  be  wise.  The  ma- 
jority rule.  Wheeler  v.  Pullman  Iron, 
etc.  Co.,  143  111.  197  (1892).  Where  a 
statute  requires  a  three  fourths  vote 
in  value  for  a  reorganization  of  a  com- 
pany, the  stock  not  voted  is  not 
counted  to  make  up  the  three  fourths, 
even  though  the  trustees  who  repre- 
sent the  stock  refuse  to  assent  or  dis- 
sent. Re  Neath,  etc.  Ry.,  [1892]  1  Ch. 
349.  Where  stockholders  in  an  apart- 
ment-house corporation  are  entitled  to 
rent  apartments  at  a  rental  to  be  fixed 
by  a  majority  vote  of  the  stockholders, 
an  increased  rental  so  voted  is  legal. 
The  by-laws  providing  for  such  a 
vote  override  a  general  statement  in 
a  prospectus  to  the  contrary,  the 
stockholders  knowing  of  the  by-law. 
Compton  V.  Chelsea,  128  N.  Y.  537 
(1891). 


1772 


CH.  XXXVII.] 


ELECTIONS 


CORPORATE   MEETINGS. 


[§  607. 


its  general  policy,  make  themselves  its  agents,  and  take  reasonable 
compensation  for  their  services  as  agents.^ 

The  question  has  arisen  whether  a  meeting  can  be  held  and  business 
transacted  when  a  majority  in  interest  of  the  stockholders  are  not 
present.  But  the  law  is  clear  that  those  stockholders  who  attend  a 
duly-called  stockholders'  meeting  may  transact  the  business  of  that 
meeting,  although  a  majority  in  interest  or  in  number  of  the  stockholders 
are  not  present.^    Where  by  statute  the  quorum  is  to  be  a  majority 


1  Meeker  v.  Winthrop  Iron  Co.,  17 
Fed.  Rep.  48  (1883) ;  s.  c,  sub  nom. 
Winthrop  Iron  Co.  v.  Meeker,  109 
U.  S.  180  (1883).     Cf.  §  662,  injra. 

2  Quoted  and  approved  in  Sylvania, 
etc.  R.  R.  V.  Hoge,  129  Ga.  734  (1907), 
and  Gilchrist  v.  CoUopy,  119  Ky.  110 
(1904).  Those  of  the  stockholders 
who  attend  the  meeting  constitute  a 
quorum,  although  they  are  a  minority. 
Eagle  Iron  Co.  v.  Colyar,  1.56  Fed. 
Rep.  954  (1907).  Stockholders  who 
attend  constitute  a  quorum.  Ash- 
croft  V.  Gammond,  132  N.  Y.  App.  Div. 
3  (1909).  See  also  p.  366,  note  2, 
supra.  Those  who  attend  a  stock- 
holders' meeting  constitute  a  quorum 
unless  the  charter  or  by-laws  provide  to 
the  contrary,  even  though  they  are  but 
a  minority  of  the  stockholders  and  rep- 
resent a  minority  of  the  stock.  Green 
;;.  Felton,  42  Ind.  App.  67.5  (1908). 
Morrill  v.  Little  Falls  IMfg.  Co.,  53 
Minn.  371  (1893) ;  Granger  v.  Grubb, 
7  Phila.  350  (1870) ;  Craig  v.  First,  etc. 
Church,  88  Pa.  St.  42  (1878),  where  the 
principle  is  laid  down  that  this  is  the 
rule  for  a  meeting  composed  of  an 
indefinite  number  of  persons,  like  stock- 
holders, but  that  where  a  definite  num- 
ber is  involved,  as  in  a  board  of  direc- 
tors, then  a  majority  must  be  present. 
Brown  v.  Pacific  Mail,  etc.  Co.,  5 
Blatchf.  525  (1867) ;  8.  c,  4  Fed.  Cas. 
420 ;  Field  v.  Field,  9  Wend.  394  (1832) ; 
Gowen's  Appeal,  10  N.  W.  Cas.  85 
(Pa.  1880);  Madison  Ave.  Bapt. 
Church  V.  Oliver  St.  Bapt.  Church,  5 
Robt.  (N.  Y.)  649  (1867);  Everett  v. 
Smith,  22  Minn.  53  (1875).  As  to  the 
rule  concerning  directors,  see  §  713a, 
infra. 

It  has  been  held  that  one  person 
cannot  constitute  a  quorum ;  that  at 
least  two  members  are  necessary   to 


make  a  corporate  meeting.  Sharpe  v. 
Dawes,  2  Q.  B.  D.  26  (1876).  In  this 
case  one  stockholder  "met,"  did  all 
necessary  business,  and  then  voted 
himself  a  vote  of  thanks.  In  Re 
Sanitary  Carbon  Co.,  12  W.  N.,  p.  223 
(1877),  where  one  stockholder,  having 
also  proxies  of  the  remaining  three 
stockholders,  held  a  meeting,  "voted 
himself  into  the  chair,  proposed  a  reso- 
lution to  wind  up  voluntarily,  declared 
the  resolution  passed,  and  appointed  a 
liquidator,"  the  court  reluctantly  fol- 
lowed the  preceding  case  and  declared 
the  "meeting"  invalid.  Where  one 
person  holds  all  the  preferred  stock 
he  may  hold  a  meeting  in  behalf  of 
that  stock.  East  v.  Bennett  Brothers, 
Ltd.,  [1911]  1  Ch.  163.  In  the  case 
Morrill  v.  Little  Falls,  etc.  Co.,  53 
Minn.  Rep.  371  (1893),  where  one  stock- 
holder held  a  stockholders'  meeting, 
the  court  said:  "It  was  held  in 
Sharpe  u.  Dawes,  46  Law  J.  Q.  B.  104, 
followed  reluctantly  in  another  case, 
that  one  person  cannot  constitute  a 
quorum ;  that  at  least  two  persons  are 
necessary  to  hold  a  corporate  meet- 
ing ;  but  this  decision  is  based  upon 
a  narrow  lexicographical  definition  of 
the  word  'meeting,'  as  the  coming  to- 
gether of  two  or  more  persons,  —  a 
reason  that  does  not  commend  itself 
to  our  judgment."  In  the  case  Ostrom 
V.  Greene,  161  N.  Y.  353  (1900),  the 
court  stated  that  it  was  open  to  ques- 
tion as  to  whether  a  majority  of  all  the 
members  in  an  unincorporated  associa- 
tion was  necessary  in  order  to  con- 
stitute a  quorum.  In  the  ease  Haskell 
I'.  Read,  68  Neb.  107  (1903),  the  court 
withdrew  its  statement  in  a  prior  deci- 
sion in  the  same  case  that  a  majority 
must  be  present  in  order  to  constitute  a 
quorum. 


1773 


§  607.]  ELECTIONS  —  CORPORATE   MEETINGS.  [cH.  XXXVII. 

of  the  stockholders,  this  means  a  majority  in  interest.^  \Vhere  a  stat- 
ute requires  holders  of  a  majority  of  the  stock  to  be  present  in  person 
or  by  proxy  to  constitute  a  meeting,  an  election  where  a  majority  is  not 
present,  is  invalid.^  A  statute  requiring  the  consent  of  the  stockholders 
to  the  sale  of  corporate  property  does  not  mean  all  the  stockholders, 
but  means  a  majority.^  Where  the  statute  authorizes  the  stockholders 
to  change  the  number  of  directors  by  a  vote  of  a  majority  in  interest,  a 
by-law  requiring  ninety  per  cent,  in  interest  is  illegal.^  A  by-law  can- 
not require  a  majority  in  interest  of  the  stockholders  to  constitute  a 
quorum  where  the  statute  states  that  those  who  attend  a  meeting  in 
person  or  by  proxy  shall  constitute  such  quorum.'^  Where  the  by-laws 
provide  that  they  may  be  amended  by  a  vote  of  two  thirds  at  any  meet- 
ing, this  means  two  thirds  of  the  stock  represented  at  the  meeting.^ 

Of  those  who  attend  the  stockholders'  meeting  a  majority  rule. 
Their  acts  are  as  valid  as  though  they  constituted  a  majority  of  all 
the  stockholders,  or  constituted  a  majority  at  a  meeting  in  which 
a  majority  of  the  stockholders  were  present."  The  presumption  always 
is  that  a  legal  majority  voted  for  any  act  or  proceeding  that  appears 
to  have  been  passed.^  The  majority  rule  does  not  apply  to  a  community 
irrigation  ditch.^ 

Two  important  limitations  and  exceptions  to  the  above  principles 
are  to  be  borne  carefully  in  mind. 

First,  the  majority  cannot  bind  the  minority  to  submit  to  an  act 
by  the  corporation  where  such  act  is  beyond  the  express  and  implied 
powers  of  the  corporation  as  given  to  it  by  its  charter.  Such  an  act  is 
ultra  vires.    A  large  amount  of  litigation  has  arisen  from  the  attempt 

iWeinburgh  v.  Union,  etc.  Co.,  55  etc.  Co.  v.  Meier,  39  Mo.  53   (1866), 

N.  J.  Eq.  640  (1897).     A  by-law  that  and   same   cases  as  in   the   preceding 

states  a  quorum  shall  be  one  third  of  notes ;  Gowen's  Appeal,  10  W.  N.  Cas. 

the  stockholders  holding  one  third  of  85   (1881).     Such  of  the  stockholders 

the    shares    of    stock   refers    to    stock  as  attend  a  duly  called  stockholders' 

issued  and  not  to  the  authorized  cap-  meeting  constitute  a  quorum,   and  a 

ital  stock.     Castner  v.  Twitchell,  etc.  majority  of  that  quorum  control  the 

Co.,  91  Me.  524  (1898).  meeting.     Re  Rapid,  etc.  Co.,  15  N.  Y. 

2  Hill  V.  Town,  138  N.  W.  Rep.  334  App.  Div.  530  (1897),  holding  also 
(Mich.  1912) .  that  where  the  statutes  provide  that  a 

3  Louis\'ille,  etc.  R.  R.  v.  Jarvis,  87  plurality  of  the  votes  represented  at 
S.  W.  Rep.  759  (Ky.  1905).  See  also  an  election  shall  elect,  the  by-laws  can- 
§  608,  infra.  not  require  a  majority  to  constitute  a 

^  Katz  V.  The  H.  &  H.  etc.  Co.,  183  quorum.     A  majority  of  those  who  at- 

N.   Y.   578    (1905).     See  also   §  622a,  tend  the  meeting  constitute  a  quorum. 

infra.  Gilchrist  v.  Collopy,  119Ky.  110  (1904). 

*  Darrin  v.  Hoff,  99  Md.  491  (1904).  ^  Citizens'  Mutual,  etc.  Ins.  Co.  v. 

«  Green  v.  Felton,  42  Ind.  App.  675  Sortwell,  90  Mass.  217   (1864). 
(1908).  »  Candelaria  v.  Vallejos,  13  N.  M. 

7  Austin  Min.  Co.  r.  Gemmel,  10  Ont.  146  (1905). 
Rep.    (Can.)    696    (1886);     Columbia, 

1774 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE   MEETINGS.  [§  608. 

of  the  majority  to  carry  out  ultra  vires  acts.  The  minority  may  ob- 
ject, and  even  a  single  stockholder  may  have  the  ultra  vires  act  enjoined 
or  set  aside.^  The  failure  of  a  stockholder  to  attend  the  stockholders* 
meeting  is  not  a  waiver  of  his  right  to  object  to  the  acts  of  the  meeting 
as  ultra  vires,  even  though  the  notice  of  the  meeting  stated  what  was 
to  be  done.- 

The  second  exception  arises  where  the  legislature  amends  the  charter 
of  the  corporation,  and  the  majority  of  the  stockholders  attempt  to 
accept  that  amendment  and  act  upon  it.  In  such  a  case,  if  the  amend- 
ment materially  changes  the  scope  and  purpose  of  the  enterprise,  the 
minority  may  object  and  may  prevent  the  acceptance  of  the  amend- 
ment.^ 

The  question  of  how  far  the  majority  rule  when  that  majority  are 
interested  in  a  contract  which  the  corporation  has  made,  and  which  is 
being  passed  upon  by  a  stockholders'  meeting,  is  considered  elsewhere.* 

§  608.  The  majority  of  votes  cast  constitutes  ari  election.  —  It  is  the 
well-settled  rule  in  corporations  having  a  capital  stock  divided  into 
shares  that  a  majority  of  the  votes  cast  at  an  election  constitutes  an 
election.^  And  this  majority,  moreover,  need  not  be  an  actual  numerical 
majority  of  all  the  votes  represented  at  the  meeting,  but  only  a  majority 
of  the  votes  cast.^  Accordingly,  a  majority  of  the  votes  cast  will  elect, 
even  though  a  majority  of  the  shares  of  stock  are  not  voted  at  all,  and 
even  though  the  owners  are  present  at  the  meeting  and  refuse  to  vote.^ 

'  This   subject   is   fully    treated   in  Barb.  344,  368  (1869) ;   afif'd,  57  N.  Y. 

Part  IV,  infra.  161 ;     State    v.    Fagan,    42   Conn.    32 

2  MeFadden  v.  Leeka,   48  Ohio   St.  (1875),  a  municipal  corporation  case. 

513    (1891).     See    also    §  606,    supra.  See  also  §  607,  supra. 

Where    the    stockholders    consent    to  *  See   §  607,  supra;    Craig  v.  First 

the  company  buying  property  owned  Pres.   Church,  88  Pa.   St.  42   (1878) ; 

by    one    of    the    directors,    a    stock-  Re     Union   Ins.     Co.,   22   Wend.   591 

holder  who  was  present  and  did  not  (1840),  holding  also    that  a   plurality 

object    cannot    complain .       Steinway  elects.     At    a    municipal    corporation 

t'.  Steinway,  2  N.  Y.  App.  Div.  301  meeting    only    those    who    vote    are 

(1896) ;    aff'd,  157  N.  Y.  710,  and  in  counted.     Persons   not   voting   at   all 

163  N.  Y.   183.      A   stockholder   who  are   not   counted.     Smith   v.    Proctor, 

takes  part  in  and  assents  to  the  action  130  N.  Y.  319  (1891).     In  regard  to 

of     a     stockholders'     meeting     which  voting  in  church  elections  in  New  York, 

authorizes  a  sale  of  the  property  to  see  People  y.  Keese,  27  Hun,  483  (1882). 

another   corporation   in   exchange   for  '  Gowen's  Appeal,  10  W.  N.  Cas.  85 

stock   of   the   latter   to   be   issued   to  (1881),  where  the  supreme  court  held 

stockholders    of    the    former    cannot  that    "those    who    voluntarily    absent 

afterwards  object  thereto  and  demand  themselves     from     a     meeting     duly 

cash,   even  though  his  assent  was  only  called  for  an  election  must  recognize 

by  refraining  from  voting  against  the  the  validity  of  the  election  regularly 

proposition.     Carr   v.    Rochester,    etc.  made  by  those  who  do  attend."     The 

Co.,  207  Pa.  St.  392  (1904).  question  was  whether  an  election  held 

'  See  ch.  XXVIII,  supra.  by  a  meeting  of  railroad  stockholders 

*  See  ch.  XXXIX,  infra.  at  which  a  majority  of  all  votes  was 

'  People  V.  Albany,  etc.   R.  R.,  55  not   cast    could    be    considered    valid. 

1775 


608.1 


ELECTIONS  —  CORPORATE   MEETINGS. 


[cH.  XXXVII. 


Although  less  than  the  full  number  of  directors  to  be  elected  receive 
a  majority  or  plurality,  yet  those  receiving  such  majority  or  plurality 
are  elected,  and  another  ballot  or  election  may  be  had  to  elect  the  re- 
mainder.^ Where  the  number  of  directors  has  not  been  legally  reduced 
in  accordance  with  the  statute,  and  at  the  next  election  a  few  votes  are 
cast  for  the  larger  number  of  directors,  while  nearly  all  the  votes  were 
cast  only  for  the  reduced  number,  the  extra  votes  elect  the  extra  member 
or  members  of  the  board.-  Not  only  in  the  elections,  but  in  voting  on 
any  other  subject,  the  majority  controls,  unless  there  is  a  statutory 
provision  to  the  contrary,^  or  there  is  fraud.'*    A  statute  requiring  the 


State  V.  Green,  37  Ohio  St.  227  (1881), 
was  a  case  of  election  of  clerk  by  a 
city  council,  and  it  was  held  that,  all 
being  present  and  engaged  in  holding 
the  election,  half  the  members  may 
not  defeat  an  election  by  refusing  to 
vote  and  then  objecting  because  a 
quorum  had  not  voted.  Common- 
wealth V.  Wickersham,  66  Pa.  St.  134 
(1870),  involved  the  election  of  a 
county  school  superintendent,  which 
was  required  to  be  "viva  voce  by  a 
majority  of  the  whole  number  of  di- 
rectors present."  A  person  receiving 
exactly  half  that  number  could  not 
be  declared  elected,  although  one  di- 
rector refused  to  vote  on  the  last  bal- 
lot. "He  remained,  and  being  present, 
was  entitled  to  be  counted."  The 
legal  intendment  [of  his  action]  was 
that  he  voted  for  neither  or  for  the 
minority  candidate."  But,  under  a 
by-law  requiring  a  majority  of  the 
stock  to  be  present,  it  has  been  held 
that  the  majority  must  be  a  majority 
of  the  whole  stock,  and  not  merely  of 
the  stock  subscribed  for.  Ellsworth, 
etc.  Co.  V.  Faunce,  79  Me.  440  (1887). 
If  the  statute  requires  a  majority  of 
the  directors  to  elect  a  director  or 
president,  one  who  is  present  but  does 
not  vote  must  be  counted.  People  v. 
Conklin,  7  Hun,  188  (1876).  See  also 
§  713a,  infra,  on  this  point.  Stock- 
holders may  vote  for  less  than  the 
whole  number  of  directors  to  be  elected. 
Vandeburgh  v.  Broadway  Ry.,  29 
Hun,  348  (1883).  But  where  a  meet- 
ing was  called  to  elect  three  directors 
and  a  majority  of  the  stockholders 
voted  for  five  directors,  only  a  small 
minority  voting  for  three,  the  latter 
votes  were  held  the  only  valid  ones, 


and  the  three  voted  for  were  declared 
elected.  State  v.  Thompson,  27  Mo. 
365,  369  (1858).  Where  twenty-three 
directors  are  to  be  elected,  a  vote  elect- 
ing twenty-two  is  effectual  to  elect 
those  twenty-two.  A  new  election  may 
be  held  to  elect  the  remaining  one. 
Re  Union  Ins.  Co.,  22  Wend.  591 
(1840).  This  case  holds  also  that  a 
plurality  is  sufficient  to  elect. 

1  Re  Union  Ins.  Co.,  22  Wend.  591 
(1840).  Even  though  the  board  of 
directors  consists  of  five,  and  the 
stockholders  at  an  election  cast  all 
their  votes  for  two,  those  two  are 
elected,  leaving  three  vacancies.  Gil- 
christ V.  Collopy,  119  Ky.  110  (1904). 
Less  than  the  full  board  may  be 
elected.  The  old  board  goes  out,  how- 
ever, and  none  of  them  holds  over. 
People  V.  Fleming,  59  Hun,  518  (1891). 
Where  five  candidates  receive  a  plural- 
ity and  three  others  receive  a  less 
number,  but  the  latter  are  a  tie,  the 
board  being  seven,  the  five  are  duly 
elected  and  may  act  as  a  board,  even 
though  no  second  ballot  has  been 
taken  to  vote  off  the  tie.  Wright  v. 
Commonwealth,  109  Pa.  St.  560  (1885). 
Where  at  an  election  four  persons  re- 
ceived the  necessary  votes,  they  will 
be  elected  directors,  although  the 
whole  number  of  directors  to  be 
elected  is  seven.  A  subsequent  election 
cannot  elect  the  whole  seven,  but  can 
elect  only  the  remaining  three.  For- 
syth V.  Brown,  2  Pa.  Dist.  765  (1893). 
See  also  §  620,  infra. 

2  Matter  of  Westchester  T.  Co.,  186 
N.  Y.  215  (1906). 

'  See  §  684,  infra,  and  ch.  XXVIII, 
su-pra.     78  S.  E.  Rep.  161. 

^  Where  there  are  two  trustees  and 


1776 


CH.   XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  609. 


consent  of  the  stockholders  to  the  sale  of  corporate  property  does  not 
mean  all  the  stockholders,  but  means  a  majority.^ 

§  609.  Is  every  share  of  stock  entitled  to  one  vote  ?  —  At  common 
law,  in  public  or  municipal  corporations,  each  qualified  elector  has 
one  vote,  and.  only  one.  This  was  a  natural  rule,  since  each  duly- 
qualified  citizen  voted  as  a  citizen  and  not  as  the  holder  of  stock.  But 
the  same  rule  should  not  apply  to  private  corporations.  Stockholders 
are  interested  not  equally,  but  in  proportion  to  the  number  of  shares 
held  by  them.  Naturally  and  reasonably  each  share  should  be  entitled 
to  one  vote.  It  has  been  held,  however,  that  at  common  law  each 
stockholder  had  but  one  vote,  irrespective  of  the  number  of  shares  held 
by  him.2  Where  the  statutes  are  silent  on  the  subject,  a  by-law  may 
give  to  each  shareholder  one  vote  for  each  share  up  to  ten,  and  may  fix 
the  proportion  of  votes  which  he  may  cast  in  excess  of  that  number.' 


they  hold  a  majority  of  the  stock,  and 
one  of  them  votes  for  himself  and  the 
other  votes  for  some  one  else,  thereby 
nullifying  the  estate's  vote,  and  then 
the  former  trustee,  by  means  of  the 
minority  stock,  elects  himself  di- 
rector and  president  and  controls  the 
board,  the  court  will  set  the  election 
aside.  Matter  of  Elias,  17  N.  Y. 
Misc.  Rep.  718  (1896).  A  majority 
of  the  stockholders  may  elect  them- 
selves directors  and  control  the  cor- 
poration. White  V.  Snell,  3.5  Utah, 
434  (1909). 

>  Louisville,  etc.  R.  R.  v.  Jarvis,  87 
S.  W.  Rep.  759  (Ky.  1905).  An 
amendment  to  the  certificate  of  incor- 
poration may  be  made  under  a  statute 
by  a  majority  vote  where  the  statute 
does  not  expressly  require  a  unanimous 
vote.  Re  Sharood  Shoe  Coporation, 
192  Fed.  Rep.  945  (1912).  A  statute 
requiring  a  certain  vote  of  the  stock 
to  amend  the  charter  refers  to  the  stock 
outstanding  and  not  to  the  authorized 
capital  stock.  Foote  v.  Greilick,  166 
Mich.  636  (1911).  A  consolidation 
under  the  Georgia  statute  need  not  be 
approved  by  every  stockholder.  A 
majority  vote  is  sufficient.  Dady  v. 
Georgia,  etc.  Ry.,  112  Fed.  Rep.  838 
(1900).  A  committee  of  arbitration 
may  act  by  a  majority  vote  unless  the 
agreement  provides  otherwise.  The 
resignation  of  one  member  just  before 
the  award  is  made  does  not  invalidate 
the  award.  Republic  of  Colombia  v. 
(112)  17 


Cauca  Co.,  106  Fed.  Rep.  337  (1901) ; 
aff'd,  113  Fed.  Rep.  1020.  Where  a 
company  may  be  dissolved  on  a  vote  of 
two  thirds  of  the  stock  represented  at 
a  meeting  called  for  that  purpose,  this 
does  not  mean  two  thirds  of  the 
entire  capital  stock.  Dreifus  v.  Colo- 
nial, etc.  Co.,  123  La.  61  (1909).  See 
also  §  609,  infra. 

2  Taylor  v.  Griswold,  14  N.  J.  L. 
222  (1834),  declaring  that  a  by-law  to 
the  contrary  is  void.  This  decision  in 
the  latter  respect  is  wrong,  and  in 
the  former  respect  is  unfortunate.  At 
common  law  stockholders  voted  by 
show  of  hands,  and  a  large  stockholder 
had  no  greater  vote  than  a  small 
one.  Re  Horbury,  etc.  Co.,  L.  R.  11 
Ch.  D.  109  (1879).  Stockholders  each 
have  one  vote;  not  even  a  special 
provision  in  the  articles  filed  under  a 
general  act  can  change  this  rule. 
Commonwealth  v.  Nickerson,  10  Phila. 
(Pa.)  55  (1873).  Each  share  of  stock 
is  entitled  to  one  vote.  Western,  etc. 
Co.  V.  Burrows,  144  111.  App.  350 
(1908).  For  an  interesting  statement 
of  the  origin  of  the  practice  of  giving 
each  stockholder  one  vote  only,  and 
of  the  gradual  changes  made  in  the 
rule,  see  Harvard  Law  Rev.,  Nov., 
1888,  p.  156.     See  §  621,  infra. 

5  Commonwealth  v.  Detwiller,  131 
Pa.  St.  614  (1890).  A  by-law  may 
authorize  one  vote  for  each  share  of 
stock,  and  a  provision  to  this  effect 
allows  such  vote  on  all  questions. 
77 


§  609. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[cH.  XXXVII. 


A  by-law  cannot  give  to  the  presiding  officer  a  casting  vote  at  an  elec- 
tion after  he  has  once  voted  his  stock. ^ 

Generally  the  charter  or  statutes  prescribe  that  each  share  of  stock 
shall  be  entitled  to  one  vote.^  And  a  statutory  or  charter  provision  to 
this  effect  applies  not  only  to  elections,  but  also  to  all  other  questions 
that  may  come  before  the  stockholders'  meetings.^  Preferred  stock 
may  by  the  terms  of  its  original  issue  be  deprived  of  voting  power,  even 
though  the  statutes  provide  for  each  stockholder  casting  as  many  votes 
as  he  has  shares.^  An  election  to  be  held  by  a  "  majority  of  stock- 
holders "  means  a  majority  in  interest.^  A  stock  vote  need  not  be  taken 
unless  called  for.^  And  although  each  voter  is  given  one  vote,  when 
in  fact  each  share  of  stock  is  entitled  to  one  vote,  yet  if  for  eight  months 
the  stockholders  acquiesce  in  the  election,  the  court  will  not  by  man- 
damus order  a  new  election."  Sometimes  the  bondholders  are  given  a 
vote.^    Under  the  reserved  right  of  the  legislature  to  amend  a  charter 


Proctor,  etc.  Co.  v.  Finley,  98  Ky.  405 
(1895),  approving  the  text  above. 

1  Lamb  v.  Melntire,  183  Mass.  367 
(1903). 

2  Hays  V.  Commonwealth,  82  Pa.  St. 
518  (1876).  Where,  by  statute,  two 
thu-ds  of  the  stockholders  are  author- 
ized to  do  an  act,  this  is  construed  to 
mean  two  thirds  of  the  stock  —  at  least 
long  acquiescence  therein  has  that  ef- 
fect. Fredericks  v.  Pennsylvania 
Canal    Co.,    109    Pa.    St.    50    (1885). 

3  Re  Rochester,  etc.  Co.,  40  Hun,  172 
(1886),  construing  a  statute  which  is 
applicable  to  all  New  York  corpora- 
tions. Each  share  is  entitled  to  one 
vote  on  a  motion  at  an  election  to  set 
aside  the  first  vote  and  to  take  an- 
other vote.  In  re  Mathiason  Mfg.  Co., 
122  Mo.  App.  437  (1907). 

estate  V.  Swanger,  190  Mo.  561 
(1905).  See  also  §  269,  supra.  Where 
the  constitution  of  the  state  provides 
that  each  share  of  stock  shall  have 
one  vote,  a  statute  authorizing  the 
issue  of  stock  with  such  voting  powers 
as  may  be  expressed  in  the  certifi- 
cate of  incorporation  does  not  sustain 
the  withholding  of  a  vote  by  the  pre- 
ferred stock,  even  though  the  certifi- 
cate of  incorporation  so  provides. 
Brooks  V.  State,  79  Atl.  Rep.  790 
(Del.  1911). 

^  Quoted  and  approved  in  In  re 
Mathiason  Mfg.  Co.,  122  Mo.  App.  437 
(1907).     Weinburgh  v.  Union,  etc.  Co., 


55  N.  J.  Eq.  640  (1897).  See  also 
§  608,  supra. 

^  Jones  V.  Concord,  etc.  R.  R.,  67 
N.  H.  234  (1892).  Even  if,  on  a  poll 
demanded  by  five  members,  each  share 
has  one  vote,  yet  until  such  poll  is 
demanded  voting  is  by  show  of  hands. 
Re  Horbury,  etc.  Co.,  L.  R.  11  Ch.  D. 
109  (1879). 

'  Re  Moore,  etc.  Co.,  14  Q.  B.  Rep. 
(Can.)  365  (1856). 

8  The  case  PoUitz  v.  Wabash,  etc. 
Co.,  167  Fed.  Rep.  145  (1909),  involved 
a  scheme  by  which  debentvire  bond- 
holders were  given  the  power  to  elect  a 
'majority  of  the  board  of  directors,  the 
president  to  be  agreed  upon  with  the 
minority  of  the  board,  and  they,  failing 
to  make  such  agreement,  the  president 
to  be  nominated  by  the  trustee  of  the 
mortgage.  An  agreement  of  promoters 
with  an  outside  party  that  he  shall 
subscribe  for  stock  and  take  part  in  the 
management  on  the  same  terms  as 
themselves  is  void  as  depriving  stock- 
holders of  the  right  to  elect  directors. 
Hampton  v.  Buchanan,  51  Wash.  155, 
(1908).  In  the  case  Arkansas,  etc.  Co. 
V.  Ft.  Lyon,  etc.  Co.,  173  Fed.  Rep.  601 
(1909),  complainant,  a  quasi-public 
irrigation  company,  sued  for  spe- 
cific performance  of  a  contract  with 
a  land  company,  and  the  latter 
set  up  that  by  the  contract  it 
had  a  right  to  name  two  of  the  five 
directors   of   the   former,    and   it   ap- 


1778 


CH.   XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


G09a. 


of  an  insurance  company,  it  cannot  prescribe  that  twenty-eight  of  the 
fifty-two  directors  shall  be  elected  by  policy  holders,  the  remaining 
twenty-four  to  be  elected  by  the  stockholders,  but  where  the  original 
charter  contemplated  voting  by  the  policy  holders  under  certain  con- 
tingencies, the  legislature  may  authorize  the  policy  holders,  as  well 
as  the  stockliolders,  to  vote  at  elections  without  giving  a  certain  number 
of  directors  to  each,  and  hence  as  against  the  dissent  of  minority  stock- 
holders the  majority  cannot  amend  the  charter  so  as  to  exclude  the 
stockholders  from  voting  for  the  above  mentioned  twenty-eight  direc- 
tors.^ 

§  609a.  Cumulative  voting.  —  In  the  constitutions  of  several  of 
the  states  there  are  provisions  for  enabling  a  minority  in  interest  of 
the  stockholders  to  elect  a  minority  of  the  directors.  This  is  effected 
by  what  is  known  as  a  system  of  cumulative  voting.  By  it  each  stock- 
holder is  entitled  to  as  many  votes  for  directors  as  equal  the  number  of 
shares  he  owns  multiplied  by  the  number  of  directors  to  be  elected. 
Thus,  if  there  are  six  directors  to  be  elected,  a  stockholder  who  owns  one 
hundred  shares  may  poll  six  hundred  votes,  and  these  votes  he  may  give 
entirely  to  one  or  two  or  more  of  the  six  candidates,  as  he  may  see  fit. 
In  this  way  any  minority  of  the  stockholders  owning  one  sixth  of  the 


peared  that  in  addition  thereto  by 
cumulating  its  votes  under  the  Colo- 
rado statute,  it  might  elect  one  other 
director,  thus  controlling  the  former, 
but  the  court  in  decreeing  specific 
performance  did  not  pass  upon  this 
provision  of  the  contract,  because 
the  other  stockholders  were  not  made 
parties.  A  contract  between  a  New 
Jersey  land  company  and  a  railroad 
company  by  which  the  latter  loans 
money  to  the  former  and  for  sLx  years  is 
to  name  three  of  the  seven  directors, 
one  of  the  three  to  be  president  and 
general  manager,  and  the  other  foiir 
directors  to  be  satisfactory  to  it,  is 
illegal,  even  though  a  majority  of  the 
stock  of  the  New  Jersey  company  is 
pledged  to  the  railroad  company  to 
secure  the  loans  and  is  to  be  voted  by 
the  raih-oad  company.  A  minority 
stockholder  of  the  land  company  may 
maintain  a  bill  to  cancel  such  a  con- 
tract. Holt  V.  California,  etc.  Co., 
161  Fed.  Rep.  3  (1908). 

1  Lord  V.  Equitable,  etc.  Soc,  194 
N.  Y.  212  (1909),  the  court  saying 
(pp.  228,  229)  :  "The  right  to  vote  for 
directors,    therefore,    is    the    right    to 


protect  property  from  loss  and  make  it 
effective  in  earning  dividends.  In 
other  words,  it  is  the  right  which  gives 
the  property  value  and  is  part  of  the 
property  itself,  for  it  cannot  be  sepa- 
rated therefrom.  Unless  the  stock- 
holder can  protect  his  investment  in 
this  way  he  cannot  protect  it  at  all, 
and  his  property  might  be  wasted  by 
feeble  administration  and  he  could  not 
prevent  it.  He  might  see  the  value  of 
all  he  possessed  fading  away,  yet  he 
would  have  no  power,  direct  or  indirect, 
to  save  himself,  or  the  company  from 
financial  downfall.  With  the  right 
to  vote,  as  we  may  assume,  his  prop- 
erty is  safe  and  valuable.  Without 
that  right,  as  we  may  further  assume, 
his  property  is  not  safe  and  may 
become  of  no  value.  To  absolutely 
deprive  him  of  the  right  to  vote,  there- 
fore, is  to  deprive  him  of  an  essential 
attribute  of  his  property.  To  so  under- 
mine that  right  as  to  essentially  affect 
its  power  of  protection,  would,  under 
ordinary  circumstances,  undermine  the 
right  to  property  involved  in  the 
ownership  of  stock  and  we  have  so 
held."     See  also  §  501,  supra. 


1779 


I  609a.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[cH.  XXXVir. 


stock,  acting  together,  may  elect  one  member  of  a  board  of  six  directors, 
and  thus  secure  a  representation  in  that  body.  A  larger  minority  might 
secure  the  election  of  two  members  of  such  a  board,  the  possibility  of 
increasing  the  minority  representation  increasing  as  the  minority  in- 
creases, without  it  ever  becoming  possible  for  a  minority,  upon  a  full 
vote,  to  secure  more  than  its  equitable  proportion  of  the  whole  board 
of  directors.  The  larger  the  number  of  directors  the  smaller  would  be 
the  minority  which  would  be  able  to  elect  one  member  of  the  board ; 
and  the  larger  the  minority  the  greater  the  representation  possible  to 
be  secured.^  Constitutional  or  statutory  provisions  which  are  designed 
to  secure  such  a  minority  representation  are  found  in  California,  Pennsyl- 
vania, Illinois,  West  Virginia,  Missouri,  Nebraska,  Michigan,  Kansas, 
Idaho,  Kentucky,  Mississippi,  Montana,  North  Dakota,  and  South 
Dakota.^  These  provisions,  if  designed  to  be  retroactive,  have  been 
held  unconstitutional  and  void.  They  can  only  apply  to  corporations 
chartered  after  their  enactment.    So  far  as  they  concern  corporations 


1  Cumulative  voting  given  by  the 
constitution  is  an  absolute  right,  and 
does  not  require  notice  of  the  intent 
to  so  vote,  nor  any  by-laws,  to  give 
it  efficacy.  By  this  provision,  "if  there 
are  six  directors  to  be  elected,  the 
single  shareholder  has  six  votes,  and, 
contrary  to  the  old  rule,  he  may  cast 
these  six  votes  for  a  single  one  of 
the  candidates,  or  he  may  distribute 
them  to  two  or  more  of  such  candi- 
dates, as  he  may  think  proper.  He 
may  cast  two  ballots  for  each  of  three 
of  the  proposed  directors,  —  three  for 
two,  or  two  for  one,  and  one  each  for 
four  others ;  or  finally,  he  may  cast 
one  vote  for  each  of  the  six  candidates." 
Pierce  v.  Commonwealth,  104  Pa.  St. 
150  (1883). 

2  The  Penn^lvania  provision  is  con- 
strued in  Wright  v.  Commonwealth, 
109  Pa.  St.  560  (1885),  holding  that 
part  of  the  directors  so  elected  by  a 
plurality  and  declared  elected  may  act, 
although  the  remaining  directors  are 
not  elected  by  reason  of  the  vote  as 
to  them  being  a  tie.  See  also  Com- 
monwealth V.  Lintsman,  6  Pittsb.  L.  J. 
(N.  S.)  122  (1875).  Cumulation  of 
votes  was  upheld  in  Commonwealth 
V.  Yetter,  190  Pa.  St.  488  (1899),  a 
case  where  a  school  was  incorporated 
as  a  joint-stock  corporation.  The 
Ohio   statute  prescribing   that   !'each 


share  shall  entitle  the  owner  to  as  many 
votes  as  there  are  directors  to  be 
elected"  does  not  authorize  cumiilative 
voting.  State  v.  Stockley,  45  Ohio 
St.  304  (1887).  The  Ohio  statute  of 
1898  provides  for  cumulative  voting. 
Schwartz  v.  State,  61  Ohio  St.  497 
(1900).  Where  cumulative  voting  pre- 
vails, and  the  statutes  require  three 
directors  to  be  residents,  and  all  the 
votes  are  cumulated  on  non-residents 
excepting  thirty-two  which  are  cast 
for  three  residents,  the  three  residents 
are  elected,  and  the  remaining  direc- 
tors are  those  of  the  non-residents 
who  received  the  highest  number  of 
votes.  Horton  v.  Wilder,  48  Kan.  222 
(1892).  In  Wright  v.  Central  Cal.  etc. 
Co.,  67  Cal.  532  (1885),  the  court  said 
that  this  provision  conferred  "upon 
the  individual  stockholder,  entitled  to 
vote  at  an  election,  the  right  to  cast 
all  the  votes  which  his  stock  repre- 
sents, multiplied  by  the  number  of  di- 
rectors to  be  elected,  for  a  single  can- 
didate, should  he  think  proper  to  do 
so,  .  .  .  or  by  distributing  them, 
upon  the  same  principle,  among  as 
many  candidates  for  directors  as  he 
shall  think  fit."  The  court  held  also 
that  this  constitutional  right  as  to 
voting  could  not  be  changed  by  a 
resolution  of  the  directors. 


1780 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  609a. 


chartered  before  the  adoption  of  such  a  constitutional  provision  they 
impair  the  obHgation  of  the  contract  between  the  corporation,  the  stock- 
holders, and  the  state,  and  infringe  the  vested  rights  of  the  stockholders.^ 
But,  under  its  reserved  power  to  alter,  amend,  or  repeal  a  charter  the 
legislature  may  allow  cumulative  voting.-  A  statute  giving  the  right 
to  cumulate  votes  does  not  apply  to  corporations  then  existing,  even 
though  such  corporations  accept  the  benefits  of  subsequent  statutes, 
such  statutes  not  imposing  any  conditions.^ 

There  are  certain  dangers  about  this  mode  of  voting,  and  an  unwary 
majority  may  find  that  a  smart  minority  has  deprived  the  majority  of 

1  State  V.  Greer,  78  Mo.  188  (1883) ;     cumulative    voting,    such    cumulative 

voting  applies  to  it.  Gregg  v.  Granby, 
etc.  Co.,  164  Mo.  616  (1901).  The 
legislature  has  no  power  to  amend  the 
charter  so  as  to  allow  cumulative  vot- 
ing, even  though  in  the  original  char- 
ter the  legislature  reserved  the  right 
to  alter,  amend,  or  repeal.  Such  re- 
served right  is  only  for  matters  which 
concern  the  public.  In  re  Election 
Newark  Assoc,  etc.,  64  N.  J.  L.  217 
(1899) ;  Attorney-General  v.  Looker, 
111  Mich.  498  (1897).  See  §  501, 
supra.  In  West  Virginia  it  is  held 
that  where  the  legislature  has  the 
right  to  amend  or  repeal  a  charter, 
the  statute  giving  the  right  to  cumu- 
late the  votes  applies  to  a  corporation 
already  existing  as  well  as  later  cor- 
porations. Cross  V.  West  Virginia, 
etc.  Ry.,  35  W.  Va.  174  (1891).  Under 
a  reserved  right  to  amend  or  repeal 
a  charter  the  legislature  cannot  take 
from  the  stockholders  of  an  insurance 
company  the  right  to  elect  all  the 
directors  and  give  to  the  policy  hold- 
ers the  exclusive  right  to  vote  for  a 
majority  of  them.  Lord  v.  Equitable, 
etc.  Society,  194  N.  Y.  212  (1909). 
3  Smith  V.  Atchison,  etc.  R.  R.,  64 
Fed.  Rep.  272  (1894) ;  Commonwealth 
V.  Butterworth,  160  Pa.  St.  55  (1894). 
Cf.  Gregg  V.  Granby,  etc.  Co.,  164  Mo. 
616  (1901),  as  to  a  constitutional 
change.  A  corporation  organized 
prior  to  the  constitution  of  1874  of 
Pennsylvania,  which  gave  the  right 
of  cumulative  voting,  becomes  subject 
to  such  right  if  it  afterwards  asks  for 
and  acquires  new  franchises.  Com- 
monwealth V.  Flannery,  203  Pa.  St. 
28  (1902). 


Hays  V.  Commonwealth,  82  Pa.  St.  518 
(1876);  Baker's  Appeal,  109  Pa.  St. 
461  (1885).  See  also,  on  this  subject, 
ch.  XXVIII,  supra.  Upon  the  ques- 
tion of  the  constitutionality  of  statutes 
providing  for  minority  representation 
or  cumulative  voting  in  the  election 
of  public  officers,  a  matter  germane  to 
the  present  subject,  see  People  v.  Ken- 
ney,  96  N.  Y.  294  (1884) ;  People  v. 
Crissey,  91  N.  Y.  616  (1883) ;  State  v. 
Constantine,  42  Ohio  St.  437  (1884). 
In  Loewenthal  v.  Rubber  Reclaiming 
Co.,  52  N.  J.  Eq.  440  (1894),  the  court 
held  that  the  original  by-laws  con- 
etituted  a  contract  between  the  stock- 
holders, and  that  a  by-law  providing 
for  cumulative  voting  could  not  be 
repealed.  In  Michigan  it  has  been  de- 
cided that  a  statute  providing  for  the 
cumulative  plan  of  voting  at  public 
elections  is  unconstitutional.  May- 
nard  v.  Board,  etc.,  84  Mich.  228 
(1890). 

2  Under  the  reserved  right  of  the 
legislature  to  alter  or  amend  a  char- 
ter, the  legislature  may  pass  a  statute 
allowing  stockholders  to  cumulate 
their  votes  in  elections,  thus  enabling 
minority  stockholders  to  elect  a  mi- 
nority of  the  board  of  directors. 
Looker  v.  Maynard,  179  U.  S.  46 
(1900).  Where  by  statute  the  state 
retains  power  to  amend  charters  sub- 
sequently granted,  a  subsequent  con- 
stitutional provision  for  cumulative 
voting  applies  to  all  such  corporations, 
whether  organized  by  special  charter 
or  under  the  general  act,  and  does 
not  impair  the  validity  of  a  contract. 
So  also  where  a  corporation  amends 
its  charter  under  an  act  providing  for 


1781 


609a. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


the  control.^  And  where,  in  cumulating  votes,  the  voter  spreads  his 
votes  over  so  many  persons  that  none  of  those  particular  persons  are 
elected,  he  cannot  have  the  election  set  aside  on  the  ground  that  by 
cumulating  on  a  less  number  of  persons  he  can  certainly  elect  them,  nor 
on  the  ground  that  there  was  an  oral  contract  as  to  who  should  be 
elected. 2  Where  a  state  is  a  stockholder,  and  by  statute  is  entitled  to  a 
certain  vote  at  elections,  a  subsequent  statute  cannot  give  to  the  state 
a  larger  vote.^  A  statute  that  each  share  shall  have  one  vote  for  each 
director  in  a  bank  prevents  the  application  of  a  prior  statute  authorizing 
cumulative  voting.''  A  statute  allowing  cumulative  voting  does  not 
apply  to  an  unincorporated  joint-stock  association,  even  though  the 
latter  exercises  certain  statutory  powers,  and  not  even  a  provision  in 
the  constitution  that  certain  provisions  therein  shall  apply  to  all  asso- 
ciations and  joint-stock  companies  having  any  of  the  powers  or  privi- 
leges of  corporations  not  possessed  by  individuals  or  partnerships  affects 
this  conclusion.^    Even  though  the  stockholders  are  entitled  to  vote  on 


1  Thus,  suppose  there  are  1,000 
shares,  and  ten  directors  to  be  elected, 
and  one  person  holds  600  shares. 
Clearly  he  should  be  able  to  elect  a 
majority  of  the  ten  directors.  Sup- 
pose he  votes  his  600  votes  for  six 
of  his  friends  (A,  B,  C,  D,  E,  and  F) 
and  for  four  of  the  minority  (G,  H,  I, 
and  J) ;  and  suppose  at  the  same  time 
the  400  shares  of  the  minority  are 
cumulated  on  three  other  parties  (K, 
L,  and  M),  with  ten  votes  for  the  four 
directors  mentioned  above  (G,  H,  I,  and 
J).  The  result  will  then  be  as  follows  : 
A  B  C  D,  E,  and  F  have  600  votes  each 
g',  H,  I,  and  J  "       610     " 

K,  L,  and  M  "    1,320     " 

In  other  words,  the  minority  have 
secured  a  majority  of  the  directors. 
Again,  suppose  the  holder  of  the  600 
shares  does  not  vote  for  any  minority 
candidate  at  all,  but  casts  600  votes 
for  each  of  his  six  candidates,  A,  B, 
C,  D,  E,  F.  Even  then  he  may 
lose  the  election.  The  minority  400 
may  cumulate  their  4,000  votes  on  six 
candidates,  and  give  each  of  the  six 
666f  votes.  Under  the  cumulative 
system  the  majority,  in  order  to  be 
safe,  must  not  only  abandon  the  idea 
of  electing  the  whole  board,  but  must 
cumulate  their  votes  on  such  a  pro- 
portion of  the  board  as  their  stock 
bears  to  the  whole  stock,  and  must 
not  cast  complimentary  votes  for  rep- 


resentatives of  the  minority.  In  the 
case  Schwartz  v.  State,  61  Ohio  St. 
497  (1900),  a  majority  of  the  stock 
was  voted  in  favor  of  a  full  board 
consisting  of  nine  members.  The  mi- 
nority cumulated  their  votes  on  five 
other  candidates,  thus  giving  each  of 
those  five  more  votes  than  any  of  the 
nine  for  whom  the  majority  voted.  The 
result  was  that  the  five  were  elected, 
thus  giving  to  the  minority  the  control 
of  the  board,  by  reason  of  the  failure  of 
the  majority  to  cumulate  their  votes. 

2  Dulin  V.  Pacific,  etc.  Co.,  103  Cal. 
357  (1894).  The  court  said  that  the 
party  "had  in  his  own  hands  enough 
stock  to  have  elected  himself  and  one 
other  director,  in  the  face  of  any  com- 
bination that  could  have  been  made ; 
and  the  court  had  no  power  to  release 
him  from  his  error,  or  do  that  for 
him  which  he  had  power  to  do  for 
himself."  In  the  case  Chicago,  etc. 
Co.  V.  Boggiano,  202  111.  312  (1903), 
the  holders  of  a  minority  of  the  stock 
by  cumulating  their  votes  elected  a 
majority  of  the  directors,  the  holder 
of  the  majority  of  the  stock  not 
having  judiciously  cumulated  his  votes. 

3  Tucker  v.  Russell,  82  Fed.  Rep. 
263  (1897). 

*  Attorney-General  v.  Bridgman,  134 
Mich.  379  (1903). 

5  Attorney-General  v.  McVichie,  138 
Mich.  387  (1904). 


1782 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[§  GIO. 


the  cumulative  plan  yet  they  are  not  obliged  to  do  so.^  A  statutory 
right  to  cumulate  votes  does  not  apply  to  a  vote  on  an  adjournment, 
it  being  impossible  to  "  cumulate  "  the  votes  in  such  a  case.^ 

§  610.  Proxies.  —  At  common  law  a  stockholder  has  no  right  to 
cast  his  vote  by  proxy .^  This  rule  was  evolved  from  the  analogous 
rule  governing  municipal  corporations,  which  requires  all  votes  to 
be  given  in  person.  The  right  to  vote  by  proxy  is  often  given  by  the 
charter  itself.  Even  if  not  so  given  the  right  may  be  created  by  by-law.* 
The  fact  is  that  stock  is  simply  property,  and  the  stock  owner  should 
be  allowed  to  act  in  regard  to  it  by  agent,  the  same  as  he  may  with  other 
property  owned  by  him.  \\Tiere  the  statutes  give  the  right  to  vote  by 
proxy,  the  by-laws  of  the  corporation  cannot  restrict  that  right  by  pro- 
viding that  only  stockholders  shall  act  as  proxies.^  A  corporation  own- 
ing stock  in  another  corporation  may  accept  proxies  to  vote  stock  in  the 
latter.^ 

The  ordinary  proxy,  being  intended  to  be  for  an  election  merely, 
does  not  enable  the  proxy  to  vote  to  dissolve  the  corporation  or  to 

1  Schmidt  v.  Mitchell,  101  Ky.  570 
(1897). 

2  Bridgers  v.  Staton,  150  N.  C. 
216  (1909). 

'  Taylor  v.  Griswold,  14  N.  J.  L.  223 
(1834) ;  Philips  v.  Wickham,  1  Paige, 
590  (1829) ;  McKee  v.  Home,  etc.  Co., 
122  Iowa,  731  (1904) ;  Brown  v.  Com- 
monwealth, 3  Grant  (Pa.),  209  (1856), 
where  the  charter  allowed  only  those 
-present  to  vote ;  Craig  v.  First  Presby- 
terian Church,  88  Pa.  St.  42  (1878); 
Commonwealth  v.  Bringhurst,  103  Pa. 
St.  134  (1883);  People  v.  Twaddell, 
18  Hun,  427,  430  (1879) ;  Re  Dean  and 
Chapter  of  Femes,  Da  vies,  116,  129 
(1608);  Attorney-General  v.  Scott,  1 
Vesey,  413  (1749) ;  Harben  v.  Phillips, 
L.  R.  23  Ch.  D.  14,  22,  36  (1882). 
Where  the  statute  allows  citizens  to 
vote  by  proxy,  an  alien  is  not  within 
its  terms,  and  cannot  do  so.  Re 
Barker,  6  Wend.  509  (1830).  A  stock- 
holder who  gives  a  proxy  cannot  after- 
wards claim  that  proxies  were  not 
authorized  by  statute,  the  charter  or 
by-laws.  Parish  v.  Cieneguita,  etc. 
Co.,  12  Ariz.  2.35  (1909). 

*  Quoted  and  approved  in  Market 
Street  Ry.  v.  Hellman,  109  Cal.  571 
(1895);  Worth,  etc.  Co.  v.  Bingham, 
116  Fed.  Rep.  785  (1902);  People  v. 
Crossley,  69  111.  195  (1873);  Phillips 
V.  Wickham,  1  Paige,  590,  598  (1829) ; 


State  V.  Tudor,  5  Day  (Conn.),  329 
(1812) ;  2  Kent,  Comm.,  294,  295.  A 
contrary  rule  is  laid  down  in  New 
Jersey.  Taylor  v.  Griswold,  14  N.  J.  L. 
222  (1834).  Where  the  charter 
authorizes  voting  by  proxy  at  elec- 
tions for  directors,  and  also  empowers 
directors  to  make  by-laws  not  incon- 
sistent with  the  laws  of  the  common- 
wealth, a  by-law  adopted  by  the  board 
of  directors  allowing  voting  by  proxy 
at  all  stock  elections  was  held  valid. 
Wilson  V.  Academy  of  Music,  43  Leg. 
Int.  86  (1886).  A  by-law  may  allow 
voting  by  proxy.  Commonwealth  v. 
Detwiller,  131  Pa.  St.  614  (1890).  A 
corporation  as  a  stockholder  may  of 
course  give  a  proxy  where  proxies  are 
allowed.  Re  Indian,  etc.  Co.,  L.  R.  26 
Ch.  D.  70  (1884).  A  by-law  may  author- 
ize voting  by  proxy,  and  such  a  by- 
law may  arise  by  long  continuation 
and  unbroken  practice.  Walker  v. 
Johnson,  17  App.  Cas.  Dist.  of  Col. 
144  (1900).     108  L.  T.  Rep.  487. 

*  People's,  etc.  Bank  v.  San  Fran- 
cisco Super.  Ct.,  104  Cal.  649  (1894). 
Where  the  statute  gives  a  right  to 
vote  by  proxy,  a  by-law  to  the  effect 
that  only  a  stockholder  can  act  as 
proxy  is  illegal  and  void.  Re  Light- 
hall,  etc.  Co.,  47  Hun,  258  (1888). 

^  Bigelow  V,  Calumet,  etc.  Co.,  167 
Fed.  Rep.  704  (1908). 


1783 


610. 


ELECTIONS  —  CORPORATE   MEETINGS. 


ICH.  XXXVII. 


sell  the  entire  corporate  business  and  property,  or  to  vote  upon  other 
important  business,  unless  the  proxy  itself  in  general  or  special  terms 
gives  the  proxy  the  power  to  vote  on  such  questions.^  But  where  the 
stockholder  does  not  promptly  object,  he  may  be  bound.^  A  proxy 
authorized  to  vote  at  a  corporate  meeting  is  not  authorized  to  vote  to 
discharge  a  mortgage  which  secures  the  stockholder,  who  gave  the  proxy, 
as  a  creditor  of  the  corporation.^  A  proxy  authorizing  the  holder  to 
vote  "  in  the  same  manner  as  I  should  do  were  I  there  personally  pres- 
ent "  estops  the  stockholder  giving  the  proxy  from  questioning  the  call 
of  the  meeting  or  the  regularity  of  an  increase  of  stock  voted  for  at  such 
meeting.^  A  proxy  authorizing  the  proxy  to  vote  as  fully  as  a  stock- 
holder could  were  he  personally  present  gives  the  proxy  the  right  to 
vote  on  the  question  of  adjournment  and  of  opening  the  ballots.^  A 
proxy  has  a  right  to  vote  on  a  viva  voce  vote  or  show  of  hands,^  but  not 
on  a  question  involving  a  consolidation.^    Where  a  vote  is  taken  by 


1  Quoted  and  approved  in  McKee  v. 
Home  Savings,  etc.  Co.,  122  Iowa,  731 
(1904).  Abbot  V.  American  Hard 
Rubber  Co.,  33  Barb.  578,  584  (1861) ; 
Cumberland  Coal  Co.  v.  Sherman,  30 
Barb.  553,  577  (1859);  Re  Wheeler, 
2  Abb.  Pr.  (N.  S.)  361  (1866),  where 
the  proxy,  being  authorized  to  vote 
for  increasing  the  stock,  voted  also 
to  issue  the  new  stock  in  exchange  for 
the  stock  of  another  company.  Marie 
V.  Garrison,  13  Abb.  N.  Cas.  210,  235 
(1883),  following  83  N.  Y.  14.  Where 
directors  are  authorized  by  charter  to 
vote  by  proxy,  the  proxy  cannot  author- 
ize a  borrowing  of  money  —  an  ultra 
vires  and  void  act  in  England.  Brown 
V.  Byers,  16  M.  &  W.  252  (1847).  A 
proxy  to  vote  is  not  a  proxy  to  de- 
mand a  poll.  Re  Haven,  etc.  Co., 
L.  R.  20  Ch.  D.  151  (1881) ;  Regina  v. 
Government,  etc.  Co.,  L.  R.  3  Q.  B.  D. 
442  (1878).  See  also  Decatur  Bldg. 
etc.  Co.  V.  Neal,  97  Ala.  717  (1893). 
A  proxy  for  an  election  does  not  ex- 
tend to  an  election  four  months  later, 
the  first  election  not  having  been  held, 
the  proxy  being  by  a  director,  the  di- 
rectors being  authorized  to  vote  as 
directors  by  proxy.  Howard  v.  Hull, 
5  Ry.  &  Corp.  L.  J.  255  (Eng.  1888). 

2  Where  a  proxy  votes  in  favor  of 
making  all  the  stock  common  stock, 
the  stockholder  himself,  if  he  wishes 
to  object,  must  do  so  promptly.  Syn- 
nott  V.  Cumberland,  etc.  Assoc,   117 


Fed.  Rep.  379  (1902).  See  also  §  599. 
supra.  Where  by  resolution  of  the 
stockholders  all  the  property  of  an 
embarrassed  corporation  is  trans- 
ferred to  trustees  to  sell  and  pay  the 
debts  and  reconvey  the  remainder  to 
the  corporation,  and  the  trustees  pro- 
ceed to  do  so,  the  transaction  is  legal, 
even  though  the  stockholders'  meeting 
is  not  held  at  its  principal  office,  and 
proxies  were  irregular  and  unauthor- 
ized, and  the  directors  took  no  action, 
and  the  conveyances  were  irregular. 
Kessler  &  Co.  v.  Ensley  Co.,  141  Fed. 
Rep.  130  (1905),  aff'd,  148  Fed.  Rep. 
1019. 

'Moore  v.  Ensley,  112  Ala.  228 
(1896). 

*  Columbia  Nat.  Bank  v.  Matthews, 
85  Fed.  Rep.  934  (1898).  A  stock- 
holder who  is  represented  at  a  meeting 
by  proxy  cannot  complain  that  notice 
was  not  given  to  others.  Foote  v.  Grei- 
lick,  166  Mich.  636  (1911).  See  §  599, 
supra. 

5  Forsyth  v.  Brown,  2  Pa.  Dist.  765 
(1893). 

«  Re  Bidwell,  [1893]  1  Ch.  603.  But 
under  the  English  statutes  proxies  are 
not  counted  where  the  vote  is  by  a 
showing  of  hands.  Re  Caratal  Mines, 
[1902]  2  Ch.  498. 

^  By  unanimous  consent  stockholders 
of  an  Arizona  corporation  may  transfer 
all  its  assets  to  a  Nevada  corporation, 
the  latter  assuming  the  liabilities  and 


1784 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[§  610. 


show  of  hands  each  person  is  entitled  to  only  one  vote,  even  though  as  a 
proxy  he  represents  several  persons,  and  a  person  who  is  a  proxy  only 
may  vote.^  A  proxy  cannot  vote  when  the  owner  of  the  stock  is  pres- 
ent and  votes.-  The  alternative  proxy  may  vote  the  stock  even  though 
the  principal  proxy  is  present,  no  one  objecting.^  Where  a  person  gives 
two  proxies,  the  last  one  revokes  the  first,  but  if  the  proxies  do  not  show 
which  one  is  last  both  will  be  rejected.^  In  England  proxies  deposited 
abroad  have  been  allowed  a  vote  by  telegraph.^  The  sale  of  proxies  is 
forbidden  by  statute  in  New  York.^  It  is  legal  for  the  directors  to 
send  out  proxies  printed  at  the  expense  of  the  company  and  to  inclose 
postage  stamps  paid  for  by  the  company,  even  though  the  proxies  named 
were  named  by  them.^ 

The  expense  of  printing  and  sending  out  a  proxy  and  a  statement 
of  questions  in  dispute  cannot  be  collected  from  the  company,  even 
though  it  was  sent  out  by  a  majority  of  the  board  of  directors.^ 

Where  a  will  directs  that  of  three  executors  two  shall  give  proxies 
to  the  third  on  stock  owned  by  the  estate,  a  court  of  equity  will  compel 


issuing  its  stock  share  for  share  for 
the  old  stock,  and  any  stockholder  who 
votes  for  it  cannot  thereafter  object, 
but  a  stockholder  who  has  merely 
given  a  proxy  is  not  bound  where  the 
stockholder  did  not  know  of  the  pro- 
posed action,  even  though  the  proxy 
votes  for  the  change  and  the  written 
proxy  gave  to  him  all  the  authority 
that  the  stockholder  "would  possess 
if  personally  present  at  such  meeting," 
those  words  having  reference  to  ordi- 
nary business  only.  Such  a  stock- 
holder is  not  bound,  even  though  the 
Arizona  corporation  is  dissolved,  inas- 
much as  such  a  reorganization  is  giving 
away  corporate  assets  to  a  new  cor- 
poration or  compelling  him  to  be  a 
party  to  a  continuation  of  the  business 
by  a  new  corporation.  He  may  cause 
the  reorganization  to  be  set  aside, 
even  though  the  Nevada  corporation 
is  not  a  party.  Farish  v.  Cieneguita, 
etc.  Co.,  12  Ariz.  235  (1909). 

'  Ernest  v.  Loma,  etc.  Mines,  [1896] 
2  Ch.  572;   aff'd,  [1897]  1  Ch.  1. 

2  Commonwealth  v.  Patterson,  158 
Pa.  St.  476  (1893).  If  a  stockholder  is 
present,  his  proxy  cannot  be  voted. 
Re  Schwartz  &  Gray,  77  N.  J.  L.  415 
(1909). 

'  Commonwealth  v.  Roydhouse,  233 
Pa.  St.  234  (1911). 


^Pope  V.  Whitridge,  110  Md.  468 
(1909). 

6  In  Re  English,  etc.  Bank,  [1893]  3 
Ch.  385,  the  court  allowed  foreign 
creditors  to  vote  abroad  hy  proxy  de- 
posited abroad,  and  to  telegraph  such 
vote  to  the  home  meeting,  on  a  scheme 
of  reorganization,  holding  also  that  a 
proxy  need  not  state  the  day  of  meet- 
ing. 

6  Laws  1892,  ch.  692,  §  613,  and  L. 
1901,  ch.  588.  It  is  illegal  for  a  stock- 
holder to  sell  his  right  to  vote.  Hafer 
V.  New  York,  etc.  R.  R.,  14  Week. 
L.  Bui.  68  (1885).  See  also  §622, 
infra. 

7  Peel  V.  London,  etc.  Ry.,  95  L.  T. 
Rep.  897  (1906);  overruling  Stud- 
dert  V.  Grosvenor,  L.  R.  33  Ch.  Div. 
528  (1886).  Where  the  charter  author- 
izes an  extension  of  the  business  and 
the  directors  propose  to  the  stock- 
holders a  modification  of  the  by-laws 
so  as  to  authorize  such  extension  and 
inclose  a  form  of  proxy,  the  expense  of 
so  doing  may  be  paid  by  the  company, 
even  though  the  directors  refuse  to 
print  and  circulate  the  arguments  of  a 
dissenting  minority.  Campbell  v. 
Australian,  etc.  Society,  99  L.  T.  Rop. 
3  (1908). 

*  Lawyers',  etc.  Co.  v.  Consolidated, 
etc.  Co.,  187  N.  Y.  395  (1907). 


1785 


§  610. 


ELECTIONS 


CORPORATE   MEETINGS. 


[cH.  XXXVII. 


the  two  to  give  the  proxies,  ahhough  the  third  intends  to  use  the  proxy 
to  continue  himself  as  president,  and  the  management  of  the  company 
is  alleged  to  be  improvident  and  ruinous.^  Where  there  are  several 
executors,  and  only  one  of  them  is  present  at  the  election,  he  may  cast 
the  vote,  even  though  a  proxy  has  been  given  by  another  of  the  exec- 
utors.^ A  court  will  not  enjoin  a  person  from  voting  proxies  on  the 
ground  that  the  parties  giving  the  proxies,  no  longer  own  the  stock, 
where  the  party  casting  the  votes  had  a  majority  outside  of  the  proxies.^ 
A  proxy  should  be  in  writing,  but  it  need  not  be  in  any  particular 
form ;  it  need  not  be  acknowledged  or  proved,  but  it  must  be  in  such 
shape  as  reasonably  to  satisfy  the  inspectors  of  election  of  its  genuine- 
ness and  validity.*  And  to  this  end  the  corporate  officers  may  insist 
upon  reasonable  evidence  of  the  regularity  and  genuineness  of  the  proxy 
before  allowing  it  to  be  voted.''    A  proxy  may  run  to  a  specified  person 


1  This  case  was  affirmed  on  an  even 
division  of  the  court.  Lafferty's 
Estate,  154  Pa.  St.  430  (1893) ;  Tunis 
V.  Hestonville,  etc.  R.  R.,  149  Pa.  St. 
70  (1892). 

2  Schmidt  v.  MitcheU,  101  Ky.  570 
(1897). 

3  Bache  v.  Central,  etc.  Co.,  78  N.  J. 
Eq.  484  (1911). 

*  Re  St.  Lawrence  Steamboat  Co.,  44 
N.  J.  L.  529  (1882);  Re  Indian,  etc. 
Co.,  L.  R.  26  Ch.  D.  70  (1884).  No 
particular  form  of  words  is  necessary 
to  constitute  a  proxy.  Smith  v.  San 
Francisco,  etc.  Ry.,  115  Cal.  584 
(1897).  See  the  form  of  proxy  in 
Marie  v.  Garrison,  13  Abb.  N.  Cas.  210, 
234  (1883),  following  83  N.  Y.  14. 
Proxies  need  not  be  acknowledged, 
proved,  or  witnessed.  Re  Cecil,  36 
How.  Pr.  477  (1869).  A  proxy  need 
not  state  the  day  upon  which  the  elec- 
tion is  to  be  held.  Re  Townshend,  18 
N.  Y.  Supp.  905  (1892).  A  proxy  is 
good,  although  the  date  when  it  is 
given  is  left  blank  and  has  not  been 
filled  in.  Re  St.  Lawrence  Steamboat 
Co.,  44  N.  J.  L.  529  (1882).  Where 
one  gave  a  proxy  to  vote  at  an  annual 
election,  it  was  held  prima  facie  evi- 
dence that  he  was  a  stockholder  just 
before  such  election.  Harger  v.  Mc- 
CuUough,  2  Denio,  119,  122  (1846).  A 
proxy  which  had  been  exercised  and 
voted  upon  for  many  years  without 
renewal  was  sustained  in  Monsseaux 
V.  Urquhart,  19  La.  Ann.  482  (1867). 


Although  a  notice  of  a  corporate  meet- 
ing, and  proxies  given  for  a  corporate 
meeting,  add  to  the  name  of  the  cor- 
poration the  place  where  it  is  located, 
this  is  immaterial.  Langan  v.  Franck- 
lyn,  20  N.  Y.  Supp.  404  (1892).  Under 
the  Alabama  statutes  authorizing  per- 
sonal property  owned  by  the  wife  to 
be  disposed  of  by  the  husband  and 
wife  by  parol,  a  wife's  proxy  to  a 
husband  to  vote  her  stock  may  be  oral. 
Hoene  v.  PoUak,  118  Ala.  617  (1898), 
holding  also  that  a  stockholder  who 
knows  that  her  stock  has  been  voted 
by  her  husband  in  favor  of  selling  all 
the  corporate  property  for  stock  in 
another  corporation  cannot  object 
thereto,  where  she  afterwards  dis- 
poses of  part  of  the  new  stock  so  issued. 
Where  there  is  a  unanimous  vote,  it  is 
immaterial  that  some  of  the  proxies 
were  irregular.  Clark  v.  Wild,  81 
Atl.  Rep.  536  (Vt.  1911). 

^  Re  St.  Lawrence  Steamboat  Co.,  44 
N.  J.  L.  529  (1882).  But  the  inspec- 
tors have  no  right  to  refuse  a  vote 
by  proxy  or  to  assume  a  judicial 
power  to  try  its  genuineness,  if  it  is 
apparently  executed  by  the  stock- 
holder and  is  regular  in  form.  Re  Cecil, 
36  How.  Pr.  477  (1869).  Neither  the 
stockholder  nor  his  proxy  can  be  com- 
pelled by  a  by-law  to  take  an  oath 
that  the  former  is  the  owner  of  the 
stock.  People  v.  Tibbits,  4  Cow.  358 
(1825);  People  v.  Kip,  4  Cow.  382 
(1822).     The  by-laws  may  require  the 


1786 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE   MEETINGS.  [§  610. 

and  in  his  absence  to  the  persons  or  person  at  the  time  managing  the 
business  jointly  and  each  of  them.^  The  proxy  should  be  dated,  but 
the  common  law  did  not  require  a  date. 

In  New  Jersey,  by  statute,  proxies  are  good  for  only  three  years 
from  their  date ;  ^  and  in  New  York  for  only  eleven  months  from  their 
date,  unless  some  other  definite  time  is  specified  ;  ^  and  in  Pennsylvania 
for  two  months,  and  the  proxy  must  be  witnessed,^  but  must  not  allow 
a  substitution,  nor  be  used  for  purposes  other  than  those  specified  therein.^ 

Where  certificates  of  proxies  are  destroyed  after  use,  parol  evidence 
is  admissible  to  prove  their  former  existence  and  sufficiency.^ 

A  proxy  signed  by  the  stocldiolder,  with  the  name  of  the  proxy 
and  the  date  of  the  meeting  left  blank  to  be  filled  in  afterwards,  is 
legal. ^  A  stockholder  who  signs  a  form  of  proxy  in  blank,  and  hands 
it  over  to  another  to  be  used  in  the  ordinary  way,  impliedly  authorizes 
that  other  to  fill  up  the  blank  with  his  own  name.^  Although  a  proxy 
contains  blanks  as  to  the  day  and  hour  of  the  meeting,  yet  these  may  be 
filled  in  by  the  party  using  the  proxy  .^ 

A  proxy  is  always  revocable.  Even  when  by  its  terms  it  is  made 
"  irrevocable,"  the  law  allows  the  stockholder  to  revoke  it.  Fre- 
quently an  attempt  is  made  to  permanently  unite  the  voting  power 
of  several  stockholders  and  thus  control  the  corporation  by  giving  irrevo- 
cable proxies  to  specified  persons.  But  the  law  allows  the  stockholder 
to  revoke  the  proxy  at  any  time.^°    Where  the  general  manager  attempts 

proxies   to   be   witnessed.     Harben   v.  '  Ernest  v.  Loma,  etc.  Mines,  [1896] 

Phillips,  L.  R.  23  Ch.  D.   14  (1882).  2  Ch.  572;   aff'd,  [1897]  1  Ch.  1. 

1  Bombay,  etc.  Corp.  v.  Shroff,  i"  Schmidt  v.  Mitchell,  101  Ky.  570 
[1905]  A.  C.  213.  (1897) ;    Woodruff   v.    Dubuque,    etc. 

2  Laws  1896,  ch.  1885,  §  36.  R.  R.,  30  Fed.  Rep.  91  (1887).     In  this 

3  Laws  1892,  ch.  687,  §  21.  case  the  stock  certificates  were  turned 
^  Act  of  March  5,  1903.  over  to  trustees  to  transfer  to  them- 
^  Pepper  &  Lewis  Digest,  Vol  1,  p.    selves,   with  power  to  vote,   hold,   or 

954.  -■  sell    the    same.     "Trust"    certificates 

6  Haywood&PittsboroughP.  R.  Co.  were  issued.     The  court  held  that  at 

V.    Bryan,    6    Jones,    L.    (N.    C.)    82  any  time  previous  to  an  actual  sale  by 

(1858).     Although  the  record  does  not  the  trustees  a  certificate  holder  might 

show  that  certain  stock  was  voted,  yet  revoke  his  interest  in  the  "trust"  and 

it  may  be  proved  that  it  was  voted  by  demand  back  his  part  of   the  stock, 

proxy.     Franklin  T.  Co.  v.  Rutherford,  To  same  effect   and   on  very   similar 

etc.  Co.,  57  N.  J.  Eq.  42  (1898).  facts,  see  Griffith  v.  Jewett,  15  Week. 

'  Sadgrove  v.  Bryden,  [1907]  1  Ch.  L.  Bull.  419  (1886) ;  Vanderbilt  v.  Ben- 

318,  nett,  6  Pa.  Co.  Ct.  Rep.  193    (1887). 

8  Ex  parte  Duce,  L.  R.  13  Ch.  D.  429  Such  irrevocable  proxies  are  not  nec- 

(1879) ;    Ex  parte  Lancaster,  L.  R.  5  essarily  void  as  against  public  policy. 

Ch.  D.  911  (1877).     As  to  whether  a  Brown  v.  Pacific  Mail  Steamship  Co., 

blank  proxy  may  be  filled  in  by  the  5  Blatchf,  525   (1867) ;    s.   c,  4  Fed. 

agent,    see    qua;re    in    White    v.    New  Cas.  420.     They  simply  are  revocable. 

York,  etc.  Soc,  45  Hun,  580  (1887),  A  proxy  given  for  a  valuable  consid- 

citing  cases.  eration  may  nevertheless  be  revoked 

1787 


§611.] 


ELECTIONS 


CORPORATE   MEETINGS. 


CH.  XXXVII. 


to  obtain  proxies  for  the  purpose  of  ousting  the  existing  management, 
and  uses  methods  calculated  to  deceive  the  persons  giving  the  proxies, 
he  is  guilty  of  a  breach  of  trust  and  his  contract  with  the  company  may 
be  cancelled.^  Where  the  directors  cause  a  clerk,  who  is  in  the  employ 
of  the  company,  to  send  out  a  circular  to  the  stockholders  representing 
himself  as  a  large  stockholder  and  asking  proxies,  with  a  view  to  thor- 
oughly investigating  the  affairs  of  the  company,  and  such  proxies  when 
obtained  are  used  to  prevent  such  investigation  by  taking  the  property 
out  of  the  hands  of  the  court,  the  court  may  disregard  the  vote  of  such 
proxies.^ 

§  611.  The  stock-hook  as  evidence  of  a  right  to  vote.  —  The  question 
who  is  entitled  to  vote  upon  a  particular  share  of  stock  is,  as  a  general 
rule,  answered  by  a  reference  to  the  corporate  transfer-book.  He  who 
is  there  registered  as  the  owner  of  the  stock  is  entitled  to  vote  upon 
it.^    Stock  transferred  on  the  day  of  the  meeting  may  be  voted.^    It  is 


if  it  is  about  to  be  used  for  a  fraud- 
ulent purpose.  Reed  v.  Bank  of  New- 
burgh,  6  Paige,  337  (1837).  An 
agreement  not  to  revoke  a  power  which 
from  its  nature  or  by  law  is  revocable 
is  not  binding.  People  v.  Nash,  111 
N.  Y.  310,  315  (1888).  A  written 
contract  not  to  vote  by  proxy,  entered 
into  by  certain  stockholders  mutually 
for  the  purpose  of  preventing  the 
board  of  directors  from  consummating 
a  proposed  sale  of  the  franchises  of  the 
corporation,  has  been  held  a  pernicious 
and  unlawful  compact.  Fisher  v. 
Bush,  35  Hun,  641  (1885).  An  irrev- 
ocable proxy  is  prohibited  by  statute 
in  New  York.  It  may  be  revoked 
even  though  coupled  with  an  interest, 
in  this  case  being  to  a  pledgee.  Re 
Germicide  Co.,  65  Hun,  606  (1892).  A 
proxy,  for  five  years,  given  so  as  to 
unite  enough  stock  to  control  the  cor- 
poration, the  holder  of  the  proxy 
agreeing  that  the  person  giving  the 
proxy  shall  have  an  office  at  a  salary  of 
S2,500  a  year,  is  void.  At  the  instance 
of  the  latter  person  a  court  of  equity 
will  enjoin  voting  thereunder.  Cone  v. 
Russell,  48  N.  J.  Eq.  208  (1891).  A 
contract  between  a  stockholder  and  a 
person,  by  which  the  latter  leases  cer- 
tain property  to  the  corporation,  and 
is  to  have  a  proxy  from  the  stockholder, 
does  not  give  the  latter  the  right  to 


rescind  as  against  the  corporation, 
even  though  such  proxy  is  not  given. 
The  corporation  is  not  affected  by  any 
agreement  as  to  the  management  or 
voting.  Kennedy  v.  Monarch,  etc. 
Co.,  123  Iowa,  344  (1904).  A  so- 
called  irrevocable  proxy  is  revocable. 
Sheppard  v.  Rockingham,  etc.  Co.,  150 
N.  C.  776  (1909). 

1  Townsley  v.  Bankers',  etc.  Co.,  56 
N.  Y.  App.  Div.  232  (1900). 

2  Re  Septimus  Parsonage  &  Co., 
[1901]  2  Ch.  424.  For  forms  of  proxies 
see  Vol.  V,  infra. 

3  As  between  pledgor  and  pledgee 
the  right  to  vote  is  in  the  one  who  is 
registered  as  a  stockholder  on  the  cor- 
porate books,  unless  there  is  an  agree- 
ment between  them  to  the  contrary, 
and  this  rule  prevails  even  though  the 
stock  stands  in  the  name  of  the  pledgee 
"as  trustee."  Commonwealth  v. 
Dalzell,  152  Pa.  St.  217  (1893),  the 
court  saying:  "The  general  rule  is 
that  as  between  the  corporation  and 
the  person  offering  to  vote,  the  right 
follows  the  legal  title,  of  which  the 
certificates  and  the  stock-books  are 
the  prima  facie  evidence.  By-laws 
may  establish  a  different  rule,  and  there 
may  be  special  circumstances  to 
change  the  equities  as  to  individuals 
or  even  as  to  the  corporation."  Where 
stock  is  transferable  only  on  the  books 


Bridgers  v.  Staton,  150  N.  C.  216  (1909). 
1788 


CH.  xxxvir. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  611. 


not  necessary  that  the  owner  of  stock  produce  his  certificate,  or  even 
have  a  certificate,  in  order  to  vote.^  Neither  will  indebtedness  for  the 
subscription  price  prevent  the  stockliolder  from  voting.^  So,  also,  it 
is  immaterial  that  the  person  in  whose  name  the  stock  is  registered  is 
merely  a  nominal  holder,  and  that  another  person  really  owns  the  stock.' 
A  subscriber  upon  a  condition  not  yet  performed  may  vote  upon  the 

of  the  corporation,  the  person  in  whose    Co.  v.  State  Board,  56  N.  J.   L.  389 


name  the  stock  stands  on  such  books 
is  entitled  to  vote  it,  and  the  books 
of  the  company  are  conclusive  upon 
the  question  as  to  who  is  entitled  to 
vote  stock  legally  issued.  Morrill  v. 
Little  Falls  Mfg.  Co.,  53  Minn.  371 
(1893);  Ex  parte  Willcocks,  7  Cow. 
402  (1827),  stating,  however,  that  in 
certain  cases,  like  that  of  stock  held 
for  the  corporation  itself,  a  different 
rule  prevails  ;  State  v.  Ferris,  42  Conn. 
560,  568  (1875),  sustaining  a  vote  by 
a  bankrupt,  the  coiu*t  saying:  "The 
party  who  appears  to  be  the  owner 
by  the  books  of  the  corporation  has 
the  right  to  be  treated  as  a  stock- 
holder and  to  vote  on  whatever  stock 
stands  in  his  name."  Hoppin  v.  Buf- 
fum,  9  R.  I.  513,  518  (1870),  the  court 
saying:  "In  a  ease  of  a  dispute  as 
to  a  right  to  vote,  the  books  of  the 
corporation  are  the  prima  facie  evi- 
dence; at  any  rate,  the  corporation 
cannot  be  required  to  decide  a  dis- 
puted right.  .  .  .  Upon  any  other 
rule  it  could  never  be  known  who 
were  entitled  to  vote,  until  the  courts 
had  decided  the  dispute."  Allen  v. 
Hill,  16  Cal.  113  (1860);  Re  St. 
Lawrence  Steamboat  Co.,  44  N.  J.  L. 
529  (1882).  The  president  has  no 
power  to  decide  what  stock  should  be 
allowed  to  vote.  The  transfer  book 
governs  as  to  that.  State  v.  Cronan, 
23  Nev.  437  (1897).  See  also  next 
section  for  various  cases  on  the  con- 
clusiveness of  the  transfer  book. 

'Beckett  v.  Houston,  32  Ind.  393 
(1869).  A  stockholder  may  vote  at 
any  corporate  meeting,  even  though  no 
certificate  of  stock  has  been  issued  to 
him.  Sherwood  v.  Wallin,  154  Cal. 
735  (1908). 

^  Birmingham,  etc.  Ry.  v.  Locke,  1 
Q.  B.  256  (1841) ;  Haskell  v.  Read,  68 
Neb.  107  (1903);  Savage  v.  Ball,  17 
N.  J.  Eq.  142  (1864) ;    American,  etc. 


(1894) ;  People  v.  Albany,  etc.  R.  R., 
55  Barb.  344,  386  (1869) ;  aff'd,  57  N.  Y. 
161 ;  Downing  v.  Potts,  23  N.  J.  L. 
66  (1851).  So  held  in  this  case,  even 
though  the  subscriber  had  paid  noth- 
ing on  his  stock.  In  General  Electric 
Co.  V.  Wightman,  3  N.  Y.  App.  Div. 
118  (1896),  it  is  stated  that  under  the 
New  York  statutes  subscribers  for 
stock  are  not  entitled  to  any  voice  in 
the  management  until  the  stock  has 
been  paid  up.  It  has  been  held  in 
Maryland  that  a  subscriber  to  the  in- 
creased capital  stock  of  a  company  is 
not  entitled  to  the  certificate  until 
he  has  paid  for  the  stock  in  full,  and 
such  subscriber  is  not  entitled  to  the 
rights  of  a  stockholder  until  he  has 
paid  in  full.  The  court  stated  that 
such  stockholders  are  not  entitled  to 
di-vidends  equally  with  other  stock- 
holders. The  basis  of  the  decision 
was  the  difference  between  original 
stock  and  increased  stock.  The  court 
refused  to  compel  the  corporation  to 
issue  a  certificate.  Baltimore,  etc.  Ry. 
V.  Hambleton,  77  Md.  341  (1893). 
Where  a  mortgage  must  be  authorized 
by  a  vote  of  two  thirds  in  value  of 
the  stockholders  this  means  a  stock 
vote,  irrespective  of  the  fact  that  some 
of  the  stock  is  only  partly  paid  up. 
Purdom  v.  Ontario,  etc.  Deb.  Co.,  22 
Ont.  Rep.  (Can.)  597  (1892). 

3  State  V.  Leete,  16  Nev.  242  (1881), 
where  a  man  put  stock  in  the  name  of 
his  son  in  order  to  qualify  him  to 
serve  as  a  director.  Where,  however, 
the  statute  prescribes  that  only  bona 
fide  stockholders  shall  vote,  a  stock- 
holder of  record  who  is  reaUy  a  dummy 
for  the  real  owner  in  order  to  enable 
the  latter  to  avoid  the  statutory 
liability  cannot  vote.  Smith  i'.  San 
Francisco,  etc.  Ry.,  115  Cal.  584 
(1897).  See  also  §  612,  infra.  A 
stockholder  of  record  may  vote,  even 


1789 


§611.]  ELECTIONS  —  CORPORATE   MEETINGS.  [cH.  XXXVII. 

question  whether  that  condition  shall  or  shall  not  be  performed.^  And 
stock  issued  for  construction,  the  work  not  having  been  performed,  may 
nevertheless  be  voted.^ 

Persons  who  are  not  registered  stockholders  on  the  day  an  election 
is  held  cannot  vote,  though  they  were  stockholders  on  the  day  the  elec- 
tion should  have  been  held.^  Where  the  corporation  delays  over  thirty 
days  in  transferring  stock,  and  in  the  meantime  a  resolution  to  wind  up 
the  company  and  reconstruct  it  was  passed  in  a  way  that  it  could  not 
have  been  passed  if  such  transfer  had  been  made,  the  court  will,  under 
the  English  statute,  allow  the  transferee  to  vote  as  though  the  transfer 
had  been  made  at  once.'*  The  holders  of  stock  issued  by  a  stock  divi- 
dend are  entitled  to  vote.^ 

Where  the  corporation  keeps  a  stock-certificate  book  but  no  transfer 
or  stock-book,  a  transfer  on  the  back  of  a  certificate,  which  is  then  can- 
celed and  pasted  back  in  the  certificate  book,  and  a  new  certificate 
issued  to  the  transferee,  is  a  sufficient  transfer  to  constitute  the  transferee 
a  stockholder.^  Although  votes  are  challenged,  and  the  inspectors 
call  for  the  stock-books,  and  such  books  cannot  be  obtained,  yet  this 
does  not  invalidate  the  election.''  If  the  stock-book  is  lost,  the  directors 
may  substitute  a  new  one,  filled  out  as  accurately  as  possible.^  Where 
the  corporation  has  kept  no  regular  stock-books,  and  the  secretary,  by 
order  of  the  directors,  prepares  a  stock-book,  getting  the  information 

though  he  is  acting  for  some  one  else.         *  Re  Sussex  Brick  Company,  [1904] 

Sylvania,  etc.  R.  R.  v.  Hoge,  129  Ga.  1  Ch.  598. 

734  (1907).  ^  Bailey  v.  Railroad  Co.,  22  Wall. 

1  Greenville,  etc.  R.  R.  v.  Coleman,  604,  637  (1874),  holding  also  that  the 
5  Rich.  L.  (S.  C.)  118,  135  (1851).  rule  is  otherwise  as  regards  the  holders 

2  Savage  v.  Ball,  17  N.  J.  Eq.  142  of  a  scrip  dividend,  where  the  scrip 
(1864).  Where  a  sale  of  bonds  hav-  was  redeemable  by  the  company  in 
ing  a  voting  power  is   made  subject  cash  or  convertible  into  stock. 

to  the  ratification  of  another  party,  ^  He  may  vote  at  elections,  and  an 
the  vendor  has  the  right  to  vote  such  assignment  by  the  corporation  on  the 
bonds  until  the  sale  is  so  ratified,  direction  of  officers  elected  by  such  a 
State  V.  McDaniel,  22  Ohio  St.  354  transferee  is  valid.  Such  a  transfer  is 
(1872).  Stock  issued  to  a  contractor  valid  also,  although  a  by-law  provided 
for  money  to  be  paid  may  be  voted  that  before  selling  his  stock  a  stock- 
by  him,  at  least  to  the  extent  or  pro-  holder  must  offer  it  to  other  stock- 
portion  of  such  part  of  his  liability  holders  for  purchase.  American  Nat. 
as  he  has  fulfilled.  Price  v.  Holcomb,  Bank  v.  Oriental  Mills,  17  R.  I.  551 
89  Iowa,  123  (1893).  (1891).     Where    a    corporation    keeps 

3  Johnston  v.  Jones,  23  N.  J.  Eq.  a  stock-certificate  book,  but  no  regular 
216,  228  (1872).  A  provision  that  stock-book,  the  former  controls  as  to 
stock  not  held  within  twenty  days  of  the  right  to  vote.  Matter  of  Utica, 
a  meeting  cannot  be  voted  does  not  etc.  Co.,  115  N.  Y.  App.  Div.  821 
prevent  the  voting  of  stock  acquired  (1906).  See  also  §  382,  supra. 
twenty  days  before  an  adjourned  ^  72e  Argus  Co.,  138  N.  Y.  557  (1893). 
meeting  is  held.  Bridgers  v.  Staton,  ^  Re  Schoharie,  etc.  R.  R.,  12  Abb, 
150  N.  C.  216  (1909).  Pr.  (N.  S.)  394  (1872). 

1790 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  611. 


from  various  sources,  this  book  governs.^  Where  the  transfer-book 
differs  from  the  stock  ledger  the  former  governs."  A  by-law  authorizing 
the  administration  of  an  oath  to  examine  the  stockholders  as  to  their 
title  is  illegal  and  void  where  the  charter  regulates  the  right  to  vote.^ 
Under  the  New  Jersey  statute,  if  the  directors  neglect  to  produce  at 
the  annual  election  an  alphabetical  list  of  the  stockholders  and  their 
residences  and  holdings,  their  election  as  directors  will  be  set  aside  even 
though  the  stock  and  transfer-books  were  present."* 

There  are  some  exceptions,  however,  to  the  rule  that  the  transfer 
or  stock-book  is  conclusive  on  the  question  of  who  is  entitled  to  vote. 
Thus,  the  inspectors  of  election  may  inquire  whether  the  stock  which  is 
about  to  be  voted  belongs  to  the  corporation,  and  if  it  does  they  may  re- 
ject the  vote.^  So,  also,  they  may  allow  an  administrator  to  vote, 
although  the  stock  stands  in  the  name  of  the  deceased  person.^ 

In  some  courts  this  rule  is  carried  still  further,  and  it  is  held  that 
the  inspectors  of  election  may  allow  the  pledgor  to  vote,  although  the 
stock  stands  in  the  name  of  the  pledgee  on  the  books  of  the  company ;  ^ 
and  it  has  also  been  held  that  the  purchaser  of  certificates  of  stock  may 
vote  thereon,  although  the  stock  stands  on  the  books  of  the  company 
in  the  name  of  the  vendor.^    It  has  been  held  in  Georgia  that  where  a 


1  Re  Election,  etc.  Grove  Cem.  Co., 
61  N.  J.  L.  422  (1898). 

2  Downing  v.  Potts,  23  N.  J.  L.  66 
(1851). 

3  People  V.  Kip,  4  Cow.  382,  note 
(1822). 

..    "  Re  Schwartz  &  Gray,  77  N.  J.  L. 
415  (1909). 

5  See  §  613,  infra. 

6  See  §  612,  infra. 
■'  See  §  612,  infra. 

8  Cited  in  Sylvania,  etc.  R.  R.  v. 
Hoge,  129  Ga.  734  (1907).  In  the 
case  Allen  v.  Hill,  16  Cal.  113,  119 
(1860),  the  court  said:  "It  would 
seem,  upon  principle,  that  the  real 
owner  of  stock  should  be  entitled 
to  represent  it  at  the  meetings  of  the 
corporation,  and  that  the  mere  fact 
that  he  does  not  appear  as  owner  upon 
the  books  of  the  company  should  not 
exclude  him  from  the  privilege  of 
doing  so."  In  Illinois  it  is  held  that 
the  corporation  must  allow  the  real 
owner  of  the  stock  to  vote,  whether  he 
be  the  registered  owner  or  not,  where 
the  corporation  has  no  by-law  requir- 
ing a  registry  of  transfers,  and  the 
vendee  produces  his  cetrificate  of 
stock   duly   transferred   on   the   back 


People  V.  Devin,  17  111.  84  (1855).  In 
a  stockholders'  vote  ratifying  the  acts 
of  directors,  a  stockholder  has  no 
right  to  vote  stock  which  he  has  trans- 
ferred to  others,  even  though  it  still 
stands  in  his  name  on  the  books. 
Graves  v.  Mono  Lake,  etc.  Co.,  81  Cal. 
303  (1889).  Where,  however,  the  un- 
registered transferee  did  not  challenge 
the  right  of  his  transferrer  to  vote 
and  did  not  claim  the  right  to  vote, 
but  attacked  the  election  afterwards 
by  quo  warranto,  his  suit  failed. 
People  V.  Robinson,  64  Cal.  373  (1883). 
State  V.  Smith,  15  Greg.  98,  118  (1887), 
contains  a  dictum  that  the  purchaser 
of  a  certificate  of  stock  cannot  vote 
on  the  stock  until  it  has  been  trans- 
ferred into  his  name.  An  owner  of 
stock  is  not  qualified  to  vote  where  his 
stock  has  not  been  transferred  to  him 
on  the  books.  Re  Schwartz  &  Gray, 
77  N.  J.  L.  415  (1909).  Where  both 
the  legal  and  equitable  owners  of 
stock  agree  as  to  how  stock  shall  be 
voted,  other  stockholders  cannot  com- 
plain that  the  vote  was  not  east  in 
accordance  with  law.  State  v.  Ferris 
42  Conn.  560  (1875),  where  a  bank- 
rupt voted  stock  still  standing  in  his 


1791 


§611.]  ELECTIONS  —  CORPORATE   MEETINGS.  [cH.  XXXVII. 

stockholder  has  sold  his  stock  and  delivered  the  certificates,  he  has  no 
right  to  give  a  proxy  on  the  stock  to  some  other  person,  even  though 
the  stock  still  stands  in  his  name,  and  the  giving  of  such  proxy  may 
constitute  a  tort  for  which  the  purchaser  of  the  stock  may  sue  for  dam- 
ages.^ The  vendor  and  vendee  of  stock  may  agree  between  themselves 
as  to  who  shall  vote  the  stock. 

Where  the  vendor  expressly  parts  with  the  right  to  vote  the  stock, 
he  cannot,  under  the  statutes  of  Pennsylvania,  vote  it  even  though  he 
appears  as  a  stockholder  on  the  corporate  books. ^  Hence  where  the 
trustee  has  no  interest  and  is  to  vote  the  stock  as  directed  by  a  committee 
of  the  stockholders  and  distribute  dividends,  the  trusteeship  may  be 
revoked  by  a  holder  of  a  trust  certificate,  and  such  holder  at  an  election 
may  demand  the  right  to  vote,  under  the  Pennsylvania  statute  authoriz- 
ing the  inspectors  of  election  to  allow  the  beneficial  owner  of  stock  to 
vote  it.^  A  statutory  provision  that  only  bona  fide  stockholders  shall 
vote  does  not  mean  that  the  voter  shall  actually  own  the  stock  himself.'* 

In  New  York,  by  statute,  the  corporate  transfer  or  stock-book  is 
made  conclusive  upon  the  question  who  may  vote.^  The  inspectors 
cannot  go  back  of  it,  but  the  court  may.^  There  are  various  other 
statutory  provisions  in  New  York  regulating  voting,  and  the  vote 
may  by  by-law  be  limited  to  those  who  are  registered  stockholders 
for  a  period  not  exceeding  forty  days  before  the  election.''    Even  though 

name.     State  v.  Pettineli,  10  Nev.  141  Pa.    St.    217    (1893).     The   registered 

(1875).     In   this   last   ease   the   regis-  stockholder  may  vote  even  though  he 

tered  holder  had  transferred  the  cer-  has     transferred     his     certificates     to 

tificate,  but  obtained  it  again  and  ex-  another.     Re   Argus    Printing   Co.,    1 

hibited  it  at  the  meeting.     If  a  vote  N.  Dak.  434  (1891). 
is  not  challenged,  an  objection  to  it  '  Commonwealth  v.  Roydhouse,  233 

afterwards  may  not  meet  with  much  Pa.  St.  234  (1911). 
favor.     iEe  Long  Island  R.R.,  19  Wend.  *  Royal,  etc.  Mining  Co.   v.  Royal 

37,  44  (1837).     See  also  §  620,  infra.  Consol.  Mines,  157  Cal.  737  (1910). 
The   vendor   of   stock   may   give    the         ^  l.  1901,  ch.  355.     Vandenburgh  v. 

vendee  a  proxy  to  vote  on  the  stock  Broadway    Ry.,    29    Hun,    348,    355 

which  still  stands  in  the  name  of  the  (1883) ;     Re    Long    Island    R.    R.,    19 

vendor  on  the  books.     Stephenson  v.  Wend.   37   (1837) ;     Re  Mohawk,  etc. 

Yokes,     27     Ont.     Rep.     (Can.)     691  R.  R.,  19  Wend.  135  (1838).     The  peg- 

(1896).  istered  stockholder  is  entitled  to  vote 

1  Witham  v.  Cohen,  100  Ga.  670  although  he  has  assigned  his  certifi- 
(1897).  cate  of  stock.     Schoharie  Valley  R.  R. 

2  Commonwealth  v.  Patterson,  158  Case,  12  Abb.  Pr.  (N.  S.)  394  (1872). 
Pa.  St.  476  (1893).  As  between  « Strong  v.  Smith,  15  Hun,  222 
pledgor  and  pledgee  the  right  to  vote  (1878). 

is  in  the  one  who  is  registered  as  a  ''  See    Laws,    1901,    ch.    355,    §  20. 

stockholder   on   the   corporate   books.  Strong  v.  Smith,  15  Hun,  222  (1878), 

unless  there  is  an  agreement  between  holding  that  the  transfer  book  is  con- 

them  to   the  contrary,   and   this  rule  elusive  upon  the  inspectors,  but  that 

prevails  even  though  the  stock  stands  the   court   has   power   to   go   back   of 

in  the  name  of  the  pledgee  "as  trus-  the      entries      therein      and      inquire 

tee."     Commonwealth  v.  Dalzell,  152  whether,  as  for  instance  in  this  case, 

1792 


CH.  XXXVII. J 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  612. 


a  person  claims  stock  which  stands  in  the  name  of  another,  and  might 
obtain  such  stock  by  a  suit  for  that  purpose,  yet  the  court  will  not  con- 
sider this  in  a  statutory  proceeding  to  contest  the  validity  of  an  election, 
because  only  the  stockholders  of  record  are  entitled  to  vote.^  Lender 
the  New  York  statute  a  person  who  has  sold  his  certificate  of  stock  can- 
not vote.^ 

A  corporation  may,  in  accordance  with  a  by-law  or  a  resolution  of  its 
board  of  directors,  close  its  books  for  a  reasonable  time  before  an  elec- 
tion, in  order  to  prepare  a  list  of  the  stockholders  entitled  to  vote.^  In 
Canada,  however,  it  has  been  held  that  at  common  law  a  corporation 
has  no  power  to  close  its  transfer  books  temporarily  for  a  meeting  or 
dividends."* 

§  612.  The  right  of  trustees,  pledgees,  administrators,  etc.,  to 
vote.  —  It  is  the  general  rule  that  a  person  holding  stock  as  trustee 
is  entitled  to  vote  upon  the  stock,  not  only  where  he  is  duly  registered 
as  a  holder  of  stock  in  trust,  but  also  where  he  is  registered  absolutely  as 
a  stockholder  upon  the  books  of  the  corporation.^     If  the  trustees  dis- 


a  transfer  of  shares  was  an  absolute 
sale  or  a  pledge,  and  thus  whether 
the  transferrer  or  transferee  has  the 
right  to  vote  them;  citing  Ex  parte 
Holmes,  5  Cow.  426  (1826) ;  Re  Long 
Island  R.  R.,  19  Wend.  37  (1837); 
and  see  N.  Y.  L.  J.,  June  29,  1889. 
Although  only  stockholders  who  still 
own  their  stock  are  allowed  to  vote, 
a  person  who  has  given  an  option  on 
his  stock  is  nevertheless  entitled  to 
vote  on  it.  Re  Neweomb,  18  N.  Y. 
Supp.  16  (1891).  In  New  York  when 
for  any  reason  the  corporation  fails 
to  hold  an  election  at  the  stated  time 
as  provided  in  the  charter  or  by-laws, 
and  the  election  is  held  subsequently, 
only  those  stockholders  are  entitled 
to  vote  who  were  qualified  electors  at 
the  time  when  the  election  ought  to 
have  been  held.  Vandenburgh  v. 
Broadway  R.  R.,  29  Hun,  348  (1883) ; 
People  V.  Tibbets,  4  Cow.  358  (182,5). 
Where  the  statute  limits  the  votes  to 
stock  that  for  ten  days  has  been  en- 
tered on  the  stock-book,  a  stockholder 
cannot  vote  who  mailed  a  certificate 
for  transfer  the  day  before  the  ten 
days  began,  if  the  corporation  did  not 
receive  the  same  until  six  days  there- 
after. The  object  of  the  statute  is 
to  enable  persons  to  ascertain  during 
the  ten  days  who  are  entitled  to  vote. 
Where  a  statute  forbids  the  voting  of 


stock  which  has  been  transferred 
mthin  twenty  days  prior  to  an  elec- 
tion, and  in  a  corporation  having  sixty 
shares  of  stock  thirty-two  shares  are 
voted,  four  of  which  were  transferred 
on  the  day  of  election,  the  court  wiU 
declare  the  election  void.  Re  Vernon, 
1  PennewiU  (Del.),  202  (1898). 

1  Matter  of  Utiea,  etc.  Co.,  115 
N.  Y.  App.  Div.  821  (1906). 

2  Re  Glen  Salt  Co.,  17  N.  Y.  App. 
Div.  234  (1897) ;   aff'd,  153  N.  Y.  688. 

3  See  §  538,  supra.  Even  though  by 
reason  of  the  transfer  books  being 
closed  for  a  short  period  of  time,  a 
vendor  of  stock  is  unable  to  have  it 
transferred  on  the  books,  and  the  com- 
pany fails  before  the  books  are  opened, 
he  is  liable  on  the  unpaid  subscrip- 
tion. Cook  V.  Carpenter,  212  Pa.  St. 
177  (1904). 

*  Re  Panton,  etc.  Co.,  9  Ont.  Law 
Rep.  (Can.)  3  (1904).     Cf.  §  538,  supra. 

5  Conant  v.  Millaudon,  5  La.  Ann. 
542  (1850) ;  Wilson  v.  Central  Bridge, 
9  R.  I.  590  (1870) ;  Hoppin  v.  Buffum, 
9  R.  I.  513,  519  (1870),  the  court  say- 
ing: "If  the  trust  was  of  such  a  na- 
ture that  the  trustee  has  the  control 
and  management  of  the  property,  and 
is  to  exercise  his  discretion  concern- 
ing it,  then  he  is  the  proper  person 
to  represent  and  vote  upon  it.  And 
the  corporation  cannot  be  required  to 


(113) 


1793 


§612. 


ELECTIONS 


CORPORATE   MEETINGS. 


[CH.  xxxvir. 


agree  as  to  how  the  stock  shall  be  voted,  the  courts  have  power  to  direct 
them.^  A  trustee  of  stock  has  the  right  to  vote  thereon  even  for  a  con- 
solidation, and  even  though  he  holds  it  for  another  corporation.^  Where 
there  are  two  trustees  and  they  hold  a  majority  of  the  stock,  and  one 
of  them  votes  for  himself  and  the  other  votes  for  some  one  else,  thereby 
nullifying  the  estate's  vote,  and  then  the  former  trustee,  by  means  of 
the  minority  stock,  elects  himself  director  and  president  and  controls 
the  board,  the  court  will  set  the  election  aside .^ 


examine  into  the  nature  of  the  trust, 
with  a  view  to  decide  as  to  the  right 
to  vote;"  Re  Barker,  6  Wend.  509 
(1831);  Re  Mohawk,  etc.  R.  R.,  19 
Wend.  135  (1838);  Re  North  Shore, 
etc.  Ferry  Co.,  63  Barb.  556  (1872), 
holding  also  that  the  administrator 
of  the  trustee  may  vote  the  stock ; 
Pender  v.  Lushington,  L.  R.  6  Ch.  D. 
70  (1877).  A  statute  may  exclude 
votes  at  a  stockholders'  meeting  by  a 
person  holding  the  stock  as  trustee, 
unless  such  person  owns  the  stock  or 
the  character  of  the  trusteeship  is 
disclosed  on  the  certificate-of-stock  or 
transfer  books.  Coolbaugh  v.  Her- 
man, 221  Pa.  St.  496  (1908).  The 
North  Carolina  statute  giving  to  a 
remainderman  the  right  to  vote  stock 
held  by  the  estate  does  not  apply  to 
stock  held  in  trust  for  a  life  tenant 
and  remainderman.  Haywood  v. 
Wright,  152  N.  C.  421  (  1910).  By 
the  terms  of  a  trust  agreement  a 
trustee  may  be  controlled  as  to  his 
vote  on  stock.  Elger  v.  Boyle,  69 
N.  Y.  Misc.  Rep.  273  (1910).  Under 
the  New  York  practice  in  a  suit  to 
compel  a  trustee  to  vote  stock  in  a 
certain  way,  he  cannot  be  compelled 
by  an  interlocutory  injunction  to  so 
vote  the  stock,  the  final  decree  not 
having  been  rendered.  Matter  of 
Dietz,  138  N.  Y.  App.  Div.  283  (1910). 
The  trustee  of  stock  in  a  foreign  cor- 
poration where  the  trust  was  for 
delivery  if  the  stock  should  be  sold, 
may  be  enjoined  from  voting  the  stock 
after  the  time  for  sale  has  expired. 
Butler  V.  Standard,  etc.  Co.,  146  N.  Y. 
App.  Div.  736  (1911).  In  Clarke  v. 
Central  R.  R.,  ,50  Fed.  Rep.  338 
(1892),  it  was  held  that  a  trust  com- 


pany has  no  power  to  hold  as  trustee 
and  vote  the  majority  of  the  stock  of 
a  great  railroad  system,  especially 
where  it  is  also  the  trustee  in  a  trust 
deed  of  the  company,  the  court 
saying:  "There  are  many  situations 
in  which  stock  may  be  so  placed  that 
it  becomes  inequitable  or  illegal  for 
it  to  be  voted.  The  law  places  the 
voting  power  of  pledged  stock  in  the 
pledgor  or  mortgagor,  even  where 
there  is  no  express  stipulation  to  that 
effect.  And  where  the  pledgor  or 
mortgagor  is  disqualified  to  vote  the 
stock,  the  disqualification  extends  as 
well  to  the  pledgee  or  trustee."  In 
this  ease,  however,  on  the  final  hear- 
ing, the  bill  was  dismissed.  See  62 
Fed.  Rep.  328  (1894).  Even  though 
a  statute  requires  that  certificates 
running  to  trustees  shall  state  who 
is  the  cestui  que  trust,  yet  an  election 
may  be  legal  though  stock  is  voted 
by  trustees  and  such  stock  does  not 
state  who  is  the  real  owner.  State 
V.  Cronan,  23  Nev.  437  (1897). 

1  Wanneker  v.  Hitchcock,  38  Fed. 
Rep.  383  (1889).  Where  stock  is  held 
in  trust  by  two  trustees  and  they  dis- 
agree, the  stock  cannot  be  voted  ex- 
cept that  the  court  may  remove  a 
trustee  if  he  is  guilty  of  bad  faith. 
Mannhardt  v.  Illinois,  etc.  Co.,  90  111. 
App.  315  (1899). 

2  Market  Street  Ry.  v.  Hellman,  109 
Cal.  571  (1895)  Where  in  connection 
with  the  giving  of  a  corporate  mort- 
gage a  majority  of  the  stock  is  placed 
in  the  hands  of  a  trustee  with  the  right 
to  the  trustee  to  vote  the  stock  as  he 
deems  best  if  the  parties  could  not 
agree,  and  subsequently  the  corpora- 
tion refuses  to  allow  the  trustee  to  vote 


3  Matter  of  Elias,  17  N.  Y.  Misc.  Rep.  718  (1896). 
1794 


CH.   XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  612. 


A  trustee  holding  stock  and  electing  himself  the  president  of  a  com- 
pany and  receiving  a  salary  must  not  allow  his  personal  interest  in  the 
salary  to  conflict  with  his  duty  as  a  stockholder  ^  nor  cause  a  large 
salary  to  be  paid  to  himself.-  In  England  it  is  held  that  directors' 
fees  received  by  trustees  of  an  estate,  who  were  elected  directors  in  re- 
spect of  the  stock  so  held  in  trust,  belong  to  the  estate.^  Where  trus- 
tees hold  a  majority  of  the  stock  of  a  corporation  and  one  of  them  is 
enjoined  from  voting  it,  the  election  may  be  enjoined  at  the  instance  of 
a  minority  stockholder,  until  the  first  suit  is  decided."*  If  a  mortgage 
covers  shares  of  stock  and  the  trustee  has  the  voting  power,  its  dis- 


the  stock,  the  mortgagee  may  treat 
this  as  a  default  on  the  mortgage  and 
then  foreclose,  and  it  is  immaterial 
that  the  trustee  was  interested  in  the 
mortgage.  Thompson-Starrett  Co.  v. 
Ellis  Granite  Co.,  84  Atl.  Rep.  1017 
(Vt.  1912). 

1  He  must  not  favor  a  sale  of  the 
property  at  too  high  a  price  on  account 
of  the  salary.  Elias  v.  Schweyer,  13 
N.  Y.  App.  Div.  336  (1897). 

2  Where  a  trustee  holding  stock 
votes  himself  into  office  and  illegally 
votes  to  himself  a  large  salary,  the 
cestuis  que  trust  may  in  a  suit  for  his 
removal  ask  also  that  he  account 
to  such  cestuis  que  trust  for  such 
salary.  Elias  v.  Schweyer,  27  N.  Y. 
App.  Div.  69  (1898).  Where  a  major- 
ity of  the  stock  of  the  corporation 
passes  by  will  to  a  trustee  of  the 
estate,  and  he  makes  himself  presi- 
dent, and  increases  his  salary,  and 
pays  little  attention  to  the  business, 
and  tries  to  sell  the  company  out  to 
a  consolidation,  and  does  not  properly 
divide  the  income  between  life  tenant 
and  remaindermen,  and  causes  the 
company  to  sell  its  reserve,  and  is 
responsible  for  the  company  losing 
its  most  valuable  contract,  and  is  un- 
able to  agree  with  a  cestui  que  trust, 
the  court  will  remove  him  from  the 
trusteeship.  Lister  i'.  Weeks,  60 
N.  J.  Eq.  215  (1900).  See  s.  c,  47  Atl. 
Rep.  588  (N.  J.  1900).  Even  though 
a  trustee  of  stock  who  has  been  an 
officer  and  stockholder  in  the  corpora- 
tion is  voted  a  salary,  this  is  no 
ground  for  removing  him  as  trustee, 
there  being  no  proof  that  he  voted 
in  favor  of  the  salary.  Neither  is 
the  fact  that  the  company  did  not  pay 


as  large  dividends  as  it  formerly  did 
any  ground  for  the  removal  of  the 
trustee.  Dailey  v.  Wight,  94  Md. 
269  (1902).  A  surrogate's  court  has 
jurisdiction  of  a  proceeding  by  a 
cestui  que  trust  to  hold  the  trustees 
responsible  for  salaries  paid  to  them 
while  acting  as  directors  of  a  corpora- 
tion in  which  the  trust  estate  held 
stock.  Borrowe  v.  Corbin,  31  N.  Y. 
App.  Div.  172  (1898) ;  aff'd,  165  N.  Y. 
634.  Where  a  person  has  contracted 
with  a  corporation  to  sell  its  preferred 
stock,  and  as  a  part  of  the  transaction 
the  stockholders  put  into  his  name  as 
trustee  a  majority  of  the  existing  stock, 
and  he  elects  himselS  a  director  and 
the  president,  and  controls  the  board 
of  directors,  but  fails  to  sell  the 
preferred  stock  and  votes  an  unearned 
salary  to  himself  and  refuses  to  give 
up  control,  he  may  be  removed  as 
trustee,  and  the  stock  will  then  be 
returned,  the  trust  being  a  personal 
one.  Barbour  ;;.  Weld,  201  Mass.  513 
(1909).  On  this  subject  of  salary  see 
also  decisions  as  to  executors  below. 

3  Re  Francis,  etc.,  [1905]  2  Ch.  295. 
In  Matter  of  Schaefer,  65  N.  Y.  App. 
Div.  378  (1901),  aflf'd,  171  N.  Y.  686, 
the  court  held  that  extra  compensa- 
tion paid  by  the  corporation  to  exec- 
utors as  directors  of  the  corporation 
did  not  belong  to  the  estate.  Where 
a  director  of  a  holding  company  serves 
as  a  director  in  a  subsidiary  company, 
his  fees  therefor  do  not  belong  to  the 
holding  company,  even  though  the 
holding  company  provided  him  with 
qualification  shares.  Re  Dover,  etc. 
Ltd.,  [1907]  2  Ch.  76. 

*  Villamil  v.  Hirsch,  138  Fed.  Rep. 
690  (1905) ;    s.  c,  143  Fed.  Rep.  654. 


1795 


§612. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH. 


XXXVII. 


cretion  cannot  be  controlled  by  a  majority  of  the  bondholders.^  A  mort- 
gage on  shares  of  stock  does  not  prevent  the  corporation  controlled  by 
such  stock  from  issuing  a  mortgage  on  its  property ;  and  it  is  no  breach 
of  trust  for  the  trustee  of  the  first  mortgage  to  be  the  trustee  of  the 
second  mortgage  where  the  first  mortgage  does  not  prohibit  such  second 
mortgage,  the  stock,  by  the  terms  of  the  mortgage,  remaining  in  the 
name  of  the  mortgagor.^  In  California  the  real  owner  of  stock  may  vote 
on  it,  although  it  stands  on  the  books  of  the  company  in  the  name  of  a 
"  dummy  "  as  "  trustee."  ^  The  court  may  authorize  the  committee 
of  an  incompetent  person  to  vote  corporate  stock  held  by  the  estate 
and  allow  the  committee  to  become  the  president  of  the  company,  but 
will  not  allow  him  to  take  a  salary  as  president,  in  addition  to  his  com- 
missions as  committee,  unless  special  services  are  shown.^ 

An  administrator  or  executor  may  vote  on  the  stock  of  the  deceased 
stockholder,  even  though  such  stock  has  not  been  transferred  to  the 
executor  or  administrator  on  the  books  of  the  company.^  Stock  held 
jointly  by  three  executors  cannot  be  voted  unless  they  all  agree  upon 
the  vote.^  Where  a  will  gives  to  one  of  three  executors  the  power  to 
vote  the  stock,  and  directs  the  other  two  executors  to  give  him  a  proxy 
to  that  purpose,  the  court  will  order  the  proxy  to  be  given,  even  though 


1  Toler  V.  East  Tennessee,  etc.  Ry., 
67  Fed.  Rep.  168  (1894). 

2  Gasquet  v.  Fidelity,  etc.  Co.,  75 
Fed.  Rep.  343  (1896). 

'  Under  the  California  statute,  stock 
placed  by  the  secretary  in  the  name  of 
a  "dummy,"  as  trustee,  cannot  be 
voted  by  such  dummy,  the  real  own- 
ers of  the  stock  not  having  assented 
thereto,  even  though  for  business  rea- 
sons they  did  not  wish  to  have  the 
stock  issued  to  themselves.  Stewart 
V.  Mahoney  Min.  Co.,  54  Cal.  149 
(1880) ;  Smith  v.  San  Francisco,  etc. 
Ry.,  115  Cal.  584  (1897).  See  also  Ex 
parte  Holmes,  5  Cow.  426  (1826); 
American  Nat.  Bank  v.  Oriental  Mills, 
17  R.  I.  551  (1891),  holding  that  the 
beneficial  owners  are  entitled  to  say 
how  the  vote  shall  be  cast.  In  the  last 
case  the  stock  had  been  surrendered 
and  new  certificates  issued,  but  no 
transfer  book  was  kept. 

*  Matter  of  Andrews,  125  N.  Y. 
App.  Div.  457  (1908) ;  rev'd  on  another 
point  in  192  N.  Y.  514. 

*  Quoted  and  approved  in  Schmidt 
V.  Mitchell,  101  Ky.  570  (1897) ;  Mar- 
ket Street   Ry.   v.   Hellman,   109  Cal. 


571  (1895).  A  foreign  executor  may 
vote  stock  belonging  to  the  estate, 
even  though  the  stock  stands  in  the 
name  of.  the  deceased  stockholder.  Re 
Cape  May,  etc.  Co.,  16  Atl.  Rep.  191 
(N.  J.  1888) ;  Re  North  Shore,  etc. 
Ferry  Co.,  63  Barb.  556  (1872),  hold- 
ing that  an  administrator  may  vote 
upon  stock  standing  in  the  name  of 
the  deceased  person,  even  though  the 
latter  held  the  stock  as  trustee.  In  a 
proceeding  to  dissolve  a  corporation 
the  administrator  is  the  proper  repre- 
sentative of  stock  owned  by  the  estate. 
Wolfe  V.  Underwood,  97  Ala.  375 
(1893).  The  administrator  and  not 
the  heirs  at  law  have  the  right  to  vote. 
Schoharie  Valley  R.  R.  Case,  12  Abb. 
Pr.  (N.  S.)  394  (1872). 

s  Tunis  V.  Hestonville,  etc.  R.  R.,  149 
Pa.  St.  70  (1892),  aff'g  s.  c,  1  Pa. 
Dist.  207  (1892).  Where  there  are  but 
two  stockholders  and  one  dies,  and  his 
administrator  takes  possession  of  the 
corporate  property  as  though  it  be- 
longed to  the  estate,  the  other  stock- 
holder may  have  a  receiver  appointed. 
Re  Belton,  47  La.  Ann.  1614  (1895). 


1796 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  612. 


he  intends  to  vote  himself  into  oflSce,  and  he  may  not  be  a  good  man- 
ager.^ An  executor  of  an  estate  which  holds  a  majority  of  the  stock  of 
the  corporation,  who  brings  about  his  own  election  as  president  at  a 
large  salary,  may  be  removed  from  his  executorship.^  The  executor 
of  an  estate  owning  stock  in  a  corporation  may  enjoin  the  corporation 
from  paying  a  back  salary  to  its  president,  who  is  a  co-executor  of  the 
estate,  even  though  the  stock  of  the  estate  was  pledged  by  the  decedent 
and  was  transferred  into  the  name  of  the  pledgee.^  In  New  York  it  is 
held  that  where  the  president,  drawing  a  salary,  dies,  and  the  existing 
board  of  directors  elect  his  executor  as  president  to  succeed  him  and 
vote  him  the  same  salary,  he  taking  no  part  therein,  he  cannot  be  com- 
pelled to  refund  such  salary  to  the  company,  even  though  as  executor 
he  controlled  a  majority  of  the  stock .^  An  executor  is  not  entitled  to 
an  allowance  from  the  estate  for  his  services  for  acting  as  a  director  in  a 
corporation  which  has  taken  over  the  business  of  the  estate,  inasmuch 
as  such  compensation  must  come  from  the  corporation  itself.^ 

A  pledgor  of  stock  is  entitled  to  vote  upon  it  in  all  cases  where  the 
stock  continues  to  stand  on  the  books  of  the  company  in  the  name  of 
such  pledgor.®  And  even  where  the  pledgee  has  caused  the  stock  to 
be  transferred  into  his  own  name,  as  by  law  he  is  allowed  to  do,^  it  has 


1  Lafferty's  Estate,  154  Pa.  St.  430 
(1893).  See  also  Tunis  v.  Hestonville, 
etc.  R.  R.,  149  Pa.  St.  70  (1892). 

2  Matter  of  Hirseh,  116  N.  Y.  App. 
Div.  367  (1906) ;   aff'd,  188  N.  Y.  584. 

3  Monmouth  Inv.  Co.  v.  Means,  151 
Fed.  Rep.  159  (1906). 

*  Hirseh  v.  Jones,  115  N.  Y.  App. 
Div.  156  (1906) ;  s.  c,  191  N.  Y.  195. 
A  trust  company  as  executor  of  an 
estate  having  a  large  stock  interest  in  a 
railroad  may  allow  an  officer  of  the 
trust  company  to  receive  a  salary  from 
the  railroad  for  acting  as  vice  president 
of  the  railroad.  Matter  of  Fidelity 
Loan,  etc.  Co.,  23  N.  Y.  Misc.  Rep. 
211  (1898).  An  executor  need  not 
account  to  his  estate  for  a  salary  which 
he  received  as  an  officer  of  the  corpora- 
tion in  which  the  estate  held  stock. 
Matter  of  Brown,  78  N.  Y.  Misc. 
Rep.  342  (1912).  See  also  the  rules 
above  as  to  trustees. 

6  Re  Goetz's  Estate,  85  Atl.  Rep. 
65  (Pa.  1912). 

6  Re  Barker,  6  Wend.  509  (1831) 
Ex  parte  Willcocks,  7  Cow.  402  (1827) 
Re  Cecil,  36  How.  Pr.  477  (1869) 
Scholfield  V.   Union  Bank,   2  Cranch, 


C.  C.  115  (1815);  s.  c,  21  Fed.  Cas. 
723;  Re  St.  La-wTence  Steamboat  Co., 
44  N.  J.  L.  529,  540  (1882),  a  dictum. 
Although  the  pledgor  of  stock  votes 
the  stock  in  favor  of  a  lease  of  the 
corporate  property  on  such  terms  that 
no  dividends  on  the  stock  are  possible, 
yet  in  the  absence  of  fraud  the  pledgee 
is  bound.  Gibson  v.  Richmond,  etc. 
R.  R.,  37  Fed.  Rep.  743  (1889).  Even 
though  a  steel  company  owns  stock  in 
an  iron  company  and  pledges  it,  and 
several  years  thereafter  causes  the 
iron  company  to  sell  all  its  property 
to  such  steel  company,  the  pledgee 
cannot  complain,  even  though  the 
steel  company  becomes  insolvent,  the 
stock  for  the  entire  period  having 
stood  in  the  name  of  the  pledgor. 
Cohen  v.  Big  Stone,  etc.  Co.,  HI  Va. 
468  (1910). 

'  See  §  466,  supra.  A  coiu-t  will  not 
at  the  instance  of  a  pledgee  order  a 
transfer  to  be  recorded  on  the  books 
to  the  pledgee  as  pledgee,  and  giving 
the  pledgor  the  right  to  vote  the  stock, 
inasmuch  as  this  would  complicate  the 
title  as  between  the  corporation  and 
its    stockholders    and    interfere    with 


1797 


?612. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


been  held  that  the  pledgor  may  demand  the  right  to  vote  at  elections, 
and  that  upon  proof  of  the  facts  the  inspectors  of  election  must  allow 
the  pledgor  to  vote  the  stock. ^  It  must  be  conceded,  however,  that 
the  established  rule  is  to  the  contrary.^  Where  the  stock  is  transferred 
to  the  pledgee  on  the  books  of  the  company  the  corporation  is  not  bound 
to  allow  the  pledgor  to  vote,  although  a  court  of  equity  has  power  to 
compel  the  pledgee  to  give  the  pledgor  a  proxy .^  Where  by  the  terms 
of  the  pledge  the  pledgor  reserves  the  right  to  vote  the  stock,  the  stock 


the  business  of  the  corporation. 
American,  etc.  Co.  v.  Pacific,  etc.  Co., 
34  Wash.  10  (1904). 

1  In  Oregon  it  is  held  that  at  com- 
mon law  the  real  owner  of  stock  is 
entitled  to  vote  it,  even  though  it 
stands  on  the  corporate  books  in  the 
name  of  his  pledgee.  It  is  denied  that 
the  transfer  book  is  binding  upon  the 
inspectors  of  election,  and  the  de- 
cisions to  that  effect  in  New  York  are 
stated  to  be  based  on  the  New  York 
statutory  law.  State  v.  Smith,  15 
Oreg.  98  (1887).  See  also  Allen  v. 
Hill,  16  Cal.  113  (1860),  to  substan- 
tially the  same  effect.  It  has  been 
held  that  the  pledgee  of  stock  is  not 
even  entitled  to  notice  of  meetings. 
McDaniels  v.  Flower  Brook  Mfg.  Co., 
22  Vt.  274  (1850). 

-  The  pledgor  and  pledgee  of  stock 
may  agree  between  themselves  as  to 
who  should  vote  the  stock.  If  there 
is  no  agreement,  the  right  to  vote 
should  follow  the  legal  title;  in  other 
words,  the  title  as  it  appears  on  the 
corporate  books.  Even  under  a 
statute  authorizing  inspectors  of  elec- 
tion, upon  a  challenge,  to  determine 
whether  the  party  who  appears  to  be 
the  owner  is  really  the  owner,  the 
pledgee  is  entitled  to  vote  the  stock 
standing  in  his  name  where  there  is 
no  agreement  to  the  contrary,  and 
even  though  the  stock  stands  in  the 
pledgee's  name  "as  trustee."  Com- 
monwealth V.  Dalzell,  152  Pa.  St.  217 
(1893).  A  pledgee  into  whose  name 
the  stock  has  been  transferred  may 
vote  it.  He  is  a  ''bona  fide''  stock- 
holder as  required  by  the  statute.  The 
pledgor  cannot  appear  at  the  meeting 
and  vote  the  stock.  Re  Argus  Printing 
Co.,  1  N.  Dak.  434  (1891).  It  is  not 
a  conversion  for  one  who  holds  stock 


as  pledgee  to  attend  corporate  meet- 
ings and  vote  upon  the  stock.  Heath 
V.  Silverthorn  Lead  Min.,  etc.  Co.,  39 
Wis.  146  (1875). 

3  J.  H.  Wentworth  Co.  v.  French,  176 
Mass.  442  (1900),  holding  also  that 
the  Massachusetts  statute  that  a  cer- 
tificate of  stock  issued  as  a  pledge 
shall  state  that  fact  on  its  face,  en- 
ables the  pledgor  to  vote  without  such 
proxy.  If  the  certificate  merely  states 
that  it  is  given  in  pledge,  without 
stating  the  name  of  the  pledgor,  the 
pledgee  to  whom  the  certificate  runs 
may  vote  the  stock.  The  court  may, 
however,  refuse  to  grant  a  mandamus 
declaring  certain  persons  duly  elected 
directors  where  they  were  elected  by 
the  vote  of  the  pledgee  as  against  the 
wishes  of  the  pledgor.  Where  stock 
in  pledge  is  transferred  on  the  books 
of  the  company  to  the  pledgee  abso- 
lutely he  can  vote  it,  unless  the 
pledgor  by  a  suit  in  equity  compels 
the  pledgee  to  give  a  proxy,  and  a 
statute  giving  the  pledgor  the  right 
to  vote  applies  only  where  the  trans- 
fer on  the  books  states  that  it  is  in 
pledge.  Canadian  Imp.  Co.  v.  Lea, 
74  N.  J.  Eq.  2.34  (1908).  Where 
after  default  in  a  debt  the  pledgee  has 
the  stock  transferred  into  his  name  he 
may  vote  the  same  at  elections  and 
may  give  a  proxy,  the  corporate  books 
being  at  least  prima  facie  evidence. 
Haynes  v.  Griffith,  16  Idaho,  280  (1909). 
The  pledgor  and  pledgee  may  agree 
between  themselves  as  to  which  one 
shall  vote  the  stock.  Getzinger  v. 
Donahue,  138  Wis.  103  (1909).  The 
Massachusetts  statute  as  to  the  rights 
of  pledgors  and  pledgees  of  stock 
does  not  apply  to  stock  issued  by  an 
unincorporated  real  estate  trust.  Lin- 
nell  V.  Leon,  206  Mass.  71  (1910). 


1798 


CH.  XXXVII. 


ELECTIONS  —  CORPORATE   MEETINGS. 


l§  612. 


being  transferred  into  the  name  of  the  pledgee,  the  pledgor  may  by  a 
bill  in  equity  compel  the  pledgee  to  give  to  the  former  a  proxy  to  vote 
the  stock  in  favor  of  a  merger  of  the  corporation  with  another  corpora- 
tion, even  though  thereby  the  pledgee  will  have  to  take  stock  of  the  new 
corporation  in  exchange  for  the  old  stock.^ 

Under  the  New  York  statute  making  the  transfer  book  conclusively 
binding  upon  the  inspectors  of  election,  the  inspectors  cannot  exclude 
the  vote  of  the  registered  stockholder,  although  he  holds  the  stock  merely 
as  pledgee;  but  under  the  New  York  statute  allowing  the  Courts  to 
summarily  review  the  election,  the  court  has  power  to  go  back  of  the 
transfer-book  and  set  the  election  aside,  where  the  statute  gave  the 
pledgor  the  right  to  vote.^  In  many  of  the  states  there  are  statutes 
which  give  to  the  pledgor  the  right  to  vote  the  stock.^  And  even  where 
there  is  no  statute  to  protect  the  pledgor's  right  to  vote,  it  has  been 
held  that  the  courts  will  intervene,^  and  that  by  a  bill  in  equity  the 
pledgor  may  compel  the  pledgee  to  give  him  a  proxy  to  vote  the  stock.^ 
But  in  order  to  invoke  the  extraordinary  powers  of  a  court  of  equity 
in  this  respect,  the  pledgor  must  show  that  the  interests  of  the  company 
have  been  or  will  be  prejudiced,  or  that  the  value  of  the  stock  has  been 
or  will  be  impaired,  and  that  the  intervention  of  the  court  is  necessary 
to  protect  the  pledgor's  rights.^    Such  is  the  case  where  the  pledgee 


^  Pennsylvania  R.  R.  v.  Pennsyl- 
vania Co;,  etc.,  205  Pa.  St.  219  (1903). 

2  Strong  V.  Smith,  15  Hun,  222 
(1878). 

3  Strong  V.  Smith,  15  Hun,  222 
(1878).  Concerning  a  similar  statute 
in  Rhode  Island,  see  Sayles  v.  Brown, 
40  Fed.  Rep.  8  (1889).  Under  the 
Colorado  statutes  an  owner  who  has 
pledged  his  stock  may  represent  the 
stock  at  all  meetings  of  the  stock- 
holders and  vote  accordingly.  Miller 
V.  Murray,  17  Colo.  408  (1892).  See 
also  as  to  the  Colorado  statute.  Nat. 
Bank  of  Commerce  v.  Allen,  90  Fed. 
Rep.  545  (1898). 

■*  Scholfield  v.  Union  Bank,  2  Cranch, 
C.  C.  115  (1815);  s.  c,  21  Fed.  Cas. 
723;  State  v.  Smith,  15  Oreg.  98 
(1887),  where  the  pledgor  obtained  an 
injunction  against  the  pledgee  voting 
the  stock,  and  the  pledgor  was  al- 
lowed by  the  inspectors  to  vote. 

*  Vowell  V.  Thompson,  3  Cranch, 
C.  C.  428  (1829) ;  s.  c,  28  Fed.  Cas. 
1308.  See  also  Hoppin  v.  Buffum,  9 
R.  I.  513  (1870),  holding  that  although 
the  pledgor  may  by  a  bill  in  equity 


compel  the  pledgee,  in  whose  name  the 
stock  stands,  to  make  a  retransfer  or 
to  give  a  proxy  to  the  pledgor,  yet 
where  the  pledgor  for  many  years 
allows  the  pledgee  to  vote  the  stock 
and  claims  the  right  at  an  election 
only  after  the  ballots  are  cast  and  are 
being  counted,  the  court  will  not  set 
the  election  aside. 

«  McHenry  ;;.  Jewett,  90  N.  Y.  58 
(1882).  Where  the  owner  of  a  major- 
ity of  the  stock  has  been  fraudulently 
deprived  of  her  stock  by  her  pledgee, 
who  has  thereby  deprived  her  of  the 
control  and  claims  the  stock  as  his 
own,  the  court  will  enjoin  him  from 
voting  the  stock  and  will  appoint  a 
receiver  of  such  stock  pendente  lite. 
Ayer  v.  Seymour,  5  N.  Y.  Supp.  650 
(Com.  PI.  1889).  Where  a  person 
pledges  his  stock  as  additional  secu- 
rity to  a  corporate  creditor  who  has 
bonds  of  the  company  in  pledge  for  the 
same  debt,  such  pledge  of  bonds,  how- 
ever, being  illegal,  the  pledgor  of  the 
stock  cannot  compel  the  creditor  to 
resort  to  the  bonds  first ;  nor,  although 
a  fictitious  sale  of  the  stock  is  alleged, 


1799 


§  612.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


CH.  XXX vir. 


is  to  control  the  company  for  a  series  of  years/  or  use  the  control  for  a 
criminal  purpose.'  A  pledgor  may  enjoin  a  pledgee  from  transferring 
stock  into  his  name  for  the  purpose  of  controlling  an  election,  which 
otherwise  the  pledgor  would  control,  where  the  statutes  of  the  state 
provide  for  recording  of  such  pledge  without  a  transfer  of  the  stock 
itself.^  The  pledgee  of  a  majority  of  the  corporate  stock,  who  by 
voting  their  stock  cause  men  of  their  choice  to  be  elected  directors, 
are  not  liable  for  the  fnisconduct  of  such  directors.^  It  is  legal  for  a 
pledgor  to  give  the  pledgee  the  right  to  vote  the  stock  and  to  elect  two 
directors.^  Stock  pledged  by  the  corporation  itself  cannot  be  voted 
under  the  New  Jersey  statute,  especially  where  the  purpose  of  the  pledge 
was  to  control  the  corporation.^ 

A  partner  may  vote  upon  stock  belonging  to  the  firm  and  registered 
in  the  partnership  name.^  Where  stock  is  entered  on  the  corporate 
books  in  the  name  of  a  person  as  an  officer  of  another  corporation,  the 
successor  in  office  of  that  person  may  vote  the  stock  without  a  transfer 
on  the  corporate  books. ^    Where  a  corporation  is  authorized  to  hold 


can  lie  compel  the  transferee  of  the 
stock  to  return  the  stock  so  that  the 
pledgor  may  vote  it,  unless  the 
pledgor  pays  the  amount  due.  Hinck- 
ley V.  Pfister,  83  Wis.  64  (1892).  Even 
though  stock  stands  on  the  books  in 
the  name  of  the  pledgee,  yet  a  court  of 
equity  may  enjoin  him  from  voting 
such  stock  in  prejudice  of  the  rights 
of  the  pledgor.  Haskell  v.  Read,  68 
Neb.  107  (1903). 

1  A  contract  between  a  New  Jersey 
land  company  and  a  railroad  company 
by  which  the  latter  loans  money  to  the 
former  and  for  six  years  is  to  name 
three  of  the  seven  directors,  one  of 
the  three  to  be  president  and  general 
manager,  and  the  other  fom-  directors 
to  be  satisfactory  to  it,  is  illegal,  even 
though  a  majority  of  the  stock  of  the 
New  Jersey  company  is  pledged  to  the 
railroad  company  to  secure  the  loans 
and  is  to  be  voted  by  the  railroad 
company.  A  minority  stockholder  of 
the  land  company  may  maintain  a  bill 
to  cancel  such  a  contract.  Holt  v. 
California,  etc.  Co.,  161  Fed.  Rep. 
3  (1908). 

2  An  indictment  under  the  anti-trust 
act  of  congress  of  July  2,  1890,  against 
individuals  for  a  conspiracy  to  sup- 
press competition  by  a  competitor, 
the  American  Sugar  Refining  Company, 


is  good,  even  though  some  of  the  acts 
of  conspiracy  are  barred  by  the  statute 
of  limitations,  the  conspiracy  being 
a  continued  one,  namely,  loaning 
money  on  the  majority  of  the  stock  of 
the  competing  company  as  collateral 
security,  and  then  voting  the  stock  to 
prevent  competition.  United  States 
V.  Kissel,  218  U.  S.  601  (1910). 

'  Spreckels  v.  Nevada  Bank,  113 
Cal.  272  (1896). 

*  Higgins  V.  Lansingh,  154  111.  301 
(1895).     See  also  §  468,  supra. 

*  Canadian  Imp.  Co.  v.  Lea,  74 
N.  J.  Eq.  234  (1908). 

^  Thomas  v.  International,  etc.  Co., 
72  N.  J.  Eq.  224  (1907) .     203  Fed.  659. 

'  Kenton  Furnace  R.  R.,  etc.  Co.  v. 
McAlpin,  5  Fed.  Rep.  737  (1880).  In 
California  he  may  vote  such  stock 
where  the  stock  belongs  to  the  firm, 
but  is  registered  in  the  name  of  the 
other  partner  who  is  dead.  Allen  v. 
Hill,  16  Cal.  113  (1860). 

8  Farmers',  etc.  Co.  v.  Chicago,  etc. 
Ry.,  27  Fed.  Rep.  146,  156  (1886); 
Monsseaux  v.  Urquhart,  19  La.  Ann. 
482  (1867).  Contra,  Re  Mohawk,  etc. 
R.  R.,  19  Wend.  135,  146  (1838),  hold- 
ing that  the  word  "cashier"  attached 
to  a  stockholder's  name  does  not 
authorize  a  succeeding  cashier  to  vote 
the  stock. 


1800 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE   MEETINGS.  [§  613. 

stock  in  another  corporation  it  is  entitled  to  vote  such  stock.^  A  cor- 
poration as  a  stockholder  may  vote  its  stock  by  an  agent.^  When  a 
municipal  corporation  is  a  stockliolder  in  a  private  corporation,  it  is 
entitled  to  vote  upon  its  stock  in  the  same  way  as  any  other  stockholder.^ 
The  fact  that  the  government  or  a  single  person  owns  all  the  stock  of 
a  company  does  not  put  an  end  to  the  corporate  existence.'*  Where 
joint  owners  of  stock  disagree  as  to  its  vote,  the  vote  is  to  be  rejected.^ 
Even  though  a  stockholder  has  made  an  assignment  for  the  benefit 
of  creditors,  yet  if  the  stock  remains  in  his  name  and  he  votes  it  at 
a  meeting  with  the  knowledge  of  the  assignee,  and  no  objection  is  made, 
the  proceedings  of  the  meeting  are  not  invalidated  thereby.^ 

It  seems  that  a  stockliolder  may  lease  his  stock.  He  may,  for  a 
certain  sum,  assign  to  another  all  dividends  during  the  specified  time, 
and  give  to  the  lessee  the  right  to  vote  the  stock  during  that  time.'  A 
gift  of  stock,  on  condition  that  the  dividends  should  all  go  to  the  owner 
and  that  he  should  vote  it,  is  a  gift  of  a  remainder  with  a  life  interest 
in  the  donor .^ 

§  613.  The  corporation  cannot  vote  upon  shares  of  its  own  stock. 
—  Shares  of  stock  owned  by  the  corporation  itself  cannot  be  voted 
either  directly  by  the  corporate  officers  or  indirectly  by  a  trustee  of 
the  corporation.  This  is  the  established  rule,  whether  the  stock  is 
registered  in  the  name  of  the  corporation  or  not.®     Stock  pledged  by  the 

1  Davis  V.  U.  S.,  etc.  Co.,  77  Md.  35  ^  Zachry  v.  Nolan,  66  Fed.  Rep.  467 
(1893).     Cf.  §  615,  infra.  (1895). 

2  State  V.  Rohlffs,  19  Atl.  Rep.  1099  «  Matter  of  Brandreth,  169  N.  Y.  437 
(N.  J.  1890).  (1902). 

'  See  §  99,  supra.     Where  stock  in  a  »  Quoted  and  approved  in  O'Connor 

railroad    is    owned    by    a    part    of    a  v.  International,  etc.  Co.,  68  N.  J.  Eq. 

county,  that  part  becomes  a  munici-  67  (1904).     Ex  parte  Holmes,  5  Cow. 

pality  for  the  purpose  of  owning  and  426  (1826) ;   McNeely  v.  Woodruff,  13 

voting  the  stock.     Hancock  v.  Louis-  N.  J.   L.  352   (1833) ;    American  Ry. 

ville,  etc.  R.  R.,  145  U.  S.  409  (1892).  Frog   Co.    v.    Haven,    101    Mass.    398 

*  The    United    States    government,  (1869) ;      Commonwealth    v.    Boston, 

though  the  owner  of  all  the  stock  of  a  etc.    R.    R.,    142    Mass.    146    (1886) ; 

canal    company,    may    continue   as    a  State   v.    Smith,    48   Vt.    266    (1876) ; 

stockholder  and  keep  up  the  corporate  Monsseaux  v.  Urquhart,   19  La.  Ann. 

existence  by  allowing  the  directors  to  482  (1867) ;    U.  S.  v.  Columbian  Ins. 

retain  one  share  each  as  a  qualifica-  Co.,  2  Cranch,  C.  C.  266  (1821) ;  New 

tion  share.     U.   S.   v.   Louisville,   etc.  England,  etc.  Ins.  Co.  v.  Phillips,  141 

Canal  Co.,  4  Dill.  601  (1873) ;   s.  c,  26  Mass.  535  (1880),  where  income  bonds 

Fed.  Cas.  1002.     See  also  §  709,  infra,  entitled  to  vote  were  held  to  have  lost 

6  Re  Pioneer  Paper  Co.,  36  How.  Pr.  that    right    when    they    were    paid  ; 

111     (1865) ;      Tunis    v.     Hestonville,  Brewster  v.  Hartley,  37  Cal.  15  (1869), 

etc.  Ry.,  1  Pa.  Dist.  207  (1892).     Cf.  where  the  company  had   pledged  its 

6.  c,  149  Pa.  St.  70.  stock.     If  all  the  stockholders  consent, 

6  Third  Nat.  Bank  of  Cincinnati  v.  the  stock  owned  by  the  corporation 

Jackson,    156  Fed.    Rep.    144    (1907) ;  may  be  voted.     Farwell  v.  Houghton, 

rev'd   on  another   point   in   167   Fed.  etc.   Works,   8   Fed.    Rep.   66    (1881). 

Rep.  26.  Where  a  mortgage  can  be  given  only 

1801 


§614. 


ELECTIONS  —  CORPORATE   MEETINGS. 


CH.  XXXVII. 


corporation  itself  cannot  be  voted  under  the  New  Jersey  statute,  es- 
pecially where  the  purpose  of  the  pledge  is  to  control  the  corporation.^ 

Where  the  directors,  just  before  the  election,  issue  or  sell  stock  owned 
by  the  corporation,  the  purpose  of  such  issue  or  sale  being  to  control 
the  election,  the  courts  will  interfere  at  the  instance  of  other  stock- 
holders where  an  actual  fraud  is  involved.^ 

§  614.  Issuing  stock  in  order  to  carry  an  election.  —  Where  the 
directors  cause  treasury  stock  to  be  sold  to  themselves  at  less  than 
its  real  value  and  for  the  purpose  of  carrying  an  election,  the  court 
will  set  the  sale  aside  as  fraudulent.^  The  majority  stockholders  may 
maintain  a  bill  in  equity  to  enjoin  the  board  of  directors,  who  represent 
a  minority  of  the  stock,  from  issuing  unissued  capital  stock  to  one  of 
themselves,  thereby  enabling  them  to  control,  such  being  the  purpose  of 
the  issue.^     In  a  proper  case  the  court  will  enjoin  the  issue  of  the  new 


upon  the  vote  of  the  stockholders, 
stock  owned  by  the  corporation  cannot 
be  voted,  but  the  pledgee  of  such  stock 
from  the  corporation  was  allowed  to 
vote.  Vail  v.  Hamilton,  85  N.  Y.  453 
(1881).  Directors  elected  by  votes 
upon  stock  owned  by  the  corporation 
are  illegally  elected.  Ex  parte  Des- 
doity,  1  Wend.  98  (1828).  Where  the 
statute  requires  the  vote  of  the 
holders  of  a  certain  amount  of  the 
stock,  only  the  outstanding  stock  is 
considered.  The  unissued  stock  and 
treasury  stock  are  not  counted. 
Market  Street  Ry.  v.  Hellman,  109 
Cal.  571  (1895).  A  Massachusetts 
decision  that  certain  stock  in  a  Maine 
corporation  belongs  to  individuals 
and  not  to  the  corporation  itself  is 
a  bar  to  a  suit  by  the  company  itself 
in  Maine,  to  enjoin  that  stock  being 
voted.  Corey  v.  Independent  Ice 
Co.,  106  Me.  485  (1910). 

1  Thomas  v.  International,  etc.,  72 
N.J.  Eq.  224  (1907). 

2  Quoted  and  approved  in  O'Connor 
V.  International,  etc.  Co.,  68  N.  J.  Eq. 
67  (1904) ;  aff'd,  68  N.  J.  Eq.  680.  See 
§  614,  infra,  on  this  subject. 

3  Hilles  V.  Parrish,  14  N.  J.  Eq.  380 
(1862).  Where  the  stock  of  a  ceme- 
tery company  of  the  par  value  of  S50 
is  worth  but  $5,  the  directors  may 
issue  it  for  land  which  is  liable  to 
come  into  competition  with  the  com- 
pany, even  though  one  motive  of  the 
directors    is    thereby    to    control    an 


election.  Rural,  etc.  Co.  v.  Wildes,  54 
N.  J.  Eq.  668  (1896) ;  rev'g  53  N.  J. 
Eq.  452  (1895).  A  stockholder  who 
was  not  present  at  a  stockholders' 
meeting  is  not  bound  by  the  ratifi- 
cation by  such  meeting  of  the  issue  of 
a  large  amount  of  the  original  capi- 
tal stock  to  the  directors  themselves 
who  were  illegally  elected,  but  who 
thereby  acquire  control  of  the  com- 
pany. Morris  v.  Stevens,  178  Pa.  St. 
563  (1897). 

''  No  request  to  the  stockholders 
to  bring  a  suit  need  be  made  and  as  to 
stock  already  issued  no  tender  of  the 
price  need  be  made ;  neither  need  it 
be  alleged  that  the  suit  is  in  behalf  of 
all  the  stockholders  or  for  the  corpora- 
tion. Trask  v.  Chase,  107  Me.  137 
(1910).  A  stockholder's  suit  to  set 
aside  a  sale  of  unissued  stock  with  a 
view  to  changing  the  control  need 
not  join  directors  who  hold  small 
amounts  of  stock  nor  stockholders 
who  took  no  part  in  the  transaction. 
Witherbee  v.  Bowles,  201  N.  Y  427 
(1911).  Where  de  facto  directors, 
immediately  after  the  election,  order 
an  issue  of  a  large  amount  of  the 
original  unissued  capital  stock  of  the 
company,  and  most  of  it  is  taken  by 
one  of  their  number,  who  thereby 
acquires  a  majority  of  the  stock  of 
the  company,  and  subsequently  the 
election  is  declared  illegal,  such  direc- 
tors may  be  enjoined  from  voting  the 
stock  so  issued,  and,  if  they  have  sold 


1802 


CH.   XXXVII. 


ELECTIONS  —  CORPORATE   MEETINGS. 


614. 


stock.^  So  also  where  directors  issue  new  stock  to  their  friends  at  less 
than  par  and  without  offering  it  to  the  existing  stockholders,  the  object 
being  to  control  a  coming  election,  the  election  will  be  enjoined  and  the 
issue  set  aside.-  A  dissenting  stockholder  may  cause  to  be  set  aside  a 
sale  of  unissued  stock  to  other  stockholders  at  a  grossly  inadequate 
price  to  enable  them  to  obtain  control.^  Dissenting  stockholders  may 
file  a  bill  to  obtain  a  cancellation  of  stock  issued  in  payment  for  patents 
to  engage  in  business  outside  of  the  territory  described  in  the  charter, 
the  real  purpose  being  to  obtain  the  vote  on  the  stock."* 

But  an  election  is  valid,  although  it  is  carried  by  treasury  stock 
of  the  corporation,  which  is  sold  by  the  directors  just  before  the  elec- 
tion in  order  to  carry  the  election,  so  long  as  the  sale  is  not  attacked 
and  set  aside  for  fraud. ^  Where  the  stock  is  not  treasury  stock,  but  is 
new  increased  capital  stock,  all  the  existing  stockholders  have  a  right  to 
subscribe  for  their  proportion  of  the  new  stock,  and  may  protect  that 
right  by  injunction.^  In  New  York  it  has  been  held  that  an  agreement 
between  stockholders  that  they  should  each  have  a  right  to  subscribe 
^ro  rata  for  unissued  stock  does  not  enable  one  of  the  stockholders  to 
set  aside  an  issue  of  such  stock  to  an  outside  party,  inasmuch  as  the 


it,  may  be  enjoined  from  voting  other 
stock  equal  in  amount  to  the  stock  so 
sold  by  them.  The  existing  stock- 
holders are  entitled  to  subscribe  for 
their  proportion  of  the  unissued  origi- 
nal capital  stock.  Morris  v.  Stevens, 
178  Pa.  St.  563  (1897).  See  also 
-post,  p.  1820,  note  1. 

1  The  court  will  enjoin  the  board  of 
directors  from  issuing  new  stock  on 
the  verge  of  an  election  and  for  the 
sole  purpose  of  carrying  that  election, 
where  the  directors  really  represent  a 
minority  of  the  stock,  and  where  the 
power  to  issue  the  new  stock  is  very 
doubtful.  Such  an  injunction  was 
granted,  even  though  the  charge  was 
made  that  the  complainant  was  inter- 
ested in  rival  companies  and  was  ex- 
ercising control  in  their  behalf. 
Fraser  v,  Whalley,  2  Hem.  &  M.  10 
(1864). 

'^  Way  V.  American,  etc.  Co.,  60 
N.  J.  Eq.  263  (1900).  Where  a  majority 
of  the  directors  issued  stock  to  a 
friend  in  order  to  carry  an  election, 
the  court  has  power  to  set  aside  the 
issue  and  also  the  election.  Luther 
V.  C.  J.  Luther  Co.,  118  Wis.  112 
(1903). 


'  Essex    V.    Essex,    141    Mich.    200 
(1905). 

*  Kimball  v.  New  England,  etc.  Co., 
69  N.  H.  485  (1899). 

5  State  V.  Smith,  48  Vt.  266  (1876). 
In  the  case  Taylor  v.  Miami  Export- 
ing Co.,  6  Ohio,  176,  223  (1833),  a  bill 
by  a  stockholder  to  compel  a  person  to 
take  back  from  the  corporation  cer- 
tain stock  which  he  had  purchased  of 
it  just  before  the  election,  and  had 
voted  at  the  election,  and  then  imme- 
diately sold  again  to  the  corporation, 
failed.  The  vote  on  these  shares,  how- 
ever, did  not  affect  the  result.  But  see 
§§  65,  70,  286  (notes),  supra,  and 
§  653,  infra.  Even  though  the  holders 
of  a  majority  of  the  stock  are  opposed 
to  the  board  of  directors,  yet  the 
former  cannot  obtain  an  injunction 
against  the  board  of  directors  selling 
treasury  stock.  Gillette  v.  Noyes,  92 
N.  Y.  App.  Div.  313  (1904).  Where 
the  stockholders  are  present  and  no 
one  objects  to  the  issue  of  unissued 
stock  to  a  director  whereby  he  ac- 
quires control,  such  issue  is  legal. 
Christopher  v.  Noxon,  4  Out.  Rep. 
(Can.)  672  (1883). 
5  §  286,  supra. 


1803 


§615. 


ELECTIONS 


CORPORATE   MEETINGS. 


[CH.  XXXVII. 


corporation  was  not  a  party  to  the  agreement,  and  the  stockholders' 
remedy  is  an  action  for  damages.^  A  court  of  equity  may  set  aside  an 
election  of  directors  carried  by  a  trick,  whereby  an  irresponsible  person 
was  allowed  to  subscribe  for  a  large  amount  of  stock,  which  he  then 
voted,  nothing  being  paid  on  the  stock.  Such  a  suit  may  be  brought 
by  some  of  the  stockholders  in  behalf  of  all.^  Even  though  stock  has 
been  issued  irregularly  to  a  director,  yet  where  he  has  held  it  for  a  year 
the  board  of  directors  cannot  just  before  an  election  arbitrarily  cancel 
such  stock  in  order  to  carry  the  election.^  It  is  of  course  legal  to  pur- 
chase stock  from  stockholders  in  order  to  control  an  election.^ 

§  615.  Where  a  corporation  owns  a  majority  of  the  stock  of  a 
rival  company,  may  it  vote  the  stock  and  control  the  latter  company  f 
—  It  has  been  held  in  several  cases  that  where  one  corporation  owns 
a  majority  of  the  stock  of  a  rival  company,  the  temptation  to  manage 
the  latter  company  for  the  benefit  of  the  former  company  will  be  so 
great  that  a  minority  stockholder  of  the  latter  company  may  enjoin 
the  former  company  from  voting  the  stock.^ 


>  Waters  v.  Waters  &  Co.,  130  N.  Y. 
App.  Div.  678  (1909) ;  aff'd,  201  N.  Y. 
184. 

2  Davidson  v.  Grange,  4  Grant's  Ch. 
Rep.  (Can.)  377  (1854). 

3  Hall  V.  Lay,  27  N.  Y.  Misc.  Rep. 
602  (1899). 

*  Toronto,  etc.  Co.  v.  Blake,  2  Ont. 
Rep.  (Can.)  175  (1882). 

^  Where  one  railroad  company  ac- 
quires a  majority  of  the  stock  of 
another  having  so  substantially  sim- 
ilar a  field  of  operations  that  there 
is  a  necessary  conflict  of  interests 
between  the  two,  the  former  may  be 
enjoined  from  voting  its  stock  on  the 
question  of  annulling  a  lease  from  one 
to  the  other,  even  though  both  com- 
panies are  in  the  hands  of  a  receiver. 
George  v.  Central  R.  R.  etc.  Co.,  101 
Ala.  607  (1894).  In  Memphis,  etc. 
R.  R.  t;.  Woods ,  88  Ala.  630  ( 1 889 ),  it  was 
held  that  where  one  railroad  company 
has  acquired  a  majority  of  the  stock 
of  another  railroad  company,  and  has 
elected  the  board  of  directors,  and 
oppressed  and  defrauded  such  latter 
company  by  buying  unnecessary  roll- 
ing stock,  making  unnecessary  re- 
pairs at  exorbitant  prices,  unduly 
apportioning  the  earnings  as  between 
the  two  roads,  and  in  other  ways 
increasing  its  own  profits  at  the  ex- 


pense of  the  latter  company,  a  mi- 
nority stockholder  in  such  latter  com- 
pany may  enjoin  the  former  company 
from  voting  such  stock  at  an  elec- 
tion. A  request  to  the  company  to 
bring  the  action  was  first  made  by  the 
stockholder  who  brought  the  suit.  A 
transportation  company  owning  a 
majority  of  the  stock  of  an  ice  com- 
pany may  be  enjoined  from  voting  the 
stock,  if  the  former  company  intends 
to  purchase  ice  from  the  latter  com- 
pany, but  otherwise  no  such  injunc- 
tion wiU  issue.  American,  etc.  Co.  v. 
Linn,  93  Ala.  610  (1890).  A  stock- 
holder in  one  mining  and  manufac- 
turing company  may  enjoin  another 
rival  company  from  voting  the  ma-, 
jority  of  stock  in  the  former  company, 
such  majority  being  owned  by  the 
latter  company.  Mack  v.  De  Bardele- 
ben,  etc.  Co.,  90  Ala.  396  (1890). 
Where  an  electric  light  company  pur- 
chases a  majority  of  the  stock  of  a 
competing  electric  light  company  in 
the  same  city,  and  elects  the  board  of 
directors,  and  fraudulently  uses  its 
power  to  make  the  latter  subservient 
to  and  as  a  feeder  to  the  former,  and 
intends  to  destroy  the  latter,  the  court, 
at  the  instance  of  a  minority  stock- 
holder of  the  latter,  will  appoint  a 
receiver  of  the  company  ;  but  the  proof 


1804 


CH.   XXXVII. 


ELECTIONS 


CORPORATE   MEETINGS. 


[§  615. 


In  New  York,  however,  the  more  logical  rule  is  laid  down  that  a  court 
of  equity  has  no  power  to  restrain  a  railroad  corporation,  which  has 
legally  purchased  a  majority  of  the  stock  of  another  railroad  corpora- 
tion, "  from  voting  on  the  stock  so  purchased  upon  the  allegation,  or 
proof,  that  it  intends  to  cause  a  board  of  directors  to  be  elected,  who, 
by  their  action  or  non-action,  may  injure  or  prejudice  the  interests  of 
the  minority  stockholders  of  the  corporation  whose  stock  has  been  so 
purchased."  ^  Such  also  is  the  law  in  New  Jersey.^  It  has  been  held 
in  Ohio  that  one  railroad  corporation  has  no  power  to  acquire  the  bonds 
of  another  railroad  corporation  in  order  to  control  the  elections  of  the 
latter,  such  bonds  having  a  voting  power.^    Where  a  railroad  company 


of  such  intent  must  be  clear.  The 
fact  that  the  directors  so  elected  are 
stockholders  in  the  controlling  com- 
pany is  not  sufficient.  Davis  v.  U.  S. 
etc."  Co.,  77  Md.  35  (1893).  It  is  il- 
legal for  an  Ohio  corporation  to  pur- 
chase a  majority  of  the  stock  of  a 
Tennessee  corporation,  for  the  purpose 
of  controlling  the  latter,  even  though 
they  are  engaged  in  a  similar  busi- 
ness, the  object  being  to  form  a  mo- 
nopoly. Hence  the  purchasing  com- 
pany cannot  enforce  the  contract  as 
to  certain  things  which  were  to  be  done 
by  the  vendor  of  the  stock.  Marble 
Co.  V.  Harvey,  92  Tenn.  115  (1892). 
See  also  Alexander  v.  Searcy,  81  Ga. 
536  (1889).  A  stockholder's  suit  to 
restrain  another  corporation  from  vot- 
ing stock  in  his  corporation  does  not 
lie  where  such  other  corporation  is 
not  made  a  party  defendant.  HoUi- 
field  V.  Wrights vilie,  etc.  R.  R.,  99  Ga. 
362  (1896). 

1  Oelbermann  v.  New  York,  etc. 
R.  R.,  77  Hun,  332  (1894). 

2  A  stockholder  will  not  be  enjoined 
from  voting  on  the  ground  that  he  is 
not  a  bona  fide  stockholder,  but  that 
his  stock  was  paid  for  by  rival  com- 
panies, and  that  he  intends  to  con- 
trol the  company  for  the  advantage  of 
those  companies.  Camden,  etc.  R.  R. 
V.  Elkins,  37  N.  J.  Eq.  273  (1883). 
The  New  Jersey  coiirts  will  at  the  in- 
stance of  a  stockholder  enjoin  a  New 
Jersey  corporation  from  owning  and 
voting  stock  in  a  Washington  corpora- 
tion where  the  Washington  courts 
hold  that  a  Washington  corporation 
has  no  power  to  own  stock  in  another 


Washington  corporation,  and  may  be 
enjoined  from  voting  such  stock. 
Coler  V.  Tacoma,  etc.  Co.,  65  N.  J.  Eq. 
347,  rev'g  64  N.  J.  Eq.  117  (1903).  A 
federal  court  has  held  that  where  a 
corporation  is  organized  to  own  and 
vote  the  stock  of  two  competing  rail- 
roads, the  courts  will  enjoin  the  voting 
of  the  stock,  the  combination  itself 
being  forbidden  by  law.  Clarke  v. 
Central  R.  R.  etc.,'  50  Fed.  Rep.  338 
(1892).  In  this  case,  however,  on  the 
final  hearing,  the  bill  was  dismissed. 
See  62  Fed.  Rep.  328  (1894).  Stock 
held  by  one  corporation  in  another 
cannot  be  voted,  where  its  charter  has 
been  forfeited  and  a  proxy  given  by  its 
directors  had  been  revoked  by  a  part 
of  them,  leaving  the  remainder  in 
minority,  and  the  stock  held  by  it  had 
been  retiu*ned  to  the  corporation  and 
canceled.  In  re  Delaware  River,  etc. 
R.  R.,  76  N.  J.  L.  163  (1908). 

3  State  V.  McDaniel,  22  Ohio  St.  354, 
368  (1872).  The  action  of  a  board  of 
directors  cannot  be  impeached  on  the 
ground  that  their  election  was  due  in 
part  to  votes  cast  on  stock  illegally 
held  by  another  corporation.  Man- 
nington  v.  Hocking  Valley  Ry.,  183 
Fed.  Rep.  133  (1910).  Where  the 
state  has  brought  suit  to  forfeit  the 
charter  of  a  railroad  company  on  the 
ground  that  a  majority  of  its  stock  is 
held  contrary  to  the  statutes  and  con- 
stitution of  the  state  by  another  rail- 
road company,  the  case  may  be 
removed  to  the  federal  couirt  if  the  lat- 
ter company  is  an  instrument  of  inter- 
state commerce,  and  purchased  the 
stock    for    interstate    commerce    pur- 


1805 


§  615.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[cH.  xxxvn. 


acquires  control  of  the  bonds  and  stock  of  a  competing  company,  and 
allows  a  foreclosure  to  take  place,  the  minority  stockholders  may  defend 
against  such  foreclosure  on  the  ground  that  the  earnings  had  been 
kept  down  and  also  diverted.^ 

The  reasonable  rule  would  seem  to  be  that  where  one  company, 
having  no  power  to  purchase  the  stock  of  a  rival  company,^  illegally 
purchases  a  controlling  interest  in  such  stock,^  or  where  one  company, 
having  legally  purchased  the  majority  of  the  stock  of  a  rival  company, 
has  managed  the  latter  company  fraudulently  in  its  own  interests,  a 
court  of  equity  should  enjoin  it  from  voting  the  stock  at  the  next  elec- 
tion. But  if  the  purchase  of  the  stock  was  legal  and  there  has  as  yet 
been  no  fraud  in  the  management  such  an  injunction  should  not  be 
granted.^    Moreover,  even  though  a  railroad  purchases  the  stock  of 


poses.  It  is  also  removable  where  the 
latter  company  claims  that  its  char- 
ter existed  before  such  constitution 
and  statutes,  and  gives  it  a  right  to 
own  such  stock.  South  Carolina  v. 
Port  Royal,  etc.  Ry.,  56  Fed.  Rep.  333 
(1893). 

1  Farmers'  L.  &  T.  Co.  v.  New  York, 
etc.  Ry.,  150  N.  Y.  410  (1896). 

2  See  §§  314-317,  supra. 

3  Milbank  v.  New  York,  etc.  R.  R., 
64  How.  Pr.  20  (1882),  where  the 
court,  at  the  instance  of  a  minority 
stockholder,  enjoined  another  railroad 
company  from  voting  a  majority  of 
the  stock  in  his  company,  although 
fraud  and  partiality  in  the  manage- 
ment for  the  benefit  of  the  majority 
stockholder  was  a  fear  of  the  future 
instead  of  a  fact  in  the  past.  The 
court  said  :  "  It  is  against  public  policy 
to  have  or  permit  one  corporation  to 
embarrass  and  control  another  and 
perhaps  competing  corporation  in  the 
management  of  its  affairs,  as  may  be 
done  if  it  is  permitted  to  purchase  and 
vote  upon  the  stock."  In  Louisiana 
it  is  held  that  where  one  corporation 
acquires  stock  in  another  corporation 
without  authority  so  to  do,  the  former 
may  collect  the  dividends  on  such 
stock  and  may  sell  it,  but  cannot  vote 
it,  and  hence  that  directors  elected  by 
such  vote  may  be  ousted  by  quo  war- 
ranto proceedings.  State  v.  Newman, 
51  La.  Ann.  833  (1899).  A  smelt- 
ing company  has  no  inherent  power 
to  purchase  stock  in  another  smelting 
company,  and  hence  may  be  enjoined 


by  a  stockholder  of  the  latter  com- 
pany from  voting  such  stock.  Par- 
sons V.  Tacoma,  etc.  Co.,  25  Wash.  492 
(1901).  A  minority  stockholder  in  a 
railroad  company  claiming  that  an- 
other railroad  company  illegally  owns 
a  majority  of  the  stock  of  the  former, 
cannot  enjoin  such  owner  from  voting 
the  stock,  by  a  suit  instituted  in  a 
state  where  the  former  corporation  is 
located,  unless  the  latter  corporation 
is  served  and  brought  in  as  a  party 
defendant.  Taylor  &  Co.  v.  South- 
ern Pacific  Co.,  122  Fed.  Rep.  147 
(1903). 

^  The  right  of  one  railroad  corpo- 
ration to  own  stock  in  another  rail- 
road corporation  carries  with  it  the 
right  to  vote  for  the  directors  and  on 
all  other  questions,  unless  such  vote 
is  for  the  purpose  of  perpetrating  an 
actual  fraud.  Rogers  v.  Nashville,  etc. 
Ry.,  91  Fed.  Rep.  299  (1898).  In  this 
case  the  court  held  that  where  one 
railroad  owns  a  majority  of  the  stock 
and  controls  the  board  of  directors  of 
another  railroad  and  causes  the  latter 
to  lease  its  road  to  the  former,  a  stock- 
holder of  the  former  may  file  a  bill  in 
equity  to  set  aside  such  lease  on  the 
ground  that  its  terms  were  so  inequi- 
table as  to  constitute  a  fraud,  and  that 
in  such  ease  no  demand  need  be  made 
to  the  board  of  directors  to  bring  the 
suit,  if  the  facts  alleged  in  the  bill 
show  that  the  board  of  directors  is 
controlled  by  the  guilty  party.  See 
also  §  6,  supra.  A  corporation  legally 
owning  stock  in  another  corporation 


1806 


CH.   XXXVII. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  615. 


another  railroad,  in  violation  of  the  charter  of  the  former,  yet,  if  sub- 
sequently the  legislature  passes  a  law  authorizing  any  corporation  to 
purchase  and  own  the  stock  of  other  corporations,  the  illegality  of  the 
above-mentioned  purchase  is  cured,  and  the  disability  to  hold  such 
stock  is  removed,  there  being  no  longer  any  statute,  rule  of  law,  or  prin- 
ciple of  public  policy  forbidding  such  purchase.^  Where  a  holding  com- 
pany increases  the  capital  stock  of  one  of  its  subsidiary  companies  and 
then  causes  it  to  purchase  the  common  stock  of  the  holding  company, 
thereby  creating  a  conflict  of  interest  between  the  preferred  stockholders 
of  the  holding  company  and  the  subsidiary  company,  which  by  the 
plan  would  control  the  holding  company  itself,  minority  stockholders 
may  enjoin  such  a  reorganization,  it  being  a  part  of  the  plan  that  the 
holding  company  shall  sell  its  various  stocks  to  such  subsidiary  company.^ 
A  stockholder  is  an  indispensable  party  to  a  suit  to  enjoin  the  voting 
of  his  stock  at  a  meeting  of  shareholders  for  the  election  of  directors, 
and  this  is  the  rule  even  though  the  stockliolder  is  a  corporation  and  has 
the  same  directors  as  the  former  corporation.^  A  stockholder  cannot 
maintain  a  suit  against  the  corporation  to  enjoin  other  stockholders 
from  selling  their  stock  to  a  second  corporation,  such  second  corporation 
and  the  other  stockholders  not  being  parties  to  the  suit.'*    A  stockholder 


mav  vote  the  same.  Bigelow  v. 
Calumet,  etc.  Co.,  167  Fed.  Rep.  721 
(1909),  the  court  saying  that  "a  board 
elected  by  the  owner  of  such  a  majority 
would  not  in  any  legal  sense  be  the 
control  of  such  majority  owner,  nor 
from  such  ownership  could  the  legal 
inference  be  drawn  that  the  Calumet 
&  Hecla  Company  dominated  the 
management  of  the  Oeeola  Company. 
The  two  companies  would  still  remain 
separate  corporations,  each  managed 
presumably  in  its  own  interest." 
A  minority  stockholder  in  a  railroad 
company  may  enjoin  a  sale  of  its 
property  to  another  railroad  corpora- 
tion which  owns  a  majority  of  the  stock 
of  the  former,  the  price  of  his  stock 
being  fixed  in  the  deal  and  it  being 
shown  that  there  were  certain  accounts 
between  the  companies  which  were 
being  litigated  and  which  might 
materially  increase  the  value  of  his 
stock.  The  court,  however,  will  not 
enjoin  the  second  company  from  voting 
its  stock  in  the  former  company  and 
thus  controlling  the  board  of  directors, 
no  fraud  being  shown.  South,  etc. 
R.  Co.  ;;.  Gray,  160  Ala.  497  (1909). 
A  minority  stockholder  in  a  gas  com- 


pany, which,  to  preserve  its  property 
and  business,  must  either  borrow 
money  for  extensions  or  else  consoli- 
date with  another  company,  cannot 
enjoin  a  sale  of  the  assets  of  the  former 
to  the  latter,  such  sale  having  been 
authorized  by  the  directors  and  a 
majority  of  the  stockholders,  even 
though  a  majority  of  the  stock  of  the 
former  company  is  owned  by  the  latter 
company,  there  being  no  actual  fraud. 
Theis  v"^  Spokane,  etc.  Co.,  94  Wash. 
477  (1908). 

1  In  re  Buffalo,  etc.  R.  R.,  37  N.  Y. 
Supp.  1048  (1896),  involving  the  same 
transaction  as  was  involved  in  Mil- 
bank  V.  N.  Y.  etc.  R.  R.,  64  How.  Pr. 
20.     See  also  §§  314-317,  supra. 

2  Robinson  v.  Holbrook,  148  Fed. 
Rep.  107  (1906). 

3  Taylor  &  Co.  v.  Southern  Pac.  Co., 
122  Fed.  Rep.  147  (1903).     204  id.  681. 

*  Ingraham  v.  National  Salt  Co.,  36 
N.  Y.  Misc.  Rep.  646  (1902) ;  aff'd,  72 
N.  Y.  App.  Div.  582 ;  appeal  dismissed, 
172  N.  Y.  664.  There  are  times,  how- 
ever, when  the  majority  stockholders 
are  bound  to  act  in  a  fiduciary  rela- 
tion towards  the  minority  stock- 
holders.    This  class  of  eases   is   fully 


1807 


§615. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


in  a  railroad,  the  majority  of  the  stock  of  which  is  held  by  another  al- 
leged competing  railroad,  cannot  enjoin  the  latter  from  selling  such 
majority  of  the  stock.^ 

An  individual  may  of  course  own  a  controlling  interest  in  two  cor- 
porations, although  they  compete  in  business ;  ^  but  the  courts  will 
carefully  scrutinize  any  contracts  between  two  such  corporations  so 
controlled.^  The  Privy  Council  in  England  has  held  that  a  cotton 
mill  manufacturing  company  which  once  was  prosperous  but  by  reason 
of  competition  is  making  no  profit  may  be  leased  to  a  company  that  has 
combined  two  or  three  other  similar  concerns,  and  even  though  a  ma- 
jority of  the  stock  of  the  lessor  is  owned  by  the  leassee  itself  as  a  holding 
company,  yet  if  the  lease  is  ratified  at  a  meeting  of  the  stockholders  the 
court  will  uphold  the  lease,  it  being  a  fair  transaction  in  itself,  although 
the  holding  company  as  the  owner  of  the  majority  of  the  stock  of  the 
lessor  was  interested  on  both  sides.'' 

A  corporation  that  owns  stock  in  another  corporation  may  vote  such 
stock  in  favor  of  dissolution  of  the  latter,  even  though  it  was  influenced 
so  to  vote  by  the  fact  that  it  has  guaranteed  dividends  on  the  stock  of 
the  latter  so  long  as  the  latter  exists.^    A  New  Jersey  court  has  held 


considered  elsewhere.  See  §  662, 
infra. 

'  Hunnewell  v.  New  York,  etc.  Ry., 
196  Fed.  Rep.  543  (1911).  A  minority 
stockholder  in  a  railroad  cannot  en- 
join the  majority  stockholder  from 
selling  its  holdings  to  another  railroad 
company,  even  though  the  purchaser 
refuses  to  purchase  the  minority 
stock  at  the  same  price,  and  even 
though  such  majority  stockholder  is  a 
railroad  company  itself,  no  damage  to 
the  minority  stockholder  being  shown. 
The  claim  that  the  sale  would  be  to  a 
competing  railroad  in  violation  of  the 
anti-trust  act  of  congress  cannot  be 
sustained  in  the  state  court.  Delavan 
V.  New  York,  etc.  R.  R.,  154  N.  Y. 
App.  Div.  8  (1912). 

2  See  pp.  856-857,  note,  supra.  Cf. 
§  317,  supra.  In  the  case  United 
States  V.  Union  Pacific  R.  R.,  226  U.  S. 
470  (1913),  the  court  declined  to  allow 
the  Union  Pacific  to  distribute  among 
its  stockholders  the  stock  which  the 
Union  Pacific  held  in  the  Southern 
Pacific,  inasmuch  as  this  would  enable 
the  individuals  who  owned  the  stock 
of  Union  Pacific  to  control  the  Southern 
Pacific  by  the  stock  so  distributed, 
thereby  continuing  the  combination. 


3  See  §  662,  infra. 

*  Dominion  Cotton  Mills  Co.  v. 
Amvot,  etc.,  106  L.  T.  Rep.  934 
(H.  of  L.  1912),  rev'g  the  Quebec 
court. 

^  WindmuUer  v.  Standard,  etc.  Co., 
114  Fed.  Rep.  491  (1902).  See  also 
§  629,  infra.  In  the  ease  Robotham 
V.  Prudential  Ins.  Co.,  64  N.  J.  Eq.  673 
(1903),  the  court  approved  the  de-' 
cision  in  WindmuUer  v.  Standard,  etc. 
Co.,  114  Fed.  Rep.  491,  but  said  that 
if  the  complaint  had  been  framed 
on  a  different  theory,  and  "if  the  com- 
plainants had  attacked  the  action  of 
the  directors  in  instituting  the  pro- 
ceedings for  dissolution  as  the  product 
of  bribery  or  improper  influence  of 
any  kind,  or  of  favoritism  to  the 
majority  stockholder,  who  had  ap- 
pointed the  directors,  a  very  different 
case  would  have  been  presented.  If 
the  complainants  had  also  charged 
that  the  directors,  their  trustees,  had 
not  only  committed  a  gross  and  fla- 
grant breach  of  duty,  but  that  the 
majority  stockholder  had  instigated 
them  to  do  it,  a  strong  ease,  appar- 
ently, would  have  been  made  out  in 
which  to  hold  the  majority  stock- 
holder liable  for  damages." 


1808 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  615. 


that  a  scheme  whereby  an  insurance  company  purchases  a  majority 
of  the  stock  of  a  trust  company,  and  the  trust  company  purchases  a 
majority  of  the  stock  of  an  insurance  company,  is  illegal,  and  will  be 
set  aside  at  the  instance  of  a  dissenting  stockholder,  inasmuch  as  it 
results  in  self-perpetuating  boards  of  directors,  without  the  responsi- 
bility which  would  exist  if  those  directors  represented  their  own  stock, 
and  the  court  pointed  out  that  the  "  Voting -Trust  Cases"  in  New 
Jersey  had  established  the  principle  of  law  that  agreements  which  sever 
the  ownership  of  stock  from  the  voting  power  are,  in  many  instances, 
a  violation  of  another  principle  of  law,  that."  every  stockholder  is  en- 
titled to  the  benefit  of  the  judgment  of  every  other  stockholder  in  the 
management  of  the  affairs  of  the  corporation."  ^  Even  though  a  tele- 
phone company  has  no  right  to  condemn  and  it  organizes  a  telegraph 
company,  which  commences  the  condemnation  proceedings,  it  is  no 
defense  that  the  latter  is  but  a  dummy  of  the  former.^  Although  the 
Michigan  statutes  authorize  one  mining  company  to  purchase  the  stock 
of  other  mining  companies,  yet  where  this  results  in  establishing  a  practi- 
cal monopoly  in  a  certain  kind  of  copper,  a  minority  stockholder  may 
enjoin  the  voting  of  such  stock  so  held  by  the  purchasing  company, 
and  no  formal  demand  need  first  be  made  by  him  upon  the  directors 
to  institute  the  suit.^ 


^  Robotham  v.  Prudential  Ins.  Co., 
64  N.  J.  Eq.  673  (1903).  The  counsel 
in  this  case  claimed  that  the  follow- 
ing situation  was  legal:  "One  man 
controls  a  company  of  $10,000,000 
capital.  He  may  form  a  new  com- 
pany, with  a  capital  of  $5,100,000,  to 
hold  a  majority  of  the  stock.  He  may 
then  sell  all  but  $2,600,000  of  the  stock 
in  company  No.  2,  and  transfer  his 
remaining  stock  to  a  new  company 
with  a  capital  of  $2,600,000.  He  may 
then  sell  to  company  No.  3  all  but 
$1,400,000  and  transfer  that  to  a  new 
company.  This  process  may  go  on 
until  the  power  of  the  whole  chain  of 
corporations  is  vested  in  the  holder 
of  a  few  thousand  dollars  of  stock  in 
the  ultimate  company,  and  the  same 
chain  can  be  used  for  an  unlimited 
number  of  companies."  In  reply  to 
this  the  court  said  that  such  a  situa- 
tion, if  it  should  arise,  might  lead 
to  the  following  questions:  "First. 
Whether  the  holders  of  the  $4,900,000 
of  stock  could  not  disfranchise  the 
new  irresponsible  adventurers  who 
assumed  to  wield  the  voting  power  of 


the  $5,100,000  of  stock  —  disfranchise 
this  stock  until  the  beneficial  owners 
of  it  should  take  control  of  their  own 
property  and  use  its  voting  power. 
Second.  Whether  the  actual,  beneficial 
owners  of  the  $5,100,000  of  stock  could 
not  break  through  the  chain  of  cor- 
porate fictions  which  separated  them 
from  their  property,  and  dictate  how 
its  voting  power  should  be  exercised. 
Third.  Whether  it  would  not  be  the 
duty  of  the  attorney-general  of  the 
state  to  take  proceedings  to  dissolve 
the  holding  companies,  as  an  abuse  of 
corporate  franchises,  —  as  a  fraud  upon 
the  extremely  liberal  provisions  of  our 
corporate  act,  which,  however,  permit 
the  incorporation  of  companies  only 
for  a  'lawful  purpose.'" 

2  Alabama,  etc.  Ry.  Co.  v.  Cumber- 
land, etc.  Co.,  88  Miss.  438  (1906). 
See  also  §  934,  infra. 

'  Bigelow  V.  Calumet,  etc.  Co.,  155 
Fed.  Rep.  869  (1907).  On  final  hearing, 
however,  the  bill  in  this  ease  was 
dismissed.  See  167  Fed.  Rep.  704; 
aflf'd,  167  Fed.  Rep.  721.  A  New 
Jersey  holding  company  may  legally 


(114) 


1809 


§  616.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


CH.  XXXVII. 


A  pledge  of  its  stock  by  a  corporation  or  its  stockholders  to  another 
corporation  is  governed  by  substantially  the  same  rules,  especially  in 
regard  to  creating  a  monopoly.^ 

§  616.  Illegal  or  fraudulent  elections  —  The  remedy  of  injunc- 
tion against  elections  and  against  voting  particular  stock.  —  A  court 
of  equity  has  power  to  enjoin  the  holding  of  an  election  by  a  corporation 
during  the  pendency  of  a  suit.^ 


acquire  a  majority  of  the  stock  of  the 
street  railways  in  different  cities  in 
Tennessee  by  issuing  shares  of  the 
New  Jersey  company  in  exchange  for 
such  shares  of  the  street  railway  com- 
panies. There  is  nothing  illegal  in 
such  a  holding  company,  provided  it 
does  not  create  a  monopoly  or  an 
unlawful  restraint  of  trade  or  sup- 
pression of  competition,  and  hence  a 
minority  stockholder  in  one  of  the 
street  railway  companies  cannot  main- 
tain a  suit  to  set  aside  such  purchases. 
Clark  V.  Memphis  St.  Ry.,  123  Tenn. 
232  (1910).  In  determining  whether 
or  not  one  company  owning  stock  in 
another  company  controls  it  in  re- 
straint of  trade,  such  control  may  exist 
even  though  the  former  does  not  own 
a  majority  of  the  latter,  inasmuch  as 
additional  stock  may  easily  be  acquired. 
Pearsall  v.  Great  Northern  Ry.,  161 
U.  S.  646  (1896).  See  also  §317, 
sv-pra. 

1  United  States  v.  Kissel,  218  U.  S. 
601  (1910).  See  also  §§  317,  612, 
supra,  and  eh.  XXIX,  supra.  Where 
one  sugar  refining  company  loans 
money  to  the  majority  stockholder 
of  another  sugar  refining  company 
and  votes  the  stock  and  elects  directors 
who  cause  the  latter  company  to  stop 
business,  the  latter  company  may  hold 
the  former,  and  also  its  own  guilty 
directors,  liable  in  treble  damages, 
under  the  anti-trust  act  of  congress  of 
July  2,  1890.  Pennsylvania,  etc.  Co. 
V.  American,  etc.  Co.,  166  Fed.  Rep. 
254  (1908).  A  contract  between  a 
New  Jersey  land  company  and  a  rail- 
road company  by  which  the  latter 
loans  money  to  the  former  and  for 
six  years  is  to  name  three  of  the  seven 
directors,  one  of  the  three  to  be  presi- 
dent and  general  manager,  and  the 
other  four  directors  to  be  satisfactory 
to  it,  is  illegal,  even  though  a  majority 


of  the  stock  of  the  New  Jersey  com- 
pany is  pledged  to  the  railroad  com- 
pany to  secure  the  loans  and  is  to  be 
voted  by  the  railroad  company.  A 
minority  stockholder  of  the  land  com- 
pany may  maintain  a  bill  to  cancel 
such  a  contract.  Holt  v.  California, 
etc.  Co.,  161  Fed.  Rep.  3  (1908). 
The  control  of  a  land  company  by  a 
railroad  company  is  against  public 
policy,  inasmuch  as  the  business  and 
the  purposes  of  the  two  corporations 
are  entirely  different.  Holt  v.  Cali- 
fornia, etc.  Co.,  161  Fed.  Rep.  3 
(1908). 

2  In  Walker  v.  Devereaxix,  4  Paige, 
229,  247  (1833),  Chancellor  Walworth 
said:  "The  court  unquestionably  has 
the  power  to  prevent  this  election  by 
an  injunction  operating  upon  the  com- 
missioners, restraining  them  from  act- 
ing as  inspectors  of  the  election."  In 
Haight  V.  Day,  1  Johns.  Ch.  18  (1814), 
Chancellor  Kent  dissolved  the  injunc- 
tion, but  did  not  question  the  power 
of  the  court  to  grant  it.  High  on  In- 
junctions, §1230,  says:  "While  the 
propriety  of  equitable  interference  by 
injunction  with  the  election  of  officers 
of  private  corporations  has  been  fre- 
quently criticized,  and  with  no  incon- 
siderable show  of  justice,  the  jurisdic- 
tion itself,  although  sparingly  exer- 
cised, is  too  firmly  established  to  be 
readily  shaken  without  the  interven- 
tion of  legislative  authority.  The 
jurisdiction  is,  however,  almost  en- 
tirely of  American  growth,  the  English 
authorities  affording  few  instances  of 
its  exercise."  A  court  of  equity  has 
jurisdiction  on  a  bill  in  equity  to  en- 
join an  election,  although  the  statute 
provides  for  a  summary  remedy  by 
application  to  the  court,  where  the 
relief  asked  for  by  the  bill  involves 
also  the  transfer  of  ^ock.  Archer  v. 
American,  etc.  Co.,  50  N.  J.  Eq.  33 


1810 


CH.   XXXVII. 


ELECTIONS  —  CORPORATE  MEETINGS. 


G16. 


A  court  of  equity  may  enjoin  the  majority  stockholders  from  holding 
a  new  election,  even  though  they  claim  that  the  former  election  was 
invalid.^ 


(1892).     The   holding   of   an   election 
may  be  enjoined  pending  a  suit  which 
has  been  commenced   to  restrain  the 
voting    the    stock    which    has    been 
illegally    issued    at    less    than    par    to 
friends   of   the   directors   in   order   to 
control  the  election.     Way  v.  Ameri- 
can, etc.  Co.,  60  N.  J.  Eq.  263  (1900). 
Where  a  corporation  has  brought  suit 
against  its  president  for  an  accounting 
for   money    misappropriated   by   him, 
and  where  the  president  owns  a  major- 
ity of  the  stock,  the  court  may  enjoin 
the   holding   of   an   election,   it   being 
shown  that  the  president  has  power  to 
elect  a  board   of  directors  who  may 
defeat  the  purpose  of  the  suit.     Coxe 
V.   Huntsville,  etc.   Co.,   129  Ala.  496 
(1900).     A    court    cannot    enjoin    the 
payment  of  dividends  and  the  election 
of  directors  and  adoption  of  by-laws 
on  account  of  the  fraud  of  individuals, 
unless    the   stockholders    are   brought 
in    as    parties    defendant.     Willis    v. 
Lauridson,  161  Cal.  106(1911).    Where 
a  new  election  is  ordered  the  court  may 
enjoin     transfers    in     the    meantime. 
Matter  of  New   York,   etc.   Co.,    145 
N.    Y.    App.    Div.    623     (1911).     In 
the  case  State  v.  Kennan,  35  Wash.  52 
(1904),  it  appears  that  a  mining  com- 
pany had  a  capital  stock  of  S50,000 
divided   into    1,000,000   shares  of   the 
par  value  of  five  cents  each  and  that 
the    secretary    issued    over    1,000,000 
spurious  shares.     The  court  sustained 
a  bill  in  equity  by  a  stockholder  against 
the  corporation  and  all  its  stockholders 
to  determine  which  held  the  genuine 
stock,   and   enjoined   any   meeting  or 
transaction    of    any    business    in    the 
meantime.     Even    though    the   Mich- 
igan   statutes    authorize    one    mining 
company    to    purchase    the    stock    of 
other    mining    companies,    yet    where 
this  results  in  establishing  a  practical 
monopoly  in  a  certain  kind  of  copper, 
a  minority  stockholder  may  enjoin  the 
voting  of  such  stock  so  held  by  the 
purchasing   company,   and  no   formal 


demand  need  first  be  made  by  him 
upon  the  directors  to  institute  the 
suit.  Bigelow  v.  Calumet,  etc.  Co.,  155 
Fed.  Rep.  869  (1907).  On  final  hear- 
ing, however,  the  bill  in  this  case  was 
dismissed.  See  167  Fed.  Rep.  704; 
aff'd,  167  Fed.  Rep.  721. 

The  court  may  enjoin  the  company 
from  receiving  any  votes  at  an  elec- 
tion unless  the  votes  of  the  plaintiff 
are  received.     Brown  v.  Pacific  Mail, 
etc.  Co.,  5  Blatchf.  525  (1867) ;   s.  c,  4 
Fed.    Cas.    420.     In    the    latter    case 
Judge   Blatchf ord   said:     "As   to   the 
character  of  the  injunction  asked  for, 
it   is   laid   down   in   Judge    Redfield's 
Treatise  on  the  Law  of  Railways  (vol. 
2,  sec.  221)  that  'it  has  been  common 
to  produce  a  positive  effect,   through 
an    injunction    out    of    chancery,    by 
means   of   a    prohibitory    order,'    and 
that  a  mandatory  order  is,  in  courts 
of  equity,   seldom  denied,   unless   the 
remedy  at  law  is  perfectly  adequate." 
In  this  case  Judge  Blatchford  enjoined 
the   election   inspectors   from   holding 
any   election   until    the   further   order 
of    the   court,    unless   certain   persons 
should  first  be  permitted  to  vote  cer- 
tain stock ;    and  also  enjoined  certain 
persons  from  voting  any   stock  until 
after  certain  other  persons  had   been 
afforded  an  opportunity  to  vote  their 
stock.     In   Shelmerdine   v.   Welsh,   47 
Leg.  Int.  26  (Phila.  Com.  PL,  January, 
1890),    the    court    did    not    deny    its 
power  to  enjoin  the  election,  but  said : 
"The  case  is  not  sufficiently  clear  to 
warrant  a  preliminary  injunction  that 
would  prevent  an  election  on  the  day 
named    in    the    charter,    and    might 
cause    the    irreparable    injury    which 
such  remedies  are  given  to  prevent." 
If  the  election  is  held  in  violation  of 
an  injunction,   this  fact  will  be  con- 
sidered  in    quo    warranto   proceedings. 
People  V.  Albany,  etc.  R.  R.,  55  Barb. 
344,  384  (1869).     The  injunction  gen- 
erally   runs    against    the    inspectors, 
president,    directors,    officers,    agents, 


1  Chiera  v.  Brevoort,  97  Mich.  638  (1893). 
1811 


§  616.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[cH. 


A  court  of  equity  may  also  enjoin  the  voting  of  particular  stock. 
In  order  to  obtain  such  an  Injunction,  however,  the  complainant  must 
show  that  the  defendant  Intends  to  vote  the  stock ;  that  he  has  no  equi- 
table right  to  do  so ;  that  the  effect  of  the  vote  will  be  to  control  the 
election ;  and  that  Irreparable  and  permanent  Injury  will  come  to  the 
corporation  or  to  the  stockholders  unless  the  injunction  Is  granted.^ 


servants,  etc.  Campbell  v.  Poiiltney, 
6  GiU  &  J.  (Md.)  94  (1834).  It  has 
been  held  that  an  injunction  perma- 
nently forbidding  the  holding  of  any 
election  whatever  is  an  interference 
with  the  management  of  corporate 
affairs,  to  which  the  courts  will  decline 
to  be  a  party ;  and  such  an  injunction 
would,  if  granted,  be  void.  People  v. 
Albany,  etc.  R.  R.,  55  Barb.  344  (1869), 
aff'd,  57  N.  Y.  161,  holding  also  that 
while  an  injunction  forbidding  in- 
spectors to  hold  an  election  at  all,  or 
to  receive  and  count  the  votes  thereof, 
is  entirely  void,  since  a  court  of  equity 
has  no  power  to  restrain  permanently 
an  officer  of  a  corporation  from  per- 
forming the  ordinary  duties  of  his 
office,  yet  they  may  be  enjoined  from 
holding  an  election  imtil  the  further 
order  of  the  court,  or  from  receiving 
the  votes  of  certain  stockholders  until 
the  votes  of  others  are  deposited.  An 
injunction  may  be  granted  staying  an 
election.  Scholfield  v.  Union  Bank,  2 
Cranch,  C.  C.  115  (1815);  s.  c,  21 
Fed.  Cas.  723,  where  the  inspectors 
denied  the  right  of  pledgors  to  vote. 
The  corporation  must  not  only  be  made 
a  party  defendant,  but  must  be  served 
or  voluntarily  appear  before  an  injunc- 
tion is  granted.  Morshead  v.  Southern 
Pac.  Co.,  123  Fed.  Rep.  350  (1903). 
If  directors  convene  a  meeting,  to  pass 
resolutions  favorable  to  themselves  on 
questions  in  which  the  interests  of  the 
directors  are  opposed  to  those  of  the 
shareholders,  by  a  circular  which  is 
misleading,  and  which  contains  state- 
ments calculated  to  obtain  proxies  in 
their  favor  without  giving  the  share- 
holders the  information  necessary  to 
enable  them  to  form  a  just  judgment 
as  to  who  are  the  proper  persons  to 
whom  to  intrust  their  votes,  the  court 
wUl  grant  an  injunction  to  restrain 
the  holding  of  the  meeting,  and  to 
restrain     the     directors     from     laying 


such  resolutions  before  the  meeting. 
Jackson  v.  Munster  Bank,  13  L.  R. 
Ir.  118  (1884).  For  other  instances 
in  which  a  court  of  equity  inter- 
fered, see  §  593,  supra,  and  §  618, 
infra. 

1  Reed  v.  Jones,  6  Wis.  680  (1858), 
holding  that  a  preliminary  injunction 
against  a  stockholder  voting  his  stock 
cannot  be  granted  on  the  ground  that 
he  had  no  title  to  the  land  which  he 
conveyed  in  payment  of  the  stock. 
The  stock  had  not  been  canceled  by 
the  company,  and  no  action  was  pend- 
ing to  cancel  it.  In  McHenry  v.  Jew- 
ett,  90  N.  Y.  58  (1882),  a  preliminary 
injunction  was  denied,  inasmuch  as 
the  complaint  showed  no  equitable 
cause  of  action.  Where  the  owner  of 
a  majority  of  the  stock  has  been 
fraudulently  deprived  of  her  stock  by 
her  pledgee,  who  has  thereby  deprived 
her  of  the  control  and  claims  the 
stock  as  his  own,  the  court  will  enjoin 
him  from  voting  the  stock  and  wUl 
appoint  a  receiver  of  such  stock 
pendente  lite.  Ayer  i'.  Seymour,  5  N.  Y. 
Supp.  650  (Com.  PI.  1889).  An  in- 
junction against  a  stockholder's  vot- 
ing certain  stock  is  not  an  injimction 
to  "suspend  the  general  and  ordinary 
business  of  a  corporation."  An  elec- 
tion is  not  such  business.  Reed  v. 
Jones,  6  Wis.  680  ( 1858) .  In  an  injunc- 
tion suit  to  restrain  the  voting  of  stock 
the  corporation  is  not  necessarily  a 
party.  Bridgers  v.  Staton,  150  N.  C. 
216  (1909).  An  injunction  against 
issuing  any  stock  pending  an  election 
is  not  violated  by  canceling  a  pre- 
vious illegal  issue  of  stock  for  less  than 
the  amount  subscribed  and  canceling 
the  balance  due  on  such  subscription. 
Matter  of  New  York,  etc.  Co.,  145 
N.  Y.  App.  Div.  630  (1911).  A 
stockholder  may  object  to  the  voting 
of  overissued  stock  in  the  hands  of  the 
party  to  whom  it  was  originally  issued, 


1812 


CH.  XXXVII. ] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  616. 


Thus,  an  injunction  has  been  granted  where  there  was  a  conspiracy 
to  obtain,  on  the  eve  of  the  election,  an  injunction  against  the  complain- 
ants from  voting  their  stock  ;  ^  also  where  the  directors  propose  to  post- 
pone the  election  in  order  to  prolong  their  term  of  office ;  ^  also,  in  cer- 
tain cases,  where  a  stockholder  has  transferred  part  of  his  stock  in  order 
to  increase  the  voting  power  of  the  stock  the  charter  limiting  the  number 
of  votes  one  stockholder  may  cast ;  ^  also  where  a  majority  of  stock  is 
owned  by  a  competing  company  which  has  acquired  control  for  the  pur- 
pose of  diverting  business  to  itself.;^  also  where  "trustees,"  who  are 
mere  agents,  refuse  to  transfer  the  stock  to  their  principals  or  to  give 
proxies.^  Under  the  New  York  practice  in  a  suit  to  compel  a  trustee 
to  vote  stock  in  a  certain  way,  he  cannot  be  compelled  by  an  interlocu- 
tory injunction  to  so  vote  the  stock,  the  final  decree  not  having  been 
rendered.^  The  question  of  whether  the  Court  may  direct  a  master 
or  receiver  to  vote  stock  is  considered  elsewhere.^ 

Where  the  owner  of  a  majority  of  the  stock  sells  it,  the  purchase 
price  being  only  paid  in  part,  and  retains  the  stock  in  his  name  until 
the  full  price  is  paid,  he  cannot  be  compelled  to  deliver  the  stock  or  to 

even  though  he  voted   to  issue  such    restraining  plaintiffs  in  their  right  to 


stock,  and  he  may  maintain  an  action 
to  have  the  stock  canceled.      Haskell 
V.  Read,  68  Neb.  107  (1903).     Where, 
/  by    fraud,    a    corporation    has    been 
L-^duced  to  sell  stock  and  it  sues  to 
/recover  back  the  same,  it  may  have  an 
/  injunction  against  the  defendant  assign- 
^ing  or  transferring  the  stock,  but  can- 
not enjoin  him  from  voting  it.     Maine, 
etc.  Co.  V.  Alexander,  115  N.  Y.  App. 
Div.  112  (1906). 

1  Brown  i'.  Pacific  Mail,  etc.  Co.,  5 
Blatchf.  525  (1867) ;  s.  c,  4  Fed.  Cas. 
420,  in  which  the  allegation  was  that 
the  defendants  contemplated,  through 
improper  means,  to  obtain  an  injunc- 
tion preventing  plaintiffs,  who  were 
large  stockholders  in  a  corporation, 
from  voting  at  an  approaching  elec- 
tion, and  that  defendants  were  im- 
properly obtaining  proxies  from  other 
stockholders  in  order  to  control  the 
election  for  their  private  purposes. 
The  complainant  alleged  that  defend- 
ants intended  to  obtain  control  for 
the  benefit  of  rival  companies,  and  in- 
tended fraudulently  to  prevent  the 
complainants  from  voting.  The  court 
enjoined  defendants  from  participat- 
ing in  any  election  unless  plaintiffs' 
votes  were  received  thereat,  and  from 


vote. 

2  A  stockholder  may  enjoin  direc- 
tors from  postponing  an  annual  elec- 
tion which  comes  in  February,  but 
which  the  directors  by  by-law  have 
changed  to  October,  thereby  endeavor- 
ing to  extend  their  term.  Elkins  v. 
Camden,  etc.  R.  R.,  36  N.  J.  Eq.  467 
(1883).  See  also  Camden,  etc.  R.  R. 
V.  Elkins,  37  N.  J.  Eq.  273  (1883). 

3  See  §  621,  infra. 
*  See  §  615,  supra. 

6  See  §  622,  infra.  An  injunction 
pendente  lite  against  the  voting  of 
certain  stock  in  connection  with  the 
formation  of  an  alleged  illegal  pool 
will  not  be  continued  where  it  failed 
to  accomplish  its  purpose  at  one  an- 
nual meeting  and  will  fail  in  the  next 
meeting.  Ryan  v.  Seaboard,  etc. 
R.  R.,  89  Fed.  Rep.  385  (1898).  The 
trustee  of  stock  in  a  foreign  corpora- 
tion where  the  trust  was  for  delivery 
if  the  stock  should  be  sold,  may  be 
enjoined  from  voting  the  stock  after 
the  time  for  sale  has  expired.  Butler 
t'.  Standard,  etc.  Co.,  146  N.  Y.  App. 
Div.  735  (1911). 

« Matter  of  Dietz,  138  N.  Y.  App. 
Div.  283  (1910). 

■>  See  §  618,  infra. 


1813 


§  616.]  ELECTIONS  —  CORPORATE   MEETINGS.  [cH.  XXXVII. 

refrain  from  ousting  the  vendee  from  the  presidency  of  the  corporation, 
v/here  the  vendee  fails  to  meet  the  other  payments  even  though  the 
vendee  has  proceeded  to  improve  the  property.^  A  vendee  of  stock 
who  has  filed  a  bill  in  equity  for  specific  performance  will  not  be  granted 
an  injunction  against  the  stock  being  voted  by  the  vendor  in  the  mean- 
time, where  the  former  does  not  allege  that  the  vendor  is  insolvent  or 
is  about  to  dispose  of  the  stock.^  An  unrecorded  stockholder  may  main- 
tain a  suit  to  prevent  the  illegal  voting  of  stock  owned  by  the  corpora- 
tion itself.^ 

Equity  has  jurisdiction  to  compel  the  transfer  of  stock  as  between 
parties.  Hence  where  stock  is  issued  in  payment  for  property,  and  the 
party  to  whom  the  certificates  are  issued  refuses  to  divide  it  among  the 
owners  of  the  property,  as  provided  by  contract,  a  court  of  equity  may 
compel  the  division  and  may  enjoin  any  election  of  the  corporation  until 
such  division  is  made.^ 

The  general  rule  is  that  one  stockholder  has  nothing  to  do  with  the 
motive  of  another  stockholder.  The  injunction  must  be  based  on  dam- 
age reasonably  certain  to  ensue.^  Accordingly,  an  injunction  will  not 
be  granted  upon  the  ground  that  the  stockholders  against  whom  the 
injunction  is  sought  are  likely  to  obtain  control  of  the  affairs  of  the 
company,  and  that  then  they  will  probably  misuse  their  power. ^ 

The  form  of  the  injunction  order  varies,  of  course,  with  the  circum- 
stances of  the  case.  The  federal  courts  have  sanctioned  a  form  which, 
while  drastic  in  its  terms,  is  effective  in  reaching  the  desired  result, 
and  is  none  too  severe  when  the  difficulties  are  considered.^    Where  a 

1  Stockton  V.  Russell,  54  Fed.  Rep.  (1867) ;  s.  c,  4  Fed.  Cas.  420.  The 
224  (1892).  voting  of  certain  stock  cannot  be  en- 

2  Lucas  V.  Milliken,  139  Fed.  Rep.  joined  on  the  ground  that  it  will  elect 
816  (1905).  directors  who  will  use  their  power  to 

^  O'Connor  J).  International,  etc.  Co.,  fraudulently   obtain    a   contract   with 

68  N.  J.  Eq.  67  (1904) ;   aff'd,  68  N.  J.  the   corporation.     Lucas    v.    Milliken, 

Eq.  680.     See  also  §  620,  infra.  139   Fed.    Rep.  816    (1905).      A  pro- 

*  Archer  v.  American,  etc.  Co.,  50  moter  cannot  enjoin   the   corporation 

N.  J.  Eq.  33  (1892).    Where  by  reason  of  from  increasing  its  stock,  even  though 

an  order  of  the  court  stock  is  issued  he  claims  that  such  increase  will  de- 

to  a  party  and  the  certificate  deposited  feat   a  contract   made  prior  to  incor- 

in  court  to  abide  an  appeal,  the  party  poration,  by  which  he  was  to  have  a 

to  whom  such  stock  runs  cannot  vote  one-sixth  interest,  the  corporation  not 

the  same  pending  the  appeal.     Durfee  having  ratified  such  contract.     Martin 

V.  Harper,  22  Mont.  373  (1899).  v.    Remington,    etc.    Co.,   95    N.    Y. 

5  Ryder  v.  Alton,  etc.  R.  R.,  13  111.  App.  Div.  18  (1904).     A  du-ector  can- 

516  (1851),  where  a  subscriber  failed  not  have  an  injunction  against  stock- 
in  his  defense  against  a  subscription^  holders  calling  and  holding  a  meeting 

by   attacking   the   policy   of   the   ma-  to  remove  him,  there  being  no  allega- 

jority  in  control.  tion    that    the   stockholders   have   no 

«  Camden,  etc.  R.  R.  v.  Elkins,  37  such  right.     Shulman  v.  Star,  etc.  Co., 

N.  J.  Eq.  273  (1883).     Cf.   Brown  v.  113  N.  Y.  App.  Div.  759  (1906). 

Pacific  Mail,  etc.  Co.,  5  Blatchf.  525  '  See  the  form  of  injunction  granted 

1814 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  616. 


party  is  enjoined  from  voting,  the  court  will  enjoin  his  proxy  from  vot- 
ing.^ The  proxy  may  be  enjoined  although  his  principal  is  not  made  a 
party  and  is  not  served.^  But  stockholders  who  are  not  made  parties 
will  not  be  enjoined.^  The  injunction  against  certain  persons  voting 
certain  stock  does  not  prevent  the  election  from  taking  place.  On  the 
contrary,  the  election  goes  on  and  is  valid,  even  though  it  happen  that 
what  would  have  been  a  minority  of  the  votes,  had  not  the  injunction 
issued,  becomes,  by  reason  thereof,  a  majority,  and  elects.^  Where 
the  injunction  is  applied  for  at  a  time  so  near  the  election  that  the  opposi- 
tion will  have  no  reasonable  opportunity  to  be  heard,  the  court  may  re- 
fuse the  application  on  that  ground.^  A  court  of  equity  will  not  grant 
an  ex  parte  injunction  at  the  instance  of  a  minority  stockholder  on  the 
eve  of  an  election  against  the  voting  of  a  majority  of  the  stock,  where 
the  result  would  be  to  enable  the  minority  to  elect. ^  Where  trustees 
hold  a  majority  of  the  stock  of  a  corporation  and  one  of  them  is  enjoined 
from  voting  it,  the  election  may  be  enjoined  at  the  instance  of  a  minority 
stockholder  until  the  first  suit  is  decided.^  The  practice  of  serving 
an  injunction  after  the  meeting  has  assembled  is  not  looked  upon  with 
favor  by  the  courts.^    Where  an  injunction  has  been  obtained  on  false 


in  Brown  v.  Pacific  Mail,  etc.  Co.,  5 
Blatchf.  525  (1867) ;  s.  c,  4  Fed.  Cas. 
420.  Approved  in  People  v.  Albany, 
etc.  R.  R.,  55  Barb.  344,  383  (1869). 
An  injunction  against  a  corporation 
recognizing  a  transfer  of  stock  was 
held  not  to  prevent  the  transferee's 
voting,  in  Commonwealth  v.  Stevens, 
168  Pa.  St.  582  (1895). 

1  Clarke  v.  Central  R.  R., etc.  Co.,  50 
Fed.  Rep.  338  (1892).  In  this  case, 
however,  on  the  final  hearing,  the  bill 
was  dismissed.  See  62  Fed.  Rep.  328 
(1894). 

2  Brown  v.  Pacific  Mail,  etc.  Co.,  5 
Blatchf.  525  (1867) ;  s.  c,  4  Fed.  Cas. 
420. 

3  Brown  v.  Pacific  Mail,  etc.  Co.,  5 
Blatchf.  525  (1867) ;  s.  c,  4  Fed.  Cas. 
420.  In  a  suit  to  restrain  specified 
stockholders  from  voting  at  a  cor- 
porate election  the  stockholders  so 
specified  are  necessary  parties  defend- 
ant. Jones  V.  Nassau,  etc.  Co.,  53 
N.  Y.  Misc.  Rep.  63  (1907).  See  also 
§  615,  supra. 

*  Brown  ;;.  Pacific  Mail,  etc.  Co.,  5 
Blatchf.  525  (1867) ;  s.  c,  4  Fed.  Cas. 
420.  Where  by  reason  of  an  injunc- 
tion against  voting  certain  stock  the 
meeting  is  not  held  at  the  time  speci- 


fied in  the  notice,  but  later  in  the  day 
a  minority  meet  and  adjourn  to  the 
next  day  and  conceal  such  adjourn- 
ment from  the  majority  and  elect  di- 
rectors, the  court  will  oust  them  from 
office.  State  v.  Bonnell,  35  Ohio  St.  10 
(1878). 

5  Where  a  bill  was  filed  to  restrain 
certain  stockholders  from  selling  or 
assigning  their  stock,  or  from  voting 
upon  it  at  an  ensuing  election,  which 
was  to  be  held  within  three  days  from 
the  date  of  the  filing  of  the  bill,  the 
court  held  that  inasmuch  as  the  proba- 
ble effect  of  the  injimction  would  be 
to  change  the  result  of  the  election, 
and  the  consequent  control  of  the 
affairs  of  the  company,  without  allow- 
ing the  stockholders  sought  to  be 
restrained  to  be  heard  in  their  own 
defense,  the  injunction  ought  to  be 
denied.  Hilles  ;'.  Parrish,  14  N.  J.  Eq. 
380  (1862).  It  appears,  however,  that 
counsel  stipulated  for  a  new  election 
in  case  the  complainant  succeeded, 
and  the  court  so  ordered. 

«  Lucas  V.  Milliken,  139  Fed.  Rep. 
816  (1905). 

7  Villamil  v.  Hirsch,  138  Fed.  Rep. 
690  (1905) ;    s.  c,  143  Fed.  Rep.  654. 

8  !'The  practice  of  proc\iring  an  in- 


1815 


§  617.] 


ELECTIONS  —  CORPORATE   MEETINGS, 


CH.  XXXVII. 


affidavits  and  bill  to  control  an  election,  and  the  proceedings  in  court 
are  discontinued  immediately  after  the  election,  the  court  will  sum- 
marily vacate  and  set  aside  the  election  by  reason  of  the  abuse  of  the 
process  of  the  court  and  the  fraud  on  the  rights  of  the  stockholders.' 
An  appeal  from  an  injunction  against  voting  certain  stock  will  be  dis- 
missed where  the  parties  may,  under  a  statute,  apply  to  the  court  to 
review  the  election  on  affidavits.^  Where  the  statutes  require  a  cor- 
poration to  keep  a  book  containing  the  names  of  the  stockholders  and 
the  stock  held  by  each,  and  it  fails  to  do  so,  a  stockholder  cannot  obtain 
a  mandatory  injunction  to  the  effect  that  voting  at  the  annual  election 
shall  be  in  accordance  with  a  list  of  stockholders,  as  certified  by  the 
transfer  agent  and  registrar  of  the  corporation.^  The  federal  court  has 
no  jurisdiction  of  a  suit  by  a  stockliolder  to  enjoin  a  corporation  from 
allowing  certain  stock  to  be  voted  on  various  grounds,  where  there  is  no 
allegation  that  the  complainant's  holdings  of  stock  are  worth  upwards 
of  two  thousand  dollars."* 

§  617.  Illegal  or  fraudulent  elections  —  The  remedies  of  quo 
warranto  and  mandamus.  —  There  are  various  ways  in  which  an 
illegal  or  fraudulent  election  of  directors  or  managers  of  an  incorporated 
company  may  be  investigated  and  remedied.     The  natural  and  proper 


junction  and  serving  it  after  the 
meeting  had  assembled  is  not  to  be 
commended,  and  should  only  be  tol- 
erated in  cases  where  the  right 
thereto  is  clearly  established."  Re 
Rochester,  etc.  Co.,  40  Hun,  172,  175 
(1886).  The  practice  of  obtaining  an 
injunction  against  the  voting  of  cer- 
tain stock  and  withholding  service  of 
the  same  until  after  the  meeting  is 
organized,  and  then  refusing  to 
adjoiirn,  was  condenmed  in  Lucas  v. 
Milliken,  139  Fed.  Rep.  816  (1905). 

'  Putnam  v.  Sweet,  1  Chand.  (Wis.) 
286,  334  (1849). 

2  Where  an  injunction  against  post- 
poning an  election  is  granted,  and  the 
election  is  held,  and  the  next  day  an 
appeal  is  taken  from  the  injunction 
order,  the  appeal  will  be  dismissed, 
inasmuch  as  the  parties  have  the 
remedy  under  the  statute  of  applying 
to  the  court  to  review  the  election. 
Camden,  etc.  R.  R.  v.  Elkins,  37  N.  J. 
Eq.  273  (1883).  Where  an  injunction 
against  voting  particular  stock  has 
been  refused,  and  the  election  held, 
an  appeal  will  be  dismissed.  Foster 
V.  Smith,  115  Cal.  611  (1897).     Where 


in  a  suit  by  a  stockholder  to  enjoin 
elections,  etc.,  pending  an  adjustment 
as  to  what  stock  is  genuine  and  what 
is  spurious,  another  stockholder  inter- 
venes, the  latter  cannot  take  an  ap- 
peal unless  notice  of  the  appeal  is 
served  also  upon  the  corporation. 
Willard  v.  Fisher,  36  Wash.  229 
(1904). 

3  Mitchell  V.  Colorado,  etc.  Co.,  117 
Fed.  Rep.  723  (1902).  But  where  the 
directors  and  officers,  in  order  to  con- 
tinue in  office,  do  not  give  notice  of 
an  annual  meeting,  but  enact  by-laws 
to  aid  them  in  this  purpose,  and  cause 
a  stockholder  to  have  the  annual  meet- 
ing enjoined,  other  stockholders  may 
file  a  cross-bill  in  such  injunction 
suit,  and  it  appearing  to  the  court 
that  a  fair  election  could  not  other- 
wise be  held,  the  court  will  modify 
the  injunction  so  as  to  allow  the  elec- 
tion to  be  held  at  a  time  fixed  by  the 
court  and  under  the  supervision  of  a 
master  in  chancery  appointed  by  the 
court.  Bartlett  v.  Gates,  118  Fed.  Rep. 
66' (1902). 

^  Harvey  v.  Raleigh  &  G.  R.  R.,  89 
Fed.  Rep.  115  (1898). 


1816 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  617. 


remedy  in  all  cases  is  the  old  remedy  of  quo  warranto  to  test  the  title 
to  office.  In  England  quo  warranto  does  not  lie  to  test  the  legality 
of  the  election  of  officers  of  a  private  corporation,  but  in  this  country  a 
contrary  rule  prevails.^  An  information  in  the  nature  of  a  quo  war- 
ranto is  not  allowed,  of  course,  but  is  a  subject  for  the  exercise  of  a  sound 
discretion.-  Certiorari  is  not  a  proper  remedy  to  review  the  action  of 
directors  in  removing  the  secretary.' 


1  Commonwealth  v.  Arrison,  15  Serg. 

&  R.  (Pa.)  127  (1827),  a  case  of 
eliurch  trustees ;  Commonwealth  v. 
Graham,  64  Pa.  St.  339  (1870),  the 
same;  People  v.  Tibbits,  4  Cow.  358 
(1825),  an  insurance  company ;  State 
V.  Farris,  45  Mo.  183  (1869),  coUege 
trustees;  Creek  v.  State,  77  Ind.  180 
(1881),  church  trustees;  State  v. 
Kupferle,  44  Mo.  154  (1869),  an  in- 
surance company  ;  State  v.  McDaniel, 
22  Ohio  St.  354  (1872),  directors  of 
a  railroad ;  Commonwealth  v.  Smith, 
45  Pa.  St.  59  (1863) ;  High,  Extraord. 
Remedies,  §  653,  etc. ;  Shortt,  Infor- 
mations, 129  (Eng.  1887) ;    Common- 

*wealth  V.  Gill,  3  Whart.  (Pa.)  228 
(1837),  giving  the  pleadings  herein: 
People  V.  Albany,  etc.  R.  R.,  55  Barb. 
344,  354  (1869) ;  aff'd,  57  N.  Y.  161. 
The  origin  and  nature  of  the  writ  of 
quo  warranto  and  the  remedy  by  infor- 
mation in  the  nature  of  a  writ  of  quo 
warranto,  which  succeeded  the  former, 
was  considered  in  Brooks  v.  State, 
79  Atl.  Rep.  790  (Del.  1911),  and  it 
was  held  that  under  it  the  title  of  a 
director  to  his  office  in  a  private  cor- 
poration could  be  tested  by  such  a 
proceeding  in  the  name  of  the  state 
upon  the  relation  of  the  attorney- 
general.  The  opinion  in  that  case  also 
discussed  the  procediire  and  form  of 
pleadings.  Quo  warranto  is  a  proper 
proceeding  to  test  the  title  of  a  direc- 
tor for  his  office,  and  it  is  no  defense 
that  the  proceeding  is  against  one  of 
the  directors,  and  that,  if  successful, 
it  would  not  determine  which  one  of 
the  opposition  directors  would  be 
substituted  in  his  place.  State  v. 
Brooks,  74  Atl.  Rep.  37  (Del.  1909). 
Quo  warranto  is  a  proper  remedy  to 
determine  the  right  of  a  relator 
claiming  to  have  been  elected  a  di- 
rector of  a  corporation.  Attorney- 
General    V,    Looker,    111    Mich.    498 


(1897).  For  a  clear  statement  of  the 
nature  of  an  information  in  the 
nature  of  a  quo  warranto  filed  by  a 
claimant  for  an  office  in  the  name  of 
the  attorney-general,  see  Gibbs  v. 
Somers  Point,  49  N.  J.  L.  515  (1887). 
A  stockholder  may  institute  quo  war- 
ranto proceedings.  Commonwealth  v. 
Stevens,  168  Pa.  St.  582  (1895).  See 
also  §  713,  infra,  concerning  de  facto 
officers.  The  validity  of  the  charter  of 
a  school  incorporated  as  a  joint-stock 
incorporation  cannot  be  tested  in  quo 
warranto  proceedings  brought  to  de- 
termine the  rights  of  parties  claiming 
to  be  trustees.  Commonwealth  v. 
Yetter,  190  Pa.  St.  .488  (1899).  Where 
there  is  a  contest  as  to  who  are  the 
legal  officers,  the  attorney  for  the  de- 
feated party  cannot  hold  the  corpora- 
tion liable  for  his  services.  Common- 
wealth V.  Order,  etc.,  192  Pa.  St.  487 
(1899).  See  s.  c,  193  Pa.  St.  240 
(1899)  and  §  879,  infra. 

2  State  V.  Lehre,  7  Rich.  L.  (S.  C.) 
234  (1864).  The  court  in  its  discre- 
tion may,  in  Minnesota,  decline  to 
aUow  a  private  person  to  file  an  infor- 
mation in  the  nature  of  quo  warranto 
to  test  the  title  to  office  of  directors. 
State,  etc.  v.  Lockerby,  57  Minn.  411 
(1894).  Quo  warranto  does  not  lie 
against  a  superintendent  who  may  be 
removed  at  any  time  by  the  directors. 
State  V.  Cronan,  23  Nev.  437  (1897). 
A  newly  elected  president  may  file  a 
petition  to  be  allowed  to  file  an  infor- 
mation in  the  nature  of  a  quo  warranto 
to  compel  a  de  facto  president  to  sur- 
render the  office  where  the  basis  of  the 
petition  is  that  the  meeting  of  the  board 
of  directors  which  elected  the  de  facto 
president  was  held  out  of  the  state  in 
violation  of  the  statutes  of  Illinois. 
Place  t;.  People,  192  111.  160  (1901). 

3  Overman  v.   Manly,   etc.   Co.,   77 
N.  J.  L.  290  (1909). 


1817 


§617. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


Mandamus,  Instead  of  quo  warranto,  lies  when  the  title  de  jure  has 
been  adjudicated.^  In  West  Virginia  mandamus  is  held  to  be  the 
proper  remedy  to  place  a  de  jure  director  in  the  place  of  the  de  facto 
director,  and  service  on  the  latter  may  be  by  publication ;  ^  and  man- 
damus lies  at  the  instance  of  a  corporation  to  compel  illegally  elected 
directors  to  turn  over  the  books  to  the  legally  elected  directors.^  Under 
the  Nevada  statute  mandamus  lies  at  the  instance  of  a  superintendent 
to  oust  a  person  who  is  illegally  holding  that  office."  The  courts  of 
one  state  will  consider  the  board  of  directors  as  legally  elected  until 
the  courts  of  the  state  wherein  the  company  was  organized  decide  to 
the  contrary.^  Hence,  mandamus  does  not  lie  in  one  state  at  the  in- 
stance of  persons  claiming  to  be  directors  in  a  foreign  corporation,  com- 
manding other  persons  to  refrain  from  acting  as  directors,  even  though 
all  the  persons  are  residents.^  Where  the  corporate  property  is  being 
wasted  by  reason  of  a  contest  between  two  rival  boards  of  directors, 
one  board  having  been  declared  illegal  by  the  court  and  the  other  re- 
fusing to  act,  the  court  will,  at  the  instance  of  a  minority  stockholder, 
appoint  a  receiver  to  protect  the  property  until  a  recognized  board  is 
elected,  and  the  stockholder  need  not  request  the  directors  to  bring  suit 
before  he  himself  brings  suit/  * 


1  Leeds  v.  Atlantic  City,  52  N.  J.  L. 
332  (1890).  The  Massachusetts  stat- 
ute that  a  certificate  of  stock  issued  as 
a  pledge  shall  state  that  fact  on  its 
face  enables  the  pledgor  to  vote  with- 
out such  proxy.  If  the  certificate 
merely  states  that  it  is  given  in 
pledge,  without  stating  the  name  of 
the  pledgor,  the  pledgee  to  whom  the 
certificate  runs  may  vote  the  stock. 
The  court  may,  however,  refuse  to 
grant  a  mandamus  declaring  certain 
persons  duly  elected  directors,  where 
they  were  elected  by  the  vote  of  the 
pledgee  as  against  the  wishes  of  the 
pledgor.  Wentworth  Co.  v.  French, 
176  Mass.  4-12  (1900). 

2  Cross  V.  West  Va.  etc.  Ry.,  35 
W.  Va.  174  (1891).  Compare  s.  c,  34 
W.  Va.  742,  and  People  v.  New  York, 
etc.  Asvlum,  122  N.  Y.  190  (1890) ;  aff'g 
7  N.  Y.  St.  Rep.  277. 

3  American  Ry.  Frog  Co.  v.  Haven, 
101  Mass.  398  (1869).  After  the  courts 
have  decided  that  certain  persons  are 
directors,  mandamus  will  be  granted 
that  the  defeated  parties  turn  over  the 
books  and  papers  to  the  former.  Mat- 
ter of  Journal  Pub.  Club,  30  N.  Y. 
Misc.  Rep.  326  (1900).     Where  a  di- 


rector was  not  qualified  and  a  new 
director  has  been  elected  in  his  place, 
he  cannot  have  mandamus  to  allow 
him  to  inspect  the  company's  books 
and  exercise  other  rights  of  a  di- 
rector, even  though  for  a  time  he  was 
permitted  to  act  as  director.  People 
V.  N.  Y.  etc.  Co.,  34  N.  Y.  Misc.  Rep. 
326  (1901). 

«  State  V.  Cronan,  23  Nev.  437  (1897). 

6  State  V.  Cronan,  23  Nev.  437 
(1897).  The  summary  statutory  rem- 
edy in  New  York  to  review  elections 
does  not  apply  to  foreign  corporations. 
Matter  of  North  Am.  Rice  Co., 
N.  Y.  L.  J.,  April  23,  1902.  See  §  619, 
infra.  It  is  doubtful  whether  a  Maine 
corporation  may  institute  a  suit  in 
New  York  to  enjoin  certain  persons 
from  representing  themselves  as  officers 
in  such  Maine  corporations  and  from 
interfering  with  its  business,  where  the 
controversy  turns  upon  the  validity 
of  an  election.  Washington,  etc.  Co. 
V.  Dimmick,  etc.,  41  N.  Y.  App.  Div. 
596  (1899).     See  also  §  734,  infra. 

6Wason  V.  Buzzell,  181  Mass.  338 
(1902). 

7  Jasper,  etc.  Co.  v.  Wallis,  123  Ala. 
652  (1899).     See  also  §§  629,  746,  infra. 


1818 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  618. 


§  618.  Illegal  or  fraudulent  elections  —  The  remedy  by  injunction 
against  directors  acting,  and  the  remedy  of  a  suit  in  equity  where 
the  validity  of  the  election  arises  incidentally  —  Receivers  and  mas- 
ters in  chancery  at  elections.  —  A  court  of  equity  may,  prior  to  the 
holding  of  an  election,  enjoin  such  election.^  But  a  different  rule  pre- 
vails after  the  election  has  actually  taken  place.  A  court  of  equity  has 
no  inherent  power  or  jurisdiction  to  entertain  a  bill  for  the  purpose  of 
reviewing  a  corporate  election  and  ousting  the  parties  who  claim  to 
have  been  elected.^ 


*  See  §  616,  supra. 

2  The  title  of  de  facto  officers  to 
their  office  cannot  be  tested  by  an  in- 
junction or  bill  in  equity.  Quo  war- 
ranto or  a  proceeding  under  the  stat- 
ute is  necessary.  People  v.  Albany, 
etc.  R.  R.,  57  N.  Y.  161,  171  (1874). 
A  stockholder  cannot  maintain  a  suit 
in  equity  to  enjoin  an  alleged  director 
from  acting  on  the  ground  that  a 
majority  of  the  directors  are  mere 
dummies,  and  do  not  actually  own  any 
stock,  as  required  by  statute,  and  that 
they  were  elected  under  an  agreement 
by  which  the  vendor  of  a  majority  of 
the  stock  caused  the  old  directors  to 
resign  and  new  ones  to  be  named  by 
the  vendee,  and  that  the  resignation 
of  one  director  was  withdrawn  before 
it  was  accepted,  but  was  afterwards 
accepted  and  a  successor  appointed 
by  the  board  of  directors,  and  that  a 
majority  of  the  stock  is  now  opposed 
to  the  existing  board  of  directors. 
The  remedy  is  quo  warranto  instituted 
by  the  attorney-general  in  the  name 
of  the  people.  Moir  v.  Provident 
Sav.,  etc.  Soc,  127  N.  Y.  App.  Div.  591 
(1908).  A  court  of  equity  has  no 
jurisdiction  to  enjoin  a  director  from 
acting  on  the  ground  that  his  prede- 
cessor had  not  duly  resigned.  Moir 
V.  Provident,  etc.  Soc,  127  N.  Y.  App. 
Div.  591  (1908).  A  court  of  equity 
has  no  power  to  decide  which  set 
of  officers  was  duly  elected,  unless 
that  question  arises  incidentally  in 
connection  with  some  other  equitabte 
matter.  St.  Patrick's,  etc.  v.  Byrne, 
59  N.  J.  Eq.  26  (1899).  A  court 
of  equity  has  no  jurisdiction  to  decide 
which  board  of  directors  was  elected. 
Kean  v.  Union  Water  Co.,  52  N.  J.  Eq. 
813  (1895),  rev'g  Union  Water  Co.  v. 


Kean,  52  N.  J.  Eq.  111.  An  ex  parte 
injunction  against  a  director  con- 
tinuing his  duties  as  a  director  is 
void  in  New  York  as  being  contrary 
to  the  statute.  Ciancimino  v.  Man,  20 
N.  Y.  Supp.  702  (1892).  Where  there 
are  two  rival  boards  of  directors,  each 
claiming  to  have  been  legally  elected, 
the  remedy  of  one  against  the  other  is 
not  an  injunction,  but  a  quo  warranto 
proceeding.  Carmel,  etc.  Co.  v.  Small, 
150  Ind.  427  (1897).  No  injunction 
lies  against  officers  acting  as  such,  on 
the  ground  of  illegal  election.  Quo 
warranto  lies.  Hartt  v.  Harvey,  32 
Barb.  55  (1860).  Equity  has  no 
power,  except  as  incidental  to  other 
relief,  to  review  an  election.  Perry  v. 
Tuskaloosa,  etc.  Co.,  93  Ala.  364 
(1891) ;  HuUman  v.  Honcomp,  5  Ohio 
St.  237  (1855) ;  New  England,  etc.  Co. 
V.  Phillips,  141  Mass.  535  (1886),  where 
an  injunction  was  sought  to  restrain 
persons  from  acting  as  directors  who 
had  been  illegally  elected.  Allen,  J.  : 
"This  course  is  open  to  the  objection 
that  suits  to  remove  or  to  institute 
corporation  officers  do  not  belong  to 
the  original  jurisdiction  in  chancery ; 
and  that  the  right  to  be  such  officer 
cannot,  in  general,  and  in  the  absence 
of  special  legislation  allowing  this 
remedy,  be  tested  by  means  of  an  in- 
junction." 1  Pomeroy,  Eq.,  §  171 ;  3 
Pomeroy,  Eq.,  §  1345.  See  also,  to 
same  effect,  Owen  v.  Whitaker,  20 
N.  J.  Eq.  122  (1869),  where  the  legality 
of  the  first  election  was  the  only 
thing  involved ;  Hughes  v.  Parker,  20 
N.  H.  58  (1849) ;  Johnston  v.  Jones, 
23  N.  J.  Eq.  216  (1872) ;  Mickles  v. 
Rochester  City  Bank,  11  Paige,  118 
(1844) ;  Mechanics'  Nat.  Bank  v.  Bur- 
net Mfg.  Co.,  32  N.  J.  Eq.  236  (1880), 


1819 


§  618.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


ICH.  XXXVII. 


Nevertheless,  where  there  has  been  a  palpable  fraud  practiced  in 
the  election,  and  usurpers  are  about  to  take  possession  of  the  property 
in  violation  of  all  justice,  a  court  of  equity  will  enjoin  them  from  doing 
so.^    The  de  facto  directors  may  enjoin  the  claimants  to  oflBce  from 


where  a  third  person  suing  the  cor- 
poration sought  to  have  its  answer 
stricken  out  because  the  officers  were 
not  duly  elected ;  Fadness  v.  Braun- 
borg,  73  Wis.  257  (1889),  a  religious 
corporation  ease ;  Wands\Vorth,  etc. 
Co.  V.  Wright,  18  W.  R.  728  (1870), 
where  fraud  was  charged  on  the  part 
of  the  inspectors  ;  Davidson  v.  Grange, 
4  Grant,  Ch.  (U.  C.)  377  (1854),  where 
the  court  refused  an  injunction,  but 
said  in  a  dictum  that  the  election 
might  be  set  aside  on  account  of 
fraudulent  voting  of  shares  subscribed 
for  by  "dummies"  to  get  control  of 
the  election  on  the  promise  that  the 
subscriptions  would  afterwards  be 
canceled.  SeK-constituted  directors 
without  a  regularly  organized  meeting 
have  not  a  good  title  to  their  office ; 
and  where  subsequently  the  incor- 
porators elected  other  directors,  the 
latter  may  cause  to  be  stayed  an 
action  brought  in  the  name  of  the 
company  by  the  self-constituted  di- 
rectors. John  Morley  Bldg.  Co.  v. 
Barras,  [1891]  2  Ch.  386.  The  Penn- 
sylvania statute  giving  the  court 
power  to  control  and  supervise  elec- 
tions where  fraud,  violence,  or  unlaw- 
ful conduct  prevents  a  fair  and  honest 
election  does  not  sustain  an  injunction 
obtained  by  majority  stockholders  — 
who  withdrew  from  the  annual  meet- 
ing and  held  a  separate  election  be- 
cause a  stock  vote  was  not  allowed  on 
the  election  of  chairman  —  against  the 
board  elected  by  the  minority.  Quo 
warranto  is  the  only  remedy.  Jenkins 
V.  Baxter,  160  Pa.  St.  199  (1894). 

1  A  stockholder  who  has  applied  reg- 
ularly for  his  part  of  the  increased 
capital  stock,  but  whose  application 
has  been  rejected,  may  by  a  bill  in 
equity  compel  the  company  to  issue 
the  stock  to  him  upon  payment  there- 
for, and  if  the  stock  has  been  already 
issued  to  parties  in  control  they  will 
be  compelled  to  give  it  up.  He  may 
also  enjoin  officers  and  directors  who 
have  been  illegally  elected  by  means 


of  such  stock  from  acting,  pending 
the  decision  in  the  case.  Schmidt  v. 
Pritchard,  135  Iowa,  240  (1907). 
Where  the  owners  of  the  whole  stock 
sell  it,  and  part  of  them  resign  and 
place  the  representatives  of  the  vendee 
in  possession,  and  those  who  remain 
in  the  board  do  so  at  his  request, 
but  transfer  to  him  their  certificates 
of  stock,  and  then  subsequently, 
when  the  time  for  the  annual  meet- 
ing has  gone  by,  they  publish  a 
notice  of  a  meeting  and  conceal  the 
notice  from  him,  and  elect  a  board, 
and  attempt  to  take  possession,  a 
court  of  equity  will  enjoin  them. 
Equity  is  not  obliged  "to  leave  the 
corporation  and  its  lawful  directors  to 
the  remedy  at  law,  always  taking  at 
least  months,  and  in  the  meantime 
suffer  the  road  to  be  operated  and  per- 
haps ruined  by  the  depredators,  be- 
cause they  claim  to  be  directors  de 
facto  or  de  jure."  Johnston  v.  Jones, 
23  N.  J.  Eq.  216,  229  (1872).  Where 
the  pledgee  of  stock  sells  it  out  and 
buys  it  in  himself,  and  at  the  annual 
election  votes  the  stock  by  proxy, 
even  though  the  stock  still  stands  on 
the  corporation  books  in  the  name  of 
the  pledgor,  and  the  pledgor  claims 
that  the  sale  is  illegal  and  that  the  di- 
rectors elected  by  the  pledgee's  vote 
intend  to  take  action  detrimental  to 
the  corporation,  such  pledgor  is  en- 
titled to  an  injunction  against  such 
directors  acting  as  directors.  Rey- 
nolds V.  Bridenthal,  57  Neb.  280  (1898). 
In  Clarke  v.  Central,  etc.  Co.,  54  Fed. 
Rep.  556  (1893),  it  appeared  that,  the 
board  of  directors  having  been 
illegally  elected,  "the  voting  power  of 
the  stock  was  enjoined,  a  new  elec- 
tion ordered,  and  the  court  appointed 
receivers,  not  for  the  purpose  of  sub- 
jecting the  properties  to  the  claims  of 
creditors,  but  to  protect  and  to  pre- 
serve them  until  they  could  be  turned 
over  to  a  legally  elected  board  of 
directors,  as  proper  trustees,  who  would 
have  the  right  under  the  law  to  take 


1820 


CH.  XXXVII. 


ELECTIONS  —  CORPORATE    MEETINGS. 


[§  618. 


attempting  to  take  forcible  possession  or  exercising  the  duties  of  the 
office.^ 

If  the  vaUdity  of  a  corporate  election  arises  incidentally  in  connection 
with  a  suit  in  equity,  the  court  will  pass  upon  the  election.  This  may 
occur  where  a  bill  is  filed  to  enjoin  a  forfeiture  of  stock,^  or  a  consolida- 
tion of  corporations,^  or  to  set  aside  an  illegal  assessment ;  *  but  not  in  a 


and  operate  the  railroad  in  the  inter- 
est of  all  concerned.     The  court  fur- 
ther   directed    that,    when    this    new 
election  should  have  taken  place,  said 
new  board  of   directors   might   apply 
to    the    court    to    have    the    property 
returned   to  the  control  of   the  prop- 
erly   constituted    officers    of    the   cor- 
poration."    In  this  case,  however,  on 
the   final    hearing,    the   bill    was    dis- 
missed.    See  62  Fed.  Rep.  328  (1894). 
Fhretended    officers    may    be    enjoined 
when    their   acts    are    destroying    the 
financial    standing    of    the    company. 
"Western,  etc.  Co.  v.  Burrows,  144  lU. 
App.   350   (1908).     Where  a  corpora- 
tion   has    an    authorized    capital    of 
$5,000,  but   only  $2,.500   are  directed 
by    the    stockholders    to    be    issued, 
it   is   illegal   and   fraudulent   to   issue 
the  remaining  authorized  capital  with- 
out  giving    the   existing   stockholders 
a    prior    right    to    subscribe    to    such 
increased  capital  pro  rata.     Directors 
elected     by     reason     of     such    illegal 
issue    will    be    enjoined    from    acting, 
where  they  are  about  to  change  the 
whole  policy  of  the  company.     Hum- 
boldt, etc.  Assoc.  V.  Stevens,  34  Neb. 
528     (1892).     A     suit     in     Kentucky 
between   rival   claimants   to   office   to 
have  an  adjudication  as  to  the  same 
and  to  have  a  receiver  does  not  pre- 
vent   one    of    the    parties    from   fore- 
closing a  mortgage  on  the  corporate 
property  in  another  state  and  having 
a  receiver    thereof   appointed.     Kelly 
V.  Mitchell,  98  Ky.  218  (1895).     A  suit 
by   a   state   to   enjoin   the   defendant 
railroad  company  from  being  managed 
by  directors  elected  by  the  votes  of 
stock  of  the  company  owned  by  a  for- 


eign railroad  corporation  ultra  vires,  and 
also  to  declare  such  votes  and  elections 
void,  and  also  for  a  receiver,  or  in  lieu 
of  all  this  for  a  forfeiture  of  the  charter, 
is  not  demurrable.  State  v.  Port  Royal, 
etc.  Ry.,  45  S.  C.  470  (1895).  For  other 
instances  in  which  a  court  of  equity 
interfered,  see  §§  593  and  616,  supra. 

1  Reis  V.  Rohde,  34  Hun,  161 
(1884).  De  facto  directors  may  en- 
join claimants  to  the  offices  from 
interfering  with  the  management,  even 
though  equity  has  no  jurisdiction  to 
pass  on  the  legality  of  an  election. 
De  Zavala  t'.  Daughters,  etc.  124  S.  W. 
Rep.  160  (Tex.  1909).  Although  there 
is  a  controversy  as  to  the  legality  of 
an  election,  yet  the  newly-elected 
president,  who  takes  peaceable  posses- 
sion of  the  property,  may  enjoin  the 
old  president,  who  claims  to  hold  over 
and  who  has  forcibly  taken  possession. 
Toronto,  etc.  Co.  v.  Blake,  2  Ont.  Rep. 
(Can.)  175  (1882). 

2  In  an  injunction  suit,  brought  by 
a  stockholder  to  prevent  the  corporate 
officers  from  forfeiting  stock,  the 
court  will  pass  upon  the  legality  of  an 
election  of  directors,  but  of  course  will 
not  and  cannot  remove  them.  Moses 
V.  Tompkins,  84  Ala.  613  (1888) ;  Gar- 
den, etc.  Co.  V.  McLister,  L.  R.  1  App. 
Gas.  39  (1875).  A  court  of  equity  may 
incidentally  pass  upon  the  validity  of 
a  corporate  election.  Haskell  v.  Read, 
68  Neb.  107  (1903).  Even  though  a 
court  of  equity  has  power  to  cancel 
illegal  stock  it  cannot  incidentally 
thereto  pass  upon  the  legality  of  a 
subsequent  election.  Crow  v.  Florence, 
etc.  Co.,  143  Ala.  541  (1905). 

'  Where  the  directors  are  about  to 


*  An  assessment  upon  stock  levied 
by  a  board  of  directors  illegally 
elected,  and  a  sale  of  the  stock  there- 
under, does  not  put  an  end  to  the 
stockholders'  suit  to  oust  such  board 


of  directors  and  to  set  aside  such  as- 
sessment and  to  set  aside  contracts 
made  by  such  board.  The  complaint 
is  not  multifarious.  Whitehead  v. 
Sweet,    12G  Cal.   67   (1899). 


1821 


§618. 


ELECTIONS  —  CORPORATE   MEETINGS. 


CH.  XXXVII. 


suit  to  enjoin  the  sale  of  stock/  nor  in  a  suit  to  compel  the  directors  to 
turn  over  the  property,^  nor  in  a  suit  to  foreclose  a  mortgage.^  In  a  suit 
by  a  stockholder  to  hold  a  president  liable  for  an  illegal  salary  paid  to 
him,  the  validity  of  his  election  may  be  contested  and  an  injunction 
asked  against  his  continuing  to  act  as  president."*  The  corporation 
may  be  liable  in  damages  under  some  circumstances.^ 

A  court  of  equity  may  appoint  a  master  to  hold  an  election  of  a 
corporation  when  by  reason  of  fraud,  violence,  or  unlawful  conduct 
on  the  part  of  some  stockholder  a  fair  election  cannot  otherwise  be 
held.®     But  a  court  of  equity  has  no  power,  prior  to  an  interlocutory 


make  an  illegal  consolidation,  and  a 
stockholder  files  a  bill  to  enjoin  it,  the 
court  will  pass  also  upon  the  legality 
of  the  election  of  the  de  facto  di- 
rectors. Nathan  v.  Tompkins,  82  Ala. 
437  (1887).  The  legality  of  an  elec- 
tion and  the  regularity  of  its  proce- 
dure as  well  as  the  qualifications  of 
its  directors  cannot  be  attacked  col- 
laterally by  a  stockholder  trying  to 
enjoin  a  proposed  sale  of  property  by 
such  directors.  Jones  v.  Bonanza,  etc. 
Co.,  32  Utah,  440  (1907). 

'  In  an  action  to  enjoin  the  sale  of 
stock  by  a  corporation  under  a  lien 
which  the  corporation  has  upon  the 
stock,  a  court  of  equity  will  not  in- 
quire into  the  regularity  of  the  elec- 
tion of  the  directors.  Elliott  v.  Sibley, 
101  Ala.  344  (1893). 

2  The  legality  of  the  election  of  di- 
rectors cannot  be  tested  by  a  suit  in 
equity,  even  though  the  suit  is  osten- 
sibly brought  to  compel  the  directors 
to  turn  over  the  property.  Bedford 
Springs  Co.  v.  McMeen,  161  Pa.  St. 
639  (1894).  Where  newly-elected  di- 
rectors bring  suit  in  the  name  of  the 
company  for  the  corporate  books,  the 
legality  of  the  election  cannot  be  ques- 
tioned by  way  of  defense.  The  ques- 
tion of  such  legality  can  be  raised 
only  by  a  direct  proceeding  for  that 
purpose.  Austin,  etc.  Co.  v.  Gemmell, 
10  Ont.  Rep.  (Can.)  696  (1886).  The 
title  of  the  secretary  and  treasurer  to 
his  office  cannot  be  tried  by  replevin 
suit  instituted  by  the  corporation,  and 
by  an  application  for  a  mandatory  in- 
junction requiring  him  to  deliver  up 
the  property.  Standard,  etc.  Co.  v. 
Byers,  31  Wash.  100  (1903).  Wh^re 
persons  desirous  of  carrying  on  a  berry- 


packing  business  try  to  do  so  by  hold- 
ing an  election  of  an  existing  corpora- 
tion and  voting  themselves  into  office, 
but  the  election  was  illegal  on  account 
of  some  of  the  stockholders  not  being 
notified,  the  court  may  distribute  the 
profits  earned  by  these  individuals 
the  same  as  though  they  had  formed 
a  partnership.  Smith  v.  Schoodoc, 
etc.  Co.,  84  Atl.  Rep.  268  (Me.  1912). 

3  The  purchaser  at  foreclosure  sale 
under  a  second  mortgage  cannot  attack 
the  first  mortgage  on  the  ground  that 
the  directors  who  authorized  it  were 
illegally  elected  by  reason  of  a  married 
woman's  stock  being  voted  when  she 
was  not  present.  Florida  Clay  Co.  v. 
Vause,  57  Fla.  407  (1909).  See  also 
§  713,  infra. 

*  Chicago,  etc.  Co.  v.  Boggiano,  202 
111.  312  (1903).  A  test  of  title  to  an 
office  is  not  by  injunction  against 
plaintiff  receiving  his  salary.  Mc- 
Carthy V.  McKinney,  137  Ga.  292 
(1911). 

6  Where  the  president  representing 
a  majority  of  the  directors  refuses  to 
allow  a  transfer  of  stock  because  it 
would  cause  him  to  lose  control  of  the 
company,  the  applicant  for  the  trans- 
fer by  proving  that  he  had  sold  a  por- 
tion of  the  stock  at  a  certain  price  sub- 
ject to  transfer  may  collect  that  price 
from  the  corporation  but  cannot  col- 
lect anything  as  to  the  remainder  of 
the  stock  unless  he  proves  that  he  was 
actually  damaged.  Hilton  v.  Sylvania, 
etc.  Co.,  8  Ga.  App.  10  (1910). 

^  Tunis  V.  Hestonville,  etc.  R.  R., 
149  Pa.  St.  70  (1892).  Where  the 
directors  and  officers,  in  order  to  con- 
tinue in  office,  do  not  give  notice  of  an 
annual  meeting,  but  enact  by-laws  to 


1822 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  G18. 


decree  or  order,  to  appoint  a  master  to  conduct  an  election,  and  to  finally 
decide  whether  certain  stock  should  be  allowed  to  vote  or  not,  on  the 
ground  that  such  stock  had  been  illegally  issued  for  property  in  vio- 
lation of  the  statute,  especially  where  other  stockholders  are  not  made 
parties  defendant.^  Where  a  claimant  to  the  office  of  the  director  has 
with  violence  illegally  taken  possession  of  the  corporate  property,  the 
court  may  appoint  a  custodian  of  the  property,  and  direct  the  custodian 
to  deliver  it  to  the  proper  officers.^ 

A  receiver,  who  is  in  possession  of  shares  of  stock,  generally  votes 
such  stock  without  his  right  to  do  so  being  questioned.  Sometimes  the 
court,  upon  appointing  a  receiver  of  stock,  expressly  authorizes  him  to 
vote  the  stock,  and  sometimes  directs  him  how  to  vote  it.^  But  gen- 
erally an  injunction  and  a  receiver  are  not  the  proper  remedies  for  a 
claim  that  the  directors  were  illegally  elected.'*  Even  if  the  term  of 
office  has  expired  while  the  election  is  being  contested  in  the  court,  a 
decree  will  be  given  if  relief  can  be  given. ^  Where  a  majority  of  the 
directors  are  in  jail,  and  they  have  been  guilty  of  fraud,  and  their  stock 


aid  them  in  this  purpose,  and  cause  a    such   an   election   is   valid.     Potomac 


stockholder  to  have  the  annual  meet- 
ing enjoined,  other  stockholders  may 
file  a  cross-bill  in  such  injunction  suit, 
and  it  appearing  to  the  court  that  a 
fair  election  could  not  otherwise  be 
held,  the  court  will  modify  the  injunc- 
tion so  as  to  allow  the  election  to  be 
held  at  a  time  fixed  by  the  court  and 
under  the  supervision  of  a  master  in 
chancery  appointed  by  the  court. 
Bartlett  v.  Gates,  118  Fed.  Rep.  66 
(1902).  A  decree  to  the  effect  that 
stockholders  entitled  to  vote  were  for- 
cibly prevented  from  voting,  and  to  the 
effect  that  a  commissioner  should  con- 
duct another  election  and  report  to  the 
court  the  vote  and  the  objections,  is 
not  a  final  decree.  National,  etc.  Co. 
V.  United,  etc.  Co.,  180  Pa.  St.  224 
(1897).  Where  an  Arizona  corpora- 
tion has  no  place  of  business  or  office 
or  property  or  business  in  Arizona,  but 
has  appointed  a  person  on  whom  serv- 
ice may  be  made,  stockholders  may 
obtain  mandamus  calling  a  corporate 
meeting,  and  service  may  be  on  the 
resident  agent  and  by  mail  on  the 
non-resident  board  of  directors,  and 
if  they  do  not  appear  the  court  may 
appoint  a  commissioner  to  hold  the 
stockholders'  meeting  and  direct  him 
to  give  notice  to  the  stockholders,  and 


Oil  Co.  V.  Dye,  14  Cal.  App.  674  (1911). 
See  also  §  612,  supra. 

1  Yetter  v.  Delaware,  etc.  R.  R.,  206 
Pa.  St.  485  (1903). 

2  Ciancimino  v.  Man,  20  N.  Y.  Supp. 
702  (1892). 

^  A  court  may  appoint  a  receiver 
to  hold  an  election,  etc.,  where  the 
entire  interests  in  the  corporation, 
including  the  stock,  belong  to  parties 
who  have  been  defrauded.  King  v. 
Barnes,  51  Hun,  550  (1889) ;  aff'd,  113 
N.  Y.  655.  See  also  dictum  in  Wan- 
neker  v.  Hitchcock,  38  Fed.  Rep.  383 
(1889),  where  the  trustees  of  stock  dis- 
agreed as  to  voting ;  People  v.  Albanv, 
etc.  R.  R.,  55  Barb.  344,  371  (1869); 
aff'd,  57  N.  Y.  161 ;  where  a  receiver's 
vote  was  set  aside,  fraud  being  involved 
and  the  appointment  being  invalid ; 
American  Inv.  Co.  v.  Yost,  25  Abb. 
N.  Cas.  274  (1890),  where  a  receiver  of 
stock  was  instructed  how  to  vote,  the 
action  being  to  enforce  an  agreement 
to  place  stock  in  the  hands  of  trustees 
until  the  debts  of  the  company  and 
chief  stockholder  were  paid. 

^  Ulmer  v.  Maine,  etc.  Co.,  93  Me. 
324    (1899). 

5  Pope  V.  Whitridge,  110  Md.  468 
(1909). 


1823 


§  619.]  ELECTIONS  —  CORPORATE   MEETINGS.  [cH.  XXXVII. 

was  fraudulently  issued,  a  stockholder  may  have  a  receiver  appointed 
and  may  have  the  directors  removed  by  the  court  and  the  corporation 
wound  up.^  Although  a  receiver  of  one  corporation  votes  stock  to 
another  corporation  held  in  pledge  and  makes  a  personal  profit  by  the 
manipulations,  yet  if  the  stockholders  of  the  second  corporation  have 
acquiesced  for  a  year  it  is  too  late  to  complain. - 

§  619.  Illegal  or  fraudulent  elections  —  Statutory  remedy  by  pe- 
tition to  a  court  of  equity.  —  In  consequence  of  the  delays  and  diffi- 
culties attending  the  remedy  of  quo  warranto,  statutes  have  been 
enacted  in  many  of  the  states  which  give  courts  of  equity  the  power  to 
review  corporate  elections  at  the  instance  of  the  parties  aggrieved. 
Such  statutes  are  found  in  New  York,  New  Jersey,  California,  and 
other  states.  By  these  statutes  the  court,  sitting  as  a  court  of  chan- 
cery, is  empowered  to  review  corporate  elections,  and  to  grant  such 
relief  as  the  particular  circumstances  and  justice  of  the  case  seem  to 
require.^  Under  the  statute  giving  the  courts  power  to  review  an  elec- 
tion the  court  may  confirm  the  election  or  order  a  new  one  or  make  such 
other  order  as  it  deems  best.^ 

These  statutes  have  proven  to  be  among  the  wisest  and  best  that 
legislatures  ever  enacted  in  regard  to  corporations.  They  furnish 
a  speedy,  simple,  just,  and  effective  remedy  for  all  complaints,  and 
are  free  from  useless  technicalities  and  expense.  Various  decisions 
under  these  statutes  are  given  in  the  notes  below,^    The  New  York 

1  California,  etc.  Ass'n  v.  Superior  illegal  but  the  contestants  did  not 
Court,  8  Cal.  App.  711  (1908).  Under  receive  a  majority  of  the  whole  number 
the  Washington  statute  where  two  per-  of  shares  outstanding  they  will  not  be 
sons  each  own  one  half  of  the  capital  declared  elected  but  the  election  will 
stock,  and  one  has  control  of  the  merely  be  set  aside.  Re  United  Towns, 
board  of  directors  and  officers,  and  at  etc.  Ass'n,  79  N.  J.  L.  31  (1909). 

the  annual  meeting  there  is  a  dead-  ^  For  various  cases  in  New  York, 

lock  and  the  old  directors  and  officers  showing  the  wide  powers  exercised  by 

hold  over,  and  such  controlling  stock-  the  court  under  this  statute,  see  Ex 

holder   votes    to    increase    salaries    to  parte    Holmes,    5    Cow.    426    (1826) ; 

them   in   violation    of   his   agreement  Schoharie  Valley  R.  R.  Case,  12  Abb. 

with  the  other  stockholder,  and  there  Pr.  (N.  S.)  394  (1872);  Ex  parte  Des- 

is    no    chance    of    reconciliation,    the  doity,    1    Wend.    98    (1828) ;    Vande- 

court   may   appoint   a   receiver,    even  burgh    v.    Broadway,    etc.    R.    R.,    29 

though   the  company   is   entirely   sol-  Hun,  348  (1883) ;  Strong  v.  Smith,  15 

vent.     Boothe    v.    Summit,    etc.    Co.,  Hun,  222  (1878)  ;  Ex  parte  Willcocks, 

55  Wash.  167  (1909).  7  Cow.  402  (1827) ;  Mickles  v.  Roches- 

2  Strang  v.  Edison,  198  Fed.  Rep.  ter  City  Bank,  11  Paige,  118  (1844); 
813  (1912).  Re  Long  Island  R.   R.,   19  Wend.  37 

5  Under    a    statute    authorizing    a  (18-37).     In  this  case  an  election  was 

court  to  review  elections,  the  proceed-  set    aside    because    the    directors    had 

ing  may  be  in  equity.     Whitehead  v.  illegally    declared   certain   shares   for- 

Sweet,   126  Cal.  67   (1899).     See  also  feited  for  non-payment  of  installments, 

the  cases  in  note  5  below.  and  refused  to  record  an  assignment 

*  Stratford  v.  Mallory,  70  N.  J.  L.  thereof  so  as  to  entitle  the  assignee  to 

294     (1904).     Where    an    election    is  vote.     In     a     proceeding     under     the 

1824 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  619. 


statute  authorizing  the  court  to  pass  upon  elections  appUes  to  an  elec- 
tion of  a  director  by  the  board  of  directors  to  fill  a  vacancy  in  the  board. ^ 


New  York  statute  the  strict  rules  as  to 
the  reception  of  evidence  in  civil 
actions  do  not  apply.  Re  Argus  Co., 
138  N.  Y.  557  (1893),  holding  also  that 
the  application  will  be  heard  by  the 
court  under  the  New  York  statute, 
although  another  party  is  joined  as 
petitioner  without  authority.  Under 
these  statutes  an  election  may  be 
declared  void  by  reason  of  the  con- 
spiracy, frauds,  or  trickery  of  a  part  of 
the  stockholders.  People  v.  Albany, 
etc.  R.  R.,  55  Barb.  344  (1869) ;  aff'd, 
57  N.  Y.  161.  Where  a  forfeiture  of 
stock  is  illegal  a  new  election  may  be 
ordered,  such  stock  having  been 
deprived  of  a  vote.  Matter  of  New 
York,  etc.  Co.,  145  N.  Y.  App.  Div. 
623  (1911).  In  a  proceeding  by  a 
stockholder  to  test  an  election  under 
the  New  York  statute,  another  stoek- 
liolder  cannot  intervene  unless  she 
shows  that  she  was  a  stockholder  at 
the  date  of  the  election  or  that  the 
former  owner  of  her  stock  did  not  vote 
for  the  directors  who  were  declared 
elected.  Matter  of  Scheel,  134  N.  Y. 
App.  Div.  442  (1909).  Where  an 
election  is  ordered  the  court  may 
allow  all  stockholders  on  that  date  to 
vote.  Matter  of  New  York,  etc.  Co., 
145  N.  Y.  App.  Div.  623  (1911).  A 
statute  repealing  the  statutory  remedy 
in  chancery  to  review  elections  oper- 
ates retrospectively  as  well  as  pro- 
spectively. Re  New  York,  etc.  Co., 
23  Hun,  615  (1881).  The  statute 
authorizing  a  court  of  •  chancery  to 
review  elections  and  order  new  ones 
does  not  authorize  the  courts  to  issue 


a  mandamus  to  the  inspectors  of  elec- 
tion in  regard  to  counting  votes  by 
proxy  and  amending  the  return. 
People  V.  Simonson,  61  Hun,  338 
(1891).  "Surprise  and  fraud  upon 
part  of  the  electors  is  ground  for  avoid- 
ing an  election."  People  v.  Albany, 
etc.  R.  R.,  55  Barb.  344,  363  (1869). 
In  this  case  the  place  of  an  election 
was  filled  by  one  party  with  roughs  as 
proxies  brought  there  for  purposes  of 
intimidation,  and  for  voting  on  viva 
voce  votes,  and  for  crowding  out  the 
regular  voters.  People  r.  Albany,  etc. 
R.  R.,  55  Barb.  379  (1869).  In  this 
case  also,  under  the  New  York  statute, 
in  an  equitable  suit  brought  by  the 
state,  the  court  appointed  a  receiver 
and  issued  an  injunction  pending  the 
suit,  and  finally  declared  elected  per- 
sons who  would  have  received  the 
most  votes  of  all  votes  that  had  been 
legally  east,  although  there  had  been 
two  elections  held  at  the  same  time 
by  the  two  parties  at  different  places 
in  the  same  town.  Under  the  New 
York  statute  making  the  transfer 
book  conclusively  binding  upon  the 
inspectors  of  election,  the  inspec- 
tors cannot  exclude  the  vote  of  the 
registered  stockholder  although  he 
holds  the  stock  merely  as  pledgee ; 
but  under  the  New  York  statute  allow- 
ing the  courts  to  summarily  review 
the  election,  the  court  has  power  to  go 
back  of  the  transfer  book  and  set  the 
election  aside,  where  the  statute  gave 
the  pledgor  the  right  to  vote.  Strong 
V.  Smith,  15  Hun,  222  (1878).  The 
above  remedy  does  not  apply  to  for- 


1  George  Ringler  &  Co.,  204  N.  Y. 
30  (1912),  holding  also  that  where  a 
statute  requires  directors  to  be  stock- 
holders it  is  not  sufficient  that  stock 
is  transferred  to  a  person  to  qualify 
him,  if  he  at  once  returns  to  the  trans- 
ferrer the  certificate  indorsed  in  blank 
by  him,  and  that  although  such  a 
director  may  bind  the  company  as  a 
de  facto  director  so  far  as  third  persons 
are  concerned,  yet  that  his  election 
may  be  set  aside  at  the  instance  of  a 


stockholder,  under  the  New  York 
statute  authorizing  the  courts  to  pass 
upon  elections  in  a  summary  way. 
In  this  case  the  court  stated  that  even 
though  the  certificate  was  transferred 
back  after  the  election  yet  that  this 
did  not  satisfy  the  law,  although  it 
would  be  sufficient  if  the  person 
retained  the  certificate  although  the 
transfer  had  been  made  to  him  for 
the   sole   purpose   of   qualifying   him. 


(115) 


1825 


620. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


Although  by  the  award  of  arbitrators  stock  is  transferred  to  a  certain 
party,  and  such  party  votes  the  stock  at  the  next  election,  and  there- 
after the  award  is  set  aside  and  the  stock  retransferred,  yet  the  party  so 
deprived  of  the  stock  during  the  election  cannot  have  the  election  set 

aside. ^ 

§  620.  Who  may  complain  of  an  illegal  election  — A  new  elec- 
tion is  not  granted  if  the  result  will  he  the  same.  —  Only  a  stock- 
holder whose  rights  have  been  infringed,  and  who  is  equitably  entitled 
to  complain,  may  institute  the  proceedings.     Persons  contracting  with 


eign  corporations.  See  §  617,  supra. 
"Where  no  allegation  of  fraud  or  deceit 
is  made,  the  court  cannot  interfere 
under  the  power  vested  in  it  by  the 
Revised  Statutes  to  nullify  or  set 
aside  the  will  of  the  shareholders  as 
expressed  by  their  votes."  Re  Well- 
man,  etc.  V.  Ciancimino,  etc.  Co., 
N.  Y.  L.  J.,  May  13,  1890.  The  cor- 
poration itself  may  apply  under  the 
statute  for  an  order  to  the  effect  that 
the  persons  declared  elected  were 
legally  elected.  Re  Pioneer  Paper  Co., 
36  How.  Pr.  Ill  (1865).  Although 
officers  in  possession  of  the  corporate 
property  and  management  may,  in 
proceedings  to  have  defendant's  elec- 
tion declared  illegal,  obtain  an  injunc- 
tion against  the  defendant's  interfering 
with  the  management  of  property, 
yet  where  the  plaintiff  obtained 
the  property  and  management  by 
violence  on  the  day  of  the  commence- 
ment of  the  suit  notwithstanding  an 
injunction  against  such  violence,  his 
injunction  will  be  dissolved.  Ciancim- 
ino V.  Man,  20  N.  Y.  Supp.  702  (1892). 
The  above  remedy  does  not  apply  to 
the  legality  of  an  election  of  the  presi- 
dent by  the  directors.  Re  Caguey, 
N.  Y.  L.  J.,  Sept.  15,  1891. 

As  to  the  California  statute  see 
Brewster  v.  Hartley,  37  Cal.  15  (1869) ; 
Wright  V.  Central  California,  etc.  Water 
Co.,  67  Cal.  532  (1885).  The  statutory 
power  of  the  court  to  inquire  into  the 
legality  of  corporate  elections  does 
not  apply  to  the  "appointment"  of  a 
director  by  the  board  to  fill  a  vacancy 
due  to  a  resignation.  Wickersham  v. 
Brittan,  93  Cal.  34  (1892).  Nor  does 
such  a  statute  enable  the  director  so 
"appointed"  to  settle  the  question  of 
the  legality  of  the  election  by  applying 


to  the  com-t.  Wickersham  v.  Murphy, 
93  Cal.  41  (1892).  Where  two  groups 
of  stockholders  are  contesting  for  con- 
trol, the  expenses  of  the  litigation 
should  not  be  borne  by  the  company. 
Wickersham  v.  Crittenden,  106  Cal. 
329  (1895).     Cf.  §  879  infra. 

Under  the  New  Jersey  statute,  if  the 
directors  neglect  to  produce  at  the 
annual  election  an  alphabetical  list 
of  the  stockholders  and  their  resi- 
dences and  holdings,  their  election  as 
directors  will  be  set  aside  even  though 
the  stock  and  transfer  books  were 
present.  Re  Schwartz  &  Gray,  77 
N.  J.  L.  415  (1909).  The  statute  in 
New  Jersey  giving  the  chancery  court 
power  to  adjudicate  elections  is  uncon- 
stitutional, inasmuch  as  the  consti- 
tution vests  that  power  in  the  supreme 
court  only.  Goldstein  v.  Ewing,  62 
N.  J.  Eq.  69  (1901).  Where  the  stock- 
holders disagree,  and  two  elections  are 
held  in  adjoining  rooms  at  the  same 
time,  the  court  may  consider  the  ballots 
cast  at  both  meetings  in  order  to  arrive 
at  the  proper  result  of  the  election. 
Re  Election,  etc.  Grove  Cem.  Co., 
61  N.  J.  L.  422  (1898).  See  also,  in 
general,  Re  St.  Lawrence  Steamboat 
Co.,  44  N.  J.  L.  529  (1882),  a  case 
where  proxies  were  illegally  rejected. 

Although  the  inspectors  admitted 
votes  on  insufficient  evidence,  yet 
if  additional  and  sufficient  evidence 
is  presented  to  the  court  the  elec- 
tion will  stand.  Conant  v.  Millaudon, 
5  La.  Ann.  542  (1850).  In  attacking 
the  validity  of  a  vote  the  burden  of 
proof  is  on  him  who  attacks  it.  Re 
Indian,  etc.  Co.,  L.  R.  26  Ch.  D. 
70  (1884). 

1  Re  Leslie,  58  N.  J.  L.  609  (1896). 


1826 


CH,  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


620. 


the  corporation  and  creditors  of  the  corporation  cannot  interfere  ;  neither 
can  the  corporation  ordinarily  defend  against  its  contracts  on  the  ground^, 
that  its  oflBcers  were  not  duly  elected.  If  they  are  de  facto  oflficers,  third 
persons  may  deal  with  them  as  such.^  Xor  is  it  every  stockholder  who 
may  complain.  A  transferee  of  one  of  the  stockholders  who  partici- 
pated in  the  fraud  will  not  be  heard  to  impeach  the  result  of  that 
fraud.^  And  in  general  the  plaintiff,  a  relator  seeking  to  set  aside  a 
corporate  election,  is  barred  of  relief  if  he  himself  was  guilty  of  mis- 
conduct or  neglect,  or  if  it  appears  that  he  has  subsequently  acquiesced 
with  knowledge  of  the  facts.^  It  is  a  principle  of  law,  also,  that  the  le- 
gality of  an  election  will  not  be  inquired  into  upon  the  ground  that 
illegal  votes  were  cast,  unless  those  votes  were  challenged  at  the  elec- 
tion at  the  time  when  they  were  cast."  The  failure  of  a  stockholder 
to  attend  the  stockholders'  meeting  is  not  a  waiver  of  his  right  to  object  to 
the  acts  of  the  meeting  as  ultra  vires,  even  though  the  notice  of  the 
meeting  stated  what  was  to  be  done.^  The  court  will,  however,  re- 
legality  of  the  election.  State  v. 
Lehre,  7  Rich.  L.  (S.  C.)  234  (1854). 
See  also  People  v.  Robinson,  64  Cal. 
373  (1883) ;  Re  Long  Island,  etc.  R.  R., 
19  Wend.  37,  44  (1837),  and  §§599, 
594,  supra.  The  challenge  of  a  vote 
need  not  be  made  when  the  ballot 
is  tendered,  but  may  be  made  after  a 
delay  of  a  few  minutes,  the  election 
being  still  in  progress  and  the  iden- 
tity of  the  ballot  being  easily  ascer- 
tained. Coolbaugh  v.  Herman,  221 
Pa.  St.  496  (1908).  A  stockholder 
who  is  present  and  has  the  means  of 
knowing  that  a  proposed  vote  is  im- 
proper but  does  not  challenge  it  cannot 
afterwards  complain.  Re  United 
Towns,  etc.  Ass'n,  79  N.  J.  L.  31 
(1909). 

*McFadden  v.  Leeka,  48  Ohio  St. 
513  (1891).  Under  a  statute  author- 
izing one  company  to  sell  out  to  another 
for  any  consideration  that  may  be 
agreed  upon  between  them,  it  is  legal 
that  the  consideration  be  a  right 
extended  by  the  new  company  to  the 
old  stockholders  to  demand  partly 
paid  up  stock  of  the  new  company 
within  a  limited  time,  a  dissenting 
stockholder  being  given  the  right  to 
have  the  fairness  of  the  proposed  sale 
passed  upon  by  the  court.  It  is  the 
duty  of  the  stockholder  in  such  case 
to  attend  the  meeting  and  vote  against 
it  if  he  objects.     It  was  no  excuse  that 


1  See  §  713,  infra. 

2  Re  S>Tacuse,  etc.  R.  R.,  91  N.  Y. 
1  (1883). 

^Wiltz  V.  Peters,  4  La.  Ann.  339 
(1849),  where  a  commissioner  of  elec- 
tion attacked  the  legality  of  votes 
which  he  himself  had  admitted  as 
commissioner.  A  stockholder  who 
unreasonably  delays  in  complaining  of 
an  election  may  be  barred  of  any 
remedy.  Jones  i'.  Bonanza,  etc.  Co., 
32  Utah,  440  (1907).  A  director  who 
is  present  at  a  directors'  meeting 
which  forfeits  stock  for  non-payment 
of  calls,  and  supports  the  resolution, 
cannot  afterwards  attack  the  for- 
feiture on  the  ground  that  the  direc- 
tors were  illegally  appointed  and  hence 
that  the  forfeiture  was  void  or  that 
notice  of  forfeiture  was  not  legally 
served.  Jones  v.  North  Vancouver, 
etc.  Co.,  [1910]  A.  C.  317. 

*  Re  Chenango,  etc.  Ins.  Co.,  19 
Wend.  635  (1839),  wherein  the  court 
said:  "It  is  quite  clear,  generally 
speaking,  that  an  illegal  vote,  not  chal- 
lenged, will  not  invalidate  an  election, 
nor  will  even  be  inquired  into."  See 
also  Schoharie  Valley  R.  R.  Case,  12 
Abb.  Pr.  (N.  S.)  394  (1872).  A  stock- 
holder who  attends  the  election  and 
votes,  and  does  not  object  to  others 
voting,  although  he  knows  they  are 
doing  so  in  \aolation  of  a  by-law,  can- 
not himself  afterwards  object  to  the 


1827 


§  620.1 


ELECTIONS  —  CORPORATE   MEETINGS. 


CH.  XXXVII. 


fuse  to  set  aside  an  election  where  every  share  of  stock  was  represented 
at  the  election,  even  though  the  minority  refuse  to  vote  on  the  ground 
that  the  meeting  had  been  called  on  less  than  ten  days'  notice  required 
by  statute.^  An  unregistered  owner  of  stock  may  maintain  a  bill  in 
equity  to  enjoin  an  illegal  voting  of  other  stock  at  an  election.^ 

Where  a  candidate  at  a  corporate  election  receives  a  majority  of  the 
votes  cast,  the  receipt  of  illegal  votes  in  his  favor  does  not  defeat  his 
election.^  An  election  will  not  be  set  aside  if  it  be  shown  that  after 
throwing  out  the  invalid  votes  the  officers  declared  elected  would  still 
have,  according  to  the  return,  a  valid  majority  of  the  votes  cast ;  *  and 
a  new  election  will  not  be  ordered  if,  after  rejecting  all  the  illegal  votes, 
and  after  admitting  the  opposition  legal  votes  which  were  rejected,  it 
still  appears  that  the  directors  returned  as  elected  had  a  majority  of  the 

votes. ^ 
The  court  may  declare  a  candidate  elected  who  received  only  a  minor- 


he  was  ill  or  abroad  or  negligent  in 
dissenting,  under  the  English  statute. 
Burdett  Coutts  v.  True  Blood,  etc., 
Ltd.,  [1899]  2  Ch.  616.  A  stock- 
holder is  not  bound  to  attend  a  meeting 
and  vote  against  an  illegal  merger. 
Douglass  V.  Concord,  etc.  R.  R.,  72 
N.  H.  26  (1903).  See  also  p.  1758, 
note  1,  supra. 

1  In  re  Griffing  Iron  Co.,  63  N.  J.  L. 
168  (1898) ;  aff'd,  63  N.  J.  L.  357  (1899). 

2  O'Connor  v.  International,  etc. 
Co.,  68  N.  J.  Eq.  680  (1905).  See  also 
§  616,  supra.  Even  though  a  person 
claims  stock  which  stands  in  the  name 
of  another,  and  might  obtain  such 
stock  by  a  suit  for  that  purpose,  yet 
the  court  will  not  consider  this  in  a 
statutory  proceeding  to  contest  the 
validity  of  an  election,  because  only 
the  stockholders  of  record  are  entitled 
to  vote.  Matter  of  Utica,  etc.  Co., 
115    N.    Y.    App.    Div.    821    (1906). 

"Re  Argus  Co.,  138  N.  Y.  557 
(1893). 

<  People  V.  TuthiU,  31  N.  Y.  550 
(1864) ;  Ex  parte  Murphy,  7  Cow.  153 
(1827) ;  Re  Chenango,  etc.  Ins.  Co.,  19 
Wend.  635  (1839);  State  v.  Lehre,  7 
Rich.  L.  (S.  C.)  234,  325  (1854); 
McNeeley  v.  Woodruff,  13  N.  J.  L.  352 
(1833);  First  Parish  v.  Stearns,  38 
Mass.  148  (1838);  School  District 
V.  Gibbs,  56  Mass.  39  (1848) ;  Christ 
Church  V.  Pope,  74  Mass.  140  (1857). 
Even  though  certain  stock  is  illegally 


issued  and  voted,  yet  if,  after  deduct- 
ing that  stock,  the  prevailing  party 
would  still  prevail,  the  election  will 
not  be  set  aside.  Kimball  v.  New 
England,  etc.  Co.,  69  N.  H.  485  (1899). 
The  court  will  not  consider  the  legality 
or  illegality  of  votes,  where  those 
votes  will  not  change  the  result,  what- 
ever the  decision  might  be.  Conant 
V.  MiUaudon,  5  La.  Ann.  542  (1850). 
Where  the  officers  declared  elected 
received  a  majority  of  the  original 
stock  as  well  as  a  majority  of  the  alleged 
illegal  increased  stock,  they  will  not 
be  ousted.  Byers  v.  Rollins,  13  Colo. 
22  (1889).  Where,  after  rejecting  all 
votes  illegally  east  by  proxy,  there 
is  still  a  majority  for  the  persons  who 
were  declared  elected,  the  court  will 
not  disturb  the  election.  Craig  v. 
First  Pres.  Church,  88  Pa.  St.  42 
(1878).  When  an  election  is  wholly 
illegal  and  without  authority  by  rea- 
son of  the  organization  not  being  com- 
plete, complaining  stockholders  need 
not  show  that  the  result  will  be  dif- 
ferent in  another  election,  and  in 
declaring  the  election  void  the  court 
will  not  continue  the  directors  so 
elected  in  office.  Matter  of  Empire 
State,  etc.,  118  N.  Y.  App.  Div.  616 
(1907). 

5  McNeeley  v.  Woodruff,  13  N.  J.  L. 
352  (1833) ;  Ex  parte  Desdoity,  1 
Wend.  98  (1828). 


1828 


CH.  XXXVIl.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  620. 


ity  of  the  votes  actually  cast,  when  such  candidate  plainly  received  a 
majority  of  all  the  legal  votes  cast.^  But  where  the  person  declared 
elected  received  a  minority  of  the  votes,  he  will  be  ousted  even  though 
the  other  candidate  was  not  qualified  to  act  as  a  director.^    Where  quo 


1  Where  the  whole  number  of  votes 
is  five  hundred  and  ninety-three,  and 
there  were  present  five  hundred  and 
thirty-seven,      and      the      candidates 
declared    not    elected    received    three 
hundred  votes,  one  hundred  and  fifty 
of  which  were  illegally  rejected  by  the 
inspectors,  the  court,  under  the  New 
Jersey   statute,   declared  those  candi- 
dates elected  and  did  not  order  a  new 
election.     Re    St.     Lawrence     Steam- 
boat  Co.,    44   N.    J.    L.   529    (1882); 
Monsseaiix  v.  Urquhart,  19  La.  Ann. 
482     (1867);    Ex    parte    Desdoity,    1 
Wend.     98     (1828);     Vandeburgh     v. 
Broadway  Ry.,  29  Hun,  348   (1883); 
Downing  v.  Potts,  23  N.  J.  L.  66,  84 
(1851),    where    an    election    was    set 
aside  and  a  new  one  ordered  because 
votes    were    illegally  rejected    on   one 
side    and    illegally    accepted    on    the 
other,  which  changed  the  result,  but 
two  directors  who  were  on  both  tickets 
and  received  all  the  votes  east  were 
held    elected.     The    court    said    that 
unless  the  legal  votes  rejected  and  the 
illegal   votes   received   were    sufficient 
to  change  the  result  of  the  election, 
the  election  would  not  be  set  aside. 
Hence  where  of   two   thousand   three 
hundred    and    ninety-two    votes    for 
certain  candidates  seven  hundred  and 
ninety-nine    were    illegal,    and    there 
were   illegally   rejected   one   thousand 
eight  hundred  and  ninety-four   votes 
for     the     defeated     candidate,     who 
received    forty-six    votes,     the    covirt 
ordered  a  new  election.     In  Re  Long 
Island    R.    R.,    19   Wend.    37    (1837), 
where  the  votes  illegally  rejected  would 
have  elected  other  persons,  the  court 
set    the   election   aside,    and    did    not 
declare  elected  those  who  would  have 
been  elected  if  the  rejected  votes  had 
been  counted,  there  being  one  thousand 
seven  hundred  votes  not  represented, 
and   eleven   thousand   that   were   dis- 
qualified under  the  statute.     The  court 
may    declare    part    of    the    directors 
illegally  elected,  and  order  a  new  elec- 
tion as  to  them,  without  affecting  the 


title  of  the  others  to  their  offices.  Peo- 
ple V.  Fleming,  59  Hun,  518  (1891). 
In  Monsseaux  v.  Urquhart,  19  La. 
Ann.  482  (1867),  the  court  ousted  a 
director  and  declared  elected  another 
person  in  his  stead.  Where  the  pre- 
siding officer  illegally  rejects  certain 
votes,  declares  certain  persons  elected, 
and  adjourns  the  meeting,  and  the 
dissatisfied  party  continue  the  meet- 
ing and  hold  another  election,  the 
court  will  consider  merely  the  ques- 
tion as  to  who  received  a  majority  of 
the  votes  which  were  legally  offered 
to  be  cast.  State  v.  Smith,  15  Oreg.  98 
(1887).  A  court  wiU  not  force  upon 
the  company  directors  who  are  tech- 
nically entitled  to  be  declared  elected, 
certain  proxies  being  irregularly  exe- 
cuted, but  will  order  a  new  election. 
Harben  v.  Phillips,  L.  R.  23  Ch.  D.  14 
(1882).  In  New  Jersey  it  has  been 
held  that,  if  the  illegally  rejected 
votes  would  have  given  the  defeated 
candidate  a  majority  of  all  the  stock, 
the  court  will  declare  him  elected,  and 
will  oust  the  one  that  was  declared 
elected.  Re  Cape  Mav,  etc.  Co.,  16 
Atl.  Rep.  191  (N.  J.  1888).  The  court 
may  confirm  an  election  or  order  a 
new  one  or  make  such  other  order  as 
it  deems  best.  Stratford  v.  Mallory, 
70  N.  J.  L.  294  (1904).  Where  an 
election  is  illegal  but  the  contestants 
did  not  receive  a  majority  of  the  whole 
number  of  shares  outstanding  they  will 
not  be  declared  elected  but  the  elec- 
tion will  merely  be  set  aside.  Re 
United  Towns,  etc.  Assoc,  79  N.  J.  L. 
31    (1909). 

2  "Votes  cast  for  a  candidate  who  is 
disqualified  for  the  office  will  not  be 
thrown  away  so  as  to  make  the  elec- 
tion fall  on  a  candidate  having  a 
minority  of  votes,  unless  the  electors 
casting  such  votes  had  knowledge  of 
the  fact  on  which  the  disqualification 
of  the  candidate  for  whom  they  voted 
rested,  and  also  knew  that  the  latter 
was,  for  that  reason,  disabled  by  law 
from  holding  the  office."     Re  St.  Law- 


1829 


§  621.] 


ELECTIONS  —  CORPORATE  MEETINGS. 


[CH.  XXXVII. 


warranto  proceedings  are  pursued,  they  can  only  oust  the  party  who 
is  in  office.     They  cannot  declare  another  person  elected.^ 

§  621.  "  Corners  "  tn  stock  —  "  Pools."  —  The  courts  will  not  aid 
either  party  in  carrying  out  an  agreement  for  advancing  the  price  of 
stock  by  means  of  fictitious  dealings  designed  to  deceive  others  concern- 
ing the  real  value  of  such  stock.-  Where  both  the  vendor  and  vendee 
of  stock  know  that  the  purpose  of  the  vendee  is  to  control  the  corpora- 
tion and  illegally  issue  corporate  paper,  the  sale  is  illegal  and  void.^ 
A  "corner"  in  cotton  is  in  itself  a  conspiracy  in  restraint  of  trade  in  vio- 
lation of  the  anti-trust  act  of  congress,  it  being  a  conspiracy  to  enhance 
artificially  the  price  throughout  the  country  and  to  compel  buyers  to 
pay  a  higher  price  or  else  go  without  cotton.'*  An  agreement  to  make  a 
"  corner  "  in  stock,  by  buying  it  up  so  as  to  control  the  market  and  then 
purchasing  for  future  deliveries,  is  illegal.^    A  "  corner  "  in  cotton  is 


rence  Steamboat  Co.,  44  N.  J.  L.  529 
(1882),  citing  cases.  See  also  People 
V.  Clute,  50  N.  Y.  451  (1872).  Even 
though  the  directors  who  were  declared 
elected  were  ineligible,  because  in 
violation  of  the  New  Jersey  statute 
they  did  not  produce  the  stock-books 
at  the  election,  yet  the  court  will  not 
necessarily  declare  elected  those  who 
received  a  minority  of  the  votes,  but 
will  order  a  new  election  if  there  was 
no  fraud  or  improper  motive  in  failing 
to  obey  the  statute.  Stratford  v. 
Mallory,  70  N.  J.  L.  294  (1904).  Unless 
the  stockholders  know  that  they  are 
voting  for  an  ineligible  candidate, 
a  candidate  who  receives  a  minority 
of  the  stock  cannot  be  declared  elected  ; 
in  other  words,  the  votes  cast  for  the 
ineligible  person  are  not  to  be  ignored, 
but  a  new  election  must  be  held. 
Schmidt  v.  Mitchell,  101  Ky.  570 
(1897).  Even  though  three  out  of 
five  directors  have  been  ousted  by  the 
court,  yet  if  one  of  the  remaining  two 
is  vice  president  and  has  been  given 
all  the  powers  of  the  president,  a 
receiver  will  not  be  appointed  under  the 
New  York  statute.  Ehret  v.  Ringler 
Co.,  144  N.  Y.  App.  Div.  480  (1911). 
1  State  V.  McDaniel,  22  Ohio  St.  354 
(1872),  where  a  number  of  legal  votes 
were  rejected  which  would  have  suf- 
ficed to  elect  certain  directors  who 
without  such  votes  had  only  a  minority 
of  the  votes  cast.  The  court  held 
that  persons  cannot  be  declared  elected 
and    inducted    into    office    upon    quo 


warranto  information ;  People  v.  Phil- 
lips, 1  Denio,  388  (1845),  making 
the  same  ruling  as  to  a  church  cor- 
poration. 

2  Livermore  v.  Bushnell,  5  Hun,  285 
(1875).  See  also,  in  general,  §445, 
note,  supra,  and  §  622,  infra. 

3  Newark  v.  Elliott,  5  Ohio  St.  113 
(1855). 

*  United  States  v.  Patten,  226  U.  S. 
525  (1913).  The  court  said :  "'Run- 
ning a  corner'  consists,  broadly  speak- 
ing, in  acquiring  control  of  all  or  the 
dominant  portion  of  a  commodity 
with  the  purpose  of  artificially  enhanc- 
ing the  price,  'one  of  the  important 
features  of  which,'  to  use  the  language 
of  the  government's  brief,  'is  the 
purchase  for  future  delivery,  coupled 
with  a  withholding  from  sale  for  a 
limited  time.'  " 

^  Sampson  v.  Shaw,  101  Mass.  145 
(1869) ;  Raymond  v.  Leavitt,  46  Mich. 
447  (1881);  Morris  Run  Coal  Co.  v. 
Barclay  Coal  Co.,  68  Pa.  St.  173 
(1871);  Arnot  v.  Pittston,  etc.  Coal 
Co.,  68  N.  Y.  558  (1877);  Keene  v. 
Kent,  N.  Y.  D.  Reg.,  March  15,  1887. 
Cf.  Petrie  v.  Hannay,  3  T.  R.  418 
(1789).  No  suit  lies  against  a  broker 
for  fraud  in  carrying  out  a  pool  or 
combination  to  "corner"  and  advance 
the  price  of  lard.  Leonard  v.  Poole, 
114  N.  Y.  371  (1889).  See  also  §  445, 
supra.  A  person  making  a  "corner" 
in  wheat  is  not  subject  to  a  criminal 
prosecution  therefor.  Raymond  v. 
Leavitt,   46  Mich.   447   (1881).     It  is 


1830 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  621. 


in  itself  a  conspiracy  in  restraint  of  trade  in  violation  of  the  anti-trust 
act  of  congress,  it  being  a  conspiracy  to  enhance  artificially  the  price 
throughout  the  country  and  to  compel  buyers  to  pay  a  higher  price  or 
else  go  without  cotton.^ 

It  is  not  necessarily  unlawful  to  form  a  "  pool  "  for  the  purpose  of 
dealing  in  a  particular  stock,^  and  the  person  who  does  the  buying  and 
selling  must  account  to  the  others.^    A  pool  with  a  guaranty  of  a  return 


not  fraud  for  the  owner  of  the  larger 
part  of  the  capital  stock  of  a  corpora- 
tion to  "corner"  the  market,  that  is, 
to  enter  into  contracts  with  various 
parties  to  purchase  stock  of  the  cor- 
poration, although  he  knew  that  such 
contracts  could  not  be  fulfilled  by 
such  parties  by  reason  of  the  fact 
that  he  himself  held  such  stock,  and 
it  could  not  be  obtained  elsewhere. 
The  same  rule  prevails  although  such 
person  offered  the  stock  for  public 
subscription  and  purchased  the  greater 
part  of  it  himself.  Salaman  v.  War- 
ner, 64  L.  T.  Rep.  598  (1891) ;  aff'd, 
65  L.  T.  Rep.  132  (1891).  Cf.  Barry 
V.  Croskey,  2  Jones  &  H.  1  (1861),, 
holding  that  the  victim  of  the  "cor- 
ner" may  file  a  bill  in  equity  to  recover 
back  the  money  lost.  For  an  inter- 
esting statement  of  the  modus  operandi 
of  a  "corner,"  see  "An  Investor's 
Notes  on  American  Railroads,"  by 
Swann,  eh.  XII  (1886). 

1  United  States  v.  Patten,  226  U.  S. 
525  (1913).  In  this  case  the  court  said  : 
"  'Running  a  corner'  consists,  broadly 
speaking,  in  acquiring  control  of  all 
or  the  dominant  portion  of  a  commod- 
ity with  the  purpose  of  artificially 
enhancing  the  price '  one  of  the  impor- 
tant features  of  which,  'to  use  the  lan- 
guage of  the  government's  brief, 
'is  the  purchase  for  future  delivery, 
coupled  with  a  withholding  from  sale 
for  a  limited  time. '  " 

2Quincey  v.  White,  63  N.  Y.  370, 
383  (1875),  modifying  Quineey  v. 
Young,  5  Daly,  327  (1874). 

'  A  member  of  a  pool  is  entitled  to 
his  share  of  the  stock  upon  its  termina- 
tion, even  though  he  was  a  trustee  of 
the  pool  and  was  an  officer  of  the  com- 
pany the  stock  of  which  had  been  pur- 
chased, and  even  though  there  had 
been  an  overissue  of  stock.  Gary 
V.    Leszynsky,    184   Mass.    44    (1903). 


A  person  who  sells  stock  to  a  supposed 
pool  and  brings  suit  to  hold  them  all 
liable  jointly,  cannot  on  appeal  claim 
that  he  might  have  held  a  portion  of 
them  liable.  Jones  i;.  Hoadley,  115 
N.  Y.  App.  Div.  479  (1906);  aff'd, 
196  N.  Y.  512.  A  pooling  agreement 
for  the  purchase  and  sale  of  particular 
stock  was  involved  in  McMillan  v. 
Whitley,  38  Utah,  452  (1911).  The 
workings  of  a  pool  which  failed  were 
described  in  Re  Lathrop,  etc.  Co., 
184  Fed.  Rep.  534  (1910).  A  member 
of  a  pool  is  entitled  to  examine  the 
books,  accounts  and  papers  of  the 
stock-brokers  who  operated  for  the 
pool.  Hotchkiss  v.  Levi,  140  N.  Y. 
App.  Div.  525  (1910).  A  pool  or 
partnership  to  purchase  the  securities 
of  a  railroad  company  and  divide  the 
profits  or  losses  is  not  terminated  by 
the  purchase  of  the  railroad  and  the 
turning  of  the  securities  over  to  the 
new  railroad  corporation  where  the 
securities  received  in  exchange  there- 
for are  pledged  to  carry  on  the  trans- 
action instead  of  being  distributed. 
Watkins  v.  Delahunty,  133  N.  Y.  App. 
Div.  422  (1909).  Where  several  par- 
ties buy  a  certificate  of  stock  in  fi^ed 
proportions  and  the  certificate  is 
taken  by  one  for  the  benefit  of  all, 
he  is  a  bailee  for  the  others  and  not  a 
vendor.  Coquard  v.  Wernse,  100  Mo. 
137  (1889).  The  general  rule  that  an 
action  affecting  a  joint  enterprise  for 
the  purchase,  upon  speculation,  of 
certain  mining  stocks,  must  join  all 
the  parties  who  enter  the  "pool,"  does 
not  necessitate  the  joinder  of  one  who 
is  out  of  the  jurisdiction.  AngeU  v. 
Lawton,  76  N.  Y.  540  (1879).  The 
representative  of  a  syndicate  after 
selling  the  stock  cannot  modify  the 
contract.  He  is  liable  to  the  others 
if  he  does  so.  Kountz  v.  Gates,  78 
Wis.    415    (1891).     Where    there   is   a 


1831 


§  622.]  ELECTIONS  —  CORPORATE   MEETINGS.  [cH.  XXXVII, 

of  the  money  Is  a  gambling  contract,  and  a  participant  cannot  recover 
back  the  money .^ 

§  622.  Voting  trusts  and  pooling  agreements  —  Restrictions  on 
right  to  vote  or  sell  stock  —  Contracts  as  to  voting,  elections,  direc- 
tors, and  control. — The  control  of  a  corporation  generally  determines  its 
success  or  failure.  The  control  also  gives  power,  patronage,  perquisites, 
salaries,  and  position.  Hence  it  is  sought  for.  In  a  large  corporation  the 
absolute  control  generally  requires  more  money  than  one  man  is  able  or 
willing  to  invest.  Consequently,  for  many  reasons,  various  stockholders 
unite  to  obtain  and  retain  the  control.  There  is  always  danger,  how- 
ever, that  some  of  these  stockholders  may  die,  or  sell  their  stock,  or  unite 
with  some  other  parties  to  obtain  control.  Hence,  for  twenty  years  last 
past,  the  business  community  and  the  lawyers  have  been  trying  to  find 
some  legal  way  of  so  tying  up  a  majority  of  the  stock  of  a  corporation 
as  to  prevent  its  being  lost.  Various  plans  have  been  tried,  some  of 
which  have  failed,  some  have  been  partially  successful,  and  some  almost 
a  complete  success.     This  whole  subject  may  be  divided  as  follows  : 

(a)  Contracts  between  stockholders  to  vote  together.  Contracts 
involving  changes  of  officers  and  payment  of  salaries.  Restrictions  by 
by-law  or  contract  as  to  amendments  to  charter,  etc. 

(b)  Restrictions  on  the  right  to  vote. 

(c)  Contracts  between  stockholders  not  to  sell  their  stock  except  to 
each  other,  or  on  condition  that  the  purchaser  will  purchase  all  of  the 
stock. 

(d)  Charter  provisions  and  by-laws  restricting  the  right  to  sell  the 
stock. 

(e)  Irrevocable  proxies. 

(/)  Deposit  of  certificates  of  stock  with  trustees,  either  with  or  with- 
out a  transfer  of  same  to  the  trustees. 

ig)  One  corporation  owning  and  holding  the  stock  of  other  corpora- 
tions. 

(h)  Voluntary  associations  to  acquire,  hold  and  vote  shares  of  stock. 

joint    operation   in  stocks,    a  "pool,"  An  agreement  with  brokers  by  which 

the   transactions   being   carried   on  in  a  person  is  to  cause  a  legislative  inves- 

the  name  of  one  only,  the  others  may  tigation,    and    in    case    certain    stock 

have  specific  performance  leading  to  a  declined  such  person  was  to  share  in 

division    of    the    stocks.     Johnson    v.  the    profits    of    short    sales,    is    illegal 

Brooks,  46  N.   Y.   Super.   13   (1880) ;  and  not  enforceable.     Veazey  v.  Allen, 

Thornton  r.  St.  Paul,  etc.  Ry.,  45  How.  173    N.    Y.   359    (1903).      As    to    the 

Pr.    416    (1873) ;    8.    c,    dismissed,    6  liability  of  the  participants  in  a  pool 

N.  Y.  Week.  Dig.  309  (1878).    A  vendor  to  buy  and  sell  the  stock  of  a  particular 

of   stock  may   collect   the  price  even  railroad  see  Post  v.  Thomas,  153  N.  Y. 

though  the  agreement  contains  a  pro-  App.  Div.  865  (1912). 
vision  for  pooling  the  stock  which  is         '  Richards  v.  Starck,  [1911]  1  K.  B. 

illegal.     Edgerton  v.  Power,  18  Mont.  296. 
3.50    (1896).     See    also    §320,    supra. 

1832 


CH.   XXXVII.] 


ELECTIONS  —  CORPORATE    MEETINGS. 


[§  622a. 


Taking  up  those  various  modes  of  uniting  the  majority  of  the  stock, 
the  first  is 

§  622a,  Contracts  between  stockholders  to  vote  together  —  Con- 
tracts involving  changes  of  officers,  and  payment  of  salaries  —  Re- 
strictions by  by-law  or  contract  as  to  amendments  to  charter,  etc.  — 
It  is  elementary  law  that  stockholders  owning  a  majority  of  the  stock 
have  a  right  to  combine  and  control  the  election  of  the  board  of  direc- 
tors.^   A  director,  however,  cannot  contract  as  to  how  he  will  vote.^ 

Several  parties  in  purchasing  stock  may  agree  that  each  one's  share 
shall  be  transferred  to  him,  but  that  all  the  stock  shall  be  voted  for 
five  years  in  one  way,  that  way  to  be  determined  by  a  majority  of  the 
stock  so  included  in  the  agreement.  Such  an  agreement  is  legal,  es- 
pecially as  it  provides  that  during  that  time  the  parties  shall  retain  the 
power  to  vote  such  stock.^ 


'  Quoted  and  approved  in  Weber  v. 
Delia,  etc.  Co.,  14  Idaho,  404  (1908). 
Havemeyer  v.  Havemeyer,  43  N.  Y. 
Super.  Ct.  506,  513  (1878);  s.  c,  45 
N.  Y.  Super.  Ct.  464  (1879);  aff'd, 
86  N.  Y.  618  (1881) ;  Faulds  v.  Yates, 
57  lU.  416  (1870),  where  it  was  held 
that  persons  holding  the  majority  of 
stock  in  a  corporation  eoidd  lawfully 
agree  among  themselves  to  vote  as  a 
unit  to  control  an  election ;  and  that 
their  agreement  that  their  votes 
should  be  cast  as  should  be  decided 
by  the  majority  of  their  own  votes 
was  not  void  as  being  against  public 
policy.  See  also  Pender  t>.  Lushington, 
L.  R.  6  Ch.  D.  70  (1877),  where  the 
court  said:  "There  is,  if  I  may  say 
so,  no  obligation  on  a  shareholder  of  a 
company  to  give  his  vote  merely  with 
a  view  to  what  other  persons  may  con- 
sider the  interests  of  the  company  at 
large.  He  has  a  right,  if  he  thinks 
fit,  to  give  his  vote  from  motives  or 
promptings  of  what  he  considers  his 
own  individual  interest."  A  stock- 
holder who  signs  an  agreement  with 
others  to  vote  their  stock  as  a  unit 
cannot  afterwards  complain  of  acts 
of  the  board  of  directors,  which  acts 
were  in  accordance  with  the  policy 
of  the  pooling  agreement.  Ziegler  v. 
Lake  St.  El.  R.  R.,  69  Fed.  Rep.  176 
(1895),  giving  portions  of  the  agree- 
ment. "It  is  not  -per  se  unlawful 
for  a  number  of  persons,  by  previous 
agreement,  to  buy  shares  of  the  stock 
of  a   corporation  for   the   purpose   of 


controUing  its  policy,  electing  its  offi- 
cers, etc."  Beitman  v.  Steiner,  98 
Ala.  241  (1893).  Where  two  partners 
desire  to  incorporate,  and  each  to  have 
the  same  interest,  and  a  third  party  to 
have  a  smaller  interest,  thereby  hold- 
ing the  balance  of  power,  and  such 
arrangement  is  carried  out,  and  the 
third  party  is  really  a  dummy  of  one 
of  the  partners,  and  thereby  gives  the 
control  of  the  corporation  to  that 
partner,  yet  the  other  partner  has  no 
legal  cause  of  complaint,  notwithstand- 
ing the  general  understanding  as  to  the 
division  of  control.  Baumgarten  v. 
Nichols,  69  Hun,  216  (1893).  Although 
a  contract  of  certain  stockholders  to 
vote  together  is  legal,  yet  a  conspiracy 
to  obtain  an  illegal  injunction  against 
others  voting  wiU  not  be  countenanced 
by  the  court.  People  v.  Albany,  etc. 
R.  R.,  55  Barb.  344,  368  (1869) ;  aff'd, 
57  N.  Y.  161.  A  majority  of  the  stock- 
holders may  elect  themselves  directors 
and  control  the  corporation.  White 
V.  Snell,  35  Utah,  434  (1909). 

2  Even  though  the  agent  of  a  stock- 
holder is  elected  director  to  protect 
the  latter's  interest,  yet  that  duty  must 
be  subordinate  to  his  independent  and 
impartial  judgment  as  a  director,  and 
any  contract  to  the  contrary  is  void. 
Singers-Bigger  v.  Young,  166  Fed.  Rep. 
82  (1908). 

'  The  court  consequently  held  that 
a  member  of  the  syndicate  who  refused 
to  vote  in  accordance  with  a  decision 
of  the  majority  had  no  right  to  vote 


1833 


§  622a.] 


ELECTIONS 


CORPORATE   MEETINGS. 


[CH.  XXXVII. 


Thus,  executors  holding  a  majority  of  the  stock  of  a  corporation 
may,  in  order  to  sell  a  portion  thereof,  agree  with  the  purchaser  that 
they  will  vote  for  two  persons  named  by  the  purchaser  to  act  as  direc- 
tors so  long  as  the  executors  hold  the  remainder  of  the  stock,  and  the 
court  will  grant  an  injunction  against  the  executors  voting  in  violation 
thereof.^  An  executory  contract,  however,  between  stockholders  that 
they  will  vote  in  a  certain  way  or  elect  certain  persons  as  directors  will 
rarely  be  enforced  specifically  by  the  courts,  and  an  action  at  law  for 
damages  for  breach  of  contract  is  unsatisfactory  in  that,  as  a  rule,  no 
substantial  damages  can  be  proven.^ 


(by  reason  of  the  California  statute 
prescribing  that  only  bona  fide  holders 
of  stock  should  vote),  the  court  holding 
that  the  original  purchase  of  the  block 
of  stock  bound  that  stock  in  its  vote. 
Smith  V.  San  Francisco,  etc.  Ry.,  115 
Cal.  584  (1897).  Where  the  subscriber 
for  the  entire  capital  stock  makes  an 
agreement  with  other  persons  by 
which  they  take  a  proportion  of  it 
and  pay  the  corporation  therefor,  and 
all  agree  that  until  the  full  amount 
has  been  taken  in  ten  share  lots,  the 
stock  will  continue  to  stand  in  his 
name,  he  cannot  afterwards  claim  the 
right  to  retain  the  stock  on  payment 
therefor.  Hladovee  v.  Paul,  124  111. 
App.  Rep.  589  (1906);  aff'd,  222  111. 
254. 

1  Greenwell  v.  Porter,  [1902]  1  Ch. 
530.  Where  by  contract  between  two 
stockholders  owning  an  equal  share 
in  the  corporation,  future  stock 
acquired  by  either  of  them  is  to  belong 
one  half  to  each,  such  contract  may 
be  specifically  enforced.  Stewart  v. 
Pierce,  116  Iowa,  733  (1902).  See  on 
this  point  §§  320,  338,  supra. 

2  An  agreement  that  a  certain  per- 
son shall  be  president  for  two  years 
will  not  be  specifi-cally  enforced  by 
the  courts.  Dulin  v.  Specific,  etc.  Co., 
103  Cal.  357  (1894),  holding  also  that 
an  election  in  which  the  party  is  not 
even  elected  a  director  will  not  be 
set  aside,  even  under  the  statutory 
power  of  the  courts  to  set  aside  elec- 
tions on  equitable  grounds.  A  court 
of  equity  will  not  grant  specific  per- 
formance of  a  contract  to  vote  stock 
as  the  complainant  stockholder  wishes, 
with  a  view  to  controlling  the  cor- 
poration.    Hence  where  the  promisee 


of  such  a  contract  knows  the  promisor 
will  not  fulfill  his  contract,  and  con- 
sequently the  promisee  buys  the 
promisor's  stock  at  a  high  price,  he, 
the  promisee,  cannot  rescind  such  pur- 
chase, but  must  pay  the  stipulated 
price.  Gage  v.  Fisher,  5  N.  Dak.  297 
(1895).  Where  several  persons  make 
a  contract  to  unite  in  obtaining  con- 
trol of  a  corporation  by  buying  the 
stock  and  one  of  them  is  to  be  made 
secretary  and  manager,  he  may  sue 
the  others  for  damages  if  they  obtain 
the  control  and  then  do  not  appoint 
him.  Lloyd  v.  Dickson,  116  La.  90 
(1906). 

An  agreement  to  elect  a  certain  per- 
son president  is  waived  if  he  partici- 
pates in  electing  others.  American, 
etc.  T.  Co.  V.  Toledo,  etc.  Ry.,  47  Fed. 
Rep.  343  (1890).  A  contract  between 
a  stockholder  and  a  third  person  by 
which  the  third  person  is  to  be  made 
a  director,  and  agrees  to  devote  his 
time  and  attention  to  the  business, 
and  develop  the  property,  and  procure 
the  construction  of  a  railroad,  and 
cause  various  lots  of  land  owned  by 
the  corporation  to  be  sold,  will  not 
sustain  an  action  at  law  for  damages 
by  the  stockholder  for  breach  of  the 
contract.  An  action  in  such  a  case 
may  be  maintained  only  by  the  cor- 
poration or  by  the  stockholder  in  its 
behalf.  So  far  as  the  contract  intended 
to  control  the  action  of  the  board  of 
directors  it  was  illegal.  Kountze  v. 
Flannagan,  19  N.  Y.  Supp.  33  (1892). 
An  agreement  that  certain  persons 
should  have  control  of  the  corporation 
until  certain  debts  were  paid  must  be 
clearly  proved  before  it  will  be  sustained 
by   the   courts.     Proctor,    etc.    Co.    v. 


1834 


CH.  XXXVII. I 


ELECTIONS  —  CORPOFL^TE   MEETINGS. 


[§  622a. 


A  contract  by  which  the  directors  who  own  a  majority  of  the  stock 
sell  such  stock  and  agree  to  substitute  the  vendees  as  directors  of  the 
company  is  legal. ^    An  agreement,  however,  of  the  officers  of  a  mutual 


Finley,  98  Ky.  405  (1895).  A  con- 
tract between  two  companies  by  which 
one  is  to  name  four  of  the  six  directors 
of  the  other  (and  is  also  to  sell  the  stock 
of  the  latter,  carry  out  its  contract, 
and  pay  dividends  on  its  stock)  is 
illegal.  James  v.  Eve,  L.  R.  6  H.  L. 
335  (1873). 

Even  though  a  partnership  trans- 
fers its  assets  to  a  corporation,  each 
partner  taking  an  equal  proportion  of 
the  stock,  except  that  a  third  party 
was  given  the  balance  of  power,  and 
such  third  party  afterwards  acts  with 
one  of  the  partners  and  controls  the 
corporation,  yet  this  is  not  sufficient 
to  set  aside  a  transfer  of  the  assets 
to  the  corporation  at  the  instance  of 
the  other  partner.  Baumgarten  v. 
Nichols,  69  Hun,  216  (1893). 

1  A  contract  to  sell  one's  stock  in 
a  corporation  and  to  resign  a  director- 
ship and  the  presidency,  and,  having 
done  so,  to  endeavor  to  induce  other 
directors  to  resign,  in  order  that  the 
purchasers  of  the  stock  may  come  in 
and  take  their  places  and  so  control 
the  management  of  the  company, 
there  being  no  evidence  of  fraud,  has 
been  held  a  contract  not  void  as 
against  public  policy.  Barnes  v. 
Brown,  80  N.  Y.  527  (1880).  A  con- 
tract whereby  a  manufacturing  cor- 
poration and  all  of  its  stockholders 
agreed  to  sell  a  certain  proportion  of 
the  capital  stock  of  said  company  and 
to  substitute  two  persons  nominated 
by  the  vendee  as  directors  in  such 
corporation  is  not  presumed  to  be 
ultra  vires,  and  a  provision  in  such 
contract  that  the  purchaser  will  carry 
on  the  business  and  divide  profits 
every  six  months  may  be  enforced  by 
the  corporation.  Rider  Life  Raft  Co. 
V.  Roach,  97  N.  Y.  378  (1884).  An 
agreement  by  which  the  directors  of 
a  company  sell  their  stock  and  resign 
their  offices  and  substitute  the  pur- 
chasers in  their  places  is  not  illegal 
or  objectionable  if  all  the  stockholders 
assent  and  if  the  corporation  is  not 
injured.     The   assent  of  a  few    minor 


stockholders  whose  stock  was  given 
to  them  will  be  presumed,  in  case  they 
have  not  objected.  Raymond  v.  Col- 
ton,  104  Fed.  Rep.  219  (1900).  Where 
a  director,  who  is  also  treasurer,  sells 
his  stock  to  the  other  directors,  it 
being  a  part  of  the  sale  that  he  give  up 
his  offices,  the  corporation  may  treat 
his  offices  as  vacant.  Anderson,  etc. 
Co.  V.  Pungs,  127  Mich.  543  (1901). 
A  sale  of  all  of  the  stock  may  be  accom- 
panied by  the  resignation  of  the  board 
of  directors.  Roosevelt  v.  Hamblin, 
199  Mass.  127  (1908).  An  agreement 
to  take  stock  and  advance  the  funds 
necessary  to  pay  a  mortgage  and  operat- 
ing expense  is  enforceable,  even  though 
it  contains  a  provision  that  the  officers 
shall  be  changed  and  the  party  could 
have  changed  them.  San  Remo,  etc. 
Co.  ;'.  Moneuse,  149  N.  Y.  App. 
Div.  26  (1912).  A  stockholder  cannot 
maintain  a  suit  in  equity  to  enjoin  an 
alleged  director  from  acting  on  the 
ground  that  a  majority  of  the  direc- 
tors are  mere  dummies  and  do  not 
actually  own  any  stock,  as  required  by 
statute,  and  that  they  were  elected 
under  an  agreement  by  which  the  ven- 
dor of  a  majority  of  the  stock  caused  the 
old  directors  to  resign  and  new  ones 
to  be  named  by  the  vendee,  and  that 
the  resignation  of  one  director  was 
withdrawn  before  it  was  accepted, 
but  was  afterwards  accepted  and  a  suc- 
cessor appointed  by  the  board  of 
directors,  and  that  a  majority  of  the 
stock  is  now  opposed  to  the  existing 
board  of  directors.  The  remedy  is 
quo  warranto  instituted  by  the  Attor- 
ney-General in  the  name  of  the  people. 
Moir  V.  Provident  Sav.  etc.  Soc.  127 
N.  Y.  App.  Div.  591  (1908).  In  the 
case  Ryan  v.  McLane,  91  Md.  175 
(1900),  the  court  seemed  to  doubt 
somewhat  this  statement  that  it  is 
legal  for  the  board  of  directors  who  own 
a  majority  of  the  stock  to  agree  to  sell 
it  and  substitute  the  vendees  as  direc- 
tors of  the  company.  It  would  seem, 
however,  as  if  such  a  contract  would 
in  its  effect  be  no  different  from  the 


1835 


§  622a. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[cH.  XXXVII. 


insurance  company  without  capital  stock  to  endeavor  to  have  the  di- 
rectors resign  and  turn  over  the  control  to  other  parties  and  enable  them 
to  remove  the  principal  place  of  business  of  the  company,  is  illegal  and 
suit  does  not  lie  to  collect  the  contract  price  therefor.^ 

Such  a  transaction,  however,  is  closely  scrutinized  by  the  courts, 
and  if  fraudulent,  as  a  matter  of  fact,  the  retiring  directors  are  per- 
sonally responsible  for  any  losses.^  A  sale  of  his  vote  by  a  stockholder 
is  illegal.^ 


common  provision  which  appears  in 
the  statutes  of  many  of  the  states  and 
in  the  by-laws  of  many  corporations, 
that  a  majority  in  interest  of  the  stock 
may  at  any  time  remove  any  of  the 
directors  and  elect  others  in  their 
place.  A  sale  of  the  majority  of  the 
stock,  together  with  a  statutory  power 
to  remove  the  directors,  is  the  same 
as  a  sale  of  the  majority  of  the  stock 
with  a  voluntary  agreement  to  have 
the  directors  resign  and  new  ones  sub- 
stituted. Where  a  construction  com- 
pany owning  the  bonds  and  stocks  of 
street  railway  companies  sells  the  same 
to  a  trust  company  on  the  agreement 
of  the  latter  to  complete  the  work, 
and  by  the  contract  a  majority  of 
the  directors  of  the  construction  com- 
pany resign,  and  appointees  of  the 
trust  company  are  substituted,  a 
stockholder  of  the  construction  com- 
pany cannot  compel  the  trust  com- 
pany to  account  for  the  value  of  the 
stocks  and  bonds,  unless  he  shows 
actual  fraud,  even  though  a  part  of 
the  agreement  was  made  after  the 
appointees  of  the  trust  company  had 
been  installed  in  office.  Kidd  v.  New 
Hampshire,  etc.  Co.,  74  N.  H.  160 
(1907).    • 

1  Sauerhering  v.  Rueping,  137  Wis. 
407    (1909).     See  also  §  650,  infra. 

^  Where  the  officers  and  directors. 


in  a  conspiracy,  resign  their  offices 
and  substitute  other  officers  who  are 
irresponsible  and  \mtrustworthy,  in 
consideration  of  unlawful  payments 
made  to  the  former  directors,  and  the 
assets  of  the  corporation  are  thereby 
lost,  the  first-named  directors  are  per- 
sonally responsible  for  their  action 
and  a  receiver  of  the  corporation  may 
hold  them  liable.  Bosworth  v.  Allen, 
168  N.  Y.  157  (1901).  A  director  of 
an  assessment  life  insurance  company 
who  receives  money  for  causing  a  per- 
son and  his  friends  to  be  elected  direc- 
tors, thereby  giving  them  the  con- 
trol of  the  company,  together  with  its 
property,  may  be  held  liable  by  the 
receiver  of  the  company  for  the  money 
so  received.  McClure  v.  Law,  161 
N.  Y.  78  (1899).  See  also  Gilbert 
V.  Finch,  173  N.  Y.  455  (1903).  Money 
received  by  a  director  of  a  cooperative 
insurance  company  for  substituting 
other  directors  and  transferring  its 
business  to  another  company  can  be 
recovered  back  on  the  ground  of  fraud, 
and  such  director  is  chargeable  with 
notice  of  the  facts  which  he  knew  or 
might  have  learned  by  the  exercise  of 
reasonable  care.  McClure  v.  Wilson, 
70  N.  Y.  App.  Div.  149  (1902).  It  is 
a  breach  of  trust  for  the  officers  of 
a  beneficial  association  to  receive  pay 
for  substituting  other  officers.     Heine- 


'  Hafer  v.  New  York,  etc.  R.  R.,  14 
W.  L.  BuU.  68  (1886).  See  also  Yale 
Law  Journal,  vol.  1,  p.  7,  and  §  610, 
supra.  A  secret  agreement  by  which 
a  vendor  of  land  of  a  corporation  pays 
half  of  the  price  above  a  certain  sum 
to  one  of  the  stockholders  on  the  con- 
dition that  he  secures  the  votes  of 
other  stockholders  to  the  purchase,  is 
fraudulent   and    cannot    be   enforced. 


Dieckmann  v.  Robyn,  162  Mo.  App. 
67  (1911).  In  buying  out  a  corpora- 
tion the  purchaser  may  pay  different 
stockholders  various  sums  to  vote  in 
favor  of  the  sale,  there  being  no  con- 
cealment and  all  the  stockholders 
having  consented.  Keady  v.  United 
Rys.  Co.,  57  Oreg.  325  (1910).  See 
also  §  320  supra,  and  §  651,  infra. 


1836 


CH    XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


622a. 


A  corporation  cannot  by  contract  agree  that  a  certain  person  shall 
be  a  member  of  its  board  of  directors  during  the  continuance  of  the 
contract.^  Even  though  a  resolution  is  passed  by  the  stockholders  that 
certain  stock  shall  name  a  majority  of  the  directors,  yet  this  will  not 
control  subsequent  elections,  and  any  person  acquiring  a  majority  of 
the  stock  may  control  the  election  notwithstanding  he  voted  for  such 
resolution.-  s^ 

A  contract  in  regard  to  elections  in  private  corporations  is  not  legal  I 
if  it  provides  that  a  lucrative  corporate  position  shall  be  given  to  one  or  / 
more  of  the  parties  to  the  contract.^  Thus,  an  agreement  of  a  large  7 
stockholder  holding  a  majority  of  the  stock,  that  upon  the  purchase  and 
absorption  of  plaintiff's  business  by  the  corporation  the  plaintiff  should  \ 
be  engaged  for  a  term  of  years  as  vice-president  and  general  manager  of  | 
the  corporation  at  a  specified  salary,  is  contrary  to  public  policy  and  J 
is  void.*  — ^ 


man  v.  Marshall,  117  Mo.  App.  546  board  and  their  own  reelection  as 
(1906).  Where  a  trustee  retires  from  officers,  is  iUegal  as  involving  their 
office  in  consideration  that  his  succes-  election  to  lucrative  positions, 
sor  pay  him  a  sum  of  money,  the  money  *  West  v.  Camden,  135  U.  S.  507 
so  paid  belongs  to  the  trust  estate.  (1890).  A  contract  made  by  a  stock- 
Perry  on  Trusts  (3d  ed.),  §  427.  Spe-  holder  for  a  consideration  to  vote  for 
cific  performance  will  not  be  granted  of  a  particular  person  for  manager  of 
an  agreement  of  the  vendors  of  stock  the  company,  and  in  the  event  of  his 
that  they  will  resign  as  directors  and  election  to  vote  for  an  increase  of 
substitute  the  vendee's  representa-  the  salary  attaching  to  that  position, 
tives  instead.  Fremont  v.  Stone,  42  is  illegal  and  cannot  be  enforced. 
Barb.  169  (1864),  the  court  stating  Woodruff  v.  Wentworth,  133  Mass.  309 
that  such  a  contract  is  unfair  towards  (1882).  An  agreement  of  persons 
the  minority  stockholders.  See  also  holding  a  majority  of  the  stock,  they 
Jacobs  I'.  Miller,  15  Alb.  L.  J.  188  being  directors  also,  that  a  person 
(1877).  Directors  have  no  power  to  purchasing  stock  from  them  shall  be 
contract  with  an  outsider  that  he  general  manager,  and  may  at  the  end 
shall,  upon  purchasing  certain  stock,  of  two  years  sell  the  stock  back  to 
be  made  a  director  in  the  company,  them  at  a  stated  price,  is  contrary 
but  a  sale  of  stock  with  an  agreement  to  public  policy  and  void.  The  ven- 
that  the  vendee  should  be  elected  dors  need  not  repurchase.  The  ar- 
superintendent  may  be  rescinded  if  rangement  is  unfair  to  the  corpora- 
the  latter  part  of  the  agreement  is  tion.  Wilbur  v.  Stoepel,  82  Mich.  344 
not  carried  out.  Seymour  v.  Detroit  (1890).  A  proxy  for  five  years,  given 
Copper,  etc.  Mills,  56  Mich.  117  so  as  to  unite  enough  stock  to  con- 
(1885).                                                 '  trol    the    corporation,    the    holder    of 

1  Sowter    V.  Seekonk,   etc.    Co.,  83  the    proxy   agreeing   that    the   person 
Atl.  Rep.  437  (R.  I.  1912).  gi'^'ing  the  proxy  shall  have  an  office 

2  Morel  V.  Hoge,  61  S.  E.  Rep.  487  at  a  salary  of  S2,,500  a  year,  is  void. 
(Ga.  1908).  At  the  instance  of  the  latter  person  a 

^  Quoted  and  approved  in  Withers  court    of    equity    will    enjoin    voting 

V.   Edmonds,   26  Tex.   Civ.   App.    189  thereunder.     Cone  v.  Russell,  48  N.  J. 

(1901),   where  the  court  held   that  a  Eq.  208  (1891).     Where  a  stockholder 

contract    between    the    president   and  in  a  railroad  company  is  induced  to 

the  teller  of  a  bank,  providing  means  take  part  in  the  formation  of  a  land 

to  secure   the  reelection  of   the  same  company  and  is  to  receive  a  certain 

1837 


§  622a.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXX  vri. 


But  the  stockholders  by  unanimous  consent  may  contract  to  turn 
over  the  management  for  a  series  of  years.     Thus  a  contract  by  which 


sum  of  money  when  a  depot  is  located 
on  such  land,  he  cannot  enforce  the 
agreement.     It    is    practically    a    sale 
of  his  vote.     Fuller  v.  Dame,  35  Mass. 
472  (1836).     A  contract  of  the  vendor 
of   bank   stock   that   he   would   make 
the  vendee  the  cashier  is  illegal  and 
void.     Noel    v.    Drake,    28    Kan.    265 
(1882).     Where    the    president    of    a 
corporation  brings  about  a  sale  of  all 
its  stock  and  a  change  of  its  officers, 
under  a  contract   by  which   the  cor- 
poration is  to  pay  him  a  certain  sum, 
he  cannot  collect  that  sum  from  the 
corporation  itseK.     Wood  v.  Manches- 
ter, etc.  Co.,  54  N.  Y.  App.  Div.  522 
(1900).     A  contract  between  promot- 
ers, by  which  one  of  them  is  to  be 
employed    by    a    proposed    insurance 
company  on  a  salary  and  a  percentage 
of   premium,   is   too   indefinite   to   be 
enforced,    even    though    some    of    the 
promoters  proceeded  to  form  the  com- 
pany.    It  seems  also  that  such  a  con- 
tract   is    contrary    to    public    policy. 
Flaherty  ;;.  Gary,  62  N.  Y.  App.  Div. 
116  (1901);    aff'd,  174  N.  Y.  550.     A 
contract  whereby  a  stockholder  sells 
his  stock  to  an  individual  who  guaran- 
tees that  the  former  will  be  employed 
at  a  stated  salary  by  the  corporation 
for  two  years  is  enforceable  against  the 
person  so  pm-chasing  the  stock,  even 
though  the  corporation  passes  into  the 
hands  of  a  receiver  before  the  expira- 
tion  of   the   two   years   and   the   em- 
ployment is  thereby   stopped.     Kins- 
man V.  Fisk,  37  N.  Y.  App.  Div.  443 
(1899).     The    president    and    general 
manager    of    an    insurance    company 
who  controls  it  by  proxies  and  who  has 
a  contract  giving  him  a  percentage  of 
the  insurance  premium  for  twenty-five 
years  and  who  four  years  before  its 
expiration  becomes  incapacitated  and 
sells   the   contract   to   another   party, 
and  causes  the  corporation  to  ratify  it, 
may  be  compelled  to  pay  over  such 
price    to    the    company.     Moulton    v. 
Field,  179  Fed.  Rep.  673  (1910).     An 
agreement  of  the  majority  stockholders 
in    four    newspaper    corporations,    by 
which  one  of  them  is  to  be  a  manager 
and  conduct  all  four  newspapers,  each 


to  be  managed  for  the  benefit  of  all, 
and  the  manager  is  to  be  allowed  to 
purchase  certain  of   the  stock   at   its 
appraised    value   which   is   much  less 
than  its  real  value,  was  against  public 
policy  and  void.     Scripps  v.  Sweeney, 
160  Mich.   148  (1910).     A  discharged 
employee  in  suing  for  wages  accruing 
after  his  discharge  need  not  give  credit 
for  salary  earned  from  a  corporation, 
in    the    stock    of    which    he    invested 
money  to  obtain  the  position,  the  entire 
transaction  being  a  loss  by  the  failure 
of  the  company.     Development  Co.  v. 
King,  170  Fed.  Rep.  923  (1909).     The 
agreement  of   promoters    to  a  person 
subscribing  for  stock  that  he  will  be 
given  a  position,  and  if  not,  they  Avill 
take  the  stock  off  his  hands,   is  not 
enforceable  if  he  is  given  a  position  and 
is    properly    discharged     for     incom- 
petency.    61     Fla.     267     (1911).     An 
owner  of  real  estate  who  deeds  it  in 
payment  for  stock  on  an  agreement 
that  the  seller  of  the  stock  shall  cause 
such  owner  to  be  elected  secretary  and 
attorney  of  the  company  at  a  lucrative 
salary  cannot  rescind  for  fraud,  such 
a   contract   being   contrary   to   public 
policy.     Gilchrist  v.  Hatch,  100  N.  E. 
Rep.   473    (Ind.    1913).     A   false  rep- 
resentation   of    the    vendor    that    the 
vendee     would     be     made     director, 
treasurer  and  business  manager  on  a 
salary  is  material  and  may  be  cause 
for  rescission.     Schwab  v.  Esbenshade, 
139    N.    W.    Rep.    420    (Wis.    1913). 
An  agreement  to  vote  in  a  particular 
way,  in  consideration  of  some  personal 
benefit,  is  illegal ;  for  a  vote  ought  to 
be  an  impartial   and   honest   exercise 
of   judgment.     Elliott    v.   Richardson, 
L.   R.  5  C.   P.  744   (1870).     See  also 
Moffatt  V.  Farquharson,  2  Bro.  C.  C. 
338  (1788) ;   Card  v.  Hope,  2  B.  &  Cr. 
661  (1824).     Compare  Bolton  v.  Mad- 
den, L.  R.  9  Q.  B.  55  (1873),  where  an 
agreement  between  two  subscribers  to 
a  charity  to  vote  for  each  other's  nomi- 
nees was  held  not  to  be  illegal.     A  con- 
tract by  which  a  stockholder  in  a  cor- 
poration agrees  to  secure  to  the  pur- 
chaser of  his  stock  a  corporate  office  at 
a  stated  salary,  and  in  case  of  his  re- 


1838 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  622a. 


the  vendors  of  the  entire  capital  stock  of  the  company  agree  that  the 
purchaser  shall  have  entire  control  and  management  of  the  business  for 
fifteen  months,  and  elect  officers  and  directors  during  that  time,  at  the 
end  of  which  time  he  is  to  pay  for  the  stock,  it  appearing  that  third 
parties  were  not  affected  thereby,  is  legal. ^     Where  all  the  stockholders 

moval  to  repurchase  the  stock,  is  void 
as  against  public  policy  and  as  a  fraud 
on  other  stockholders,  unless  it  is 
proved  that  the  transaction  is  not  for 
the  private  benefit  of  the  vendor,  or 
that  it  was  consented  to  bj^  the  other 
stockholders.  Guernsey  v.  Cook,  120 
Mass.  501  (1876);  Noyes  v.  Marsh, 
123  Mass.  286  (1877).  A  contract  to 
preserve  the  control  and  status  quo  was 
involved  in  Harris  i'.  Scott,  67  N.  H. 
437  (1873).  The  contract  provided 
for  voting  on  all  subjects,  for  salaries, 
and  for  sales  of  stock  before  and  after 
death.  The  court  refused  to  grant 
specific  performance  for  sale  after 
death.  Where  three  persons,  being 
the  owners  of  a  majority  of  the  stock, 
agree  that  they  will  vote  their  stock 
to  elect  as  directors  three  persons  to 
be  named  by  one  of  them,  and  two 
persons  to  be  named  by  the  others, 
and  that  one  of  them,  who  received  a 
salary  of  $2,500,  should  receive  a  sal- 
ary of  $5,000,  and  that  two  of  such 
directors  should  receive  a  salary  of 
$500  each,  the  agreement  is  illegal. 
Snow  V.  Church,  13  N.  Y.  App.  Div. 
108  (1897).  A  contract  by  which  a 
purchaser  of  a  majority  of  the  stock 
of  three  corporations  agrees  that  the 
corporations  should  employ  the  seller 
of  the  stock  at  a  fixed  salary  for  a 
certain  time,  and  after  a  certain  time 
the  seller  to  have  a  salary  and  name 
one  half  of  the  directors,  is  illegal,  and 
cannot  be  enforced  by  the  vendor  as 
against  the  vendee,  even  though  the 
stock  has  been  delivered  and  paid  for 
under  such  agreement.  Fennessy  v. 
Ross,  5  N.  Y.  App.  Div.  342  (1896). 
A  contract  of  sale  of  stock  whereby 
the  vendee  is  to  be  voted  a  certain 
salary  and  an  equal  representation  in 
the  board,  and  in  case  either  party 
wishes  to  sell  stock  it  is  first  to  be 
offered  to  the  other  party  at  a  fixed 
price,  is  void  as  an  attempt  to  barter 
away  the  offices.  Fennessy  v.  Ross, 
90  Hun,   298    (1895).     Where  a  part 


of  the  consideration  of  a  contract  in 
X'egard  to  voting  stock  in  a  certain 
way  is  that  one  of  the  parties  shall 
be  given  an  official  position  in  the 
corporation  at  a  salary,  the  contract 
is  void  and  unenforceable.  Gage  v. 
Fisher,  5  N.  Dak.  297  (1895).  In  the 
case  Witham  v.  Cohen,  100  Ga.  670 
(1897),  a  stockholder  who  had  ob- 
tained proxies  from  most  of  the  other 
stockholders,  on  an  agreement  by 
which  he  was  to  become  president  on 
a  certain  salary,  was  held  to  have  a 
right  of  damages  against  a  stockholder 
whose  stock  he  had  pm-chased,  but 
who,  nevertheless,  had  given  a  proxy 
to  some  other  person.  A  person  who 
contracts  to  purchase  stock  may  de- 
fend against  an  action  for  the  price 
by  setting  up  that  the  vendor  falsely 
represented  that  the  vendee  was  about 
to  be  deprived  of  the  presidency  of 
the  company ;  and  that  thereby  the 
vendee  was  induced  to  make  the  con- 
tract of  purchase  at  an  unconscionable 
price.  Delano  v.  Rice,  23  N.  Y.  App. 
Div.  327  (1897).  Where  the  agree- 
ment was  to  keep  the  vendor  in  a  pro- 
fessorship, the  court  will  not  aid  the 
parties.  The  agreement  is  against 
public  policy.  Jones  v.  Scudder,  2 
Cin.  Super.  Ct.  178  (1872). 

1  Borland  v.  Prindle,  etc.  Co.,  144 
Fed.  Rep.  713  (1906).  The  majority 
stockholders  may  contract  with  the 
remaining  stockholders  that  the  latter 
should  vote  all  the  stock,  and  collect 
the  dividends,  and  pay  the  former  a 
specified  sum  monthly,  and  also  pay 
all  assessments  on  the  stock,  and  debts 
incurred  during  the  duration  of  the 
contract.  White  v.  Snell,  35  Utah,  434 
(1909).  A  person  owning  a  majority 
of  the  stock  of  a  coal  company  which  is 
in  a  receiver's  hands  may  make  a  con- 
tract with  his  lawyers  by  which  they 
loan  the  necessary  funds  to  the  com- 
pany and  are  to  receive  a  proportion  of 
the  stock  and  are  also  to  have  the  vote 
on  the  remainder  of  the  stock  until  the 


1839 


§  622a.] 


ELECTIONS 


CORPORATE   MEETINGS. 


[CH.  XXXVII. 


join  in  selling  a  majority  of  the  stock  to  another  person,  it  is  legal  to 
provide  in  the  contract  that  the  vendors  shall  continue  to  be  officers 
for  five  years  at  specified  salaries,  all  creditors  having  been  paid.^     Even 


company  is  solvent.  Winsor  v.  Com- 
monwealth Coal  Co.,  63  Wash.  62 
(1911).  In  the  reorganization  of  an 
insolvent  corporation  by  sealing  down 
its  securities  and  stock,  it  is  legal  to 
provide  that  the  company  shall  be 
managed  by  a  committee  of  five,  three 
selected  by  the  creditors  and  two  by 
the  stockholders,  until  the  creditors 
are  paid.  Ecker  v.  Kentucky  Re- 
fining Co.,  144  Ky.  264,  (1911).  In 
the  case  Warren  v.  Pim,  66  N.  J.  Eq. 
353  (1904),  Mr.  Justice  Swayze  said: 
"Can  it  be  contended  that,  if  a  corpora- 
tion finds  it  necessary  to  borrow  money 
upon  bonds  issued  for  a  long  term  of 
years,  the  stockholders  cannot,  con- 
sistently with  public  policy,  in  order 
to  secure  the  loan,  vest  the  manage- 
ment of  the  corporation  in  hands 
satisfactory  to  the  lenders  and  for  a 
term  commensurate  with  the  loan?" 
Where  minority  stockholders  agree  to 
finance  the  company  if  they  are  given 
control  of  its  business  and  under  such 
agreement  do  finance  the  company  and 
the  majority  stockholders  then  take 
control,  the  minority  stockholders  may 
have  a  receiver  appointed,  if  the  com- 
pany is  not  able  to  repay  money  ad- 
vanced on  their  credit.  Wood,  etc. 
Co.  V.  American,  etc.  Co.,  62  Atl.  Rep. 
768  (N.  J.  1906).  A  company  cannot 
contract  not  to  alter  a  by-law  which 
provides  that  a  certain  vendor  of  prop- 
erty to  the  corporation  shall  be  govern- 
ing director  and  shall  have  the  power 
to  appoint  other  directors  and  to  re- 
move them  at  any  time,  even  though 
such  contract  is  contained  in  the  by- 
laws themselves.  Punt  v.  Symons  & 
Co.,  Ltd.,  [1903]  2  Ch.  506.  An  agree- 
ment between  the  corporation  and 
some  of  its  stockholders,  by  which  the 
latter  contribute  a  part  of  their  stock  as 
treasury  stock,  on  condition  that  they 
shall  continue  to  be  directors  and 
officers  for  a  certain  time  is  illegal 
under  a  statute  requiring  such  officers 
to  be  elected  annually  by  the  stock- 
holders, and  hence  even  if  the  cor- 
poration accepts    the  stock    and  sells 


it  and  does  not  retain  such  persons 
in  their  offices,  they  cannot  hold  it 
liable  in  damages,  nor  in  claim  and 
delivery,  nor  for  conversion,  nor  on 
contract.  Glass  v.  Basin,  etc.  Co.,  31 
Mont.  21  (1904).  A  contract  between 
a  New  Jersey  land  company  and  a 
railroad  company  by  which  the  latter 
loans  money  to  the  former  and  for 
six  years  is  to  name  three  of  the  seven 
directors,  one  of  the  three  to  be  presi- 
dent and  general  manager,  and  the 
other  four  directors  to  be  satisfac- 
tory to  it,  is  illegal,  even  though  a 
majority  of  the  stock  of  the  New  Jersey 
company  is  pledged  to  the  railroad 
company  to  secure  the  loans  and  is  to 
be  voted  by  the  railroad  company. 
A  minority  stockholder  of  the  land 
company  may  maintain  a  bill  to  cancel 
such  a  contract.  Holt  v.  California, 
etc.  Co.,  161  Fed.  Rep.  3  (1908). 
Where  all  the  stockholders  and  direc- 
tors of  a  planing  mill  corporation  turn 
its  property  over  to  a  person  to  oper- 
ate and  give  him  an  option  on  their 
stock,  the  fact  that  he  failed  in  the 
management  does  not  render  hira 
liable  in  damages,  no  fraud  being 
proved.  Ring  v.  Brown,  84  Neb. 
589  (1909).  In  the  case  Arkansas,  etc. 
Co.  V.  Ft.  Lyon,  etc.  Co.,  173  Fed.  Rep. 
601  (1909),  complainant,  a  quasi-public 
irrigation  company,  sued  for  specific 
performance  of  a  contract  with  a  land 
company,  and  the  latter  set  up  that 
by  the  contract  it  had  a  right  to  name 
two  of  the  five  directors  bf  the  former, 
and  it  appeared  that  in  addition  there- 
to by  cumulating  its  votes  under  the 
Colorado  statute,  it  might  elect  one 
other  director,  thus  controlling  the 
former,  but  the  court  in  decreeing 
specific  performance  did  not  pass  upon 
this  provision  of  the  contract,  because 
the  other  stockholders  were  not  made 
parties. 

1  Kantzler  v.  Benzinger,  214  111.  589 
(1905).  Where  a  person  sells  the  entire 
capital  stock  and  takes  it  back  as 
security  for  payment  of  part  of  the  pur- 
chase  price,   together  with  an  agree- 


1840 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  622a. 


though  the  statute  provides  that  each  stockholder  shall  have  as  many 
votes  as  he  owns  shares  of  stock,  a  by-law  and  contract  that  certain 
persons  shall  name  two  out  of  five  directors  are  legal. ^  An  agreement 
of  persons  as  a  condition  of  their  election  that  the  bank  should  extend 
to  a  certain  party  credit  for  loans  at  a  specified  rate  of  interest  is  illegal.^ 
But  a  stockliolder  in  a  bank  in  selling  some  of  his  stock  may  agree  that 
the  purchaser  shall  be  cashier  five  years,  and  may  agree  to  take  back 
the  stock  at  the  end  of  that  time  at  the  same  price,  where  such  agree- 
ment is  in  good  faith  and  for  the  purpose  of  benefiting  the  bank  and 
does  benefit  it.^  Where  part  of  the  consideration  in  the  sale  of  stock 
is  that  the  vendor  resign  an  office  in  the  company,  and  the  vendee  be 
elected  in  his  place,  and  this  has  been  carried  out,  the  vendee  cannot 
rescind  for  fraud  unless  he  resigns  the  position  or  does  something 
towards  restoring  the  vendor  to  his  former  position.^  An  agreement 
by  a  stockholder  to  give  a  person  part  of  his  stock  if  such  person  accept 
the  position  of  a  director  is  not  necessarily  against  public  policy.^  A 
contract  by  which  stock  is  contributed  for  the  purpose  of  developing 
the  business  of  the  company  is  legal.®  But  the  common  undertaking 
must  be  a  legal  one.^  The  vendor  of  stock  may  of  course  agree  to  vote 
as  the  vendee  wishes.^     Closely  connected  with  the  above  principles 


ment  that  he  shall  remain  treasurer, 
director,  and  financial  manager,  and  he 
is  afterwards  ousted  from  those  posi- 
tions, he  may  apply  to  the  court  to  be 
reinstated  and  the  agreed  salary  paid. 
Goetzinger  v.  Donahue,  138  Wis.  103 
(1909). 

*  Colonist,  etc.  Co.  v.  Dunsmuir,  32 
Can.  S.  C.  Rep.  679  (1902). 

2  Blue  V.  Capital  Nat.  Bank,  145 
Ind.  518  (1896).  A  person  who  loans 
a  sum  of  money  to  a  corporation  on 
the  agreement  of  its  directors  that  he 
was  to  be  assistant  secretary  at  a 
specified  salary,  may  recover  back  the 
money.  Meridian,  etc.  Co.  v.  Eaton, 
41  Ind.  App.  118  (1907). 

3Bonta  V.  Gridley,  77  N.  Y.  App. 
Div.  33  (1902).  In  a  suit  by  a  vendee 
for  fraud  inducing  the  purchase  of 
stock  it  may  be  proved  that  the  vendor 
promised  that  the  corporation  would 
employ  the  vendee  as  secretary  and 
treasurer  at  a  specified  salary,  and 
that  this  promise  was  not  carried  out, 
such  promise  not  being  the  main 
fraud  complained  of.  McDonald  v. 
Smith,  139  Mich.  211   (1905). 

*  Gassett  v.  Glazier,  165  Mass.  473 


(1896).  A  going  corporation  may  pur- 
chase stock  owned  by  its  president 
in  order  to  terminate  his  contract  of 
employment  and  obtain  his  resigna- 
tion as  president,  where  the  contract 
is  a  fair  one  and  another  party  had 
agreed  to  purchase  such  stock  from 
the  corporation  at  once  and  subscribe 
for  further  capital  stock.  Joseph  v. 
Raff,  82  N.  Y.  App.  Div.  47  (1903)  ; 
aff'd,  176  N.  Y.  611. 

^Almy  V.  Orne,  165  Mass.  126 
(1896). 

«  See  §§  76,  334,  supra. 

^  If  the  purpose  is  to  rob  a  railroad 
and  bribe  a  judge,  the  court  will  aid 
no  one.  Tobey  v.  Robinson,  99  111. 
222  (1881).     Cf.   §  39,  supra. 

^  An  agreement  by  a  vendor  of 
stock,  which  is  to  be  delivered  after 
an  election,  that  he  will  vote  as  the 
vendee  desires,  is  legal.  Mobley  v. 
Morgan,  6  Atl.  Rep.  694  (Pa.  1886). 
One  corporation  issuing  its  stock  as 
security  to  another  may  agree  that 
the  latter  shall  hold  and  vote  the 
stock  of  and  in  the  former.  Tona- 
wanda,  etc.  R.  R.  v.  New  York,  etc. 
R.  R.,  42  .Hun,  496  (1886). 


(116) 


1841 


§  6226. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  xxxvir. 


of  law  is  the  question  whether  a  director  or  stockholder  may  vote  his 
stock  in  favor  of  a  sale  of  corporate  property  to,  or  a  purchase  of  prop- 
erty for  the  corporation  from,  another  corporation  in  which  such  direc- 
tor or  stockholder  is  interested  as  a  stockholder.  The  general  rule  is 
that  a  contract  between  two  corporations  having  certain  stockholders  or 
directors  in  common  will  be  sustained  by  the  courts  if  the  contract  is 
fair  towards  the  minority  stockliolders.  If  it  is  so  unfair  as  to  amount 
to  a  fraud,  the  courts  will  set  it  aside  upon  the  complaint  of  the  minority 
stockholders.^ 

Sometimes  an  attempt  is  made  to  tie  up  the  control  of  a  company 
by  restricting  any  increase  in  the  number  of  directors  or  amending  the 
certificate  of  incorporation  in  other  respects.  Thus  a  statute  that  the 
number  of  directors  may  be  increased  by  a  vote  of  a  majority  in  interest 
of  the  stock  does  not  render  illegal  a  provision  in  the  certificate  of  in- 
corporation that  the  directors  shall  not  be  increased  except  upon  the 
unanimous  vote,  the  statute  allowing  the  insertion  of  special  provisions 
in  the  certificate  of  incorporation.  The  court  held  that  the  provision 
was  a  limitation  instead  of  an  increase  of  power.^ 

§  6226.  Restrictions  on  the  right  to  vote.  —  At  common  law  it  is 
legal  for  a  corporation,  upon  issuing  preferred  stock,  to  impose  a  condi- 
tion that  such  stock  shall  not  have  any  right  to  vote.^     It  is  legal  also 


*  See  §  662,  infra.  A  stockholder 
may  vote  on  a  question  in  which  he 
has  a  personal  interest  other  than  his 
interests  as  a  stockholder.  Middleton 
V.  Arastraville,  etc.  Co.,  146  Cal.  219 
(1905). 

2  Ripin  V.  Atlantic  Mercantile  Co., 
205  N.  Y.  442  (1912).  Where  the 
statute  authorizes  the  stockholders  to 
change  the  number  of  directors  by  a 
vote  of  a  majority  in  interest,  a  by-law 
requiring  ninety  per  cent,  in  interest 
is  illegal.  Katz  v.  The  H.  &  H.,  etc. 
Co.,  183  N.  Y.  578  (1905).  Even 
though  an  agreement  for  organizing  a 
company  to  take  over  the  property  of 
several  companies  provides  for  twelve 
directors,  this  does  not  prevent  the 
corporation  reducing  the  number  of 
directors  as  allowed  by  statute,  espe- 
cially where  the  corporation  has  not 
ratified  the  agreement,  although  the 
reduction  in  the  number  of  directors 
would  modify  the  power  of  cumulative 
votes.  Mox-eover,  a  stockholder's  in- 
junction against  the  reduction  is  not 
sufficient  if  it  is  against  the  corpora- 
tion only.     Bond  v.  Atlantic,  etc.  Co., 


137  N.  Y.  App.  Div.  671  (1910). 
Where  the  statute  provides  that  a 
majority  of  the  stock  present  shall  be  a 
quorum,  a  by-law  cannot  require  a 
majority  of  all  the  stock  to  be  present. 
Clark  1'.  Wild,  81  Atl.  Rep.  536  (Vt.  1911). 
'  Preferred  stock  may  by  the  terms 
of  its  original  issue  be  deprived  of 
voting  power,  even  though  the  statutes 
provide  for  each  stockholder  casting 
as  many  votes  as  he  has  shares.  State 
V.  Swanger,  190  Mo.  561  (1905).  Pre- 
ferred stock  may  be  issued  without 
voting  power,  if  so  provided  in  the 
certificate  of  incorporation  under  tha 
Delaware  statute  authorizing  restric- 
tions on  the  voting  power,  even  though 
the  constitution  provides  that  each 
share  shall  have  one  vote.  This  is 
merely  a  waiver  by  the  stockholder  of 
a  privilege  which  he  had.  -State  v. 
Brooks,  74  Atl.  Rep.  37  (Del.  1909). 
It  is  legal,  upon  the  issue  of  preferred 
stock,  to  provide  that  it  shaU  not 
vote  at  corporate  elections.  Such  a 
provision  wiU  be  upheld.  Miller  v. 
Ratterman,  47  Ohio  St.  141  (1890). 
See  also  §  269,  supra. 


1842 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE   MEETINGS.  [§  6226. 

for  the  corporation,  with  the  assent  of  all  stockholders,  to  give  to  bonds 
a  voting  power,^  although  a  contrary  rule  has  been  reached  in  Illinois 
under  a  statute  to  the  effect  that  elections  shall  be  by  the  stockholders 
and  not  otherwise.^  There  is  no  rule  of  public  policy  which  forbids  a 
corporation  and  its  stockholders  from  making  any  contract  they  please 
in  regard  to  restrictions  on  the  voting  power.^  If  the  agreement  is 
made  by  unanimous  consent  it  is  legal.  Such  restrictions,  however, 
generally  are,  and  always  should  be,  printed  on  the  certificates  of  stock, 
so  that  a  purchaser  may  take  with  full  notice.  A  provision  in  a  certifi- 
cate of  incorporation  that  directors  named  therein  shall  continue  until 
they  become  incapacitated,  resign,  or  die,  is  void  and  does  not  prevent 
an  election."  But  where  the  statutes  allow  the  incorporators  to  insert 
in  the  charter  any  provision  relative  to  the  powers  of  the  company,  or 
of  its  stockholders  and  directors,  the  right  to  vote  may  be  withheld 
from  the  stockholders  until  a  certain  date,  thus  leaving  the  first  directors 
in  oflBce  during  the  intervening  time,  and  a  further  provision  that  during 
that  time  the  directors  may  do  any  act  which  the  stockholders  might 
do  enables  them  to  sell  all  the  property,  where  that  was  the  chief  pur- 
pose of  the  corporation,  and  the  corporation  was  unable  to  develop 
the  property.^  A  by-law  passed  at  the  time  of  the  organization  of  the 
company  may  limit  the  number  of  votes  which  a  single  stockholder 
may  cast ;  ^    unless,  of  course,  the  statutes  provide  to  the  contrary.^ 

1  In  State  v.  McDaniel,  22  Ohio  St.     Rockingham,     etc.    Co.,     150    N.    C. 
354  (1872),  the  bondholders  on  a  re-    776  (1909). 

organization  were   given  by    contract         *  State  v.  Anderson,  31   Ind.   App. 

the  power  to  vote,  and  the  court  up-  34  (1903). 

held  such  contract  right.  In  Phillips  *  Union  T.  Co.,  etc.  v.  Carter,  139 
V.  Eastern  R.  R.,  138  Mass.  122  (1884),  Fed.  Rep.  717  (1905). 
the  court  passed  upon  a  statutory  «  A  by-law  may  provide  that  stock- 
scheme  in  which  the  creditors  of  a  holders  shall  have  one  vote  for  each 
railroad  company,  by  the  terms  of  a  share  held  by  them  up  to  ten  shares, 
mortgage,  chose  two  thirds  of  the  and  may  fix  the  proportion  which 
directors  and  the  stockholders  chose  their  votes  shall  bear  to  their  shares 
one  third  until  the  debt  was  reduced  above  that  number.  Commonwealth 
to  a  certain  figure.  v.  Detwiller,   131   Pa.  St.  614   (1890). 

2  A  contract  and  by-law  giving  a  Cf.  notes  below. 

voting  power  to  bondholders  at  cor-  ^A  by-law  restricting  the  right  of 

porate    elections    is    void    as    against  members  of  a  church  to  vote  as  au- 

public  policy  and  the  statutes,  where  thorized   by  statute   is  void.     People 

the  statutes  prescribe  that  the  direc-  v.   Phillips,    1    Denio,   388    (1845).     A 

tors  shall  be  elected  by  the  stockholders  by-law  restricting  the  right  of  electors 

and  shall  not  be  elected  in  any  other  in  a  town  to  vote  is  not  good.     Rex 

manner.     Durkee   v.   People,    155   111.  v.  Spencer,  3  Burr.  1827  (1766) ;    Rex 

354  (1895),  aff'g  s.  c,  53  111.  App.  396  v.   Head,  4  Burr.   2515,  2521    (1770). 

(1393)  See  also   §  4a,  supra;    People  v.   Kip, 

3  Quoted  and  approved  in  State  v.  4  Cow.  382,  note  (1822),  holding  that 
Swanger,  190  Mo.  561  (1905).  Re-  a  corporation  has  no  power,  by  a  by- 
strictions  on  the  right  to  vote  are  not  law,  to  demand  an  oath  of  a  stock- 
favored  by   the    court.     Sheppard    v.  holder  in  order  to   test  his  qualifiea- 

1843 


§  6226. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


Under  the  partnership  association  statute  of  Pennsylvania,  a  by-law 
may  be  enacted  taking  away  the  voting  power  from  any  stock  which  is 
sold,  even  though  it  is  purchased  by  an  existing  member.^  All  this  is  a 
matter  of  private  contract.^  Where  the  charter  limits  the  number 
of  votes  which  one  stockholder  may  cast,  the  provision  cannot  be 
evaded  by  transfers  to  various  persons.  The  courts  will  enjoin  the  voting 
of  the  stock.^  Under  the  reserved  right  to  amend,  the  legislature  may 
change  the  charter  of  a  library  corporation,  so  that  each  share  shall 
have  one  vote,  instead  of  restricting  the  vote  of  those  who  held  more 
than  five  shares. "*    A  by-law  that  all  purchasers  of  stock  shall  agree 


tions  as  a  voter.  Where  the  charter 
authorizes  depositors  and  stockholders 
to  elect  new  members,  the  directors 
cannot  by  by-law  exclude  the  former 
from  elections  and  give  a  veto  to 
stockholders  only.  Commonwealth  v. 
Gill,  3  Whart.  (Pa.)  228  (1837). 

1  Carter  v.  Producers'  Oil  Co.,  182 
Pa.  St.  551  (1897). 

2  Subscribers  to  stock  may  make  a 
contract  by  which  they  divide  their 
subscriptions  with  others  and  agree 
that  no  person  should  hold  more  than 
a  certain  amount  of  stock.  Hladovee 
V.  Paul,  222  111.  254  (1906). 

3  Mack  V.  De  Bardeleben,  etc.  Co., 
90  Ala.  396  (1890).  Where  stock  has 
been  transferred  in  order  to  give  it 
a  vote,  the  transferrer  having  already 
all  tjie  stock  that  the  charter  allows 
one  stockholder  to  vote,  the  transfer 
being  merely  nominal  and  for  voting 
purposes  only,  an  injunction  will  issue 
against  its  being  voted.  Webb  v. 
Ridgely,  38  Md.  364  (1873),  where 
stock  had  been  colorably  transferred 
without  consideration  for  the  purpose 
of  controlling  an  election,  there  being 
a  provision  in  the  charter  prohibiting 
a  single  stockholder  from  voting  on 
more  than  twenty  shares.  Where 
valuable  privileges  other  than  voting 
attach  to  stock,  a  nominal  transfer 
to  obtain  these  privileges  will  not  be 
sustained  as  regards  them.  Baker's 
Appeal,  108  Pa.  St.  510  (1885),  where 
free  admission  to  a  theater  was  given 
to  stockholders.  Although  a  person 
transfers  stock  to  another  in  order  to 
evade  a  statute  which  prohibits  any 
one   stockholder  from  voting   on  any 


more   than  one  eighth  of   the  capital 
stock,  yet  the  person  to  whom  it  is 
transferred  may  make  a  valid  agree- 
ment to  retransfer  the  same  and  the 
court    will    enforce    this    agreement. 
Scott  V.  Scott,  68  N.  H.  7  (1894).     Al- 
though the  charter  limits  each  person 
to  one  hundred   votes,   yet   a   person 
voting  a  hundred  votes  in  his  own  name 
may  vote  another  hundred  as  proxy 
for  his  wife,  if  it  is  bona  fide  her  prop- 
erty.    Conant  v.  Millaudon,  5  La.  Ann. 
542  (1850).     Where  the  charter  limits 
the  amount   of  stock  which  a  single 
person  may  hold,  his  vote  is  limited  to 
that  amount,  and  the  provision  cannot 
be  evaded  by  his  holding  and  voting 
stock  in  the  name  of  another  person. 
Bartlett  v.  Fourton,  115  La.  26  (1905). 
A  statute  which  confines  the  right  to 
vote  to  stockholders  who  are  citizens 
of  the  state  by  which  the  corporation 
is    chartered    cannot    be    evaded    by 
colorable   transfers   of   shares   to  resi- 
dents of  the  state  merely  for  the  pur- 
pose   of    having    them    voted    upon. 
State  V.  Hunton,  28  Vt.   594   (1856). 
Such  a  statute  would  now,  however, 
probably   be   held    to   be   unconstitu- 
tional.    See    §  813,    infra,   relative   to 
statutes  prohibiting  citizens  of  other 
states  from  being   trustees.     But   see 
Campbell  v.  Poultney,  6  G.  &  J.  94 
(1834).     In   England  it  is  not  illegal 
to    transfer  or  procure   shares   before 
a    meeting    so    as    to    multiply    votes 
at  it :    nor  can  votes  so  obtained  be 
disregarded.     They  may  be  cast.     Pen- 
der V.  Lushington,  L.  R.  6  Ch.  D.  70 
(1877) ;  fi£'StrantonIron,etc.Co.,L.R. 
16  Eq.  559  (1873) ;  Cannon  v.  Trask, 


*  Rankin  v.  Newark,  etc.  Assoc,  64  N.  J.  L.  625  (1900). 
1844 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE   MEETINGS.  [§  622c. 

that  the  stock  shall  be  voted  in  favor  of  increasing  the  capital  stock  is 
void  as  in  restraint  of  trade  and  as  an  unreasonable  limitation  on  the 
voting  power  of  a  stockholder.^  A  statute  prohibiting  a  stockholder 
from  voting  "  whose  liability  is  past  due  and  unpaid  "  refers  to  a  sub- 
scription liability  and  not  to  a  commercial  liability.^  Even  though  the 
purchaser  of  forfeited  stock  may  not  be  liable  for  unpaid  calls,  yet,  under 
the  charter,  he  may  be  unable  to  vote  such  stock,  unless  he  pays  such 
unpaid  calls.^ 

The  right  to  vote  is  generally  restricted  by  the  charter  to  those  who  are 
registered  stockholders.^  In  some  states  the  right  to  vote  is  limited  to 
those  who  have  been  stockliolders  of  record  for  a  certain  number  of 
days  before  the  election.^  A  statute  that  inspectors  of  election  must 
allow  the  beneficial  owner  of  stock  to  vote  it  overrides  a  by-law  that  no 
stock  shall  be  voted  except  by  the  registered  owner  for  twenty  days 
prior  to  the  election.^  A  provision  in  the  certificate  of  organization 
limiting  votes  to  stock  that  has  been  held  for  a  year  is  illegal  where  the 
statute  gives  each  member  a  vote.^  Where  a  company  attaches  condi- 
tions to  its  acceptance  of  a  subscription,  the  subscriber  is  not  entitled 
to  vote  until  the  conditions  are  complied  with.^ 

§  622c.  Contracts  between  stockholders  not  to  sell  their  stock  except 
to  each  other  or  on  condition  that  the  purchaser  will  purchase  all 
of  the  stock.  —  A  stockholder  has  a  right  to  sell  his  stock  at  any 
time  and  to  whomsoever  he  pleases  without  regard  to  other  stockholders. 
Even  though  he  owns  a  majority  of  the  stock  there  is  no  principle  of  law 
obliging  him  to  provide  for  the  sale  of  others'  stock  when  he  sells  his 
own.^  Hence,  contracts  are  often  entered  into  between  a  portion  or 
all  of  the  stockholders  of  a  corporation  to  the  effect  that  they  will  hold 
and  sell  their  stock  together.     Such  a  contract  is  legal. ^°    The  difficulty 

L.  R.  20  Eq.  669  (1875) ;    Moffatt  v.  stockholder  is,  by  virtue  of  his  owner- 

Farquhar,  L.  R.  7  Ch.  D.  591  (1878) ;  ship  of  stock,   bound   to  continue  in 

and   see   North-West   Transp.    Co.    v.  the   holding   of   it   in   order   to   allow 

Beatty,  L.  R.  12  App.  Cas.  589  (1887).  another  stockholder  to  make  a  profit 

»  McNulta  V.  Corn  Belt  Bank,  164  out  of  negotiations  then  pending.  .  .  . 

111.  427  (1897).  We  do  not  understand  that  a  stock- 

2  U.  S.  V.  Barry,  36  Fed.  Rep.  246  holder  is  under   obligations,   legal   or 
(1888).  moral,    to    sacrifice    his    personal    in- 

3  Randt,    etc.    Co.    v.    Wainwright,  terests  in  order  to  secure  the  welfare 
[1901]  1  Ch.  184.  of  the  corporation  of  which  he  is  a 

^  See  §  611,  swpra.  stockholder,     or     to     enable     another 

"See  §  611,  supra.  stockholder  to  make  gains  and  prof- 

6  Commonwealth  v.  Roydhouse,  233  its."     Farmers'   L.   &  T.   Co.   v.   Chi- 

Pa.  St.  234  (1911).  cago,  etc.  Ry.,  163  U.  S.  31,  44  (1896). 

'  Re  United   Towns,  etc.  Ass'n,  79  i"  In  Havemeyer  v.  Havemeyer,  43 

N.  J.  L.  310  (1909).  N.  Y.  Super.  Ct.  506  (1878) ;   s.  c,  45 

8  Spitzel  V.  Chinese  Corporation,  80  N.   Y.   Super.   Ct.   464   (1879)  ;•    aff'd, 

•  L.  T.  Rep.  347  (1899).  86  N.  Y.  618  (1881),  it  was  held  that 

«  "We  do  not  understand  that  one  an  agreement  of  several  stockholders 

1845 


§  622c. 


ELECTIONS 


CORPORATE   MEETINGS. 


[cH.  xxxvir. 


with  such  a  contract,  however,  is  that  upon  a  breach  thereof  only  the  ac- 
tual loss  suffered  and  not  the  full  value  of  the  stock  of  the  injured  party 
is  recoverable  in  damages.^  Hence,  such  a  contract  should  contain  a  pro- 
vision obligating  the  selling  stockliolder  to  buy  the  stock  of  the  others.^ 
Another  form  of  contract  is  to  the  effect  that  before  any  of  the  stock- 
holders sell  their  stock  they  shall  first  offer  it  to  the  other  stockholders. 
This  kind  of  surplusage  contract  also  is  legal  and  will  be  enforced  by 
the  courts.^    A  contract  wherebv  a  stockholder  desiring  to  sell  must 


not  to  sell  their  own  stock  except  in 
connection  with  that  of  the  other  par- 
ties to  the  contract  was  not  in  re- 
straint of  trade  and  was  not  contrary 
to  public  policy,  as  restricting  the 
right  of  alienation,  but  the  measure 
of  damages  for  breach  of  such  a  con- 
tract is  only  the  actual  loss  suffered 
by  a  decline  in  the  value  of  the  stock 
by  reason  of  the  breach.  See  also 
Griffith  V.  Jewett,  15  W.  L.  BuU.  419 
(1886). 

1  See  pp.  1848-1849,  infra. 

2  For  form  of  contract  by  majority 
stockholder  that  in  case  of  sale  the 
minority  stock  shall  receive  the  same 
price,  see  Vol.  V,  infra. 

'  In  the  case  Jones  v.  Brown,  171 
Mass.  318  (1898),  in  a  close  corpora- 
tion, the  stockholders  made  a  contract, 
the  essential  parts  of  which  are  set 
forth  in  the  opinion  of  the  court,  pro- 
viding for  the  purchase  of  the  stock 
of  a  certain  stockholder  in  case  of 
his  death,  and  for  the  purchase  of 
the  stock  of  any  other  stockholder 
who  ceased  to  be  connected  -nnth  the 
corporation.  The  former  stockholder 
having  died,  the  court  granted  specific 
performance  of  the  contract  and  com- 
pelled his  estate  to  deliver  the  stock 
upon  payment  of  the  specified  price. 

Where  one  person  advances  money 
to  another  to  purchase  a  certain  stock 
on  an  agreement  that  they  will  co- 
operate, and  in  case  the  latter  wishes 
to  sell  he  will  not  sell  to  unfriendly 
parties  without  giving  the  former  the 
first  chance  to  purchase,  and  the  stock 
is  in  the  possession  of  the  former  as 
security  for  the  loan,  a  sale  by  the 
latter  to  an  unfriendly  party  with 
notice  of  the  facts  is  not  sufficient  to 
sustain  a  bill  in  equity  to  compel  the 
first-named     party     to     transfer     the 


stock  to  such  purchaser.  The  court 
said:  ."One  or  more  stockholders  ia 
a  corporation  may  agree  to  stand  to- 
gether in  carrying  out  an  honest  busi- 
ness policy  consistent  with  what  they 
believe  to  be  to  the  best  interests  of 
all  the  stockholders.  This  was  not 
a  pooling  agreement,  to  vest  the  gov- 
ernment of  the  corporation  for  a  time 
in  certain  members  of  it,  or  to  yield 
the  control  to  a  few  who  might  domi- 
nate, regardless  of  the  interests  of 
the  many.  It  was  intended  to  main- 
tain a  status  of  independence  for  the 
railway  company  that  it  might  be 
operated  under  the  purposes  of  its 
charter."  Rigg  v.  Reading,  etc.  Ry., 
191  Pa.  St.  298  (1899). 

Where,  in  order  "to  enable  the  com- 
pany to  keep  its  stock  in  the  owner- 
ship of  stockholders  of  its  own  choos- 
ing," each  stockholder  enters  into  an 
agreement  with  the  corporation  that 
in  case  he  wishes  to  sell  his  stock  it 
shaU  first  be  appraised  and  then  of- 
fered to  the  corporation  before  it  is 
offered  to  any  one  else,  the  refusal 
of  the  board  of  directors  to  make 
an  appraisal,  in  accordance  with  the 
agreement,  does  not  render  the  cor- 
poration liable  in  damages,  inasmuch 
as  it  is  clear  that,  even  though  the 
stock  were  appraised,  the  corporation 
would  not  buy  it.  Whiton  v.  Batch- 
elder,  etc.  Corp.,  179  Mass.  169  (1901). 
A  court  will  enjoin  a  party  from  vot- 
ing upon  or  disposing  of  his  stock 
in  the  corporation  pendente  lite  where 
the  plaintiffs  show  that  they  trans- 
ferred the  stock  to  the  defendant  on 
the  latter's  agreement  not  to  sell  the 
same,  except  with  the  consent  of  the 
former,  and  that  when  he  did  sell 
the  stock  three  fourths  of  the  pro- 
ceeds should  apply  to  the  former,  and 


1846 


CH.   XXXVII. 


ELECTIONS 


CORPORATE   MEETINGS. 


[§  622c. 


first  offer  his  stock  to  the  other  stockholders  is  not  contrary  to  pubHc 
poUcy.^ 


it  appearing  further  that  the  defend- 
ant had  given  the  stock  to  his  sister 
without  consideration.  Weston  i'. 
Goldstein,  39  N.  Y.  App.  Div.  661 
(1899).  Where  the  majority  stock- 
holders agree  in  writing  that  for  three 
years  they  will  give  each  other  proxies 
on  their  stock  to  vote  at  elections, 
and  during  that  time  will  not  sell 
their  stock  unless  all  agree  thereto, 
and  further,  that  if  any  one  desires 
to  sell  he  will  first  offer  his  stock 
to  the  others,  specific  performance  by 
way  of  injunction  against  a  sale  with- 
out the  consent  of  the  others  will  not 
be  granted  where  at  the  time  of  trial 
the  three  years  have  already  elapsed. 
The  remedy,  if  there  is  any,  is  at  law. 
Brown  v.  Britton,  41  N.  Y.  App.  Div. 
57  (1899).  Where  a  partnership  is 
transformed  into  a  corporation  and 
the  two  partners  agree  that  one  shall 
have  1,000  shares  of  the  stock  and 
the  other  998  shares  and  a  third  per- 
son two  shares,  and  the  first  partner 
agrees  that  in  case  he  sells  his  998 
shares  he  will  transfer  the  other  two 
shares  to  his  partner,  such  agreement 
does  not  prevent  the  first  partner  from 
transferring  single  shares  to  qualify 
new  trustees,  inasmuch  as  the  agree- 
ment does  not  prohibit  his  selling  less 
than  998  shares.  Burden  v.  Burden, 
159  N.  Y.  287  (1899).  Where  a  cor- 
poration having  treasury  stock  in  its 
treasury  sells  all  its  assets  to  another 
corporation,  excepting  its  patent  rights, 
such  sale  is  not  a  sale  of  the  treasury 
stock  within  the  meaning  of  a  prior 
stock-pooling  contract  of  the  old 
corporation  that  certain  other  stock 
should  be  sold  before  such  treasury 
stock  was  sold.  Myers  v.  Buell, 
67  N.  Y.  App.  Div.  290  (1901).  Even 
though  stockholders  agree  not  to  offer 
their  stock  to  others  without  first  of- 
fering it  to  one  another,  yet,  if  sub- 
sequently some  of  them  authorize  the 
others  to  do  as  they  think  best  in 
regard  to  the  matter,  and  the  latter 
dispose  of  some  of  the  joint  stock, 
they  are  protected  in  so  doing.  Smith 
V.  Bierce,  104  La.  96  (1900).  An  agree- 
ment of  stockholders  that  they  will  not 


sell  their  stock  except  to  the  others 
collectively  is  waived  if  they  consent 
to  a  sale  to  one  of  them.  Scripps  v. 
Sweeney,  160  Mich.  148  (1910).  A 
provision  in  a  certificate  of  stock  that  it 
shall  be  transferred  only  upon  consent 
of  the  board  of  directors  is  illegal,  but 
a  provision  that  the  corporation  shall 
have  a  right  to  repurchase  it  is  legal  if 
corporate  creditors  are  not  injured. 
Douglass  V.  Aurora,  etc.  Co.,  160  111. 
App.  506  (1911). 

1  The  various  stockholders  of  a  com- 
pany may  give  interchangeably  a  first 
option  of  thirty  days  to  purchase  their 
shares  of  stock  whenever  any  one 
desires  to  sell,  each  contracting  for 
himself,  the  contract  further  provid- 
ing that  such  thirty  days  were  to 
commence  in  ease  of  the  death  of  a 
stockholder,  so  far  as  his  stock  was 
concerned  ;  and  they  may  further  con- 
tract that  another  person  is  to  have 
a  similar  option  in  case  the  first  op- 
tion is  not  exercised.  A  party  en- 
titled to  such  option  may  have  specific 
performance  of  it.  The  mutual  cove- 
nants of  the  contract  are  a  sufficient 
consideration  to  support  it.  The  court 
said:  "It  is  contended  that  the  con- 
tract is  void  as  prohibiting  the  right 
to  alienate  this  stock.  Such  is  not 
the  fact.  The  right  to  sell  it  was  not 
fettered  for  an  instant.  Indeed,  by 
the  terms  of  the  contract  provision 
is  made  for  the  exercise  of  such  right. 
The  only  limitation,  if  there  was  a 
determination  to  sell,  was  the  privi- 
lege by  the  other  party  to  buy  upon 
certain  conditions  and  such  conditions 
have  never  been  held  invalid.  This 
case  does  not  fall  within  the  principle 
announced  in  Fisher  v.  Bush  (35  Hun, 
641)  and  similar  cases.  Therein  there 
was  an  express  agreement  not  to  sell 
for  any  purpose,  and  it  was  held  void 
as  against  public  policy.  Here  there 
was  no  limitation  of  the  right  to  sell ; 
it  was  only  subject  for  a  limited 
period  to  the  right  of  the  other  party 
to  buy.  And  an  agreement  which 
seeks  to  control  the  stock  of  a  cor- 
poration for  purposes  of  management, 
lawful  in  itself,  is  not  subject  to  any 


1847 


§  622c. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


An  agreement,  however,  between  the  stockholders  of  a  corporation 
that  no  one  of  them  will  sell,  assign,  or  dispose  of  his  stock  without 
having  first  given  the  other  parties  to  the  agreement  an  opportunity 
to  purchase,  does  not  disable  a  party  from  transferring  a  legal  title  to 
the  stock  without  the  consent  of  the  other  parties  and  in  violation  of 
the  agreement,  and  this  although  the  transferee  was  cognizant  of  the 
agreement  at  the  time  of  the  transfer.^  It  is  a  breach  of  contract,  but 
the  remedy  is  usually  at  law  for  damages.^  A  corporation  cannot  refuse 
to  transfer  stock  on  the  ground  that  the  vendor  had  agreed  with  others 
not  to  sell  his  stock.^  Such  also  is  the  rule  as  to  a  contract  that  a  stock- 
holder before  seUing  his  stock  to  others,  shall  first  ofi'er  the  stock  to 
the  corporation  itself.  A  personal  agreement  between  the  incor- 
porators, promoters,  and  proposed  subscribers  to  the  stock  of  a 
proposed  corporation,  by  which  agreement  the  corporation  is  to 
have  the  first  right  to  buy  the  stock  of  any  one  who  wishes  to  sell, 
does  not  prevent  a  sale  by  a  stockholder  without  offering  the  stock 


infirmity,  but  is  the  exercise  of  a 
legal  right."  Scruggs  v.  Cotterill,  67 
N.  Y.  App.  Div.  583  (1902). 

A  person  who  makes  a  contract 
with  other  stockholders  by  which 
none  are  to  sell  their  stock  to  out- 
siders except  by  mutual  consent,  and 
that  any  stock  so  sold  shall  be  fur- 
nished equally  by  all  the  parties,  and 
that  in  ease  any  one  wishes  to  sell  the 
others  shall  have  the  first  opportunity 
to  buy,  cannot  maintain  a  suit  to  have 
the  agreement  annulled  and  the  ar- 
rangement dissolved  as  being  a  co- 
partnership. It  is  merely  a  personal 
contract  by  majority  stockholders  to 
control  the  corporation.  Whitting- 
ham  V.  Darrin,  45  N.  Y.  Misc.  Rep.  478 
(1904). 

1  Quoted  and  approved  in  Colonial, 
etc.  Co.  V.  Ream,  77  S.  E.  Rep.  508 
(Va.  1913).  The  enforcement  of  spe- 
cific performance  of  such  an  agreement 
by  a  court  of  equity  rests  in  the  discre- 
tion of  the  court ;  it  may  not  be  de- 
manded as  a  right.  The  fact  that  the 
transferee  holds  the  stock  subject  to 
the  enforcement  of  the  equitable 
remedy  does  not  in  any  way  interfere 
with  his  legal  title,  nor  does  it  preclude 
the  corporation  from  treating  him  as, 
and  according  to  him  all  the  rights  of,  a 
stockholder,  including  the  right  to 
vote  upon  the  stock  at  a  stockholders' 
meeting.     Re  Argus  Co.,  138  N.  Y.  557 


(1893).  An  agreement  of  the  holder 
of  a  majority  of  the  stock  that  he  will 
retain  control  is  no  defense  by  the 
corporation  to  an  action  by  the  re- 
ceiver of  such  stockholder  to  transfer 
the  stock  on  the  corporate  books. 
Weller  v.  Pace  Tobacco  Co.,  25  N.  Y. 
Week.  Dig.  531  (1886).  A  contract  of 
a  stockholder  not  to  transfer  or  sell  his 
stock  does  not  bind  a  bona  fide  pur- 
chaser. Brinkerhoff-Farris,  etc,  Co.  v. 
Home  Lumber  Co.,  118  Mo.  447 
(1893).  Where  all  the  stockholders 
agree  to  a  consolidation,  but  before 
it  is  carried  out  one  of  them  sells  his 
stock,  the  purchaser,  if  he  knew  of 
the  agreement,  is  bound  by  it,  but 
is  entitled  to  a  transfer  of  the  stock 
to  himself  on  the  books.  Senn,  v. 
Union,  etc.  Co.,  115  Mo.  App.  685 
(1906). 

2  A  contract  whereby  the  vendee  of 
bank  stock  agrees  not  to  sell  it  until 
he  has  first  offered  it  to  the  vendor 
at  the  book  value  of  the  stock,  sus- 
tains a  suit  for  damages  if  the  vendee 
sells  without  first  making  such  offer. 
The  damage  is  nominal  unless  spe- 
cial damage  is  proved,  and  damage 
cannot  be  recovered  for  loss  of  control 
of  the  corporation  by  reason  of  such 
breach.  Cothran  v.  Witham,  123  Ga. 
190  (1905). 

3  Sylvania,  etc.  R.  R.  v.  Hoge,  129 
Ga.  734  (1907). 


1848 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  622c. 


to  the  corporation.     Hence  the  corporation  cannot  refuse  to  transfer 
the  stock. ^ 

Specific  performance  of  such  a  contract,  however,  will  be  granted 
by  the  courts,  where  there  are  special  reasons  therefor  and  performance 
is  possible. - 

1  Quoted  and  approved  in  Colonial, 
etc.  Co.  V.  Ream,  77  S.  E.  Rep.  508 
(Va.  1913).  Ireland  v.  Globe,  etc.  Co., 
20  R.  I.  190  (1897) ;  s.  c,  21  R.  I.  9 
(1898).  Where,  according  to  contract, 
stock  sold  to  the  corporation  is  ap- 
praised by  the  corporation,  and  the  ap- 
praised price  is  actually  paid  to  and 
received  by  the  stockholder,  he  cannot 
maintain  a  bill  to  obtain  a  larger  price, 
but  must  either  rescind  or  sue  at  law. 
Tuttle  V.  Batchelder,  etc.  Co.,  170 
Mass.  315  (1898).  Where,  in  order 
"to  enable  the  company  to  keep  its 
stock  in  the  ownership  of  stockholders 
of  its  own  choosing,"  each  stock- 
holder enters  into  an  agreement  with 
the  corporation  that  in  case  he  wishes 
to  sell  his  stock  it  shall  first  be  ap- 
praised and  then  offered  to  the  cor- 
poration before  it  is  offered  to  any 
one  else,  the  refusal  of  the  board  of 
directors  to  make  an  appraisal,  in 
accordance  with  the  agreement,  does 
not  render  the  corporation  liable  in 
damages,  inasmuch  as  it  is  clear  that, 
even  though  the  stock  were  appraised, 
the  corporation  would  not  buy  it. 
Whiton  V.  Batchelder,  etc.  Corp.,  179 
Mass.  169  (1901). 

^  The  stockholders  in  a  private  trad- 
ing corporation  may  agree  that,  upon 
the  death  of  any  one  or  more  of  them, 
the  remainder  shall  have  the  right 
to  purchase  the  stock  of  the  decedent 
at  its  value.  This  is  not  invalid  as 
against  public  policy  or  as  an  im- 
proper restraint  of  the  power  of 
alienation.  The  court  may  grant 
specific  performance  of  such  contract. 
Fitzsimmons  v.  Lindsay,  205  Pa.  St. 
79  (1903).  Where  all  the  stockholders 
make  a  contract  that  the  stock  of 
any  one  who  might  die  or  withdraw 
should  first  be  offered  to  the  remain- 
ing stockholders  at  a  fair  price  or 
its  book  value,  to  be  ascertained  by 
arbitrators,  such  contract  may  be 
enforced  in  equity,  and  dividends 
declared  after  the  death  go  to  the  pur- 


chasers and  the  award  bears  six  per- 
cent, interest  from  the  date  of  the 
death.  The  good-will  is  to  be  in- 
cluded in  the  value.  In  re  Lindsay's 
estate,  210  Pa.  St.  224  (1904).  A 
court  of  equity  will  enforce  a  con- 
tract between  stockholders  by  which 
if  any  one  wishes  to  sell  he  must 
first  offer  his  stock  to  the  other  stock- 
holders ratably,  the  price  to  be  de- 
termined by  the  holders  of  a  major- 
ity of  the  stock.  If  one  stockholder 
is  excluded  from  participating  he  may 
enjoin  the  sale.  Boswell  v.  Buhl,  213 
Pa.  St.  450  (1906).  A  transfer  of 
stock  by  several  persons  to  a  trust 
company  for  five  years  under  an 
agreement  by  one  of  them  to  buy  the 
stock  at  that  time  if  the  other  parties 
wished,  is  not  enforceable  if  they  wait 
over  a  year  after  the  expiration  of 
the  five  years  before  giving  notice  of 
their  wish  to  sell.  HoUis  v.  Libby, 
101  Me.  302  (1906).  Where  in  the 
organization  of  a  mercantile  corpora- 
tion some  of  the  principal  employees 
become  stockholders,  under  a  eon- 
tract  between  all  the  stockholders,  by 
which  a  majority  might  declare  a 
stockholder  to  be  undesirable,  and 
thereupon  he  was  to  be  paid  the  cash 
value  of  the  stock  as  appraised,  the 
stock  to  be  then  divided  among  the 
other  stockholders,  a  suit  in  equity 
lies  to  compel  an  employee  to  give 
up  stock  so  appraised,  and  the  ap- 
praisal is  the  actual  cash  value  of 
the  assets  without  anything  for  good- 
will, and  the  fact  that  there  is  pre- 
ferred stock  is  immaterial,  if  it  is 
redeemable  at  any  time,  it  being 
shown  also  that  the  common  stock 
had  never  been  sold  on  the  market. 
Boggs  V.  Boggs  &  Buhl,  217  Pa.  St. 
10  (1907).  Where  a  stockholder  agrees 
to  transfer  his  stock  to  the  company  at 
an  appraisal  to  be  made  by  the  direc- 
tors, the  decision  of  the  directors  can- 
not be  impeached  by  showing  that  they 
committed  errors  of  judgment  in  the 


1849 


§  622c. 


ELECTIONS 


CORPORATE   MEETINGS. 


[cH.  XXXVII. 


A  lower  New  York  court  held  that  an  agreement  of  several  stockholders 
not  to  sell  their  stock,  except  upon  the  concurrent  consent  of  all  the 
signers  to  the  agreement,  was  illegal  and  void  as  in  restraint  of  trade 
and  against  public  policy,^  but  the  New  York  court  of  appeals  reached  a 
different  conclusion.- 

It  is  to  be  borne  in  mind  that  an  oral  contract  on  this  subject  may 
be  void  by  the  statute  of  frauds,^  and  that  a  unilateral  contract,  amount- 
ing to  an  option  without  consideration  already  paid,  may  not  be  legally 
binding."    A  corporation  in  selling  its  stock  may  do  so  on  condition 


appraisal.  A  stockholder  may  be 
forced  to  specifically  perform  a  contract 
to  convey  his  stock  to  the  corporation, 
a,ccording  to  an  appraisal  made  by  the 
directors,  to  be  disposed  of  by  them  as 
they  may  see  fit,  where  the  evidence 
shows  that  none  of  the  stock  of  said 
corporation  has  ever  been  sold  on  the 
market  or  otherwise  than  by  transfer 
to  the  directors,  and  no  fraud  in  the 
appraisal  is  charged,  and  the  remedy 
by  an  action  for  damages  would  be 
inadequate.  New  England  Trust  Co. 
V.  Abbott,  162  Mass.  148  (1894). 
Where  the  stockholders  in  a  cotton  oil 
company  agree  that  if  any  one  wishes  to 
sell  his  stock  he  should  first  offer  the 
same  to  the  others,  and  in  the  event  of 
the  death  of  any  one  his  estate  shall  do 
so  to  the  extent  of  $5,000  of  the  stock 
or  less  if  the  estate  has  less,  the  con- 
tract is  indefinite  and  uncertain  as  to 
when  the  option  will  arise  and  the 
other  stockholders  cannot  maintain  a 
bill  of  enforcement  where  they  do  not 
allege  that  an  estate  intends  to  sell  its 
stock,  even  though  the  contract  pro- 
vided that  such  an  estate  should  sell. 
Stay  V.  Tennille,  159  Ala.  514  (1909). 

1  Fisher  v.  Bush,  35  Hun,  641 
(1885).     See  also  §  320,  supra. 

2  Williams  v.  Montgomery,  148 
N.  Y.  519  (1896),  practically  reversing 
68  Hun,  416,  and  74  Hun,  427.  See 
also  p.  1857,  infra.  Thus,  where  two 
patentees  agree  to  own  their  patents 
in  common,  and  then  contract  with  a 
corporation  to  convey  the  patents  to 
it  for  stock  to  be  issued  to  them 
jointly,  each  to  have  one  half,  and 
each  to  have  one  half  the  dividends 
thereof,  the  certificates  not  to  be 
changed,  sold,  or  pledged  for  ten 
years,  except  upon  their  joint  consent, 


the  instrument  may  also  provide  that 
one  of  them  shall  vote  the  stock  as 
proxy  for  the  ten  years,  unless  both 
agree  otherwise.  The  court  held  that 
such  a  contract  is  legal,  being  prac- 
tically a  contract  to  become  partners 
in  the  ownership  of  stock  for  ten 
years.  Hey  v.  Dolphin,  92  Hun,  230 
(1895). 

'  An  oral  agreement  whereby  one 
party  makes  a  loan  to  the  corporation 
in  consideration  of  the  other  party 
keeping  the  former  in  control  and  giv- 
ing him  an  option  on  the  latter's 
stock,  does  not  sustain  a  suit  for  dam- 
ages, even  if  broken  by  the  latter, 
inasmuch  as  it  is  void,  under  the 
statute  of  frauds,  as  not  to  be  per- 
formed within  a  year.  Gazzam  v. 
Simpson,  114  Fed.  Rep.  71  (1902). 
See  §  339,  supra. 

*  A  unilateral  contract  is  not  bind- 
ing. A  consideration  must  exist  or 
the  covenants  be  mutual.  Jordan  v. 
Indianapolis,  etc.  Co.,  61  N.  E.  Rep. 
12  (Ind.  1901).  As  to  options,  see 
§  334,  supra.  An  option  to  sell  min- 
ing stock  with  no  definite  time  fixed 
as  to  the  duration  of  the  option  may 
be  revoked  three  months  later,  no  sale 
having  been  made  in  the  meantime, 
and  a  subsequent  sale  by  the  owner 
of  the  stock  at  an  advanced  price  to 
a  party  whom  the  party  receiving  the 
option  had  been  negotiating  with,  does 
not  entitle  such  party  receiving  the 
option  to  any  interest  in  the  sale. 
Rees  V.  Pellow,  97  Fed.  Rep.  167 
(1899),  the  court  holding  that  such 
an  option  may  be  terminated  at  any 
time  in  good  faith.  The  mutual  cove- 
nants contained  in  a  contract  be- 
tween a  railroad  company  and  a  tele- 
graph company,   by  which  they  join 


1850 


CH.  XXXVII. 


ELECTIONS 


CORPORATE   MEETINGS. 


[§  622rf. 


that  the  certificates  therefor  are  not  to  be  issued  for  five  years,  the  pur- 
pose being  to  pool  the  stock  for  that  length  of  time.^  Stock  is  sometimes 
issued  to  employees,  conditional  on  continued  service.^ 

§  Q22d.  Charter  proiisio?is  and  by-laws  restricting  the  right  to 
sell  stock.  —  The  by-laws  of  a  corporation  cannot  legally  prohibit  or 
limit  the  right  of  a  stockholder  to  sell  his  stock  .^ 


in  defraying  the  expense  of  a  line  of 
telegraph  on  a  railroad  right  of  way, 
to  be  operated  for  their  joint  benefit, 
is  a  sufficient  consideration  for  sus- 
taining the  contract,  where  there  has 
been  part  performance  of  such  con- 
sideration. Western  Union,  etc.  Co. 
V.  Pennsylvania  Co.,  129  Fed.  Rep.  849 
(1904). 

1  Williams  v.  Ashurst  Oil,  etc.  Co., 
144  Cal.  619  (1904). 

2  Where  stock  is  issued  to  an  em- 
ployee and  he  leaves  the  certificates 
with  the  eompanj%  and  the  president 
writes  on  them  that  the  stock  was  to 
revert  to  the  company  or  to  him  if  the 
employee  left  the  company,  and  the 
employee  does  leave  and  sues  the 
company  for  conversion  for  not  de- 
livering the  stock  to  him,  it  is  for  the 
jury  to  decide  whether  he  had  agreed 
to  such  conditional  ownership.  Lay- 
man V.  Slocomb  &  Co.,  7  Pen.  (Del.) 
403  (1909).  A  corporation  may  agree 
to  employ  a  person  as  assistant  general 
manager  at  a  specified  salary  so  long 
as  he  retains  certain  stock  which  he 
has  purchased.  Darknell  v.  Coeur 
D'Alene,  etc.  Co.,  18  Idaho,  61  (1910). 
Under  the  usual  statute  for  an  increase 
of  capital  stock  of  corporations,  the 
secretary  of  state  need  not  accept  and 
file  an  amendment  to  the  charter 
increasing  the  capital  stock  with  the 
provision  that  the  increase  shall  be 
"option  stock"  to  be  issued  to  em- 
ployees only  and  to  be  offered  back 
to  the  company  upon  the  employment 
of  the  employee  ceasing.  Lufkin  Rule 
Co.  V.  Secretary  of  State,  127  N.  W. 
Rep.  784  (1910') ;    163  Mich.  30. 

3  Morgan  v.  Struthers,  131  U.  S.  246, 
252  (1889) ;  Feckheimer  v.  National 
Exch.  Bank,  79  Va.  80  (1884),  where 
a  by-law  prohibiting  transfers  except 
with  the  consent  of  the  directors  was 
declared  void  ;  Bank  of  Attica  v.  Man- 
ufacturers', etc.  Bank,  20  N.  Y.  501 


(1859) ;  Orr  v.  Bigelow,  14  N.  Y.  556 
(18.56) ;  aff'g  s.  c,  20  Barb.  21  (1854) ; 
Sargent  v.  Franklin  Ins.  Co.,  25 
Mass.  90  (1829)  ;  Moore  v.  Bank  of 
Commerce,  52  ISIo.  377  (1873).  A  by- 
law limiting  the  amount  of  stock 
which  a  single  person  may  hold,  and 
also  forbidding  a  transfer  to  an  out- 
side person,  except  with  the  consent 
of  the  board  of  directors,  is  illegal. 
IMiUer  v.  Farmers',  etc.  Co.,  78  Neb. 
441  (1907).  A  by-law  to  the  effect 
that  a  transfer  of  stock  shall  be  allowed 
only  upon  consent  of  all  the  other 
stockholders  is  void  as  in  restraint 
of  trade.  Re  Klaus,  67  Wis.  401 
(1886).  A  by-law  that  no  transfer 
of  stock  shall  be  allowed  except  with 
the  consent  of  the  president  or  a 
majority  of  the  directors  is  illegal  and 
void,  being  in  restraint  of  trade. 
Finch  V.  Macoupin  Tel.  &  Tel.  Co., 
146  111.  App.  158  (1908).  As  regards 
corporate  liens  herein,  see  ch.  XXXI, 
supra.  See  also,  as  to  the  general 
policy  of  the  law  to  discountenance 
restrictions  on  right  to  sell,  Moffatt  v. 
Farquhar,  L.  R.  7  Ch.  D.  591  (1878). 
In  this  ease  the  directors  were  com- 
pelled to  allow  a  transfer,  although  the 
purpose  of  the  transfer  was  to  multiply 
votes.  A  secretary  cannot  refuse  to 
register  a  transfer  on  account  of  the 
motive  of  the  transfeiTer.  Re  Klaus, 
67  Wis.  401  (1886).  A  by-law  provid- 
ing that,  if  any  stockholder  shall 
desire  to  dispose  of  his  stock,  he 
shall  give  written  notice  of  his  inten- 
tion to  sell,  and  that  the  other  stock- 
holders shall  thereupon  have  the 
option  to  pm-ehase  the  stock  at  the 
price  named,  is  an  invalid  restraint 
on  alienation.  Victor,  etc.  Co.  v. 
Bloede,  84  Md.  129  (1896).  A  by-law 
that  no  stockholder  shall  sell  his 
stock  or  have  a  transfer  of  it  unless 
he  shall  first  have  offered  it  for  sale 
to    the  directors  is    illegal    and  void. 


1851 


§  Q22d.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVU. 


It  has  been  held  in  Massachusetts,  however,  that  a  by-law,  recited 
on  the  face  of  a  certificate  of  stock,  to  the  effect  that  a  stockholder 
will  not  sell  his  stock  without  first  offering  it  to  the  directors  at  the 
same  price,  prevents  the  stockholder  transferring  the  stock  to  his 
principal,  he  not  having  disclosed  that  he  was  acting  as  agent. 
Such  a  by-law  is  legal,  and  the  corporation  may  refuse  to  transfer  the 
stock  in  violation  of  the  by-law.^     Even  though  a  by-law  provides 


Brinkerhoff-Farris,  etc.  Co.  v.  Home 
Lumber  Co.,  118  Mo.  447  (1893).  A 
by-law  that  all  purchasers  of  stock 
shall  agree  that  the  stock  shaU  be 
voted  in  favor  of  increasing  the  capi- 
tal stock  is  void  as  in  restraint  of 
trade  and  as  attempting  to  limit  the 
voting  power  of  a  stockholder.  Mc- 
Nulta  V.  Corn  Belt  Bank,  164  lU.  427 
(1897).  Where  a  stockholder  pur- 
chases certificates  of  stock  which  pro- 
vide that  they  are  transferable  only 
to  the  company,  and  at  an  appraisal 
to  be  made  by  its  directors,  as  pro- 
vided in  the  by-laws  printed  on  the 
back  of  the  certificates,  and  signs  a 
receipt  therefor,  "subject  to  the  con- 
ditions and  restrictions  therein  re- 
ferred to,  and  to  the  by-laws  of  the 
company,  to  which  I  agree  to  con- 
form," he  is  bound  by  the  provisions 
of  the  certificates,  though,  when  con- 
sidered as  by-laws,  they  may  be  void. 
In  such  case  the  records  of  a  directors' 
meeting  showing  that,  by  vote  of  the 
directors  prq^ent,  a  stockholder's 
shares  were  appraised  at  a  certain 
price  and  taken  for  the  use  of  the 
company,  sufficiently  shows  an  ap- 
praisal, although  no  notice  of  hear- 
ing was  given  the  stockholder.  New 
England  Trust  Co.  v.  Abbott,  162 
Mass.  148  (1894).  Where  by  the  by- 
laws any  stockholder  wishing  to  sell 
his  stock  must  first  offer  it  to  other 
stockholders,  and  a  stockholder  dies 
and  one  of  his  heirs  brings  suit  against 
the  executors  for  his  proportion  of 
the  stock,  and  another  heir  claims  that 
the  stock  should  be  sold,  the  corpora- 
tion itself  and  all  the  other  stock- 
holders are  necessary  parties.  Cham- 
pollion  V.  Corbin,  71  N.  H.  78  (1901). 
The  fact  that  the  by-laws  require  a 
stockholder,  in  case  he  wishes  to 
seU,  to  first  offer  the  stock  to  the 
corporation  or  other  stockholders  be- 


fore selling  to  others,  does  not  affect 
the  validity  of  another  by-law  author- 
izing assessments  on  the  stock. 
Farmers',  etc.  Co.  v.  Smith,  74  Conn. 
625  (1902).  A  by-law  requiring 
stockholders  to  offer  their  stock  to 
the  corporation  itself  before  selling 
such  stock  elsewhere  is  illegal,  and 
a  purchaser  of  a  certificate  of  stock 
is  entitled  to  a  transfer  on  the  books, 
even  though  his  transferrer  agreed 
to  the  by-law  and  did  not  comply 
therewith.  Ireland  v.  Globe,  etc.  Co., 
21  R.  I.  9  (1898).  Where  a  stock- 
holder in  a  national  bank  indorses 
his  certificate  in  blank,  and  causes 
it  to  be  sold  at  public  auction,  and  the 
auctioneer  sells  it  to  the  cashier  of 
the  bank,  and  takes  it  to  the  bank, 
and  presents  it  to  such  cashier  for 
transfer,  and  for  four  years  dividends 
thereon  are  paid  to  the  cashier,  the 
vendor  is  no  longer  liable,  even  though 
the  stock  was  not  transferred  on  the 
bank  books,  and  even  though  a  by- 
law of  the  bank  prohibited  any  officer 
from  holding  stock  in  the  bank 
except  by  permission  of  the  board 
of  directors.  Earle  v.  Coyle,  97  Fed. 
Rep.  410  (1899).  A  by-law  that  the 
stock  shall  not  be  transferable  ex- 
cept to  the  corporation  itself  is 
illegal,  even  though  it  is  expressed 
on  the  face  of  the  stock  certificates ; 
and  hence  a  stockholder  cannot  com- 
pel a  corporation  to  pm-chase  his 
stock,  even  though  the  corporation 
has  pTU"chased  the  stock  of  other  mem- 
bers, and  even  though  the  corporation 
is  essentially  a  community  of  property 
affair,  having  a  capital  stock.  Herring 
V.  Ruskin,  etc.  Assoc.  52  S.  W.  Rep. 
327  (Tenn.  1899).  86  Atl.  Rep.  1026. 
1  Barrett  v.  King,  181  Mass.  476 
(1902).  A  by-law  authorizing  a  cor- 
poration to  buy  the  stock  of  a  member 
who  wishes  to  sell  is  a  contract  bind- 


1852 


CH.  XXXVII.] 


ELECTIONS 


CORPORATE   MEETINGS. 


[§  622rf. 


that  a  stockholder  before  selHng  the  stock  should  give  a  thirty 
day  option  to  the  board  of  directors  to  purchase  it,  yet  the  board 
of  directors  may  waive  that  option  and  allow  the  transfer  and  the 
stockholders  themselves  cannot  object.^  A  bona  fide  purchaser 
of  stock,  however,  may  be  entitled  to  a  transfer  on  the  corporate 
books  although  the  by-laws  required  the  stockholders  to  offer  their 
stock  to  the  corporation  at  par  before  selling  it  elsewhere.^  A 
resolution  of  the  stockholders  that  the  company  should  not  allow 
any  further  transfers  of  stock  until  the  company  is  out  of  financial 


ing  on  a  stockholder  who  wishes  to 
sell,  the  corporation  having  been  organ- 
ized to  purchase  household  supplies 
for  the  members  and  interest  being 
paid  instead  of  dividends.  Such  a 
purchase  by  the  corporation  is  legal, 
even  though  it  has  no  profits,  it  being 
practically  not  a  purchase  but  a 
repayment.  Lindsay  v.  Arlington,  etc. 
Assoc,  186  Mass.  371  (1904).  A 
by-law  that  no  stockholder  shall  sell 
or  assign  his  stock  imtil  after  he  should 
offer  it  to  the  other  stockholders  at 
par  does  not  prevent  the  probate  court 
on  the  death  of  a  stockholder  distrib- 
uting his  stock  among  his  heirs  in 
kind.  Re  Vernon's  Estate,  225  Pa.  St. 
368  (1909).  A  by-law  that  a  stock- 
holder moving  away  must  sell  his  stock 
on  demand  to  the  corporation,  and 
shall  have  but  one  dividend  after 
such  removal,  is  not  valid  as  against 
the  stockholder  who  had  been  away  for 
four  years  and  against  whom  the  by- 
law was  enforced  on  account  of  his 
opposition  to  the  management,  es- 
pecially where  the  by-law  was  not 
enforced  against  other  stockholders. 
Adams  v.  Protective,  etc.  Co.,  210  Mass. 
172  (1911).  A  brewing  corporation 
may  by  by-law  require  its  stockholders 
when  they  wish  to  sell  their  stock  to 
first  notify  the  directors  and  give  the 
latter  a  reasonable  time  to  sell  the  stock 
to  classes  of  persons  mentioned  in  the 
by-laws,  and  if  a  stockholder  violates 
this  by-law  his  transferee  cannot 
compel  the  corporation  to  register 
the  transfer.  Nicholson  v.  Franklin, 
etc.  Co.,  82  Ohio  St.  94  (1910).  A 
farmer's  telephone  company  may 
enforce  a  by-law  that  no  member  shall 
sell  his  stock  until  after  he  has  first 
offered  it  to  the  company  at  a  price  not 


exceeding  its  original  cost.  Star,  etc. 
Tel.  Co.  V.  Longfellow,  85  Kan.  353 
(1911).  A  provision  in  the  articles 
of  incorporation,  by-laws  and  in  the 
certificates  of  stock,  that  no  transfer 
of  stock  shall  be  made  except  with  the 
consent  of  two  thirds  of  the  remain- 
ing stock,  and  in  ease  of  refusal  the 
stock  is  to  be  purchased  by  the  other 
stockholders  at  par,  is  valid.  Re 
Laun,  146  Wis.  252  (1911).  A  by-law 
that  no  stockholder  should  sell  his 
stock  without  first  offering  it  to  the 
corporation  does  not  apply  where  one 
company  holding  stock  in  another  has 
consolidated  with  a  third  company. 
Silversmiths  Co.  v.  Reed  &  Barton 
Corp.,  199  Mass.  371  (1908).  A 
provision  in  the  charter  or  the  by-laws 
that  a  stockholder  shall  not  sell  his 
stock  without  first  giving  a  stated 
period  within  which  the  corporation 
and  the  other  stockholders  may  have 
opportunity  to  purchase  is  legal. 
Moses  V.  Soule,  63  N.  Y.  Misc.  Rep. 
203  (1909).  Where  all  the  incorpo- 
rators agree  upon  a  by-law  that  no 
stockholder  shall  sell  his  stock  until 
he  or  his  estate  has  offered  it  to  the 
other  stockholders,  such  by-law  is 
binding.  Garrett  v.  Philadelphia,  etc. 
Co.,  39  Pa.  Sup.  Ct.  78  (1909).  Even 
though  the  charter  gives  the  cor- 
poration the  prior  right  to  piirchase 
its  stock  when  sold  bj'  its  share- 
holders, yet  by  allowing  a  transfer, 
the  corporation  waives  this  provi- 
sion. Bartlett  v.  Fourton,  115  La.  26 
(1905). 

1  Hughes  V.  Citizens'  etc.  Co.,  226 
Pa.  St.  95  (1909). 

2  Amidon  v.  Florence,  etc.  Co.,  132 
N.  W.  Rep.,  166  (S.  Dak.  1911). 


1853 


§  622(/. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.   XXXVII. 


difficulties  does  not  bind  a  stockholder  who  did  not  take  part  in 
the  meeting.^ 

The  right  of  transfer  is  sometimes  limited  by  statute,  as  where  stock 
cannot  be  transferred  until  all  calls  thereon  shall  have  been  fully  paid. 
Where  the  charter  or  a  statute  forbids  transfers  before  the  full  capital 
stock  is  paid  in,  any  transfer  before  such  payment  has  been  held  to  be 
void.^  The  Illinois  statute  against  options  does  not  apply  to  a  contract 
by  which  the  vendor  of  stock  agrees  to  buy  it  back  at  the  end  of  five 
years  if  the  vendor  so  desires,  the  vendee  on  his  part  agreeing  not  to  sell 
the  stock  to  any  one  in  the  meantime,  without  first  offering  it  to  the 
vendor.^ 

In  England  sometimes  express  authority  is  given  to  the  directors 
by  the  articles  of  association,  to  refuse  to  permit  a  transfer  unless  the 
same  is  satisfactory  to  them.^  They  have  this  power,  however,  only 
by  express  authority,  and  it  is  not  extended  by  implication.^  The  power 
must  be  reasonably  exercised,  and  its  exercise  must  be  free  from  fraud, 
caprice,  and  arbitrary  power.^ 

1  Smith  V.  Bank,  etc.  Scotia,  8  S.  C.  and  so  foreign  to  all  received  notions. 
Rep.  (Can.)  558  (1883).   C/.  §412,  supra,  and  the  universal  practice  and  mode 

2  Merrill  v.  Call,  15  Me.  428  (1839).  of  dealing  in  these  stocks,  that  it 
The  case  Quiner  v.  Marblehead  So-  cannot,  in  the  absence  of  legislative 
cial  Ins.  Co.,  10  Mass.  476  (1813),  expression,  be  held  to  exist."  See 
holds  that,  nevertheless,  such  a  trans-  also  Farmers',  etc.  Bank  v.  Wasson, 
fer  vests  in  the  transferee  all  the  48  Iowa,  336  (1878),  the  court  hold- 
transferrer's  interest  in  the  stock.  Cf.  ing  that  a  by-law  that  transfers  of 
Kahn  v.  Bank  of  St.  Joseph,  70  Mo.  stock  shall  not  be  valid  unless  ap- 
262  (1879).  The  statutes  of  a  state  proved  by  the  board  of  directors 
cannot  restrict  or  interfere  with  the  cannot  restrain  transfers.  "Itsenforce- 
transferability  of  certificates  of  stock  ment  would  operate  as  an  infringe- 
in  national  banks.  Doty  v.  First  Nat.  ment  upon  the  property  rights  of 
Bank,  5  N.  D.  9  (1892).  others,   which   the   law   will   not   per- 

*Ubben    v.    Binnian,    182    111.    508  mit.     It  would,  besides,  operate  as  a 

(1899).  restraint  upon  the  disposition  of  prop- 

*  Shortridge  v.  Bosanquet,  16  Beav.  erty  in  the  stock  of  the  corporation, 

84    (1852) ;   Bargate  v.    Shortridge,    5  in   the   nature   of   restraint   of   trade, 

H.  L.  Cas.  297  (1855) ;    Re  Joint-stock  which   the   courts  will  not   tolerate." 

Discount  Co.,  Shepherd's  Case,  L.  R.  A   transferee   is   liable   on   an   unpaid 

2  Eq.  564  (1866) ;    aff'd,  L.  R.  2  Ch.  subscription    where    the    transfer    has 

App.  16.  been    recorded    on    the    books,    even 

5  Weston's   Case,   L.    R.   4   Ch.   20  though  the  transferee  did  not  comply 

(1868);    Gilbert's  Case,  L.   R.  5  Ch.  with  the  by-law  requiring  the  names 

App.  559(1870);  Chappell's  Case,  L.R.  of  transferees  to  be  submitted  to  the 

6  Ch.  App.  902  (1871);    Re  Stranton  board   of   directors   and   the  approval 

Iron,  etc.  Co.,  L.  R.  16  Eq.  559  (1873) ;  of    such   board    and    requiring    trans- 

Moffatt  V.  Farquhar,  L.  R.  7  Ch.  D.  ferees  to  sign  the  by-laws.     The  cor- 

591     (1878) ;      Slee     v.     International  poration    may    waive    such    require- 

Bank,    17    L.    T.    Rep.    425    (1867).  ments.     People's,  etc.  Bank  v.  Rickard, 

Judge  Dillon,  in  Johnson  v.  Laflin,  5  139  Cal.  285  (1903). 
Dill.  65,  78;    s.  c,  13  Fed.  Cas.  758,  «  They  cannot  refuse  to  allow  any 

763;   aff'd,  103  U.  S.  800  (1880),  said:  transfers.        Robinson     v.      Chartered 

."Such  a  power  is  so  capable  of  abuse  Bank,  L.  R.  1  Eq.  32  (1865).     And  an 

1854 


CH.   XXXVII.] 


ELECTIONS 


CORPORATE   MEETINGS. 


[§  G22rf. 


The  corporation  cannot  refuse  to  allow  a  registry  on  the  ground  that 
there  was  no  consideration  for  the  transfer ;  ^  nor  because  a  claimant  of 
the  stock  notified  it  not  to  make  the  registry,-  The  holders  of  a  ma- 
jority of  the  stock  may  sell  such  majority  without  obligating  the  pur- 
chaser to  purchase  also  the  minority  stock  or  any  part  thereof.^ 

Similar  to  a  charter  restriction  on  the  sale  of  stock  is  a  provision 
in  the  articles  of  association  of  an  unincorporated  joint-stock  associa- 
tion to  the  effect  that  no  stockholder  shall  sell  his  stock  except  on 


objection,  not  to  the  transferee,  but  to 
the  purpose  of  the  transferrer  in 
respect  to  the  voting  is  not  sufficient. 
Moffatt  V.  Farquhar,  L.  R.  7  Ch.  D.  591 
(1878).  But  the  board  may  refuse  to 
give  its  reasons  for  refusing  to  allow 
the  transfer,  and  in  that  ease  it  will 
be  presumed  to  have  had  sufficient 
reason  for  the  refusal.  Ex  parte 
Penney,  L.  R.  8  Ch.  App.  446  (1872). 
Directors  cannot  refuse  to  allow  a 
transfer  on  account  of  hostility  to 
the  transferee,  even  though  the  trans- 
fer does  not  set  out  the  address  of  the 
transferrer  or  the  particular  number  of 
the  share  transferred,  the  transferrer 
having  only  one  share.  Re  Letheby, 
etc.,  Ltd.,  [1904]  1  Ch.  815.  Where  the 
by-laws  limit  the  right  of  transfer  of 
stock,  and  give  the  directors  the  power 
to  pass  upon  the  same,  the  court  will 
presume  that  their  action  in  refusing 
a  transfer  was  based  on  good  reasons, 
even  though  no  reason  was  given.  Re 
Coalport  China  Co.,  [1895]  2  Ch.  404. 
If  misrepresentations  are  made  in  in- 
ducing the  directors  to  allow  trans- 
fer, they,  having  discretion,  may  avoid 
the  same.  Payne's  Case,  L.  R.  9  Eq. 
223  (1869);  Master's  Case,  L.  R.  7 
Ch.  292  (1872) ;  Bishop's  Case,  L.  R. 
7  Ch.  296  (1869).  Although  a  trans- 
fer is  rejected  by  the  directors,  the 
transferee  is  nevertheless  entitled  to 
dividends  and  the  title  to  the  stock. 
Poole  V.  Middleton,  29  Beav.  646 
(1861).  Where  the  company  may 
accept  or  reject  a  transferee,  and  re- 
jects him,  the  transferee  cannot  re- 
cover back  from  the  transferrer  the 
consideration  of  the  transfer.  Lon- 
don Founders'  Assoc,  v.  Clarke,  20 
Q.  B.  576  (1888).  See  Healey,  Com- 
panies Law  (3d  ed.),  p.  90.  Where 
the    directors    are    authorized    by    the 


articles  of  incorporation  to  reject  a 
transfer  of  stock  on  the  ground  that 
they  do  not  approve  of  the  transferee, 
"the  discretionary  power  is  of  a  fidu- 
ciary nature  and  must  be  exercised 
in  good  faith ;  that  is,  legitimately 
for  the  purpose  for  which  it  is  con- 
ferred. It  must  not  be  exercised  cor- 
ruptly, or  fraudulently,  or  arbitrarily, 
or  capriciously,  or  wantonly.  It  may 
not  be  exercised  for  a  collateral  pur- 
pose. In  exercising  it  the  directors 
must  act  in  good  faith  in  the  inter- 
est of  the  company  and  with  due  re- 
gard to  the  shareholder's  right  to 
transfer  his  shares,  and  they  must 
fairly  consider  the  question  of  the 
transferee's  fitness  at  a  board  meet- 
ing." It  is  not  a  sufficient  reason 
that  the  transferee  is  not  a  member  of 
a  particular  family,  and  the  directors 
will  be  ordered  to  make  the  transfer. 
Re  Bell,  65  L.  T.  Rep.  245  (1891). 

'  Helm  V.  Swiggert,  12  Ind.  194 
(1859). 

2  Ex  parte  Sargent,  L.  R.  17  Eq. 
273  (1874).     Cf.  §  387,  supra. 

3  Hunnewell  v.  New  York,  etc.  Ry., 
196  Fed.  Rep.  543  (1911).  A  majority 
stockholder  in  a  railroad  cannot  en- 
join the  majority  stockholder  from 
selling  its  holdings  to  another  railroad 
company,  even  though  the  purchaser 
refuses  to  purchase  the  minority  stock 
at  the  same  price,  and  even  though 
such  majority  stockholder  is  a  rail- 
road company  itself,  no  damage  to  the 
minority  stockholder  being  shown. 
The  claim  that  the  sale  would  be  to  a 
competing  railroad  in  violation  of  the 
anti-trust  act  of  Congress  cannot  be 
sustained  in  the  state  court.  Delavan 
V.  New  York,  etc.  R.  R.,  154  N.  Y. 
App.  Div.  8  (1912). 


1855 


§  622e. 


ELECTIONS  —  CORPORATE   MEETINGS. 


CH.  XXXVII. 


specified  conditions  or  that  he  shall  not  sell  it  at  all,  except  to  a  party 
satisfactory  to  the  other  stockholders.  Such  provisions  are  legal,  being 
merely  matters  of  private  contract.^ 

§  622e.  Irrevocable  proxies.  —  The  plan  of  trying  to  tie  up  the 
contract  of  a  corporation  by  obtaining  irrevocable  proxies  from  the 
holders  of  a  majority  of  the  stock  had  to  be  abandoned,  because  the 
so-called  "  irrevocable  "  proxies,  although  irrevocable  by  their  terms, 
were  held  by  the  courts  to  be  revocable  at  any  time.^    This  plan  of 


1  Thus  where  the  articles  prohibited 
sales  of  the  stock,  a  purchaser  has  no 
right  to  vote  or  participate  in  the  asso- 
ciation, but  is  merely  entitled  to  the 
dividends.  Harper  v.  Raymond,  3 
Bosw.  (N.  Y.)  29  (1858).  See  King- 
man V.  Spurr,  24  Mass.  235  (1828). 
See  also  Taft  v.  Harrison,  10  Hare, 
489  (1853),  as  to  Uability  after  an 
offer  to  sell  to  the  company.  A  pro- 
vision in  the  articles  of  association 
of  a  joint-stock  association  to  the 
effect  that  no  member  nor  his  execu- 
tors, administrators,  or  other  legal 
representatives  should  sell  or  trans- 
fer his  stock  until  after  it  had  been 
offered  to  the  association  or  other 
members,  does  not  prevent  an  execu- 
tor transferring  the  stock  to  the  resid- 
uary legatee.  Lane  v.  Albertson,  78 
N.  Y.  App.  Div.  607  (1903).  Under  the 
Pennsylvania  statutes  relative  to 
joint-stock  companies  to  the  effect 
that  a  purchaser  of  stock  who  is  not 
thereafter  elected  to  partnership  shall 
be  paid  the  value  of  his  stock,  the 
company,  by  admitting  him  as  to 
some  of  the  stock,  admits  him  as  to 
all,  but  the  fact  that  he  is  already  a 
holder  of  some  stock  does  not  entitle 
him  to  be  admitted  as  to  new  stock 
purchased  by  him.  Carter  v.  Pro- 
ducer's Oil  Co.,  200  Pa.  St.  579  (1901). 
Where  an  unincorporated  partnership 
issues  so-called  certificates  of  stock 
representing  a  specified  interest  in 
such  partnership,  and  one  of  the  part- 
ners assigns  his  certificates  as  col- 
lateral security  and  afterwards  sells 
them,  the  purchaser  is  entitled  to  his 
share  of  the  partnership  property  and 
to  demand  an  accounting,  even  though 
the  certificates  provided  that  they  were 
not  transferable.  The  transfer  of  such 
certificates  as  security  need  not  be  re- 
corded as  a  chattel  mortgage.     Rom- 


merdahl  v.  Jackson,  102  Wis.  444 
(1899).  Although  an  unincorporated 
association's  articles  provide  that  trans- 
fers of  stock  shall  be  made  only  with 
consent  of  the  directors,  yet,  where 
such  provision  is  for  many  years  dis- 
regarded, a  stockholder  who  so  trans- 
ferred his  stock  at  a  time  when  the 
assets  equaled  the  liabilities  cannot 
be  held  liable  as  a  stockholder.  Wads- 
worth  V.  Duncan,  164  111.  360  (1896) ; 
Wadsworth  v.  Laurie,  164  111.  42 
(1896).  The  foreclosure  and  sale  of 
a  pledge  of  stock  in  the  Western  As- 
sociated F*ress  has  been  refused  where 
it  was  shown  that  the  stock  merely  en- 
titled the  holder  to  receive  news ;  that 
no  transfer  was  allowed  except  by 
consent  of  the  association,  and  such 
consent  had  never  been  given,  and 
the  association  was  not  made  a  party 
to  the  suit.  Metropolitan  Nat.  Bank 
V.  St.  Louis  Dispatch  Co.,  36  Fed. 
Rep.  722  (1888) ;  aff'd,  149  U.  S.  436. 
In  this  case  it  is  to  be  noticed  that  no 
profits  or  di\ddends  could  arise  from 
the  stock. 

2  See  §610,  supra.  "It  is  against 
the  settled  rules  governing  the  control 
of  corporations  that  an  irrevocable 
power  of  voting  or  directing  votes  on 
stock  should  be  vested  in  a  person 
who  is  neither  interested  in  the  stock 
nor  a  representative  of  persons  in- 
terested." Clowes  V.  MiUer,  60  N.  J. 
Eq.  179  (1900).  A  stockholder  may 
transfer  his  certificate  to  his  children, 
who  at  the  same  time  may  give  him 
an  irrevocable  power  to  vote  the  stock 
during  his  life  and  to  receive  and  keep 
the  dividends  on  the  stock.  Such  an 
agreement  is  enforceable,  even  though 
the  stock  is  transferred  into  the  names 
of  the  children,  the  certificates,  how- 
ever, not  being  actually  delivered  to 
them.     Matter  of  Brandreth,  58  N.  Y. 


1856 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE   MEETINGS.  [§  622/. 

depositing  the  certificates  of  stock  with  trustees,  without  a  transfer 
on  the  books  of  the  corporation,  and  then  giving  irrevocable  proxies 
to  the  trustees,  was  one  of  the  first  plans  tried.  The  courts,  however, 
held  that  inasmuch  as  the  proxies  were  revocable,  the  plan  of  the  trust 
itself  had  failed,  and  hence  the  certificates  might  be  demanded  back.^ 

§  622/.  Deposit  of  certificate  of  stock  with  trustees,  either  with  or 
without  a  transfer  of  same  to  the  trustees.  —  This  is  the  usual  and 
most  important  method  of  tying  up  the  control  of  a  majority  of  the 
stock  of  a  corporation.  It  has  given  rise  to  much  litigation  and  more 
or  less  conflicting  decisions.  Each  case  turns  largely  on  the  peculiar 
form  of  the  particular  contract  under  consideration,  and  yet  there  are 
certain  general  features  and  principles  of  law  applicable  to  this  form  of 
contract,  which  are  gradually  defining  the  limit  between  legal  and  illegal 
contracts  of  this  nature.  It  has  been  objected  that  this  mode  of  tying 
up  the  stock  of  a  corporation  violates  the  statute  against  restraint  on 
the  alienation  of  personal  property ;  that  it  is  contrary  to  public  policy, 
which  favors  a  free  transfer  of  property;  that  it  is  unfair  towards 
minority  stockholders,-  and  that  it  separates  the  voting  power  from  the 
ow^nership  of  the  stock.  The  leading  cases  on  this  subject  are  as  fol- 
lows : 

The  New  York  court  of  appeals  has  held  that  an  agreement  of  several 
holders  of  stock  to  deposit  their  stock  in  a  trust  company  for  a  term  of 
six  months  and  not  to  sell  it  during  that  time  is  legal,  there  being  no 
provision  depriving  any  party  of  his  right  to  vote  on  the  stock.  The 
court  held  also  that  where  compensation  in  damages  for  a  breach  woiild 
be  inadequate,  a  court  of  equity  might  grant  specific  performance  of 
such  a  contract  by  enjoining  a  breach  thereof.  Such  a  contract  is  not 
void  as  suspending  the  power  of  alienation,  nor  is  it  against  public  policy 
as  being  a  restraint  upon  trade,  the  purpose  of  the  contract  being  to 
prevent  a  sacrifice  of  the  stock.^ 

App.  Div.  575  (1901),  rev'd  on  another  the  stock  was  placed  in  the  names  of 

point  in  169  N.  Y.  437.  five  trustees  selected  from  the  stock- 

'  Woodruff  V.  Dubuque,  etc.  R.  R.,  holders    with    irrevocable    power    to 

30  Fed.  Rep.  91  (1887) ;   Hafer  v.  New  vote  the  stock  as  owners  and  elect  a 

York,  etc.   R.  R.,   14  W.  L.  Bull.  68  board  of  nine  directors,  and  after  the 

(1885).      See    Griffith    v.    Jewett,    15  dividends    had    repaid    to    the    stock- 

W.  L.  Bull.  419  (1886) ;    Vanderbilt  i-.  holders    their    investment    with    eight 

Bennett,    6    Pa.    Co.    Ct.    Rep.    193  per  cent,  interest,  the  price  of  gas  was 

(1887) ;    Starbuck  v.  Mercantile  Trust  to  be  reduced  to  cost,  so  that  there 

Co.,   60  Conn.   553    (1891).     See  also  should   be   no   further   profits   on   the 

an  excellent  article  and  careful  re^-iew  stock.     The  gas  having  given  out,  the 

of    the    eases    by    Judge    Baldwin    in  court  held  that  the  stockholders  had 

1   Yale  L.  J.   1    (1891).     In  the  case  a     right     to     have     the    corporation 

Consumers',  etc.   Co.   v.   Quinby,   137  wound  up  and  its  assets  distributed  to 

Fed.   Rep.  882   (1905),  a  natural  gas  them. 

company   was    so   organized    that   all         *  Williams      v.    Montgomery,      148 
(117)  1857 


§  622/.] 


ELECTIONS 


CORPORATE   MEETINGS. 


[CH.  XXXVII. 


In  1901  the  legislature  of  the  state  of  New  York  declared  the  public 
policy  of  that  state,  as  to  the  "  pooling  "  of  stock,  by  enacting  a  statute 


N.  Y.  519  (1896),  practically  reversing 
68  Hun,  416,  and  74  Hun,  425.  See 
§  812,  infra. 

The  following  decisions  have  also 
been  rendered  in  New  York  state.  The 
directors  of  a  New  Jersey  holding  cor- 
poration owning  a  majority  of  the 
stock  of  a  New  York  insurance  com- 
pany cannot  place  the  stock  in  a  vot- 
ing trust  for  a  period  of  years,  because 
it  is  the  duty  of  such  directors  to 
manage  and  control  the  property  of 
the  corporation  instead  of  delegating 
such  control  to  outside  individuals. 
Knickerbocker,  etc.  Co.  v.  Voorhees, 
100  N.  Y.  App.  Div.  414  (1905). 
Where  a  majority  of  the  stock  is  put 
in  the  name  of  a  trustee  under  an  agree- 
ment by  which  the  latter  is  to  vote  the 
stock  under  the  existing  board  of 
directors  for  fifteen  years  or  during 
the  lives  of  two  persons  named  and 
the  survivor  of  them,  whichever  term 
should  first  end,  the  holder  of  one  of 
the  trust  certificates  may  enjoin  the 
trustee  from  voting  the  stock  in  favor 
of  increasing  the  number  of  directors. 
Byington  v.  Piazza,  131  N.  Y.  App. 
Div.  895  (1909).  In  the  case  Sullivan 
t'.  Parkes,  69  N.  Y.  App.  Div.  221 
(1902),  the  holders  of  a  majority  of 
the  stock  of  a  Delaware  corporation 
entered  into  a  written  agreement, 
by  which  the  certificates  were  deposited 
with  a  trust  company  for  fifteen 
years,  together  with  irrevocable 
proxies  to  two  specified  persons  to 
vote  the  stock  during  that  time,  and 
in  ease  they  disagreed  they  were  to 
select  a  third  party  who  was  to  decide 
between  them,  the  proxies  to  be 
renewed  every  three  years,  the  owners 
retaining  the  right  to  sell  or  pledge 
their  stock,  subject  always,  how- 
ever, to  the  agreement,  and  the  pur- 
chaser to  come  into  the  agreement 
and  execute  similar  proxies,  and  the 
agreement  further  providing  that  be- 
fore any  party  sold  his  stock  he 
should  first  offer  it  to  the  others  at  the 
same  price  at  which  he  intended  to 
sell.  The  two  proxies  failed  to  agree 
and  could  not  agree  on  an  arbitrator 
and  one  of  them  filed  a  bill  for  an  in- 


junction to  prevent  the  other  from  vot- 
ing his  own  stock  in  violation  of  the 
agreement.  The  court  held  that  the 
injunction  would  not  lie  because  the 
contract  had  become  impossible  of  per- 
formance, by  reason  of  the  arbitrator 
not  being  provided  for,  and  on  the 
further  ground  that  the  agreement  did 
not  prohibit  each  stockholder  voting 
his  own  stock,  in  case  the  proxies 
could  not  agree,  and  the  court  doubted 
the  validity  of  the  irrevocable  proxies^ 
and  doubted  the  validity  of  a  provis- 
ion against  the  stockholder  voting  his 
stock,  even  if  there  had  been  such  a 
provision.  The  court  intimated  also 
that  an  agreement  preventing  the  sale 
of  stock  for  fifteen  years  would  be 
void  under  the  Personal  Property  Law 
of  New  York  (L.  1897,  ch.  417,  §  2), 
and  that  the  spirit  of  the  statute  mili- 
tated against  an  agreement  to  give 
proxies  for  that  length  of  time. 

A  court  will  enjoin  a  party  from 
voting  upon  or  disposing  of  his  stock 
in  a  corporation  pendente  lite  where 
the  plaintiffs  show  that  they  trans- 
ferred the  stock  to  the  defendant  on 
the  latter's  agreement  not  to  sell  the 
same,  except  with  the  consent  of  the 
former,  and  that  when  he  did  sell  the 
stock  three  fourths  of  the  proceeds 
should  belong  to  the  former,  and  it 
appearing  further  that  the  defendant 
had  given  the  stock  to  his  sister  with- 
out consideration,  Weston  v.  Gold- 
stein, 39  N.  Y.  App.  Div.  661  (1899). 
In  the  case  United,  etc.  Co.  v.  Omaha, 
etc.  Co.,  164  N.  Y.  41  (1900),  where 
a  reorganization  committee,  in  carry- 
ing out  the  reorganization  agreement, 
tied  up  the  stock  by  giving  to  the 
committee  the  power  to  vote  the 
same  until  certain  dividends  were 
paid,  the  court  held  that  the  com- 
mittee had  no  such  power  under  the 
original  reorganization  agreement. 
Trustees  under  a  reorganization  who 
are  to  hold  a  majority  of  the  stock 
and  vote  the  same  for  five  years, 
unless  they  decide  to  distribute  the 
same  before  that  time,  are  not  pre- 
cluded from  selling  stock  owned  by 
themselves  individually,  and  the  fact 


1858 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  622/. 


under  which  stockholders  may  pool  their  stock  by  transferring  the  same 
to  a  person  to  vest  in  him  the  right  to  vote  the  stock  for  a  time  not  ex- 
ceeding five  years,  on  snch  terms  and  conditions  as  therein  set  forth, 


that  they  sell  their  own  stock  is  no 
ground  for  compelling  a  distribution 
of  the  remaining  stock.  Haines  v. 
Kinderhook,  etc.  Ry.,  33  N.  Y.  App. 
Div.  154  (1898).  An  agreement  of 
stockholders  not  to  sell  their  stock 
except  by  concurrent  consent  of  all 
the  signers  to  the  agreement  is  void 
as  in  restraint  of  trade  and  against 
public  policy.  Fisher  v.  Bush,  35  Hun, 
641  (1885). 

The  trustees  are  not  purchasers  and 
owners  of  the  stock.  People  v.  North 
River  Sugar  Ref.  Co.,  121  N.  Y.  582 
(1890).  The  trustee  of  stock  in  a 
foreign  corporation  where  the  trust 
was  for  delivery  if  the  stock  should  be 
sold,  may  be  enjoined  from  voting  the 
stock  after  the  time  for  sale  has 
expired.  Butler  v.  Standard,  etc.  Co., 
146  N.  Y.  App.  Div.  735  (1911). 
An  outside  stockholder  cannot  object 
to  other  stockholders  uniting  their 
interests  in  a  "trust,"  and  thereby 
obtaining  control  of  the  corporation. 
Zimmerman  v.  Jewett,  19  Abb.  N.  Cas. 
459  (1886).  An  agreement  of  the 
holder  of  a  majority  of  the  stock 
that  he  will  retain  control  is  no 
defense  by  the  corporation  to  an 
action  by  the  receiver  of  such  stock- 
holder to  transfer  the  stock  on  the 
corporate  books.  Weller  v.  Pace  To- 
bacco Co.,  25  N.  Y.  Week.  Dig.  531 
(1886).  Where  stock  is  deposited 
with  a  trustee  for  purposes  of  reorgan- 
ization, and  transferable  certificates 
are  issued  therefor  by  the  trustee,  a 
claimant  of  stock  which  another  per- 
son has  deposited,  and  for  which  such 
other  person  has  the  trustee's  certifi- 
cate, cannot  compel  the  trustee  to 
deliver  up  the  stock  until  the  trustee's 
certificate  is  returned,  even  though 
the  party  holding  it  is  a  party  defend- 
ant. Bean  v.  American  Loan,  etc.  Co., 
122  N.  Y.  622  (1890).  As  to  the 
nature  of  trustee's  certificates  in  gen- 
eral, see  §  888,  infra. 

Where  a  trustee  holding  stock  votes 
himself  into  office  and  illegally  votes 
to  himself  a  large  salary,   the  cestuis 


que  trust  may  in  a  suit  for  his  removal 
ask  also  that  he  account  to  such 
cestuis  que  trust  for  such  salary. 
Elias  V.  Sehweyer,  27  N.  Y.  App.  Div. 
69  (1898).  Where  the  stockholders 
transfer  a  portion  of  their  stock  to 
one  of  their  number  to  be  disposed  of 
by  him  for  the  interests  of  the  com- 
pany, and  to  raise  money  to  carry 
on  business,  he  may  use  a  portion  of 
the  same  to  reimburse  one  of  the 
stockholders  for  stock  which  the  lat- 
ter used  in  the  interest  of  the  com- 
pany. Playa,  etc.  Co.  v.  Gage,  60  N.  Y. 
App.  Div.  1  (1901);  aff'd,  172  N.  Y. 
630.  Where  a  trustee  or  agent  with 
whom  bonds  are  deposited  issues  his 
certificate  to  the  effect  that  he  holds 
bonds  specified  in  such  certificate  to 
be  deUvered  to  a  person  specified  in 
such  certificate,  all  coupons  on  such 
bonds  belong  to  the  person  named  in 
the  certificate,  although  the  certificate 
itself  is  not  actually  delivered  until 
several  years  after  the  date  of  the 
certificate.  If  such  coupons  have  been 
canceled  and  returned  to  the  corpora- 
tion issuing  the  bonds,  and  the  trus- 
tee is  held  liable  for  such  coupons, 
the  trustee  may  hold  the  corporation 
liable.  Kelly  v.  Forty-Second  Street, 
etc.  R.  R.,  37  N.  Y.  App.  Div.  500 
( 1 899 ) .  An  agreement  by  which  stock- 
holders transfer  their  stock  to  one  of 
their  number  to  be  sold  in  ten  share 
lots  and  to  be  voted  as  a  unit,  as  di- 
rected by  four  fifths  of  the  members, 
and  in  case  of  disagreement  certain 
ones  were  to  offer  their  stock  for  sale 
to  the  others,  the  purpose  being  to 
retain  the  management  and  control  in 
the  persons  who  originallj'  organized 
the  enterprise,  is  valid  so  long  as  each 
party  retains  his  original  interest  and 
no  other  rights  intervene.  The  mu- 
tual promises  of  said  agreement  are  a 
sufficient  consideration.  If  some  of 
the  parties  violate  the  agreement 
other  parties  may  treat  it  as  a  rescis- 
sion and  may  recover  back  their 
stock.  Gray  v.  Bloomington  &  N.  Ry., 
120  111.  App.  159  (1905). 


1859 


§  622/.]  ELECTIONS  —  CORPORATE   MEETINGS.  [cH.  XXXVII. 

provided  other  stockholders  are  allowed  to  come  into  the  agreement. 
The  stock  may  be  transferred  for  that  purpose  on  the  books  of  the  com- 
pany, the  new  certificates  and  the  corporate  books  to  refer  to  such  agree- 
ment, and  the  agreement  itself  to  be  filed  with  the  corporation  and  to 
be  open  to  the  inspection  of  other  stockholders.^  Forms  of  such  a 
voting  trust  agreement  are  given  at  the  end  of  this  work. 

The  supreme  court  of  Massachusetts  has  rendered  a  logical  and 
clear  decision  on  this  question.  It  holds  that  an  agreement  of  various 
persons  to  purchase  a  majority  of  the  stock  of  a  corporation,  the  stock 
when  purchased  to  be  voted  by  a  committee  of  five  of  the  subscribers 
for  at  least  three  years,  is  not  illegal  even  though  the  title  to  the  stock  is 
given  to  a  trustee  during  that  time.  The  court  said  :  "  We  know  noth- 
ing in  the  policy  of  our  law  to  prevent  a  majority  of  stockholders  from 
transferring  their  stock  to  a  trustee  w^ith  unrestricted  power  to  vote 
upon  it.  .  .  .  A  stockholder  has  a  right  to  put  his  shares  in  trust, 
whatever  his  motive.  If  the  trust  is  an  active  one  he  cannot  terminate 
it  at  will ;  and  the  attempt  to  cut  himself  off  by  contract,  instead  of  by 
the  imposition  of  duties,  from  ending  it,  certainly  is  not  enough  to  poison 
the  covenant  with  the  plaintiff.  It  might  be  held  that  the  duty  of  voting, 
incidental  to  the  legal  title,  made  such  a  trust  an  active  one  in  all  cases. 
As  to  the  arrangement  for  the  trustees  uniting  to  elect  their  candidates, 
the  decisions  of  other  states  show  that  such  arrangements  have  been 
upheld,  and  we  do  not  think  that  it  needs  argument  to  prove  that  they 
are  lawful.  If  stockholders  want  to  make  their  power  felt  they  must 
unite.  There  is  no  reason  why  a  majority  should  not  agree  to  keep 
together."  ^     But  where  a  person  has  contracted  with  a  corporation 

1  L.  1901,  ch.  355.  The  voting  trust  Law.  United  States,  etc.  Rad.  t^. 
agreement  by  which  a  majority  of  the  State  of  New  York,  151  N.  Y.  App.  Div. 
stock  of  the  Equitable  Life  Insurance  367  (1912) ;  aff'd,  208  N.  Y.  144  (1913). 
Company  of  New  York  was  placed  in  ^  Brightman  v.  Bates,  175  Mass.  105 
the  hands  of  trustees  was  declared  (1900),  enforcing  a  contract  for  corn- 
legal  in  Lord  v.  Equitable,  etc.  Society,  missions  for  services  in  purchasing 
57  N.  Y.  Misc.  Rep.  417  (1908) ;  rev'd  such  stock. 

on  another  point  in  194  N.  Y.  212.  An  unincorporated  joint-stock  asso- 
Seealsos.  c,  195  N.  Y.  212,  238  (1909),  elation  to  buy,  lease,  and  sell  land  is 
to  the  effect  that  that  agreement  was  legal,  even  though  the  title  to  the  land 
legal.  A  purchaser  of  a  voting  trust  is  held  in  the  name  of  trustees  who 
certificate  who  hands  the  same  to  cannot  act  except  upon  a  three-fourths 
the  vendor  to  be  transferred  into  the  vote  of  the  stockholders.  A  stock- 
vendee's  name  is  not  protected  against  holder  cannot  have  a  receiver  ap- 
a  pledge  of  the  certificate  by  the  pointed  and  the  business  wound  up  on 
vendor  for  the  latter's  personal  debts,  the  ground  of  its  being  illegal.  Howe 
Union  Trust  Co.  v.  Oliver,  155  N.  Y.  t^.  Morse,  174  Mass.  491  (1899).  The 
App.  Div.  646  (1913).  Where  stock  contract  of  an  agent  to  sell  stock  does 
is  pooled  for  five  years  and  trustee's  not  give  the  principal  a  right  to  dam- 
certificates  issued  in  lieu  thereof,  a  ages  for  failure  to  sell,  where  the 
transfer  of  the  trust  certificates  is  principal  delivered  trustees'  receipts 
taxable    under    the    New    York    Tax  instead  of  the  stock  itself,  the  stock 

1860 


CH.  xxxvn.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


I§  622/. 


to  sell  its  preferred  stock,  and  as  a  part  of  the  transaction  the  stocks 
holders  put  into  his  name  as  trustee  a  majority  of  the  existing  stock,  and 
he  elects  himself  a  director  and  the  president,  and  controls  the  board  of 
directors,  but  fails  to  sell  the  preferred  stock  and  votes  an  unearned 
salary  to  himself  and  refuses  to  give  up  control,  he  may  be  removed  as 
trustee,  and  the  stock  will  then  be  returned,  the  trust  being  a  personal 
one.^ 

In  New  Jersey,  also,  the  highest  court  has  upheld  a  pooling  agreement 
of  stock  of  a  terminal  corporation,  whereby  for  two  and  one  half  years 
the  stockholders  turned  over  their  certificates  to  certain  persons,  together 
with  proxies,  with  power  to  vote  on  any  question,  including  the  sale  of 
the  property,  and  to  exchange  the  stock  for  stock  in  other  corporations 
or  to  hypothecate  it,  the  stockholders  agreeing  in  the  meantime  not  to 
sell  their  stock,  the  object  being  to  finance  and  complete  the  enterprise, 
and  hence  a  bill  filed  by  one  of  the  depositing  stockholders  to  reclaim 
his  stock  was  held  not  to  lie.^ 


having  been  "pooled."  Simmons  v. 
Brooks,  159  Mass.  219  (1893).  The 
fact  is  that  Massachusetts  has  de- 
veloped and  elaborated  this  plan  of 
pooling  stock  much  more  than  in 
other  states.  In  that  state  the  trus- 
tees often  issue  trustees'  certificates 
of  stock  in  the  usual  form  of  stock  cer- 
tificates. See  §  622  (h),  infra.  Where 
a  reorganization  has  been  completed, 
and  a  voting  trust  established  and  a 
release  to  the  reorganization  com- 
mittee executed  by  the  certificate 
holders,  one  of  the  certificate  holders 
cannot  hold  them  liable  in  damages 
on  the  ground  that  as  trustees  of  the 
voting  trust  they  controlled  the  board 
of  directors  and  had  mismanaged  the 
new  corporation,  it  appearing  that 
they  did  not  constitute  a  majority  of 
the  board  of  directors  and  that  in 
managing  the  corporation  they  acted 
as  stockholders  and  directors,  and  not 
as  a  reorganization  committee.  Law- 
rence V.  Curtis,  191  Mass.  240  (1906). 

1  Barbour  v.  Weld,  201  Mass.  513 
(1909). 

*  The  court  said  :  "  This  instrument, 
which  gave  the  defendants  control 
over  the  complainant's  stock,  appears 
to  have  been  for  a  common  interest ; 
it  is  consistent  with  the  purposes  for 
which  the  corporation  was  created, 
and  its  continuance  appears  to  be  nec- 
essary for  the  advantage  of  all  who 


are  interested  in  the  development  of 
the  property.  A  power  of  attorney 
may  become  irrevocable  whenever  the 
object  is  to  create  an  interest ;  and 
this  is  so,  even  if  it  is  not  stated  in 
the  instrument  itself  to  be  irrevo- 
cable. .  .  .  The  statute  does  not  in 
terms  prevent  a  stockholder  from  giv- 
ing an  irrevocable  power  of  attorney 
to  vote  at  stockholders'  meetings,  sub- 
ject to  the  time  limit  as  to  elections, 
nor  can  we  see  any  reason  why  a 
stockholder  may  not  give  such  a 
proxy  if  he  chooses,  and  be  bound  by 
it.  He  can  easily  avoid  the  effect  of 
it  by  appearing  and  voting  in  person 
at  all  meetings.  There  is  no  statutory 
provision,  nor  can  we  perceive  any 
reason  offensive  to  public  policy,  pre- 
venting a  stockholder  from  giving  an- 
other powers  over,  or  rights  in,  his 
shares  in  a  corporation  to  the  same 
extent  that  he  might  give  in  any 
property."  The  court  also  said  :  "*No 
illegal  purpose  is  manifest  upon  the 
face  of  this  agreement,  nor  has  any 
been  alleged  in  the  bill.  It  appears 
to  be  consistent  with  the  purposes  for 
which  the  company  was  created,  and 
which  continuance  appears  to  be  nec- 
essary for  the  advantage  of  all  who 
are  interested  in  the  development  of 
the  property.  It  is  expressly  declared 
to  be  for  the  benefit  of  all  who  join  in 
it.     No  stockholder  is  prevented  from 


1861 


§  622/.] 


ELECTIONS 


CORPORATE   MEETINGS. 


[CH.  XXXVII. 


It  has  also  been  held  in  New  Jersey  that  an  agreement  between 
two  stockliolders  by  which  certain  stock  is  issued  to  a  trustee  to  be 
held  by  the  trustee  for  eighteen  months,  unless  sooner  disposed  of  by 
consent  of  the  parties,  the  stock  in  the  meantime  to  be  voted  as  directed 
by  one  of  the  parties,  the  stock  at  the  termination  of  that  period  to  be 
divided  between  them  in  a  certain  way,  is  legal. ^ 

On  the  other  hand  it  has  been  held  in  New  Jersey  that  an  English 
company  holding  a  majority  of  the  stock  of  a  New  Jersey  corporation, 
the  American  stockholders  being  excluded,  and  the  holding  company 
having  the  voting  power  without  the  legal  title  to  the  stock,  may  be 
compelled  to  give  up  the  stock  to  the  certificate  holders.^    And  it  has 


joining  in  this  agreement,  and  no  chase,  which  affect  the  ultimate  dis- 
stockholder  who  has  not  availed  him-  posal  of  the  stock."  Clowes  v.  Mil- 
self  of  the  opportunity  to  join  in  it  ler,  60  N.  J.  Eq.  179  (1900). 
is  excluded  from  the  benefit  of  it.  No  ^  Warren  v.  Pim,  66  N.  J.  Eq.  353 
one  appears  to  have  been  injured  by  (1904).  The  lower  court  in  New 
it.  The  complainant  does  not  allege  Jersey  said:  "Voting  trusts  are  not 
in  what  way  he  is  damaged  by  its  declared  to  be  necessarily  unlawful, 
continuance."  Chapman  v.  Bates,  47  They  may  or  may  not  be  lawful, 
Atl.  Rep.  638  (N.  J.  1900),  aff'g  60  according  to  the  circumstances  of  the 
N.  J.  Eq.  17  (1900).  case.  The  general  rule  is  that  prima 
^  If  one  of  the  parties,  who  had  a  facie  they  are  unlawful,  but  may  be 
right  to  prescribe  how  the  stock  rendered  lawful  by  the  circum- 
should  be  voted,  subsequently,  but  stances."  Hence,  where  a  majority  of 
prior  to  the  expiration  of  the  agree-  the  stock  of  a  New  Jersey  corporation 
ment,  sells  his  interest  in  the  stock,  is  held  abroad  and  a  few  of  the  for- 
such  sale  being  made  subject  to  the  eign  stockholders,  in  connection  with 
agreement,  his  right  in  regard  to  the  a  reorganization  of  the  company,  send 
voting  of  the  stock  does  not  pass  to  a  circular  to  the  foreign  stockholders 
the  purchaser,  but  vests  in  the  trus-  only,  stating  that  the  foreign  stock- 
tee.  "It  is  against  the  settled  rules  holders  will  not  be  allowed  to  enter 
governing  the  control  of  corporations  the  reorganization  unless  they  consent 
that  an  irrevocable  power  of  voting  or  to  the  new  stock  being  pooled,  the  cu"- 
directing  the  votes  on  stock  should  be  cular  not  specifying  the  duration  of 
vested  in  a  person  who  is  neither  in-  the  pool,  nor  limiting  the  right  of  a 
terested  in  the  stock  nor  a  representa-  stockholder  to  withdraw  his  stock, 
tive  of  persons  interested."  The  court  and  such  pool  is  thereupon  made  of 
said  in  regard  to  the  duty  of  the  trus-  the  foreign  stockholders  only,  and 
tee, in  holding  the  stock,  "it  must  ex-  then  the  originators  of  it  organize  a 
ereise  this  right  and  power  honestly  trust  company  under  English  law, 
and  in  its  best  judgment  as  trustee,  without  a  capital  stock,  to  hold  a 
giving  such  weight  as  in  its  judgment  majority  of  such  new  stock,  they 
it  is  entitled  to,  to  the  fact  that  the  themselves  and  their  nominees  to  be 
complainant,  the  owner  beneficially  in-  the  trustees  for  fifty  years,  although 
terested  in  the  majority  of  the  stock  they  own  but  one  seventh  of  the  entire 
held  in  trust,  is  opposed  to  the  change."  stock,  an  American  stockholder  may 
The  court  said:  "It  must  be  ob-  enjoin  such  pool  from  voting  such 
served  that  the  trust  agreement  is  stock,  especially  where  he  also  has 
not  simply  a  deposit  for  the  purpose  purchased  some  of  the  trust  certifi- 
of  voting,  but  is  a  trust  to  hold  the  cates  issued  by  such  English  corpora- 
stock  for  a  limited  period,  to  await  tion.  This  amounts  to  an  absolute 
the  result  of  certain  options  of  pur-  and  irrevocable  power  in  the  few  in- 

1862 


CH.  XXXVII. J 


ELECTIONS  —  CORPORATE    MEETINGS. 


[§  622/. 


been  held  by  the  lower  court  in  New  Jersey  that  a  stock-pooling  agree- 
ment by  which  for  five  years  the  holders  of  a  majority  of  the  stock  trans- 
fer it  to  trustees  in  exchange  for  certificates  of  the  trustees  themselves, 
and  the  trustees  are  given  power  to  formulate  a  plan  for  financing  the 
company  and  submit  the  same  to  such  stockholders,  who  shall  be  bound 
thereby  unless  they  object  in  a  certain  way,  and  the  trustees  are  then 
given  power  to  carry  out  such  plan,  and  stockholders  who  do  not  come 
into  the  agreement  should  not  be  entitled  to  any  rights  or  benefits 
thereunder,  the  trustees  to  elect  such  directors  as  they  see  fit,  is  illegal, 
and  a  stockholder  who  has  not  come  into  the  agreement  may  enjoin 
the  trustee  from  voting  such  stock,  even  though  some  of  the  trustees 
are  beyond  the  jurisdiction  of  the  court.^     In  New  Jersey  the  complaint 


dividuals  to  control  and  manage  the 
New  Jersey  company  for  fifty  years, 
whereas,  under  the  original  circular 
the  stock  turned  in  did  not  authorize 
such  plan,  and  did  not  limit  the  right 
of  the  equitable  owner  to  compel  the 
trustee  to  vote  his  stock  as  he  might 
direct,  or  to  make  a  retransfer  to  him 
of  his  stock.  Hence  the  American 
stockholder  may  file  a  bill  to  compel  a 
transfer  to  him  by  the  English  cor- 
poration of  the  stock  represented  by 
Ms  trust  certificate  and  to  compel 
the  trustee  to  vote  his  stock  as  he 
directs,  and  to  enjoin  any  action  to 
the  contrary.  Warren  v.  Pim,  65  N.  J. 
Eq.  36  (1903).  This  decision  was  prac- 
tically affirmed  in  66  N.  J.  Eq.  353  by 
a  divided  court  of  seven  to  six.  The 
basis  of  the  affirmance  was  that  the 
English  corporation  had  no  title  to  the 
stock,  but  held  it  for  voting  pvu-poses 
only.  Mr.  Justice  Dixon  stated  that 
stockholders  not  participating  in  a 
voting  trust  could  question  it  only 
under  the  general  rules  of  law  and 
equity.  Mr.  Justice  Pitney  pointed 
out  the  difference  between  a  "holding 
company"  and  such  a  trust,  as  fol- 
lows :  "A  holding  company  is  owner  of 
the  stock  itself.  This  association  is 
not.  It  is  only  a  sham  owner,  vested 
with  a  colorable  and  fictitious  title  for 
the  sole  purpose  of  permanently  voting 
upon  stock  that  it  does  not  own.  The 
officers  of  a  holding  company  are 
responsible  to  the  stockholders  therein  ; 
are  subject  to  be  called  to  account 
annually,  and  to  be  refused  reelection 
if  their  management  of  the   concerns 


intrusted  to  them  is  not  satisfactory 
to  then-  constituents.  But  under  the 
present  voting  trust  there  is  no  such 
responsibility,  no  such  control  by  the 
constituents.  The  constituents  —  that 
is,  the  owners  of  the  deposited  shares 
—  have  disabled  themselves  from  exer- 
cising by  force  of  majorities  any  con- 
trol over  the  discretion  of  the  trus- 
tees. The  only  control  that  is  at  all 
reserved  is  either  to  terminate  the 
trust  outright,  or  else  to  simply  oust 
one  trustee  and  put  another  man  in 
his  place."  He  also  pointed  out  that 
in  the  Chapman  case  the  trustees  had 
power  to  sell  the  stock  held  by  them 
in  trust.  He  also  held  that  stock- 
holders who  had,  as  well  as  those  who 
had  not,  participated  in  the  trust  could 
object  thereto.  Judge  Greene  in  his 
opinion  held  that  the  validity  of  the 
voting  trust  is  subject  to  two  limita- 
tions:  (a)  That  the  holders  of  all  of 
the  shares  of  the  corporation  shall 
have  an  equal  privilege  (after  fair 
information)  of  availing  themselves  of 
the  trust  agreement,  if  they  shall  so 
choose;  and  (6)  that  the  object  and 
aim  of  the  trust  shall  be  the  equal 
benefit  of  all  the  shares. 

1  The  court  said  :  "If,  however,  the 
stockholder  undertakes  to  make  irrev- 
ocable his  grant  of  power,  and  to  de- 
nude himself  for  a  fixed  period  of  the 
power  to  judge  and  determine  and 
vote  as  to  the  proper  management  and 
control  of  the  affairs  of  the  corpora- 
tion, then  whether  the  grant  of  power 
is  good  or  not  must  depend  on  the 
purposes  for  which  it  is  given.     When 


1862 


622/.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


may  be  made  by  a  stockholder,  who  has  deposited  his  stock  in  the  trust, 
or  by  one  who  has  not.^  The  holder  of  a  "  voting  trust  "  certificate 
is  sufficiently  a  stockholder  to  apply  under  the  New  Jersey  statute  for 
the  winding  up  of  the  company,  it  being  insolvent.^ 


the  scheme  devised  does  not  embrace 
a    grant    of    irrevocable    powers    by 
proxy,  but  seeks  a  similar  object  by 
the  creation  of  a  trust  and   the  ap- 
pointment of  a  trustee,  to  whom  the 
title  of  the  stock  is  conveyed,  a  like 
doctrine  must  be  appUed.     If  no  pro- 
vision is  made  for  the  conduct  of  the 
trustee,  at  least  he  would  be  bound  to 
vote   on    the   stock   held    in    trust   in 
accordance  with  the  expressed  wishes 
of    the    cestui    que    trust;     but    if    the 
transfer  of  the  legal  title  to  the  stock 
is  made  and  accepted  under  an  agree- 
ment   of    the    stockholder    which    de- 
prives him  of  all  power  to  direct  the 
trustee,  and  all  opportunity  to  exercise 
his  own  judgment  in  respect   to   the 
management  of  the  affairs  of  the  cor- 
poration,  then,   whether  the   transac- 
tion is  open  to  the  objection  of  other 
stockholders,  as  depriving  them  of  the 
right   they   have   to   the  aid   of   their 
co-stockholders,    must    be    dependent 
upon  the  purposes  for  which  the  trust 
was  created,  and  the  powers  that  were 
conferred.      If  stockholders,  upon  con- 
sideration,    determine     and     adjudge 
that  a  certain  plan  for  conducting  and 
managing  the  affairs  of  the  corpora- 
tion is  judicious  and  advisable,  I  have 
no  doubt  that  they  may,  by  powers  of 
attorney,  or  the  creation  of  a  trust, 
or  the  conveyance  to  a  trustee  of  their 
stock,  so  combine  or  pool  their  stock 
as  to  provide  for  the  carrying  out  of 
the  plan  so  determined  upon.     But  if 
stockholders  combine  by  either  mode 
to  intrust  and  confide  to  others  the 
formulation  and  execution  of  a  plan 
for  the  management  of  the  affairs  of 
the    corporation,    and    exclude    them- 
selves by  acts  made  and  attempted  to 
be  made  irrevocable  for  a  fixed  period, 
from  the  exercise  of  judgment  there- 
on,  or  if  they  reserve  to   themselves 
any  benefit  to  be  derived    from  such 
plan,  to  the  exclusion  of  other  stock- 
holders who  do  not  come  into  the  com- 
bination, then,  in  my  judgment,  such 
combination,    and    the    acts    done    to 


effectuate  it,  are  contrary  to  public 
policy,  and  other  stockholders  have  a 
right  to  the  interposition  of  a  court  of 
equity  to  prevent  its  being  put  into 
operation."  The  court  also  said  : 
"The  agreement  discloses  an  intent  to 
exclude  stockholders  who  do  not  enter 
into  it  from  whatever  benefits  could 
be  claimed  thereunder.  This,  in  my 
judgment,  shows  a  combination  con- 
trary to  public  policy,  and  one  to 
which  any  non-assenting  stockholder 
may  object."  Kreissl  v.  Distilling  Co. 
etc.,  61  N.  J.  Eq.  5  (1900).  An  agree- 
ment whereby  $83,000  of  stock  is 
pooled  in  a  trustee's  hands,  the  latter 
issuing  trustee's  certificates  therefor, 
and  electing  such  directors  as  the  cer- 
tificate holders  may  direct,  according 
to  the  trust  agreement,  may  be  an- 
nulled and  set  aside  at  the  instance  of 
purchasers  of  the  remaining  $17,000 
of  stock  and  of  a  majority  of  the  trus- 
tee's certificates.  White  v.  Thomas, 
etc.  Co.,  52  N.  J.  Eq.  178  (1893). 

1  In  the  cases  White  v.  Thomas 
Inflatable  Tire  Company,  52  N.  J.  Eq. 
178  (1893),  and  Kreissl  v.  Distilling 
Company,  61  N.  J.  Eq.  5  (1900),  the 
complainants  were  stockholders  who 
had  not  united  in  any  voting  trust.  In 
the  cases  Cone  v.  Russell,  48  N.  J.  Eq. 
208  (1891),  and  Chapman  v.  Bates,  60 
N.  J.  Eq.  17 ;  aff'd,  61  N.  J.  Eq.  658 
(1900),  the  complainants  were  stock- 
holders who  had  united  in  a  voting 
trust,  and  had  given  proxies  or  powers 
of  attorney  irrevocable  for  a  period  of 
years.  In  the  case  Warren  v.  Pim, 
65  N.  J.  Eq.  36  (1903),  the  com- 
plaining stockholder  sued  in  both 
capacities,  he  being  the  holder  of  stock 
which  had  not  united  in  the  trust  and 
also  the  purchaser  of  trustee's  cer- 
tificates. 

2  O'Grady  v.  United  States,  etc. 
Co.,  71  Atl.  Rep.  1040  (N.  J.  1908) ; 
75  N.  J.  Eq.  301,  the  certificate  in  this 
case  being  as  follows:  "This  is  to 
certify  that  on  the  1st  day  of  October, 
1912, will     be     entitled     to 


1864 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE   MEETINGS.  [§  622/. 

It  has  been  held  in  Missouri  that  where  a  person  sells  stock  to  two 
others,  and  the  three  agree  to  pool  their  stock  so  that  all  benefits  should 
be  shared  equally,  including  the  sales  thereof  and  including  any  divi- 
dends received  within  a  specified  time  on  certain  other  stock  owned  by 
one  of  the  parties,  the  agreement  is  valid  and  a  suit  for  an  accounting 
may  be  maintained  thereon ;  ^  and  in  California,  that  where  the  holder 
of  a  majority  of  the  stock  had  contracted  to  transfer  it  to  a  specified 
person  with  proxy  irrevocable,  authorizing  the  latter  to  vote  the  stock 
for  five  years  for  the  benefit  and  protection  of  the  corporation,  and  the 
party  so  contracting  refused  to  fulfill  and  voted  the  stock  himself  and 
elected  a  board  of  directors,  the  court,  having  taken  jurisdiction  under 
the  California  statute  authorizing  the  court  to  review  elections,  had 
jurisdiction  to  grant  specific  performance  of  such  contract  ;2  and  in 
Maryland,  that  specific  performance  wdll  not  be  granted  at  the  instance 
of  the  purchaser  of  stock  where  the  purchase  is  from  the  committee  of 
a  pool  of  such  stock,  and  it  is  shown  that  the  pooling  agreement  required 
a  vote  of  three  fourths  of  the  stock  in  the  pool  before  a  sale  could  be 
made,  and  it  is  also  shown  that  the  contract  of  purchase  was  partly 
an  option,  in  that  the  purchaser  was  to  forfeit  a  deposit  he  had  already 
made  in  case  he  did  not  fulfill,  and  it  being  further  shown  that  in  another 
suit  the  complainant  had  stated  the  value  of  the  stock,  and  it  being 
further  shown  that  the  purpose  of  the  contract  was  to  obtain  control  of 
a  large  system  of  railroads,  including  the  board  of  directors ;  ^  and  in 
New  Hampshire  that  an  agreement  of  stockholders  to  vote  their  stock 
in  a  certain  way  for  one  year  is  legal,  and  such  vote  may  be  by  a  voting 
trust ; "  and  in  Virginia  that  the  purchasers  of  stock  may  put  it  in  their 
own  names  as  trustees  to  hold  and  vote  the  same  for  twenty-five  years 
as  a  majority  of  the  trustees  may  determine,  and  may  sell  trustees' 

receive    a    certificate,    or    certificates,  cate,  or  by  or  under  any  agreement  ex- 

for fuUy  paid  shares  of  $100  press  or  implied."  155N.Y.App.Div.646. 

each    of    the    common    stock    of    the  >  Green   v.    Higham,    161   Mo.    333 

United  States  Independent  Telephone  (1901). 

Co.,  a  corporation  organized  under  the  ^  Whitehead  v.  Sweet,   126  Cal.  67 

laws  of  the  state  of  New  Jersey,   and  (1899). 

in  the  meantime  to  receive  payments  '  Ryan    v.    McLane,    91    Md.    175 

equal  to  the  dividends,  if  any,  collected  (1900).     Where  an  agreement  for  the 

by    the   undersigned    voting   trustees,  pooling  and  voting  of  stock  provides 

upon  a  like  number  of  such  shares  of  that    any   holder   of    trustee's   certifi- 

common  stock  standing  in  their  names ;  eates    may     on    six    months'     notice 

and  until  the  1st  day  of  October,  1912,  demand  from  the  trustee  repayment  of 

the  voting  trustees  shall  possess  and  the  price  which  he  paid  for  the  stock, 

be   entitled   to   exercise   all   rights   of  such  demand  may  be  enforced  by  a 

every  name  and  nature,  including  the  suit  and  the  money  collected  from  the 

right  to  vote  in  respect  of  any  and  all  trustee.     Waggaman  v.  Nutt,  88  Md. 

such  stock;  it  being  expressly  stipu-  265  (1898). 

lated  that  no  voting  right  passes  to  the  "  Bowditch     v.     Jackson     Co.,     82 

holder  thereof  by  or  under  this  certifi-  Atl.  Rep.  1014  (N.  H.  1912). 

1865 


§  622/.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


CH.  XXX VII. 


certificates  representing  it  and  the  purchaser  of  one  of  the  certificates 
cannot  have  the  trust  dissolved  prior  to  the  expiration  of  the  twenty-five 
years,  the  purpose  of  the  trust  being  to  secure  a  satisfactory  manage- 
ment and  the  consideration  being  the  mutual  promises.  The  court 
held  that  the  cases  to  the  contrary  involved  an  unlawful  purpose  or 
questionable  means  to  accomplish  a  lawful  purpose.^ 

In  Pennsylvania  it  is  held  that  the  stockholders  of  a  machine  com- 
pany may,  in  order  to  insure  continuance  of  the  existing  policy  and  man- 
agement, execute  a  trust  agreement  transferring  their  stock  on  the  books 
to  voting  trustees,  the  latter  receiving  new  certificates  in  their  individual 
names  and  issuing  their  trustees'  certificates  to  the  stockholders  as 
against  the  old  stock  and  agreeing  to  continue  as  directors  without 
pay  during  the  trusteeship,  the  agreement  to  continue  for  five  years, 
when  the  trustees  are  given  power  to  purchase,  at  twice  its  par  value, 
the  stock  of  any  one  who  wishes  to  withdraw  at  that  time.^  In  Ohio 
it  is  held  that  it  is  legal  for  the  stockholders  to  deposit  their  stock  with 
a  depositary,  to  be  transferred  to  such  depositary  and  voted  by  him  as 
directed  by  a  committee  of  the  stockholders,  such  committee  being 
named,  the  object  of  the  deposit  being  to  effect  an  adjustment  of  dif- 
ferences between  the  common  and  preferred  stockholders ;  ^    and  in 

a  trustee,  and  the  lessee  issues  "stock 
trust  certificates"  therefor,  being  its 
obligation  to  pay  a  fixed  rate  of 
interest  per  year,  with  an  option  on  its 
part  to  pay  the  principal  sum  or  not 
at  its  option  at  a  specified  time,  the 
stock  being  security  therefor,  to  be 
sold  by  the  trustee  in  case  the  prin- 
cipal and  interest  are  not  paid,  this 
form  of  financing  does  not  create  a 
debt,  and  hence  such  certificates  are 
not  subject  to  taxation  as  a  bond  and 
mortgage,  the  transaction  being  really 
a  guaranteed  dividend  or  rental. 
Commonwealth  v.  Union,  etc.  Co.,  192 
Pa.  St.  507  (1899).  A  trust  of  stock 
for  the  benefit  of  both  the  bondholders 
and  the  stockholders  cannot  be  broken 
up  by  one  of  the  stockholders  only. 
Shelmerdine  v.  Welsh,  47  Leg.  Int. 
26  (Phila.  Com.  PI.  1890). 

^  The  agreement  did  not  prevent 
any  stockholder  from  demanding  back 
his  stock  whenever  he  saw  fit.  The 
court  held  that  this  was  not  a  "voting 
trust,"  and  that  it  was  merely  "a  con- 
venient method  by  which  distant  and 
widely  separated  shareholders  became 
enabled,  indirectly,  to  participate  in 
the   control   and   management   of   the 


1  Carnegie  Trust  Co.  v.  Security, 
etc.  Co.,  Ill  Va.  1  (1910),  the  court 
saying :  "If  the  analysis  of  the  ele- 
ments of  property  in  the  ownership 
of  a  share  of  stock,  given  by  Cook 
on  Corporations,  be  sound  —  and  we 
think  it  cannot  be  controverted  — 
then  the  right  to  vote  the  stock  is, 
in  itself,  and  of  itself,  a  valuable  right 
of  property,  and  such  a  trust  becomes 
by  virtue  of  that  right  an  active  and 
not  a  passive  or  dry  trust." 

2  Boyer  v.  Nesbitt,  227  Pa.  St.  398 
(1910). 

Where  the  trustee  has  no  interest 
and  is  to  vote  the  stock  as  directed  by 
a  committee  of  the  stockholders  and 
distribute  dividends,  the  trusteeship 
may  be  revoked  by  a  holder  of  a  trust 
certificate,  and  such  holder  at  an  elec- 
tion may  demand  the  right  to  vote, 
under  the  Pennsylvania  statute  author- 
izing the  inspectors  of  election  to  allow 
the  beneficial  owner  of  stock  to  vote  it. 
Commonwealth  v.  Roydhouse,  233 
Pa.  St.  234  (1911).  Where  one  street 
railway  company  takes  a  lease  of  the 
street  railways  of  three  other  companies 
on  an  agreement  whereby  the  stock  of 
the  latter  companies  is  deposited  with 


1866 


CH.  XXXVII. 


ELECTIONS 


CORPORATE   MEETINGS. 


622/. 


Alabama  and  Iowa  that  where,  in  order  to  prevent  the  foreclosure  and 
sale  of  a  railroad,  a  reorganization  agreement  is  entered  into  by  the 
creditors  and  stockholders,  whereby  the  claims  of  the  creditors  and  the 
voting  power  of  the  stockholders  are  vested  in  trustees,  the  voting  power 
to  be  exercised  by  the  trustees  until  certain  debts  were  paid,  the  stock- 
holders cannot  withdraw  from  the  agreement  and  claim  the  right  to  vote 
upon  their  stock, ^  This  decision  was  entirely  correct,  and  in  fact  many  of 
the  voting  trusts  have  been  created  as  a  part  of  the  plans  of  reorganiza- 
tion of  insolvent  railroad  systems.^    In  the  reorganization  of  an  insol- 


eompany,  and  from  which  each  could 
recede  at  any  time  and  demand  return 
of  his  stock  without  violating  any 
term  of  the  agreement.  The  deposi- 
tary is  a  proxy  required  to  vote  the 
stock  as  directed  by  the  committee." 
The  contract  of  deposit  is  given  in  the 
report.  The  suit  arose  on  quo  ivar- 
ranto  proceedings  to  oust  the  board  of 
directors  who  were  elected  by  the  vote 
of  the  depositary,  but  whose  title  to 
office  was  denied  by  the  company. 
Ohio,  etc.  Co.  v.  State,  49  Ohio  St.  668 
(1892) ;  State  v.  O.  &  M.  Ry.,  6  Ohio 
Circ.  Ct.  415  (1892).  Cf.  Hafer  v.  N.  Y. 
etc.  R.  R.,  14  W.  L.  Bull.  68  (1886). 

1  Not  even  a  subsequent  change  in 
the  agreement  so  as  to  authorize  the 
issue  of  first  mortgage  bonds  to  take 
up  some  of  the  debt  will  enable  the 
stockholders  to  claim  the  right  to  vote 
upon  their  stock  before  the  debts  spec- 
ified above  have  been  paid.  Mobile, 
etc.  Co.  V.  Nicholas,  98  Ala.  92  (1893). 
Where  a  bondholder's  reorganization 
agreement  provided  that  plans  should 
be  formulated  and  should  be  binding 
on  all  the  bondholders  who  signed  un- 
less a  majority  dissented  within  thirty 
days,  and  a  majority  does  not  so  dis- 
sent, a  single  bondholder  cannot  object. 
Even  though  the  agreement  provides 
for  an  assessment  for  a  certain  amount 
for  legal  and  other  expenses  an  addi- 
tional assessment  may  be  levied  to 
preserve  the  property.  A  provision  in 
the  agreement  that  bonds  of  a  new  cor- 
poration shall  be  issued  in  exchange 
for  bonds  of  the  old  and  that  the  stock 
shall  be  pooled  until  the  company 
becomes  self-supporting  is  legal.  Cow- 
ell  V.  City,  etc.  Co.,  130  Iowa,  671 
(1906).  See  also  Shelmerdine  v.  Welsh, 
47  Leg.  Int.  26  (Phila.  Com.  PI.  1890). 


2  The  following  from  "  Bradstreet's  " 
of  September  6,  1902,  is  in  point : 


VOTING   TRUSTS 

Recent  events  in  the  financial  world  have 
given  rise  to  a  good  deal  of  discussion  about 
the  nature  and  bearings  of  what  is  known 
as  voting  trusts  in  connection  with  the 
stocks  of  railroads  and  other  corporations. 
The  definition  of  the  term  is  a  delegation  of 
the  right  to  elect  directors  and  officers  of 
such  companies  to  certain  trustees,  either 
for  a  specified  period  or  a  length  of  time 
contingent  upon  other  events,  commonly  the 
payment  of  dividends  on  the  stocks  held  in 
trust.  Arrangements  of  this  kind  are  the 
outcome  for  the  most  part  of  the  railroad 
reorganizations  which  have  been  so  frequent 
during  the  past  decade.  When  modern  and 
correct  principles  began  to  be  applied  to  the 
reconstruction  of  bankrupt  corporations,  it 
was  found  that  one  of  the  primary  require- 
ments was  that  bankers  and  capitalists 
should  provide  very  large  sums  of  money 
for  the  purpose  of  buying  up  claims  against 
the  company,  for  extinguishing  the  rights 
of  non-assenting  holders  of  stocks  and 
bonds,  and  for  the  purchase  of  the  equip- 
ment and  completion  of  the  improvements 
needed  to  put  the  plants  in  condition  for 
profitable  operation.  The  natural  sequence 
of  this  was  that  the  bankers  or  syndicates 
who  supplied  the  capital  desired  to  retain 
the  management  of  the  company  in  their 
own  hands  for  a  certain  length  of  time,  so 
that  they  might  have  the  assurance  that 
their  plans  would  be  carried  out  by  a  man- 
agement nominated  by  themselves  and  in 
sympathy  with  their  views.  In  matters  of 
that  kind  continuity  of  management  and  an 
absence  of  liability  to  sudden  changes  in 
the  control  or  policy  are  very  important. 
Consequently,  in  nearly  all  of  the  large  rail- 
road reorganizations,  like  those  of  the 
Northern  Pacific,  Erie,  Reading,  and  so 
forth,  the  plans  under  which  the  finances 
of  the  companies  were  readjusted  included 
provisions  by  which  the  stocks  of  the  reor- 
ganized road  were  to  be  deposited  with 
three  or  more  voting  trustees,  who  would 
issue  _  against  the  stock  their  certificates, 
carrying  a  beneficial  interest  to  the  holders 
of  such  certificates  in  the  stocks  so  depos- 
ited. In  most  cases  the  voting  trust  was 
arranged    to    last    for    from    three    to    five 


1867 


§  622/.]  ELECTIONS  —  CORPORATE    MEETINGS.  [cH.  XXXVII. 

vent  corporation  by  scaling  down  its  securities  and  stock,  it  is  legal 
to  provide  that  the  company  shall  be  managed  by  a  committee  of  five, 
three  selected  by  the  creditors  and  two  by  the  stockholders,  until  the 
creditors  are  paid.^ 

On  the  other  hand,  it  has  been  held  in  Alabama  that  although  many 
stockholders  transfer  their  stock  to  a  trustee  to  hold  and  vote  it  for 
three  years,  and  agree  not  to  sell  until  they  have  offered  to  sell  to  one 
another,  yet  any  one  may  sell  to  an  outsider,  and  the  latter  may  de- 
mand back  his  stock  from  the  trustee.^ 

In  Maine  it  is  held  that  a  transfer  of  a  controlling  interest  of  stock 
of  a  railroad  company  to  trustees  to  hold  until  the  road  is  completed, 
and  then  to  return  the  same  to  the  transferrers,  the  object  being  to  se- 
cure the  cooperation  of  municipalities  in  obtaining  an  extension  of  the 
charter  and  the  granting  of  municipal  aid,  is  legal,  the  transaction  being 
a  fair  one,  and  being  known  to  the  public,  and  insisted  upon  by  the  pub- 
lic before  aid  would  be  given.^  And  it  is  also  held  that  a  stockholder 
who  with  other  stockholders  has  transferred  a  majority  of  the  capital 
stock  to  a  trustee  to  be  sold  at  such  time  and  for  such  price  as  a  majority 
of  the  depositaries  might  direct,  the  trustee  to  vote  the  stock  in  the 
meantime  as  three  specified  stockholders  or  a  inajority  of  them  should 
direct,  cannot  enjoin  the  sale  of  the  stock  at  public  auction  as  authorized 
by  the  majority  of  the  depositaries,  even  though  the  main  purpose  of 
the  plan  is  to  retain  control  until  such  sale,  the  agreement  providing 
that  if  the  sale  is  not  made  within  two  years  the  stock  was  to  be  returned 
to  the  depositaries.  Such  agreement  is  not  a  voting  trust  with  incidental 
power  of  sale,  but  is  a  power  of  sale  with  incidental  voting,  the  purpose 
being  to  prevent  a  sale  to  hostile  interests  and  provide  for  a  sale  of  the 
entire  stock  deposited.'* 

The  federal  court  as  early  as  1867  held  that  an  agreement  by  which 
various  owners  of  stock  place  their  stock  in  the  hands  of  one  person  as 
trustee  or  agent  to  hold  for  a  certain  period  of  time,  the  parties  agreeing 
not  to  sell  their  stock  without  having  first  offered  to  sell  it  to  the  rest  of 
their  associates  at  a  price  not  above  the  then  current  market  value,  and, 
in  case  of  their  declining  to  take  it,  without  next  offering  it  to  the  trustee, 
but  any  one  of  the  parties  to  be  at  liberty  to  withdraw  at  any  time  on 
those  terms,  is  not  "  contrary  to  public  policy,  or  any  wise  open  to  ob- 

years,  or  until  dividends  had  been  paid  on     prior  to   the  time  when   the   arrangement 
at  least  the  preferred  stock,   either  for  a     would  have  been  terminated, 
year  or  longer,  at  a  specified  rate.     It  was 

ttstefsXireUSt:r^Ut%h74"t^  .  J  ^^^^J-n^1^^^'^^   ^'^""^^  ^"" 

ing  trust  of  their  own  volition,  and  in  at  ^'^'*  ^y-  ■^"'*  (iyAly- 

least  two  notable  cases,  those  of  the  North-  ^  Moses  v.  Scott,  84  Ala.  608  (1888). 

ern  Pacific  and  the  Baltimore  &  Ohio,  the  3  Greene  v.  Nash,  85  Me.  148  (1892). 

votmg  trustees  did  actually  end  their  trus-  4  TToll    „     IVTor^ill    T"     r'r^      lOfi   A/Tr. 

teeship  and  deliver  the  stock  itself  to  the  ^^^^    ^-    J^^errill    T.    Co.,    106   Me. 

holders  of  the  voting  trustees'  certificates  465  (1910). 

1868 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  622/. 


jection  " ;  ^    and  there  have  been  many  recent  decisions  in  the  fed- 
eral courts  on  various  "  pooling "  agreements.^     Most   of   the   deci- 


1  Brown  v.  Pacific  Mail  S.  Co.,  5 
BIatchf.525(1867);s.c.,4Fed.Cas.420. 

2  In  the  case  Levi  v.  Evans,  57 
Fed.  Rep.  677  (1893),  three  stock- 
holders, by  an  instrument  similar  to  a 
bill  of  sale,  sold  their  stock  to  a 
fourth  stockholder  "for  and  during 
the  period  of  six  months,  ...  in 
trust  for  the  use  and  benefit  of  the 
grantors,"  with  power  to  sell  the  same 
on  certain  terms,  yet  the  court  held 
that  this  instrument  was  not  a  sale 
or  trust  agreement,  but  merely  a 
power  of  attorney.  It  did  not  pre- 
vent the  fourth  stockholder  from  selling 
his  own  stock  on  such  terms  as  he 
chose,  even  though  he  did  not  sell  the 
stock  of  the  others,  it  not  appearing 
that  the  sale  of  his  stock  prevented 
his  selling  the  stock  of  the  others. 
The  instrument  conveyed  merely  at 
most  "only  a  dry  legal  title  for  the 
mere  purpose  of  sale,  and  with  the 
power  of  sale  carefully  circumscribed." 

In  the  case  Ryan  v.  Seaboard  & 
R.  R.  R.,  89  Fed.  Rep.  397  (1898), 
there  was  involved  a  pooling  agree- 
ment by  which  the  signers  agreed  for 
five  years,  or  until  thirty  days  after 
the  agreement  should  be  abrogated, 
not  to  sell  nor  dispose  of  their  stock 
nor  to  delegate  the  voting  power 
thereof  to  any  person  other  than  three 
specified  persons  and  without  the  writ- 
ten consent  of  tliree  fourths  of  the 
aggregate  shares  of  the  signers  of  the 
agreement,  and  the  agreement  also 
authorized  these  three  persons  to  vote 
as  proxy  for  all  signers  of  the  agree- 
ment who  should  not  be  personally 
present  at  any  meeting  of  the  stock- 
holders. The  essential  features  of  the 
agreement  were  that  no  stockholder 
would  sell  his  stock  for  five  years 
except  upon  the  consent  of  three 
fourths  of  the  stock  in  pool,  and  in  the 
meantime  he  would  vote  in  person  or 
through  specified  proxies.  One  of  the 
signers,  after  sending  in  his  certificate 
indorsed  in  blank,  sold  the  same  to 
the  complainant  in  this  suit  without 
delivery  of  the  certificate  itself,  such 
certificate  having  been  canceled  and  a 
new  certificate  issued  to  the  chairman 


of  the  pooling  committee.  This  suit 
was  instituted  to  compel  the  delivery 
of  the  stock  called  for  by  such  cer- 
tificate and  sale  and  for  other  relief. 
The  court  held  that  the  suit  would 
lie,  but  that  all  the  parties  signing  the 
agreement  were  necessary  parties  de- 
fendant in  this  suit  to  determine  the 
validity  of  the  agreement,  excepting 
such  of  them  as  had  sold  their  stock. 
The  court  held  also  that  the  suit  was 
not  multifarious,  although  it  joined 
the  company  as  a  party  defendant  in 
order  to  obtain  a  transfer  of  the  stock. 

An  injunction  pendente  lite  against 
the  voting  of  certain  stock  in  connec- 
tion with  the  formation  of  an  alleged 
illegal  pool  will  not  be  continued 
where  it  failed  to  accomplish  its  pur- 
pose at  one  annual  meeting  and  will 
fail  at  the  next  meeting.  Ryan  v.  Sea- 
board &  R.  R.  R.,  89  Fed.  Rep.  385 
(1898).  The  fact  that  one  of  the 
trustees  of  a  voting  trust  is  an  officer 
in  a  certain  railroad  does  not  render 
illegal  the  voting  of  the  stock  in  favor 
of  consolidating  with  that  railroad, 
there  being  no  proof  of  wrong-doing 
or  unfair  terms.  Dady  v.  Georgia, 
etc.  Ry.,  112  Fed.  Rep.  838  (1900). 
A  court  of  bankruptcy  cannot  compel 
as  a  compromise  the  reorganization 
of  a  bankrupt  company  by  the  issue 
of  stock  in  a  new  company  to  the  cred- 
itors and  the  forming  of  a  voting  trust 
for  ten  years.  Re  Northampton,  etc. 
Co.,  185  Fed.  Rep.  542  (1911).  In 
a  suit  by  a  stockholder  who  has  put 
his  stock  into  a  pool  to  enjoin  the  sale 
of  the  stock,  as  provided  in  the  pool 
agreement,  where  he  stipulates  that 
in  case  he  is  defeated  in  the  suit,  the 
stock  may  be  sold  under  order  of  the 
court,  he  is  bound  by  the  stipulation. 
Hall  V.  Ames,  182  Fed.  Rep.  1008 
(1910) ;  s.  c,  190  Fed.  Rep.  139. 

Where  two  stockholders  make  a  con- 
tract by  which  the  stock  is  placed  in 
the  name  of  one  of  them  to  be  held  in 
trust  and  voted  by  him  as  they  agree, 
and  in  case  of  disagreement  an  arbi- 
trator is  to  decide,  and  the  stock  is 
not  to  be  sold  until  they  agree  to  sell, 
the  one  so  placing  stock  in  the  name 


1869 


622/.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVIT. 


sions  on  this  subject,  however,  have  been  In  the  state  courts,  and  as 
shown  above,  those  decisions  have  quite  uniformly  sustained  this 
mode  of  tying  up  for  a  term  of  years  the  control  of  a  majority  of  the 
stock  of  a  corporation.     There  are  a  few  decisions  to  the  contrary.^ 

not  good  until  recorded  except  as 
between  the  parties,  yet  where  various 
stockholders  have  pooled  their  stock 
by  turning  in  their  certificates  of 
stock  to  one  person  to  hold,  and  one 
of  the  parties  so  pooling  has  sold  his 
pool  certificate,  and  the  manager  of 
the  pool  knowing  that  fact  refuses  to 
permit  the  stock  itself  to  be  cor- 
respondingly transferred  on  the  books 
of  the  company,  and  later  fraudu- 
lently obtains  a  judgment  against  the 
party  who  originally  entered  the  pool, 
and  sells  out  his  stock  under  such 
judgment,  he  may  be  compelled  by  a 
court  of  equity  to  transfer  the  stock 
to  the  purchaser  of  the  pool  certifi- 
cate, even  though  the  stock  has 
advanced  in  value  and  two  years  have 
intervened.  Brissell  v.  Knapp,  155 
Fed.  Rep.  809  (1907).  A  syndicate 
operation  was  involved  in  Hogg  v. 
Hoag,  107  Fed.  Rep.  807  (1901),  where 
certain  stocks  and  property  were 
transferred  to  a  trustee,  who  issued 
certificates  therefor  to  the  members  of 
the  syndicate.  A  part  of  the  sub- 
scribers did  not  pay,  and  the  vendor 
of  the  property  took  the  trustee's  cer- 
tificates of  such  non-paying  sub- 
scribers, and  on  the  death  of  the  trus- 
tee a  bill  was  filed  to  have  the  court 
substitute  a  new  trustee  and  one  of 
the  subscribers  filed  a  cross-bill  for  an 
accounting.  The  court  decreed  a  wind- 
ing up  of  the  syndicate  and  appointed 
a  receiver.  The  court  held  that  a  par- 
tial payment  made  to  the  vendor  of 
the  stocks  was  legal,  even  though  all 
the  property  was  not  conveyed  to  the 
trustee,  as  contemplated,  and  that  the 
vendor's  acceptance  of  the  certificates 
of  non-paying  subscribers  obligated 
him  to  pay  therefor,  although  such 
trustee's  certificates  had  become  worth- 
less, the  transaction  being  in  connec- 
tion with  the  Oregon  Pacific  Railroad 
Company.  The  court  said  that  the 
syndicate  was  in  substance,  though 
not  technically,  a  joint-stock  company. 
1  It  has  been  held  in  North  CaroUna 


of  the  other  as  trustee  cannot  sue  the 
latter  for  refusal  to  deUver  to  the 
former  his  part  of  the  stock.  Louis- 
ville Trust  Co.  V.  Stockton,  75  Fed. 
Rep.  62  (1896).  Where  stock  is  trans- 
ferred to  a  trustee  to  sell  with  the 
stock  of  other  persons,  the  trustee's 
power  of  sale  is  not  revoked  by  the 
death  of  the  transferrer.  Hiller  v. 
Ladd,  80  Fed.  Rep.  794  (1897). 

A  contract  to  combine  to  control  the 
majority  of  the  stock  of  a  railroad 
company  may  be  violated  by  a  party 
to  it,  although  by  its  terms  it  is  irrev- 
ocable. Clarke  v.  Central  R.  R.  etc., 
50  Fed.  Rep.  338  (1892).  In  this  case, 
however,  on  the  final  hearing,  the  bill 
was  dismissed.  See  62  Fed.  Rep.  328 
(1894).  Where  stock  is  placed  in  a 
trustee's  hands,  and  a  trustee's  cer- 
tificate is  taken  therefor,  a  pledge  of 
the  trustee's  certificate  is  not  a  pledge 
of  the  stock  sufficient  to  cut  off  subse- 
quent attachments  of  the  stock.  Bid- 
strup  V.  Thompson,  45  Fed.  Rep.  452 
(1891).  A  "trust"  of  stock  was 
involved  in  Farmers'  Loan,  etc.  Co.  v. 
Chicago,  etc.  Ry.,  27  Fed.  Rep.  146 
(1886),  where  Hugh  J.  Jewett,  presi- 
dent of  the  Erie  Railway,  held  as  trus- 
tee the  stock  of  the  Chicago  &  Atlan- 
tic Railroad,  the  western  connec- 
tion of  the  former  company.  The 
court  did  not  pass  on  the  permanency 
of  the  trust.  Where  a  third  party 
holds  the  pledged  stock  and  agrees 
with  the  pledgee  that  if  the  pledgee 
does  not  pay  any  assessments  the 
third  party  may  pay  them  and  obtain 
repayment  out  of  the  dividends,  hold- 
ing the  stock  as  security,  and  the 
third  party  pays  the  assessments  with- 
out the  pledgee  being  notified  of  such 
assessments,  and  the  third  party 
causes  the  identity  of  the  stock  to  be 
lost,  the  pledgee  can  reclaim  the  stock 
without  paying  the  assessment  to  such 
third  party.  Moore  v.  Bank  of  British 
Columbia,  125  Fed.  Rep.  849  (1903). 
Even  though  by  the  statutes  of  a  state 
(Arizona)   a   transfer   of   the   stock  is 


1870 


CH.   XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  622/. 


The  above  decisions  seem  to  lead  to  the  conchision  that  a  deposit 
of  certificates  of  stock  with  trustees  for  a  specified  period  of  time, 
either  with  or  without  a  transfer  of  the  same  to  the  trustees,  is  legal, 
and  is  not  in  violation  of  the  usual  statute  against  restraints  on  the 
alienation  of  personal  property ;  ^  and  is  not  opposed  to  public  policy 
as  a  restraint  upon  trade ;  -  and  is  not  an  implied  fraud  upon  stock- 
holders who  are  not  allowed  to  participate ;  and  is  not  an  illegal  separa- 


that  where  a  majority  of  the  stock- 
holders of  a  national  bank  have  trans- 
ferred their  stock  to  three  trustees  to 
hold  and  vote  it  for  fifteen  years  as 
irrevocable  proxies,  an  outside  stock- 
holder may  enjoin  the  carrying  out 
of  the  agreement  where  the  three 
trustees  are  officers  of  the  national 
bank  and  the  acts  of  congress  forbid 
an  officer  of  a  national  bank  acting 
as  proxy.  Bridgers  v.  First  Nat.  Bank, 
152  N.  C.  293  (1910).  In  a  suit 
for  damages  for  fraud  inducing  a  per- 
son to  subscribe  for  stock,  a  part  of  the 
fraud  may  be  the  forming  of  a  voting 
trust  to  control  the  corporation  and 
cause  it  to  make  fraudulent  contracts. 
Worth  V.  Knickerbocker  T.  Co.,  151 
N.  C.  191  (1909).  A  purchaser  of 
a  trustee's  certitieate  may  maintain 
a  bill  in  equity  to  have  the  stock  trans- 
ferred by  the  trustees  to  the  holders  of 
the  certificate,  the  trust  being  a  voting 
trust  for  three  years,  the  sole  purpose 
being  to  pool  the  stock  and  control  the 
company.  The  trust  is  void.  Shep- 
pard  V.  Rockingham,  etc.  Co.,  150 
N.  C.  776  (1909).  A  pooling  agree- 
ment for  ten  years  by  the  majority 
stockholders  with  a  provision  that 
the  directors  are  to  be  divided  among 
them  is  void,  the  stock  being  trans- 
ferred to  trustees  with  authority  to 
vote,  that  being  a  violation  of  the 
statute  limiting  proxies  to  three  years. 
Bridgers  v.  Staton,  150  N.  C.  216 
(1909).  An  agreement  between  stock- 
holders holding  a  majority  of  the  shares 
to  pool  their  stock  by  transferring  it  to 
trustees,  and  authorizing  them  to  vote 
all  such  stock  at  corporate  meetings, 
and  to  pledge  it  as  collateral  for  loans, 
is  void,  as  against  public  policy. 
Hence  the  holder  of  one  of  the  trust- 
tee's  certificates  may  demand  his 
stock  and  may  enjoin  the  trustee  from 
voting   his   stock   or   disposing   of   it. 


Harvey  v.  Lin\dlle  Imp.  Co.,  118  N.  C. 
693  (1896). 

A  vendor  of  stock  may  collect  the 
price  even  though  the  agreement  eon- 
tains  a  provision  for  pooling  the  stock 
which  is  illegal.  Edgerton  v.  Power,  18 
Mont.  3.50  (1896).  A  pool  of  stock 
does  not  prevent  a  creditor  of  one  of 
the  participants  causing  to  be  sold  on 
execution  his  debtor's  interest  in  the 
stock,  such  sale  to  be  subject  to  the 
pooling  contract  if  it  is  la^vful.  Har- 
din V.  White,  etc.  Co.,  26  Wash.  583 
(1901). 

1  Williams  v.  Montgomery,  148 
N.  Y.  519,  526  (1896),  where  the  court 
said  that  under  the  New  York  statute 
the  power  of  alienation  is  suspended 
only  when  there  are  no  persons  in  being 
by  whom  an  absolute  title  can  be  con- 
veyed, and  that  "the  test  of  alien- 
ability of  real  or  personal  property  is 
that  there  are  persons  in  being  who 
can  give  a  perfect  title,"  and  that 
"where  there  are  li\ing  parties  who 
have  unitedly  the  entire,  right  of 
ownership,  the  statute  has  no  applica- 
tion," and  that  inasmuch  as  the  agree- 
ment of  several  persons  not  to  sell  for 
a  specified  time  may  at  any  time  be 
waived  or  canceled  by  unanimous  eon- 
sent,  the  statute  does  not  apply.  A 
trust  deed  is  not  void  as  suspending 
the  power  of  alienation,  inasmuch  as 
by  payment  the  mortgage  may  cease, 
or  by  agreement  of  all  parties  inter- 
ested it  may  be  canceled.  Balfour- 
Guthrie,  etc.  Co.  V.  Woodworth,  124 
Cal.  169  (1899).  See  to  same  effect 
§  812,  infra. 

2  Williams  v.  Montgomery,  148 
N.  Y.  519,  .526  (1896),  where  the  agree- 
ment not  to  sell  for  six  months  was 
upheld,  the  court  saying:  "Nor  was 
the  agreement  opposed  to  public 
policy,  for  a  reasonable  regulation  as  to 
the  mode  of  selling  the  stock,  so  as  to 


1871 


§  622/.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


tion  of  the  voting  power  from  the  ownership  of  the  stock ;  provided  al- 
ways that  no  actual  fraud  is  involved  in  the  transaction.  In  other 
words,  such  a  pooling  of  stock  is  not  illegal  in  itself,  but,  like  all  contracts, 
may  be  illegal  if  actual  fraud  is  involved.^ 

It  remains  to  add  that  while  the  agreement  of  the  holder  of  a  trustee's 
certificate,  like  the  agreement  of  a  holder  of  a  certificate  of  stock,  not 
to  sell  the  same  during  a  specified  time,  is  legal,  just  as  the  agreement  of 
a  partner  in  a  copartnership,  not  to  sell  his  interest  therein  or  dissolve 
the  partnership  for  a  term  of  years,  is  legal,^  nevertheless  such  con- 
tracts do  not  actually  prevent  a  sale,  A  sale  made  in  violation  of 
such  a  contract  is  upheld  by  the  courts,  but  the  party  making  such  a  sale 
in  violation  of  his  contract  is  liable  in  damages  to  the  other  parties.^ 

A  trustee  of  stock  to  vote  the  same  for  a  period  of  years  and  issue  its 
trust  certificates  to  the  depositors  may  resign  and  file  a  bill  in  equity 


prevent  the  sacrifice  thereof,  was  not 
a  restraint  upon  trade.  As  an  inci- 
dent to  the  contract,  making  parti- 
tion of  the  shares,  it  was  competent 
for  the  parties  to  agree  that  the  stock 
donated  to  the  corporation,  in  which 
they  had  a  common  interest,  should  be 
first  offered  for  sale.  This  was  no 
restraint  upon  the  business  freedom 
of  the  parties,  but  a  promotion  of  the 
general  interest,  by  temporarily  with- 
holding from  the  market  shares  owned 
by  individuals  in  order  to  afford  a 
reasonable  opportunity  to  sell  shares 
indirectly  owned  by  all.  The  pro- 
tection of  the  interests  of  all  con- 
cerned, by  preventing  the  market  from 
suddenly  becoming  overcrowded  and 
ruinously  depressed,  was  a  reasonable, 
just,  and  honest  purpose,  which  the 
law  does  not  condemn.  There  was  no 
evil  tendency  in  the  arrangement,  as 
it  simply  prevented  a  course  of  action 
that  would  have  brought  loss  both  to 
the  common  and  the  personal  inter- 
ests." See  also  cases  on  pp.  1861- 
1864,  su-pra;  also  p.  1874,  note  3,  infra. 

1  For  an  article  on  voting  trusts,  see 
10  Harvard  Law  Rev.  428;  also  an 
article  in  36  Am.  Law  Rev.  222. 

^Bagley  v.  Smith,  10  N.  Y.  489 
(1853).  A  contract  to  continue  a 
partnership  for  a  definite  period  of 
time  is  valid.  Greenhood  on  Public 
Policv,  p.  503. 

'  Dart  V.  Laimbeer,  107  N.  Y.  669 
(1887) ;  Bagley  v.  Smith,  10  N.  Y.  489 


(1853);  Sk-inner  v.  Dayton,  19  John. 
513,  537  (1822),  where  the  court  said: 
"Even  where  partners  covenant  with 
each  other  that  the  partnership  shall 
continue  seven  years,  either  partner 
may  dissolve  it  the  next  day  by  pro- 
claiming his  determination  for  that 
purpose ;  the  only  consequence  being 
that  he  thereby  subjects  himself  to  a 
claim  for  damages  for  a  breach  of  his 
covenant."  Marquand  v.  New  York, 
etc.  Co.,  17  John.  511,  529  (1819), 
where  the  court,  in  answer  to  the 
argument  that  a  sale  by  a  partner  in 
violation  of  the  partnership  agreement 
should  be  declared  void,  said : 
"According  to  the  doctrine  on  the  part 
of  the  appellants  a  party  may  lock  up 
his  capital  in  a  mercantile  house  by 
such  an  agreement  as  the  one  in  this 
case,  and  it  must  remain  untouched, 
without  the  consent  of  his  copartners, 
during  his  life.  If  the  creditors  take 
it  by  assignment  they  must  become 
partners  in  the  firm,  and  can  only 
touch  the  yearly  profits,  and  must  be 
liable  to  the  yearly  losses,  and  for  all 
the  engagements  of  the  firm.  This 
doctrine  appears  to  me  to  be  too 
unreasonable,  and  too  inconvenient,  to 
be  endured."  See  also  Bishop  v. 
Breckles,  Hoffman,  Ch.  534  (1840) ;  3 
Kent,  Com.  58;  Parsons  on  Partner- 
ship (4th  ed.),  sec.  280,  309,  note; 
Am.  &  Eng.  Ency.  of  Law,  vol.  XVII, 
pp.   1099,   1100. 


1872 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE   MEETINGS.  [§622^'. 

to  have  the  court  pass  on  its  accounts  and  accept  such  resignation  and 
substitute  a  new  trustee,  even  though  the  trust  instrument  provides 
for  resignation  and  the  selection  of  a  new  trustee,  and  such  new  trustee 
has  been  selected  in  accordance  therewith,  it  appearing,  however,  that 
litigation  was  pending  as  to  the  original  title  to  some  of  the  stock,  and 
the  trustee  wished  to  be  certain  of  absolute  discharge  on  resignation.^ 
Compensation  of  trustees  of  a  voting  trust  cannot  be  collected  from  the 
corporation  itself,  nor  from  stockholders  who  did  not  take  part  in  the 
trust.^ 

§  622gr.  One  corporation  owning  and  holding  the  stock  of  other 
corporations.  —  The  latest  method  of  tying  up  the  majority  of  the 
stock  of  a  corporation  and  thereby  securing  control  is  by  organizing 
another  corporation  to  purchase,  own,  hold,  and  vote  the  stock  of 
the  former  corporation.^  This  plan  is  especially  used  where  it  is  de- 
sired to  unite  the  control  of  two  or  more  competing  railroad  corpora- 
tions or  manufacturing  corporations.  Such  was  the  plan  adopted 
in  the  Northern  Securities  Company,  which  acquired  a  majority  of 
the  stock  of  the  Northern  Pacific  Railroad  Company  and  the  Great 
Northern  Railroad  Company.  Such  also  was  the  plan  of  the  United 
States  Steel  Corporation,  which  acquired  the  control  of  a  large  number 
of  competing  steel  manufacturing  corporations.  The  Pennsylvania 
and  the  Union  Pacific  companies  are  examples  of  a  combination  of  a 
holding  company  and  a  railroad  company,  and  in  certain  respects  those 
railroad  companies  are  great  railway  stock  investment  trusts.  Ordi- 
narily one  corporation  has  no  charter  power  to  purchase  the  stock  of 
another  corporation,^  but  the  statutes  of  most  of  the  states  now  allow 
incorporation  for  any  legal  purpose,  and  hence  it  is  possible  to  organize 
a  corporation  for  the  purpose  of  owning  and  holding  the  stock  of  other 
corporations.  The  advantage  of  this  plan  is  that  the  absolute  title  to 
the  stock  passes,  whereas,  in  a  pooling  or  trustee  agreement,  the  stock 
is  to  be  returned  to  the  participating  parties,  and  there  is  alwa;ys  dan- 
ger that  one  or  more  of  the  participating  parties  may  at  any  time  bring 
suit  to  recover  back  such  stock.  The  objection  to  the  plan,  however, 
is  that  it  enables  the  directors  of  the  stockholding  corporation  to  sell 
the  stock  at  any  time,  and  it  involves  not  merely  temporary  pooling  of 

1  Moore  Printing  Co.  i^.  Nat.  Sav.  portion  does  not  constitute  such  a  part- 
etc.  Co.,  218  U.  S.  422  (1910).  nership  as   to  entitle  one   to  sue  the 

2  Clark  V.  National,  etc.  Co.,  82  others  for  an  accounting  of  profits 
Conn.   178  (1909).  where  the  others  had  formed  such  a 

^  An   agreement   of   various   stock-    corporation  with  other  parties,  leaving 
holders  in  several  street  railway  com-    out  the  first-named  party.     Schantz  v. 
panics  to  form  a  new  corporation  and     Oakman,  16.3  N.  Y.  148  (1900). 
transfer    their    interest     thereto    and  "*  See   §§  314-316,   supra. 

divide  the  new  stock  in  a  certain  pro- 

(118)  1873 


§  622h.]  ELECTIONS  —  CORPORATE   MEETINGS.  [cH.  XXXVII, 

the  stock,  but  the  permanent  parting  with  the  title.  Another  objection 
is  that  the  stockholding  corporation  itself  is  liable  to  be  attacked  by  the 
state,  on  the  ground  that  it  is  an  illegal  combination  of  competitors, 
in  restraint  of  trade,  and  in  violation  of  statutes  prohibiting  such  com- 
binations. Such  was  the  result  of  the  formation  of  the  Northern  Se- 
curities Company  and  the  Union  Pacific— Southern  Pacific  combina- 
tion.^ A  national  bank  cannot  act  as  a  holding  company,  but  banking 
is  so  intimately  connected  with  bonds  and  stock  that  the  latest  device 
for  uniting  the  business  is  for  trustees  to  hold  the  stock  of  an  invest- 
ing company  and  pay  the  dividends  to  the  owners  of  the  bank  stock, 
a  statement  to  that  effect  being  printed  on  the  certificates  of  bank 
stock  and  the  beneficiary  interest  in  the  investing  company's  stock 
being  salable  only  upon  and  with  a  sale  of  the  bank  stock.^  This 
whole  subject  of  holding  companies  is  considered  at  length  elsewhere  in 
this  work.^ 

§  622/i,  Voluntary  associations  to  acquire,  hold,  and  vote  shares  of 
stock.  —  There  is  still  another  plan  of  organization,  namely,  a  volun- 
tary association  for  acquiring,  holding,  and  voting  shares  of  stock  in 
one  or  more  corporations.  Such  a  voluntary  association  may  have  for 
its  chief  object  the  investment  of  funds  in  the  stocks  of  many  corpo- 
rations, for  permanent  investment  purposes,  or  may  have  for  its  chief 
object  the  control  of  one  or  more  corporations,  or  it  may  combine 
both  of  these  purposes.  The  fundamental  difference  between  such  a 
voluntary  association  and  a  voting  trust  is  that  the  former  is  to  receive 
and  distribute  dividends,  while  the  latter  is  merely  to  hold  and  vote 
stock  in  order  to  retain  control ;  the  former  contemplates  the  purchase 
of  stock  in  many  corporations  and  may  contemplate  their  sale  and  the 
reinvestment  of  the  funds  from  time  to  time,  while  the  latter  generally 
pertains  to  but  one  stock,  which  is  to  be  held  during  the  period  of  the 
trust  and  is  then  to  be  distributed  in  kind ;  the  former  may  or  may  not 
contemplate  the  control  of  one  or  more  corporations,  while  the  latter 
has  as  its  sole  object  the  control  of  a  single  corporation  for  a  definite 
number  of  years ;  the  former  is  an  unincorporated  joint-stock  associa- 
tion while  the  latter  is  a  bare  agency  for  a  single  specific  purpose,  namely, 
to  vote  the  stock  .^ 

'  See    §  317,    supra.       Under     the         ^  ggg  §  317^  supra. 
Massachusetts      statute      prohibiting         ^  In    England    the  voluntary  asso- 

railroads    from     holding     directly     or  elation   is  often   used   for  investment 

indirectly  the  stock  of  any  other  corpo-  purposes.     The  trustees  are  authorized 

ration,  a  steam  railroad    cannot  indi-  to  invest  the  funds  in  the  stocks  and 

rectly  hold  the  stock  of  a  street  railroad  bonds   of   miscellaneous   corporations, 

by  having  a  holding  company  as  an  in-  Generally    they    are    limited    in    the 

termediary.     Attorney-General  v.  New  amount  which  they  may  invest  in  any 

York,  etc.  R.  R.,  198  Mass.  413  (1908).  one  direction.     That  which  is  lost  in 

2  See  forms  in  vol.  V,  infra.  one  investment  is  expected  to  be  made 

1874 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE  MEETINGS. 


[§  622h. 


A  voluntary  association  for  investment  purposes  is  an  evolution. 
Originally  the  statutes  of  England,  and  most  of  the  states  in  America, 
did  not  allow  incorporation  for  investment  purposes,  or  even  for  general 
business  purposes.  Consequently  unincorporated  joint-stock  associa- 
tions arose.  They  were  midway  between  partnerships,  on  the  one 
side,  which  were  too  restricted  in  their  capital,  purpose,  and  flexibility, 
and  corporations,  on  the  other,  which  had  a  limited  liability.  These 
unincorporated  joint-stock  associations  were  organized  for  all  sorts 
of  business,  especially  express  company  business.  Then  came  the  unin- 
corporated joint-stock  association  for  investment  in  stocks  and  bonds 
of  corporations ;  in  other  words,  a  voluntary  association  for  investment 
purposes,  the  most  notable  example  of  which  is  The  Mackay  Companies. 
This  plan  of  a  voluntary  association  to  acquire,  own,  and  vote  shares 
of  stock  has  been  especially  developed  in  Massachusetts.^  In  that 
state  such  associations  for  holding  personal  property,  or  real  estate,  or 
for  carrying  on  business,  have  been  uniformly  upheld  by  the  courts 
since  the  first  decision  in  that  state  in  1827.^    The  commissioner  of 


up  by  profits  in  another.  It  is  a  mode 
of  investment  on  a  large  scale,  and  is 
made  on  the  principle  of  an  average 
gain  and  loss.  See  Healey,  Company 
Law   and   Practice    (2d   ed.),   p.    191. 


like  other  so-called  voluntary  associa- 
tions, are  ordinarily  organized  in  the 
form  of  express  trusts,  with  the  legal 
title  to  the  property  held,  and  the  busi- 
ness of  the  trust  managed,  by  trus- 


For  the  form  of  articles  of  agreement    tees,  and  the  beneficial  interest  divided 


of  this  kind  of  "trust,"  and  for  a 
detailed  statement  of  the  various  provis- 
ions that  are  made,  varying  accord- 
ing to  the  charter  of  the  enterprise 
and  the  purposes  of  the  participants, 
see  Sykes  v.  Beadon,  L.  R.  11  Ch.  D. 
170  (1879) ;  Smith  v.  Anderson,  L.  R. 
15  Ch.  D.  247  (1880) ;  Wigfield  v.  Pot 


into  transferable  shares  with  or  with- 
out a  par  value,  according  to  the 
fancy  of  their  organizers.  As  such 
associations  are  under  no  statutory 
restrictions,  they  may  create  as  many 
shares  to  represent  the  beneficial 
interest  as  they  see  fit.  In  matters 
of     internal     government     it     is     not 


ter,  45  L.  T.  Rep.  612  (1882) ;  Credit    uncommon  to  follow  corporate  anal- 
Mobilier  v.  Commonwealth,  67  Pa.  St.     ogies,  and  to  treat  the  shareholders  as 


233  (1870),  the  last  case  being  a 
*' trust"  created  to  construct  a  rail- 
road, the  cestui  que  trust  being  the 
stockholders  of  a  designated  corpora- 
tion. 

The  trustees  of  an  English  unincor- 
porated association  to  purchase  mu- 
nicipal bonds  are  protected  as  bona 
fide  purchasers,  and  the  defense  that 
it  was  not  a  legal  mode  of  doing 
business  will  fail.  Johnson  v.  Lewis, 
6  Fed.  Rep.  27  (1881). 

*  A    special    commission    appointed 


though  stockholders  in  a  corporation 
and  the  trustees  as  the  directors 
thereof."     See  101  N.  E.  Rep.  949. 

2  The  following  are  the  decisions  in 
that  state  arranged  in  chronological 
order:  A  shareholder  in  an  unincor- 
porated association,  formed  in  1817, 
to  own  and  operate  a  distillery,  had 
the  power  to  sell  his  share  to  another 
person  without  written  assignment, 
even  though  the  articles  required  a 
written  assignment.  Alvord  v.  Smith, 
22  Mass.  232  (1827).     Where  the  arti- 


by  the  legislature  of  Massachusetts  cles  of  agreement  of  an  unincorporated 
to  examine  into  voluntary  associa-  stage  coach  association  provide  that 
tions  in  that  state  reported  on  Jan-  no  shareholder  shall  transfer  his 
uary  4,  1913,  and  among  other  things  shares  without  the  consent  of  the 
said    (p.    4):     "Holding   associations,     directors,  a  purchase  of  shares  without 

1875 


§  622A.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[cH.  XXXVII. 


corporations  of  Massachusetts  in  his  report  upon  voluntary  associa- 
tions, January  17,  1912,  summarized  the  advantages  of  such  associa- 
tions as  follows : 


such  consent  takes  nothing  except  the 
right  to  collect  dividends  when  paid. 
Kingman  v.  Spurr,  24  Mass.  235  (1828). 
The  articles  of  agreement  of  an  unincor- 
porated stage  coach  association  may 
provide  that  a  member  may  refuse  to 
pay  an  assessment  and  abandon  his 
shares.  Clark  v.  Reed,  28  Mass.  446 
(1831).     See  102  N.  E.  Rep.  435. 

The  Kennebec  Lumber  Company 
was  organized  in  Massachusetts  in 
1835  to  purchase  a  township  of  land 
in  Maine  and  to  cut  and  dispose  of 
the  lumber  upon  it.  The  shareholders 
were  held  Uable  as  partners  on  a  note 
given  by  an  agent.  Tappan  v.  Bailey, 
45  Mass.  529  (1842).  Subscribers  to 
shares  in  a  wharf  improvement  asso- 
ciation are  not  liable  beyond  the 
amount  of  their  subscription  for  debts 
contracted  by  a  committee.  Danforth 
V.  Allen,  49  Mass.  334  (1844).  Minor- 
ity shareholders  in  a  reservoir  associa- 
tion may  enjoin  the  majority  from 
requiring  pay  for  the  use  of  the  water, 
in  violation  of  the  agreement.  Ballou 
V.  Wood,  62  Mass.  48  (1851).  A  state 
tax  on  an  English  unincorporated  insur- 
ance association,  doing  business  in 
Massachusetts,  was  involved  in  Oliver 
V.  Liverpool,  etc.  Ins.  Co.,  100  Mass. 
531  (1868) ;  aff'd,  sub  nom.  Liverpool 
Ins.  Co.  V.  Massachusetts,  10  Wall. 
566  (1870).  Shares  owned  by  a 
resident  in  an  unincorporated  asso- 
ciation known  as  the  McKay  Sewing 
Machine  Association,  organized  in 
Lawrence,  Massachusetts,  cannot  be 
taxed  thereon,  because  it  is  a  part- 
nership and  its  personalty  is  taxable 
in  the  town  or  city  where  its  busi- 
ness is  carried  on.  Hoadley  v.  County 
Com'rs,  105  Mass.  519  (1870).  A 
shareholder  in  an  unincorporated 
express  company  organized  in  New 
York  is  liable  as  a  partner  in  Massa- 
chusetts, even  though  he  claims  that 
under  the  New  York  statutes  a  judg- 
ment must  first  be  obtained  against 
the  association  itself.  Taft  v.  Ward, 
106  Mass.  518  (1871) ;  s.  c,  111  Mass. 
518  (1873) ;  see  also  Bodwell  v.  East- 


man, 106  Mass.  525  (1871).  A  share- 
holder in  a  ferryboat  association,  who 
has  been  obliged  to  pay  its  debts,  may 
have  contribution  from  other  share- 
holders. Whitman  v.  Porter,  107 
Mass.  522  (1871).  Shareholders  in 
the  Adams  Express  Company,  organ- 
ized in  New  York,  are  personally 
liable  for  the  loss  of  a  trunk,  even 
though  the  New  York  statutes  pro- 
vided that  judgment  must  first  be 
obtained  against  the  association 
itself.  Gott  V.  Dinsmore,  HI  Mass. 
45  (1872).  Where  the  trustees  of  an 
unincorporated  land  association  exe- 
cute a  note  reading:  "We  as  trus- 
tees, but  not  individually,  promise  to 
pay,"  etc.,  they  cannot  be  held  per- 
sonally Uable.  Proof  must  be  given 
that  they  have  trust  property  with 
which  to  respond.  Shoe  &  L.  Natl. 
Bank  v.  Dix,  123  Mass.  148  (1877). 
Citizens  of  Massachusetts  who  organ- 
ize an  unincorporated  joint-stock  asso- 
ciation to  manufacture  lumber  in 
North  Carolina  are  liable  as  partners 
in  Massachusetts.  Machinists'  Nat. 
Bank  v.  Dean,  124  Mass.  81  (1878). 
The  members  of  a  voluntary  fire  asso- 
ciation are  liable  for  its  debts.  Newell 
V.  Borden,  128  Mass.  31  (1879).  A 
Massachusetts  shareholder  in  an 
express  company  is  liable  for  its  debts, 
even  though  it  was  organized  in  New 
York  state.  Boston,  etc.  R.  R.  v. 
Pearson,  128  Mass.  445  (1880).  A 
member  of  a  voluntary  association  to 
hold  public  exhibitions  of  poultry  and 
pigeons  is  not  liable  for  a  premium 
awarded  at  the  show.  Volger  v.  Ray, 
131  Mass.  439  (1881).  Contracts 
entered  into  by  the  trustees  of  a  trust 
deed  for  many  shareholders  bind  the 
latter  but  not  the  former  personally, 
where  the  trustees  were  authorized  to 
make  the  contracts  and  did  so  as 
trustees.  It  is  immaterial  that  the 
contracts  are  under  seal.  Cook  v. 
Gray,  133  Mass.  106  (1882).  The 
statute  of  1878  taxing  unincorporated 
associations  the  same  as  corporations 
is  unconstitutional,  because  the  former 


1876 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  622  A. 


(1)  The  experience  of  twenty-five  years  shows  that  they  furnish  a 
convenient,  safe,  and  unobjectionable  form  of  co-operative  ownership 
and  management  to  the  interest  alike  of  the  investor  and  the  public. 


have  no  franchises  to  tax  and  they  pay 
taxes  on  their  tangible  property,  and 
hence  the  tax  is  not  "proportional" 
as  required  by  the  constitution  of  the 
commonwealth.  Gleason  v.  McKay, 
134  Mass.  419  (1883).  In  a  suit 
involving  the  liability  of  a  member  of  a 
voluntary  association,  called  the  Ryder 
Reciprocal  Grate  Association,  the 
defense  was  set  up  that  the  organiza- 
tion was  illegal.  The  court  said,  per 
Judge  Oliver  Wendell  Holmes,  Jr. 
(now  of  the  supreme  court  of  the 
United  States) :  "  It  is  too  late  to  con- 
tend that  partnerships  with  transfer- 
able shares  are  illegal  in  this  common- 
wealth. They  have  been  recognized 
as  lawful  by  the  court,  from  Alvord  v. 
Smith,  5  Pick.  232,  to  Gleason  v. 
McKay,  134  Mass.  419.  Even  if  the 
question  were  a  new  one,  we  should 
come  to  the  same  result.  The  grounds 
upon  which  they  were  formerly  said 
to  be  illegal  in  England,  apart  from 
statute,  have  been  abandoned  in 
modern  times."  Phillips  v.  Blatchford, 
137  Mass.  510  (1884).  Where  all  the 
business  of  a  car  trust  is  carried  on  in 
Boston,  and  no  part  elsewhere,  and  all 
meetings  of  the  trustees  are  held 
there,  the  partnership  resides  there, 
and,  under  the  Massachusetts  statutes, 
the  rolling  stock  owned  by  such  a  vol- 
untary association  and  leased  by  the 
American  Loan  &  Trust  Company  of 
Boston,  as  the  representative  of  the 
car  trust,  is  taxable  in  Boston,  where 
the  trust  company  resides.  Ricker  v. 
American  L.  &  Trust  Co.,  140  Mass. 
346  (1885).  Where  trustees  holding 
patents  and  having  power  to  dispose  of 
them  issue  scrip  to  the  parties  in 
interest,  the  latter  are  cestuis  que  trust, 
and  hence  a  bill  in  equity  to  hold 
them  liable  for  the  debts  and  to  sell 
the  estate  does  not  lie,  the  proper 
remedy  being  a  suit  at  law  against  the 
trustees.  Mayo  v.  Moritz,  151  Mass. 
481  (1890).  An  unincorporated  asso- 
ciation to  acquire,  rent  and  sell  land 
does  not  violate  the  rule  against  per- 
petuities nor  create  an  illegal  restraint 


upon  alienation.  A  shareholder  can- 
not have  it  wound  up  as  illegal,  even 
though  it  might  continue  beyond  lives 
in  being  and  twenty-one  years,  there 
being  a  provision  that  it  might  be  ter- 
minated at  any  time  after  five  years 
on  a  three  fourths  vote  of  the  associa- 
tion. Howe  V.  Morse,  174  Mass.  491 
(1899) .     The  court  said  (pp.  504,  505)  : 

"  The  entire  ownership  is  never  for 
a  moment  uncertain,  nor  unvested, 
and  at  every  moment  each  owner  can 
freely  dispose  of  his  property,  and  at 
each  moment  it  can  be  transferred  to 
his  creditor  by  the  ordinary  processes 
of  the  law,  and  at  each  moment  the 
trust  can  be  terminated  at  the  will  of 
the  owners  of  the  equitable  interest. 
.  .  .  The  provision  in  the  present 
trust,  that  the  shareholders  are  not  to 
have  any  interest  or  title  in  the  trust 
property  itself,  and  no  right  to  call 
for  partition,  and  that  the  share  shall 
be  personal  property,  is  not  a  restraint 
upon  alienation,  since  the  alienation 
of  the  legal  and  the  equitable  owner- 
ships is  provided  for."  See  102  N.  E. 
Rep.  432. 

A  trustee  of  a  Massachusetts  volun- 
tary association  cannot  transfer  its 
property  to  a  corporation  in  exchange 
for  stock  of  the  corporation,  even 
though  the  trust  agreement  authorizes 
a  sale,  it  appearing  that  the  trust 
agreement  has  a  further  provision  that 
the  proceeds  of  the  sale  shall  be  divided 
among  the  beneficiaries,  the  latter  pro- 
vision being  equivalent  to  a  require- 
ment that  the  sale  be  for  cash.  In  a 
suit  to  enjoin  such  sale  an  action  to 
hold  members  of  the  executive  com- 
mittee personally  liable  for  conspiracy 
cannot  be  joined.  Moody  v.  Flagg, 
125  Fed.  Rep.  819  (1903).  Even 
though  an  unincorporated  association 
for  the  investment,  management,  and 
use  of  real  estate,  shares  of  stock, 
bonds  and  other  securities,  becomes 
insolvent,  yet  a  suit  at  law  does  not 
lie  at  the  instance  of  a  creditor  against 
the  trustees  as  "Trustees  of  the  Boston 
Associates."     Even     if     the     trustees 


1877 


§  622h.] 


ELECTIONS 


CORPORATE   MEETINGS. 


[cH.  xxxvir. 


(2)  Their  form  of  management  is  more  convenient  and  flexible,  and 
more  economical  than  that  of  a  corporation.  Trustees  can  transact 
business  with  more  ease  and  rapidity  than  a  board  of  directors. 

are  certificate  holders,  a  suit  at  law 
cannot  reach  their  interest  as  certifi- 
cate holders,  the  remedy  being  in 
equity.  The  creditor  might  have  sued 
the  trustees  personally  at  law,  unless 
his  contract  provided  against  their 
personal  liability.  Hussey  v.  Arnold, 
185  Mass.  202  (1904).  In  this  case 
the  business  was  investment,  manage- 
ment and  use  of  property  and  real 
estate,  shares  in  trusts  and  corpora- 
tions, bonds  secured  by  mortgage  on 
real  estate,  and  other  similar  securities, 
with  a  view  to  obtaining  income  and 
profit  for  the  owners.  The  trustees 
could  be  removed  and  successors 
appointed  by  three  fourths  in  value 
of  the  shareholders,  and  if  not  removed, 
they  could  fill  vacancies  in  their  board 
caused  by  death  or  resignation  or 
otherwise.  The  trust  could  be  ter- 
minated by  three  fourths  in  interest 
of  the  shareholders ;  otherwise  it  was 
to  continue  for  twenty  years  after 
the  death  of  the  last  subscriber  to  the 
agreement.  The  court  said  (p.  204) : 
"Whether  the  trustees  in  this  case, 
in  dealing  with  the  petitioners,  pro- 
vided against  personal  liability  in 
accordance  with  the  direction  of  the 
agreement,  as  they  might  do,  does  not 
appear.  If  they  did,  these  petitioners 
cannot  maintain  an  action  at  law 
against  anybody.  As  agents  and  trus- 
tees under  the  agreement  they  were  not 
authorized  to  contract  any  debt  which 
should  charge  the  certificate  holders. 
Of  course,  if  an  action  at  law  cannot 
be  maintained,  there  can  be  no  effec- 
tual attachment  in  such  a  suit  as  the 
petitioners  originally  brought.  If  the 
trustees  contracted  in  the  usual  way, 
without  referring  to  anything  which 
would  limit  the  liability  resulting  from 
an  ordinary  contract,  they  are  per- 
sonally liable  to  these  petitioners,  and 
judgment  can  be  obtained  and  enforced 
against  them  individually ;  but  the 
trust  property  cannot  be  held  under  an 
attachment  nor  sold  upon  an  execution 
for  their  personal  debts.  If,  as  we 
presume  to  be  the  fact,  the  trustees 
were    also    certificate    holders    having 


equitable  interests  in  the  property, 
these  are  not  attachable  in  an  action 
at  law.  They  can  be  reached  only 
through  proceedings  in  equity." 

Where  a  consolidated  railroad  in 
Massachusetts  and  Connecticut  owns 
all  the  stock  of  a  Connecticut  holding 
company,  and  that  holding  company 
forms  an  unincorporated  association 
to  acquire  Massachusetts  street  rail- 
way company  stocks,  and  the  holding 
company  guarantees  dividends  on  the 
stocks  of  the  unincorporated  associa- 
tion, the  steam  railroad  is  indirectly 
holding  stock  of  the  street  railway 
companies.  The  supreme  court  said : 
"All  who  have  any  proprietary  inter- 
est in  it  have  rights  of  property  as 
individual  owners,  subject  to  such 
restraints  upon  the  management  and 
use  of  it  as  are  legally  imposed  by  the 
contracts  under  which  it  is  held.  They 
are  equitable  tenants  in  common.  By 
the  terms  of  the  agreement  the  associa- 
tion must  be  wound  up  and  liquidated 
at  the  end  of  20  years  and  11  months.'' 
Attorney-General  v.  New  York,  etc. 
R.  R.,  198  Mass.  413  (1908).  The 
opinion  of  the  supreme  court  of  Massa- 
chusetts in  the  case  Smith  v.  Smith, 
handed  down  in  1908,  to  the  effect 
that  a  trustee  of  an  estate  could  not 
legally  invest  in  the  stock  of  a  volun- 
tary association  formed  to  own  street 
railway  stocks,  was  afterwards  with- 
drawn by  the  court.  An  unincorpo- 
rated association  to  conduct  a  co- 
operative store,  certificates  similar  to 
certificates  of  stock  being  issued  to 
the  members,  is  a  partnership,  and 
each  member  is  liable  for  the  debts, 
there  being  no  notice  to  the  creditor 
of  any  limitation  of  liability,  and  the 
managing  agent  who  has  conducted 
the  affairs  may  purchase  goods  on 
credit  and  give  the  association's  notes 
therefor.  Ashley  v.  Dowling,  203 
Mass.  311  (1909).  The  Massachu- 
setts statute  as  to  the  rights  of  pledg- 
ors and  pledgees  of  stock  does  not 
apply  to  stock  issued  by  an  unincor- 
porated real  estate  trust.  Linnell 
V.    Leon,    206    Mass.    71     (1910).     A 


1878 


CH.   XXXVII. I 


ELECTIONS 


CORPORATE   MEETINGS. 


622  L 


Such  an  association  is  similar  in  many  respects  to  express  companies, 
nearly  all  of  which  are  unincorporated  joint-stock  associations,  and 
have  wide  powers  to  invest  their  surplus  profits  in  the  stocks  and  bonds 
of  corporations.^ 

1  For  instance,  the  United  States 
Express  jCompany,  an  unincorporated 
association,  was  organized  in  1854 
under  an  agreement  which  provided 
that  the  property  and  business  should 
be  vested  in  and  controlled  and  man- 
aged by  a  board  of  five  directors  to 
hold  their  offices  until  others  should 
be  chosen  in  their  stead,  and  that  in 
case  of  a  vacancy  in  the  board  prior 
to  a  call  for  an  election  by  the  stock- 
holders, such  vacancy  might  be  filled 
by  the  board  of  directors,  and  that 
whenever  the  shareholders,  to  the 
amount  of  two  thirds  in  interest, 
should,  in  writing,  request  an  elec- 
tion of  one  or  more  directors,  a  meet- 
ing should  be  held  for  that  purpose. 
See  People  v.  Wemple,  117  N.  Y.  136 
(1889),  as  reported  in  1033  Cases  in 
Court  of  Appeals.  Practically  the  di- 
rectors are  self-perpetuating  under 
such  an  agreement.  The  National 
Express  Company  was  organized  in 
1853  on  very  much  the  same  plan. 
See  People  v.  Coleman,  133  N.  Y.  279 
(1892),  as  reported  in  1255  Cases  in 
Court  of  Appeals.  In  the  case  Ricker 
V.  American  L.  &  T.  Co.,  140  Mass.  346 
(1885),  a  taxation  case,  the  agree- 
ment under  which  a  car  trust  associa- 
tion was  formed  named  the  original 
board  of  managers  who  were  to  hold 
their  position  subject  to  the  share- 
holders removing  them  and  electing 
others  at  any  time.  The  court  said : 
"The  ear  trust  association  was  not 
a  corporation.  It  was  a  mere  volun- 
tary association.  There  is  no  inter- 
mediate form  of  organization  between 
a  corporation  and  a  partnership,  like 
the  joint-stock  companies  of  England 
and  of  some  of  the  United  States, 
known  to  the  laws  of  this  common- 
wealth. Since  this  association  is  not 
a  corporation  its  members  must  be 
partners,  unless,  indeed,  as  the  de- 
fendant contends,  they  are  simply  co- 
owners.  But  we  cannot  look  upon 
them  as  simply  co-owners." 


railroad  which  has  no  further  use  for 
certain  terminal  land  cannot  deed  it 
to  trustees  to  develop  and  sell  for  the 
benefit  of  the  railroad  company  and 
other  persons  who  might  become 
interested  in  the  trust.  Williams  v. 
Johnson,  208  Mass.  544  (1911).  But 
where  by  reason  of  the  negligence  of 
the  trustees  a  second  mortgage  is  not 
protected  and  consequently  is  fore- 
closed, the  shareholders  may  hold  the 
trustees  personally  liable.  Ashley  v. 
Winkley,  209  Mass.  509  (1911). 
Where  preferred  shares  in  an  unin- 
corporated trusteeship  to  hold  stock  in 
corporations  are  issued  by  the  trustee- 
ship to  the  preferred  shareholders  to 
pay  arrears  of  preferred  dividends,  a 
life  tenant  of  an  estate  owning  pre- 
ferred shares  is  entitled  only  to  the 
income  from  such  newly  issued  shares, 
there  not  having  been  any  profits 
added  to  the  capital  as  representing 
such  increased  preferred  shares.  Gar- 
diner V.  Gardiner,  212  Mass.  508 
(1912).  The  validity  of  such  an  organ- 
ization depends  upon  the  laws  of  the 
state  wherein  it  is  organized.  Thus 
where  stock  in  several  corporations 
is  put  in  trust  by  a  deed  acknowledged, 
delivered,  and  accepted  by  the  trustees 
in  New  York  where  the  grantor  resided, 
the  trust  deed  is  governed  by  the  law 
of  New  York,  without  reference  to 
the  residence  of  the  trustees  or  the 
subsequent  residence  of  the  grantor. 
Mercer  v.  Buchanan,  132  Fed.  Rep. 
501  (1904).  Cf.  s.  c,  137  Fed.  Rep. 
1019.  A  voluntary  association,  of 
course,  is  not  legal  where  it  is  organ- 
ized for  the  purpose  of  combining  and 
actually  does  combine  competing  cor- 
porations so  as  to  prevent  competition 
and  to  control  rates  or  prices.  See 
§§317,  503a,  supra.  See  also  North- 
ern Securities  Co.  v.  United  States, 
193  U.  S.  197  (1904),  aff'g  United 
States  V.  Northern  Securities  Co., 
120  Fed.  Rep.  720.  In  general  see 
Sears  Trust  Estates  as  Business  Com- 
panies.    See  102  N.  E.  Rep.  355. 


1879 


§  622A. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVIl. 


The  general  legal  status  of  such  a  voluntary  association,  and  the 
liability  of  its  shareholders  and  trustees,  and  the  powers  of  its  trustees, 
and  the  principles  of  law  governing  suits  by  or  against  it,  as  well  as  the 
principles  governing  its  dissolution,  are  similar  to  those  of  the  ordinary 
unincorporated  joint-stock  associations.^  "  The  law  of  partnership 
is  a  branch  of  the  law  of  principal  and  agent,  while  trustees  under  an 
express  trust  are  the  absolute  principals,  but  accounting  to  the  bene- 
ficiaries, who  have  no  powers  either  as  principals  or  agents  in  actual 
administration."  ^  Inasmuch  as,  in  such  association,  the  title  to  the 
property  is  nearly  always  vested  in  trustees,  the  principles  of  law  appli- 
cable to  trust  estates  are  to  be  considered.  At  common  law  the  placing 
of  personal  property  in  trust  for  the  purpose  of  carrying  on  business  in 
the  name  and  under  the  management  of  the  trustees  is  legal  and  allow- 
able.^ The  statutes  of  the  various  states,  however,  must  be  consulted 
in  reference  to  this  point.^  There  is  Uttle  doubt  that  merchandise, 
land,  and  shares  of  stock  may  be  placed  in  trusts.  The  law  is  clear 
that  "  every  kind  of  valuable  property,  both  real  and  personal,  that 
can  be  assigned  at  law  may  be  the  subject-matter  of  a  trust."  ^ 


*  See  eh.  XXIX,  supra. 

2  Chandler  on  Express  Trusts,  p.  21. 

3  For  decisions  at  common  law  to 
the  effect  that  property  may  be  vested 
in  trustees  for  the  purpose  of  carry- 
ing on  business,  see  Ex  parte  Garland, 
10  Ves.  Jr.  110  (1804) ;  Scott  v.  Izon, 
34  Beav.  434  (1865).  In  Holmes  v. 
Mead,  52  N.  Y.  332,  344  (1873),  the 
court  said :  "A  trust  in  personal  prop- 
erty, which  is  not  in  conflict  with  the 
statute  regulating  the  accumulation  of 
interest  and  protecting  the  suspension 
of  absolute  ownership  in  property  of 
that  character,  is  valid  when  the 
trustee  is  competent  to  take,  and  a 
trust  is  for  a  lawful  purpose  well  de- 
fined, so  as  to  be  capable  of  being 
specifically  executed  by  the  court. 
Trusts  of  personal  property  are  not 
affected  by  the  statute  of  uses  and 
trusts,  which  applies  only  to  trusts  in 
real  property."  In  Gott  v.  Cook,  7 
Paige,  521,  534  (1839),  the  chancellor 
said  :  "The  Revised  Statutes  have  not 
attempted    to    define   the   objects   for 


which  express  trusts  of  personal  es- 
tate may  be  created,  as  they  have 
done  in  relation  to  trusts  of  real  es- 
tate. Such  trusts,  therefore,  may  be 
created  for  any  purposes  which  are 
not  illegal."  See  also  Graff  v.  Bon- 
nett,  31  N.  Y.  9  (1865).  In  Power  v. 
Cassidy,  79  N.  Y.  602,  613  (1880),  the 
court  said:  "The  law  does  not  limit 
or  confine  trusts  as  to  personal  prop- 
erty except  in  reference  to  the  sus- 
pension of  ownership,  and  they  may 
be  created  for  any  pm-pose  not  for- 
bidden by  law."  To  the  same  effect, 
Bucklin  v.  Bucklin,  1  Keyes  (N.  Y.), 
141  (1864) ;  Goebel  v.  Wolf,  113  N.  Y. 
405  (1889).  Under  the  statutes  of 
New  York  a  trust  of  property  con- 
sisting of  real  estate  is  void  unless 
the  purpose  of  the  trust  is  to  sell  the 
land  for  the  benefit  of  creditors ;  or 
to  sell,  mortgage,  or  lease  it  for  the 
benefit  of  annuitants  or  for  satisfying 
a  lien  on  the  land ;  or  to  receive  the 
rent  and  use  it  for  the  support  of  a 
certain  person ;    or  to  accumulate  the 


*  Many  of  them,  including  Mich- 
igan, Wisconsin,  Minnesota,  Califor- 
nia, Dakota,  North  Carolina,  Georgia, 
Pennsylvania,  Connecticut,  Kentucky, 
and  Vermont,  have  statutes  expressly 


specifying    the    objects    for    which    a 
trust  may  be  created.     See  Stimson, 
American  Statute  Law,  §  1703. 
^  1  Perry,  Trusts,  §  67. 


1880 


CH.   XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  622A. 


It  is  the  policy  of  the  law  to  limit  the  time  during  which  a  person 
may  tie  up  his  personal  property  or  real  estate.  Generally  this  time 
is  fixed  as  the  life-time  of  the  survivor  of  any  two  persons  then  living 
and  designated  by  the  person  creating  the  trust.  Each  state,  by  its 
statutes,  generally  limits  the  time  during  which  property  may  be  tied 
up  by  a  trust,  and  if  a  trust  is  formed  for  a  period  longer  than  that 
allowed  by  statute  the  trust  itself  is  void.^ 

This  possible  objection  to  such  a  voluntary  association,  however, 
is  disposed  of  by  the  fact  that  at  any  time  the  trust  may  be  dissolved 
by  the  unanimous  consent  of  the  shareholders  or  trustees,  and  gener- 
ally, by  the  terms  of  the  trust  agreement,  may  be  dissolved  on  the 
vote  of  less  than  all  of  the  shareholders  and  trustees.  Hence,  the 
usual  statute  against  restrictions  on  the  alienation  of  property  does  not 
apply  to  such  a  voluntary  association.- 

More  difficult  questions  arise  in  regard  to  the  liability  of  the  trustees 
and  shareholders.  At  common  law  a  trustee  who  carries  on  any  kind 
of  business  is  Hable  personally,  and  to  the  entire  extent  of  his  private 
fortune,  for  all  the  debts  incurred  in  the  management  and  execution  of 
the  trust.^  It  is  possible,  however,  that  the  use  of  the  words  "  as 
trustee,"  in  the  contract  entered  into,  will  protect  him  against  the  lia- 
bifity.'' 


rent  for  a  certain  person.  L.  1896, 
eh.  547,  §  76.  Accordingly  a  modern 
"trust"  whose  property  consists  of 
real  estate  in  New  York,  might  be 
void.  But  as  to  personal  property  the 
law  is  generally  different.  As  to  New 
York,  see  Gerard,  Titles,  p.  235.  Cf. 
§§  812,  822/. 

1  Gerard,  Titles  to  Real  Estate  (3d 
ed.),  p.  223.  Moreover,  if  the  time 
is  to  be  measured  by  the  life  of  a 
person  then  living,  a  trust  which  is  to 
exist  for  a  fixed  period,  however  short, 
without  reference  to  the  life  of  a  per- 
son then  living,  is  void.  Gerard, 
Titles  to  Real  Estate  (3d  ed.),  pp. 
224,  225.  In  New  York  the  suspension 
can  be  for  only  two  lives  in  being, 
and,  in  certain  cases,  twenty-one 
years  thereafter.  Con.  Laws,  Real 
Property  Law,  §  42.  These  statutes 
apply  to  real  and  personal  property. 
Gerard,  Titles  to  Real  Estate  (3d  ed.), 
p.  235 ;  Hone  v.  Van  Schaick,  7  Paige, 
221  (1838).  Compare  §§  812,  822/, 
infra;  Holmes  v.  Mead,  52  N.  Y.  332, 
344  (1873).  The  statutory  prohibition 
against   the   accumulation   of   the   in- 


come of  trust  property,  except  in  the 
case  of  infants,  applies  both  to  real 
estate  and  personalty.  Gerard,  Titles 
to  Real  Estate  (3d  ed.),  pp.  233,  235. 

'^  See  note  1,  p.  1871,  supra.  Seealso 
Howe  V.  Morse,  174  Mass.  491  (1899). 

^  Thompson  v.  Brown,  4  Johns.  Ch. 
619  (1820);  Wild  v.  Davenport,  48 
N.  J.  L.  129  (1886);  Stephens  v. 
James,  77  Ga.  139  (1886) ;  Rogers  v. 
Wheeler,  43  N.  Y.  598  (1871);  Jones 
V.  Seligman,  81  N.  Y.  190  (1880).  A 
person  dealing  with  executors  who 
are  continuing  the  business  and  who 
knows  they  are  acting  in  that  capacity 
cannot  hold  the  beneficiaries  liable, 
but  is  confined  to  the  property 
actually  involved.  Manhattan  Oil 
Co.  y.  Gill,  118  N.  Y.  App.  Div.  17 
(1907).  Where  trustees,  who  are  bound 
to  wind  up  the  affairs  of  a  corporation, 
sell  its  property  with  a  covenant  that 
they  had  authority  to  sell,  they  are 
liable  personally  if  the  assignment  was 
void,  there  being  no  covenant  against 
personal  liability.  Shannon  v.  Mastin, 
108  S.  W.  Rep.  1116  (Mo.  1908). 

*  Contracts  entered  into  by  the  trus- 


1881 


§  622A. 


ELECTIONS 


CORPORATE   MEETINGS. 


[CH.  XXXVII. 


The  supreme  court  of  Massachusetts  has  held  that  where  a  trust 
agreement  provides  that  neither  the  trustee  nor  the  holders  of  shares 
shall  be  personally  liable  for  the  debts  of  the  trust,  no  action  at 
law  lies  against  the  trustee  for  such  debts,  the  only  remedy  being  in 
equity  to  reach  the  trust  property,  even  though  the  association  is  in- 
solvent.^ There  is  little  doubt  that  the  creditors  of  the  trust  may  col- 
lect their  debts  from  its  property.  This  has  been  a  doubtful  point, 
but  it  is  now  reasonably  well  settled.  It  matters  not  whether  the  trus- 
tees have  expressly  bound  the  trust  property  to  pay  the  debts.  Espe- 
cially where  the  trustee  is  insolvent,  a  creditor  of  the  trust  may  proceed 
against  its  property  to  procure  payment  of  a  debt  incurred  in  the  execu- 
tion of  the  trust.^ 


tees  of  a  trust  deed  for  many  share- 
holders bind  the  latter  but  not  the 
former  personally,  where  the  trustees 
were  authorized  to  make  the  contracts 
and  did  so  as  trustees.  It  is  im- 
material that  the  contracts  are  under 
seal.  Cook  v.  Gray,  133  Mass.  106 
(1882).  But  see  Stevenson  v.  Polk, 
71  Iowa,  278  (1887);  1  Pars.  Cont. 
(6th  ed.),  *122.  As  to  the  mode  of 
compelling  payment  of  a  debt  in- 
curred by  a  trustee  who  has  issued 
scrip  to  represent  the  property,  see 
Mayo  V.  Moritz,  151  Mass.  481  (1890), 
holding  that  the  remedy  is  not  by  a 
receiver  to  wind  up  the  trust.  On 
this  subject  of  the  liability  of  trustees 
compare  the  respective  liabilities  of 
promoters  in  §  705 ;  of  officers  of 
unincorporated  associations,  §  508  ;  of 
committeemen,  §  888 ;  and  of  persons 
who  sign  their  names  and  add  an 
official  title,    §  724,   infra. 

1  Hussey  v.  Arnold,  185  Mass.  202 
(1904).  The  trusteeship  referred  to  in 
the  preceding  case  was  one  of  the  kind 
which  has  become  quite  common  in 
Massachusetts.  The  court  said  :  "The 
object  of  it,  apparently,  was  to  obtain 
for  the  associates  most  of  the  advan- 
tages belonging  to  corporations,  with- 
out the  authority  of  any  legislative 
act,  and  with  freedom  from  the  restric- 
tions and  regulations  imposed  by  law 
upon  corporations.  ...  As  agents 
and  trustees  under  the  agreement,  they 
were  not  authorized  to  contract  any 
debt  which  should  charge  the  certifi- 
cate holders,  ...  If  the  trustees 
contracted  in  the  usual  way,  without 


referring  to  anything  which  would  limit 
the  liability  resulting  from  an  ordinary 
contract,  they  are  personally  liable  to 
these  petitioners,  and  judgment  can  be 
obtained  and  enforced  against  them  in- 
dividually." The  court  stated  that 
it  did  not  pass  on  whether  all  of  the 
provisions  of  the  agreement  were  en- 
forceable in  the  courts.  In  the  case 
Hibbs  V.  Brown,  112  N.  Y.  App.  Div. 
214  (1906) ;  aff'd,  190  N.  Y.  167,  the 
court  said  (p.  219):  "There  can  be 
no  doubt,  however,  that  it  is  compe- 
tent for  the  members  of  a  joint-stock 
association  to  have  the  contracts  so 
drawn  as  to  confine  the  liability  to 
the  assets,  and  thus  create  the  same 
situation  as  to  their  rights  and  lia- 
bilities as  if  the  joint-stock  associa- 
tion were  a  corporation  and  they  were 
stockholders."  See  also  §  508,  supra. 
-  Cater  v.  Eveleigh,  4  Desaus. 
(S.  C.)  19  (1809) ;  James  v.  Mayrant,  4 
Desaus.  (S.  C.)  591  (1815);  Mont- 
gomery V.  Eveleigh,  1  McCord  Ch. 
(S.  C.)  267  (1826);  Magwood  v. 
Johnston,  1  Hill  (S.  C.)  Ch.  228 
(1833) ;  Gaudy  v.  Babbitt,  56  Ga.  640 
(1876);  Tennant  v.  Stoney,  1  Rich. 
Eq.  (S.  C.)  222,  243  (1845);  Wylly 
V.  Collins,  9  Ga.  223  (1851);  Frost  v. 
Shackleford,  57  Ga.  261  (1876) ;  Fer- 
rin  V.  Myrick,  41  N.  Y.  315  (1869). 
Contra,  Worrall  v.  Harford,  8  Ves.  Jr. 
4  (1802);  Mulhall  v.  Williams,  32 
Ala.  489  (1858) ;  Jones  v.  Dawson,  19 
Ala.  672  (1851).  See  also  New  v. 
Nicoll,  73  N.  Y.  127  (1878);  Noyes 
I'.  Blakeman,  6  N.  Y.  567  (1852).  Cf. 
Mayo  V.  Moritz,  151  Mass.  481  (1890). 


1882 


CH.  XXXVII.]  ELECTIONS  —  CORPORATE   MEETINGS.  [§  622^. 

As  a  general  rule  the  cestui  que  trust,  the  beneficiary,  cannot  be  held 
liable  for  debts  created  by  the  trustees,  or  for  debts  incurred  in  the 
execution  of  the  trust.  This  question  has  arisen  chiefly  in  cases  where 
trustees  have  carried  on  the  business  of  an  insolvent  person  for  the 
benefit  of  the  creditors  of  the  latter.^  And  the  same  conclusion  is  reached 
in  cases  where  an  executor,  administrator,  or  trustee  carries  on  a  busi- 
ness for  the  benefit  of  a  beneficiary .^  But  an  unincorporated  associa- 
tion to  conduct  a  co-operative  store,  certificates  similar  to  certificates 
of  stock  being  issued  to  the  members,  is  a  partnership,  and  each  member 
is  liable  for  the  debts,  there  being  no  notice  to  the  creditor  of  any  limita- 
tion of  liability,  and  the  managing  agent  who  has  conducted  the  affairs 
may  purchase  goods  on  credit  and  give  the  association's  notes  therefor.^ 
It  has  been  held,  on  the  other  hand,  that  the  trustee  cannot  render  the 
cestui  que  trust  liable,  even  though  the  trustee  contracts  with  the  credi- 
tor to  that  effect."* 

In  England  it  has  been  decided  that  these  old  principles  of  law  are 
applicable  to  a  voluntary  association  for  acquiring,  holding,  and  voting 
shares  of  stock.  The  courts  of  England  have  decided  that  such  an  or- 
ganization is  not  a  partnership  or  mere  association,  but  is  similar  to  an 
old  common-law  trust  estate.  This  conclusion  was  reached  in  construing 
an  English  statute  which  prohibits  certain  partnerships  or  associations 
from  doing  business.^     In  Massachusetts,   however,   these  voluntary 

iStorrs  u.  Flint,  46  N.  Y,  Super.  Ct.  decision    that    it    is    not    the    general 

498  (1880) ;    Cox  v.  Hickman,  1  H.  L.  estate  of  the  testator  which  is  liable, 

Cas.  268  (1860) ;   Re  Stanton  Iron  Co.,  but  only  so  much  as  he  has  author- 

21  Beav.  164  (1855) ;    Selwyn  v.  Har-  ized  to  be  employed  in  the  business, 

rison,  2  Johns.  &  H.  334  (1862).     See  is  stated  to  be  still  the  law.     See  also 

Bingaman    v.    Hickman,    115    Pa.    St.  Strickland  v.  Symons,  L.  R.  26  Ch.  D. 

420  (1887).  245    (1884).     An   estate   is   not   liable 

'  In  Ex  parte  Garland,  10  Ves.  Jr.  for  debts  created  by  a  partnership 
110  (1804),  where  a  testator  directed  continued  by  order  of  the  will.  Stew- 
that  a  certain  sum  be  used  to  carry  art  v.  Robinson,  115  N.  Y.  328  (1889), 
on  a  business,  and  the  executor  so  ^  Ashley  v.  Dowling,  203  Mass.  311 
used  it,  and  the  business  became  in-  (1909). 

solvent,    held,    per    Lord    Eldon,    that  *  Stanton  v.  King,  8  Hun,  4  (1876) ; 

no  other  part  of  the  testator's  prop-  aff'd,  69  N.  Y.  609.     See  15  Am.  L.  Rev. 

erty  was  liable  for  the  debts  thereby  456;       Burch     v.      Breckinridge,      16 

incurred;    overruling  Hankey  t;.  Ham-  B.   Mon.    (Ky.)   488   (1855);    New  v. 

mond,     1    Cooke's    Bankr.     Law,    67  NicoU,  12  Hun,  431  (1877) ;    aff'd,  73 

(1785).     Lord     Eldon     further     said :  N.  Y.  127. 

"On  the  other  hand,  the  case  of  the  ^  In  England  a  statute  exists  which 

executor   is   very   hard.     He   becomes  forbids  any  company,   association,   or 

liable,    as    personally    responsible,    to  partnership    consisting    of    more    than 

the   extent    of    all    his   own    property,  twenty  persons  from  carrying  on  any 

.  .  .  though    he    is     but    a     trustee,  business   for   the   acquisition   of  gain. 

But    he    places    himself    in    that    sit-  unless  it  is  registered  as  a  company 

uation    by   his    own    choice."     In    Re  under  the  Joint-stock  Companies  Act, 

Johnson,  L.  R.  15  Ch.  D.  548  (1880),  and  complies  therewith  as  regards  re- 

the  cases  are  reviewed.     Lord  Eldon's  ports,  etc.     It  has  been  held  that  aa 

1883 


§  622A. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


associations  are  held  to  be  partnerships  and  the  shareholders  are  Hable 
as  partners  unless  their  liability  has  been  expressly  restricted  in  some 
way.^  Any  person  may  serve  as  a  trustee,  provided  that  person  is  com- 
petent to  take  the  legal  title  to  the  property.- 

The  trustees  of  a  "  voluntary  association  "  correspond  somewhat 
to  the  directors  of  a  corporation.  They  generally  are  elected  annually 
by  the  certificate  holders  at  a  regularly  called  meeting.  The  instru- 
ment creating  the  "  voluntary  association  "  usually  provides  for  the 


"investment  trust"  is  not  a  "company, 
association,  or  partnership,"  and  con- 
sequently is  not  affected  by  this 
statute.  Wigfield  v.  Potter,  45  L.  T. 
Rep.  612  (1882);  Crowther  v.  Thor- 
ley,  32  W.  R.  330  (1884) ;  Re  Siddall, 
L.  R.  29  Ch.  D.  1  (1885);  Smith  v. 
Anderson,  L.  R.  15  Ch.  D.  247  (1880). 
The  last  ease  cited  was  an  action 
to  have  the  "trust"  dissolved,  on  the 
ground  that  it  was  a  partnership,  and 
was  doing  business  in  violation  of  the 
statute.  The  court  refused  to  grant 
the  relief  desired,  and  said  that  the 
certificate  holders  were  not  partners 
and  did  not  form  an  association. 
"There  has  never  been  anything  creat- 
ing any  mutual  rights  or  obligations 
between  those  persons.  They  are 
from  the  first  entire  strangers,  who 
have  entered  into  no  contract  what- 
ever with  each  other,  nor  has  either 
of  them  entered  into  any  contract 
with  the  trustees  or  any  trustee  on 
behalf  of  the  other,  there  being  noth- 
ing in  the  deed  pointing  to  any  man- 
date or  delegation  of  authority  to 
anybody  to  act  for  the  certificate  hold- 
ers as  between  themselves,  and  noth- 
ing, as  it  appears  to  me,  by  which 
any  liability  could  ever  be  passed 
upon  the  certificate  holders  either  as 
between  themselves  or  as  between 
themselves  and  anybody  else.  .  .  . 
If  there  is  any  business  at  all,  it  is 
to  be  carried  on  by  the  trustees. 
Whatever  is  to  be  done  is  to  be  done 
by  the  trustees."  And  Cotton,  L.  J., 
said :  "The  trustees  here  are  the  only 
persons  who  are  dealing  with  the  in- 
vestments, and  they  are  dealing  not 
as  agents  for  some  principal,  but  as 
trustees  in  whom  the  property  and 
the  management  of  it  are  vested,  and 
who  have  the  power  of  changing  the 


investments  and  securities.  That  is 
just  like  the  case  which  often  occurs 
where  the  executors  or  trustees  of  a 
will  are  directed  to  carry  on  a  business. 
The  fact  that  they  are  to  account  to 
others  for  the  profits  made  is  a  matter 
utterly  immaterial  as  between  them 
and  those  with  whom  they  deal.  They 
deal  with  those  persons  as  the  only 
persons  contracting,  and  hold  them- 
selves out  as  personally  liable.  Those 
persons  have  no  right  whatever  as 
against  the  persons  beneficially  en- 
titled." This  case  was  one  involving 
an  "investment  trust."  See  also  dicta 
to  the  same  effect  in  Credit  Mobilier  v. 
Commonwealth,  67  Pa.  St.  233  (1870), 
and  see  People  v.  North  River,  etc.  Co., 
121  N.  Y.  582  (1890).  In  other  cases 
it  is  intimated  that  these  voluntary 
associations  are  like  unincorporated 
joint-stock  associations,  and  that  the 
relation  between  the  shareholders  and 
the  trustees  or  directors  is  more  like 
that  of  principal  and  agent  than  of 
cestui  que  trust  and  trustee.  See  Hogg 
V.  Hoag,  107  Fed.  Rep.  807  (1901); 
Levi  V.  Evans,  57  Fed.  Rep.  677  (1893). 

1  See  note  2,  p.  1875,  supra.  "Debts 
incurred  under  express  trusts  are  not 
the  debts  of  the  beneficiaries  under  the 
trust,  but  are  the  personal  debts  of  the 
trustees,  who  are  not  agents,  but  are 
the  absolute  owners,  and  principals. 
The  trustees  have  to  account,  of  course, 
to  the  beneficiaries ;  but  the  benefi- 
ciaries have  no  partnership  powers ; 
and  a  strict  express  trust  cannot  be 
held  as  to  its  beneficiaries  to  be  a 
partnership,  with  partnership  powers 
and  liabilities,  without  creating  con- 
fusion and  a  mischievous  subversion  of 
established  principles."  Chandler  on 
Express  Trusts,  p.  26. 

2  1  Perry,  Trusts,  §  39. 


1884 


CH.   XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  622A. 


election  of  trustees,  and  for  their  succession  and  term  of  office.  There 
is  nothing  in  the  old  law  of  trust  estates  which  forbids'  this  change  of 
trustees.^ 

Where,  by  the  trust  deed,  a  majority  of  the  cestuis  que  trust  have 
power  to  fill  a  vacancy  caused  by  the  incapacity  or  inability  of  the 
trustee,  they  may  substitute  a  new  trustee  when  the  old  trustee  removes 
to  and  becomes  a  resident  of  a  foreign  country.^  The  trustee  has  no 
powers  beyond  those  which  are  expressly  conferred  by  the  trust  instru- 
ment.^ Thus  trustees,  who  hold  stock  in  various  corporations,  are 
trustees  and  not  vendees  of  the  stock.*    Trustees  ordinarilv  have  no 


1  "The  person  who  creates  the  trust 
may  mould  it  into  whatever  form  he 
pleases ;  he  may  therefore  determine 
in  what  manner,  in  what  event,  and 
upon  what  condition  the  original  trus- 
tees may  retire  and  new  trustees  may 
be  substituted.  All  this  is  fully  with- 
in his  power,  and  he  can  make  any 
legal  provisions  which  he  may  think 
proper  for  the  continuation  and  suc- 
cession of  trustees  during  the  con- 
tinuation of  the  trust."  Perry,  Trusts, 
§  287.  In  England,  under  the  vesting 
acts,  the  court  held  that  it  had  power 
to  vest  the  estate  of  such  a  "trust" 
in  new  trustees  where  one  of  the  old 
trustees  was  dead,  another  was  in- 
sane, and  under  the  trust  agreement 
the  certificate  holders  had  elected  new 
trustees.  Re  Siddall,  L.  R.  29  Ch.  D. 
1  (1885).  A  similar  power  was  given 
to  the  court  in  regard  to  trusts  of 
personal  property  in  New  York  by 
L.  1882,  Ch.  185.  As  regards  the  com- 
mon law  rules  and  powers  of  the 
courts  herein,  see  Perry,  Trusts,  §§  276 
et  seq.  At  common  law,  upon  the 
death  of  the  surviving  trustee,  his 
executor  or  administrator  becomes  the 
trustee.  Boone  v.  Citizens'  Sav.  Bank, 
84  N.  Y.  83,  87  (1881) ;  DePeyster  v. 
Beekman,  55  How.  Pr.  90  (1877).  In 
the  cost-book  company  case  of  John- 
son V.  Goslett,  18  C.  B.  728  (18-56), 
the  following  provision  appears:  "The 
trustees  of  the  said  lease  shall,  when 
and  if  required  by  the  directors,  ex- 
ecute a  deed  declaring  that  they  hold 
the  said  mine  under  and  by  virtue 
of  such  lease  as  trustees  for  the  bene- 
fit of  the  shareholders  in  the  said 
company,  according  to  their  respective 


shares  and  interests  therein ;  and  if 
any  or  either  of  the  said  trustees,  or 
any  future  trustees,  shall  resign,  or 
die,  or  become  incapable  or  unwilling 
to  act,  then  new  trustees  or  a  new 
trustee  may  be  appointed  by  any  of 
the  general  meetings  of  shareholders 
hereinafter  provided  for,  in  the  place 
of  the  trustees  or  trustee  so  resign- 
ing, or  dying  or  becoming  incapable 
or  unwilling  to  act,  as  aforesaid ;  and 
the  said  premises  shall  be  forthwith 
assigned  to  and  vested  in  the  said 
new  trustee  or  trustees  jointly  with 
the  continuing  trustee  or  trustees,  or 
in  such  new  trustees  only,  as  the  case 
may  require,  at  the  expense  of  the 
said  company." 

2  Farmers'  L.  &  T.  Co.  v.  Hughes, 
11  Hun,  130  (1877).  In  this  case  the 
deed  of  trust  provided  that  the  trus- 
tees or  their  sxirvivor  might  be  re- 
moved by  the  vote  of  a  majority  in 
interest  of  the  holders  of  the  bonds 
referred  to  in  the  trust  deed,  at  any 
meeting  called  for  that  purpose ;  and 
further,  by  a  separate  and  distinct 
provision,  that  in  case  of  the  death, 
removal,  resignation,  incapacity  or  in- 
ability of  both  or  either  of  said  trus- 
tees to  act  in  the  execution  of  the 
trust,  then  a  majority  of  the  holders 
of  such  bonds  might  designate  and 
select,  in  writing,  one  or  more  com- 
petent persons  to  fill  the  vacancy  so 
occurring.  The  property  may  be  made 
to  vest  in  new  trustees  without  trans- 
fer, if  the  trust  instrument  is  so 
drawn.     1  Perry,  Trusts,  §  284. 

3  1  Perry,  Trusts,   §§  454,  460. 

^  People  V.  North  River,  etc.  Co., 
121  N.  Y.  582  (1890). 


1885 


§  622^.] 


ELECTIONS 


CORPORATE   MEETINGS. 


CH.  XXXVII. 


power  to  sell  stock  held  in  trust.^  The  trustees  may  sue  and  be  sued 
in  their  own  names  on  all  matters  and  contracts  pertaining  to  the  trust.^ 
They  are  not  liable  to  the  cestui  que  trust  for  losses  incurred  by  their 
management  of  the  property  of  the  trust.  They  are  bound  merely  to 
exercise  ordinary  discretion  and  to  obey  the  directions  of  the  instru- 
ment creating  the  trust.  It  is  only  for  a  breach  of  trust  that  they  may 
be  made  to  account  to  the  cestui  que  trust. ^  But  where  by  reason 
of  the  negligence  of  the  trustees  a  second  mortgage  is  not  protected  and 
consequently  is  foreclosed,  the  shareholders  may  hold  the  trustees  per- 
sonally liable."*  The  commissioner  of  corporations  of  Massachusetts 
in  his  report  upon  voluntary  associations,  January  17,  1912,  said  that  a 
shareholder  has  no  right  to  an  accounting  as  in  a  partnership,  nor  any 
right  to  examine  the  books  as  in  a  corporation. 

The  trustees  of  an  unincorporated  bank,  however,  are  liable  for 
depositing  its  money  with  a  stock  brokerage  house  even  though  the 
agreement  exempted  them  from  liability  except  for  wilful  misconduct.^ 


1  See  eh.  XIX,  supra.  The  trustees 
of  the  American  Cattle  Trust  cannot 
sell  shares  of  stock  which  they  hold. 
Gould  V.  Head,  38  Fed.  Rep.  886 
(1889) ;  s.  c,  41  Fed.  Rep.  240  (1890). 
A  trustee  holding  property  for  various 
persons  cannot  transfer  it  to  a  cor- 
poration in  exchange  for  stock  of  the 
latter,  even  though  the  trust  agree- 
ment authorizes  a  sale  but  provides 
that  the  proceeds  of  the  sale  shall  be 
divided  among  the  beneficiaries.  In 
a  suit  to  enjoin  such  sale  an  action 
to  hold  members  of  the  executive 
committee  personally  liable  for  con- 
spiracy should  not  be  joined.  Moody 
V.   Flagg,    125  Fed.   Rep.   819    (1903). 

2  In  this  respect  the  trustee  is  not 
the  same  as  the  director  of  a  corpora- 
tion. "A  trustee  is  a  man  who  is 
the  owner  of  the  property,  and  deals 
with  it  as  principal,  as  owner,  and 
as  master,  subject  only  to  an  equi- 
table obligation  to  account  to  some  per- 
sons to  whom  he  stands  in  the  rela- 
tion of  trustee,  and  who  are  his 
cestuis  que  trust.  .  .  .  The  office  of 
director  is  that  of  a  paid  servant 
of  the  company.  A  director  never 
enters  into  a  contract  for  himself, 
but  he  enters  into  contracts  for  his 
principal ;  that  is,  for  the  company 
of  whom  he  is  a  director  and  for 
whom  he  is  acting.  He  cannot  sue 
on    such    contracts,    nor   be    sued    on 


them  unless  he  exceeds  his  authority. 
That  seems  to  me  to  be  the  broad 
distinction  between  trustees  and  di- 
rectors." Smith  V.  Anderson,  L.  R. 
15  Ch.  D.  247  (1880). 

3  Simonton  v.  Sibley,  122  U.  S.  220 
(1887).  Where  a  railroad  construc- 
tion contract  is  assigned  to  trustees 
to  be  carried  out  and  the  profits  to 
be  paid  to  the  stockholders  of  a 
designated  corporation,  the  stockhold- 
ers may  compel  the  trustees  to  pay 
over  such  profits.  The  trustees  can- 
not set  up  that  they  were  also  di- 
rectors of  the  railroad.  Hazard  v.  Dil- 
lon, 34  Fed.  Rep.  485  (1888).  Where 
a  reorganization  has  been  completed, 
and  a  voting  trust  established  and  a 
release  to  the  reorganization  commit- 
tee executed  by  the  certificate  holders, 
one  of  the  certificate  holders  cannot 
hold  them  liable  in  damages  on  the 
ground  that  as  trustees  of  the  voting 
trust  they  controlled  the  board  of  di- 
rectors and  had  mismanaged  the  new 
corporation,  it  appearing  that  they 
did  not  constitute  a  majority  of  the 
board  of  directors  and  that  in  man- 
aging the  corporation  they  acted  as 
stockholders  and  directors,  and  not 
as  a  reorganization  committee.  Law- 
rence V.  Curtis,  191  Mass.  240  (1906). 

*  Ashley  v.  Winkley,  209  Mass.  509 
(1911). 

6  Holmes  v.  McDonald,  80  N.  E.  Rep. 


1886 


CH.  XXXVII. 


ELECTIONS  —  CORPORATE  MEETINGS. 


[§  622^. 


The  compensation  of  the  trustee  is  usually  fixed  by  the  trust  deed.  If 
not  it  falls  within  the  provisions  of  the  statutes,  or  a  reasonable  com- 
pensation is  allowed  by  the  common  law.^  The  property  of  the  volun- 
tary association  cannot  be  seized  for  the  individual  debts  of  the  trustee,^ 
but  the  interest  of  the  certificate  holder  may  be  reached,  so  as  to  sub- 
ject it  to  the  payment  of  his  debts.^  In  this  respect  the  certificates 
resemble  shares  of  stock.  A  life  estate  in  the  shares  of  a  joint-stock 
company  is  the  same  as  in  an  incorporated  company.^ 

An  unincorporated  association,  formed  in  a  state  where  statutory 
joint-stock  associations  are  unknown,  is  not  subject  to  the  corporation 
tax  act  of  congress.^  But  the  trust  property  where  it  consists  of  per- 
sonal property  in  the  nature  of  bonds,  stock,  notes,  or  evidences  of 
indebtedness,  or  corresponds  to  the  capital  stock  of  a  corporation,  may 
be  taxed  at  the  place  where  the  main  office  or  place  of  business  of  the 
voluntary  association  exists.  The  extent  of  the  taxation  depends,  of 
course,  upon  the  statutes  of  the  state  wherein  the  tax  is  laid.^ 


714  (111.  1907).  As  to  a  limita- 
tion of  their  liability,  see  §§  805,  815, 
infra. 

»  2  Perry,  Trusts,  §  917. 

2  Gibson  v.  Stevens,  7  N.  H.  352 
(1834),  where  a  trustee  was  author- 
ized to  continue  the  testator's  busi- 
ness. The  property  was  held  not  sub- 
ject  to    the    trustee's   personal    debts. 

3  As  to  rule  at  common  law,  see 
2  Alb.  L.  J.  261,  288.  In  New  York, 
by  statute,  all  transfers  of  personal 
property  made  in  trust,  for  use  of  the 
person  making  the  same,  are  void  as 
against  his  creditors,  existing  or  sub- 
sequent. 2  R.  S.  135,  §  1  (7th  ed.,  p. 
2327,  and  cases  there  cited).  See  also 
Graff  V.  Bonnett,  31  N.  Y.  9,  14,  18 
(1865). 

*  Bishop  V.  Bishop,  81  Conn.  509 
(1909). 

6  Eliot  V.  Freeman,  220  U.  S.  178 
(1911). 

8  In  the  case  Oliver  v.  Liverpool, 
etc.  Ins.  Co.,  100  Mass.  531  (1868); 
aff'd,  sub  nom.  Liverpool  Ins.  Co. 
V.  Massachusetts,  10  Wall.  566  (1870), 
it  was  held  that  a  Massachusetts 
statute  imposing  a  license  fee  on 
foreign  insurance  companies  "incor- 
porated or  associated"  under  the  laws 
of  foreign  governments  was  appli- 
cable to  an  English  unincorporated 
joint-stock  association.  In  the  case 
Rieker  v.  American  L.  &  T.  Co.,  140 


Mass.  346  (1885),  it  was  held  that 
a  car  trust  association  having  its  chief 
place  of  business  in  Boston  was  sub- 
ject to  taxation  on  its  personal  prop- 
erty at  that  place,  even  though  the 
certificates  of  interest  issued  by  the 
trustees  were  owned  by  non-residents 
as  well  as  residents. 

The  following  is  the  New  York 
law  on  this  subject :  The  Constitution, 
§  107,  prescribes  that  the  term  corpo- 
rations as  used  in  a  particular  article 
in  that  Constitution,  shall  be  con- 
strued to  include  "all  associations  and 
joint-stock  companies  having  any  of 
the  powers  or  privileges  of  corpora- 
tions not  possessed  by  individuals  or 
partnerships."  The  statutory  con- 
struction law,  §  5,  prescribes  that  the 
term  person  shall  include  a  corpora- 
tion and  a  joint-stock  association.  The 
New  York  Tax  Law,  §  4  (16),  pre- 
scribes that  a  stockholder  "in  an  in- 
corporated company  liable  to  taxation 
on  its  capital  shall  not  be  taxed  as 
an  individual  for  such  stock."  In 
People  V.  Wemple,  117  N.  Y.  136 
(1889),  it  was  held  that  a  statute 
levying  a  tax  upon  corporations,  joint- 
stock  companies,  and  associations  or- 
ganized under  the  laws  of  the  state, 
apply  to  a  common  law  joint-stock  as- 
sociation organized  in  the  state,  even 
though  not  organized  under  any  stat- 
ute of  the  state.     In  People  v.  Cole- 


1887 


§  G22h. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[cH.  XXXVII. 


There  is  little  difficulty  in  determining  whether  a  certificate  holder 
may  terminate  his  interest  in  the  voluntary  association  and  demand 
his  proportion  of  the  property.  In  certain  deposits  with  trustees  of  cer- 
tificates of  shares  of  stock  he  sometimes  may.^  But  in  general  a  single 
certificate  holder  cannot  have  the  whole  association  dissolved  and  wound 
up  before  the  time  fixed  by  the  trust  agreement  for  its  dissolution  has 
arrived.^  If  the  voluntary  association  itself  is  forbidden  by  the  statutes 
of  the  state  wherein  it  exists,  it  will  not  be  wound  up  by  the  courts. 
The  law  will  not  compel  a  trustee  to  account  for  property  or  transac- 
tions which  grow  out  of  a  contract  which  was  prohibited  by  statute. 
It  is  outside  of  the  protection  of  the  law.^  If,  however,  the  volun- 
tary association  is  legal,  it  may  be  terminated  at  any  time  by  a  decree 
of  a  court,  upon  the  consent  of  all  the  parties  who  are  interested  in  it.^ 
But  a  voluntary  association  will  not  be  dissolved  and  wound  up  merely 
because  the  trustees  have  been  guilty  of  a  breach  of  trust.  The  remedy 
in  such  a  case  is  to  enjoin  or  remove  the  trustees.^  Where,  however, 
the  trust  is  insolvent  and  incapable  of  proceeding,  a  dissolution  and 
winding  up  of  its  business  will  be  decreed  by  a  court.® 


man,  133  N.  Y.  279  (1892),  it  was  held 
that  the  city  of  New  York  could  not 
tax  an  unincorporated  joint-stock  com- 
pany under  a  tax  statute  applicable 
to  "stock  corporations."  See  also 
Hoey  V.  Coleman,  46  Fed.  Rep.  221 
(1891) ;  Sanford  v.  Gregg,  58  Fed.  Rep. 
620  (1893) ;  Gregg  v.  Sandford,  65  Fed. 
Rep.  151  (1895).  In  the  case  Matter 
of  Jones,  172  N.  Y.  575  (1902),  it  was 
held  that  shares  of  an  unincorporated 
joint-stock  association  are  personal 
property  and  subject  to  an  inheritance 
tax  thereon,  even  though  the  property 
of  the  association  consisted  of  real 
estate.  By  reason  of  the  statutory 
construction  law,  referred  to  above, 
the  New  York  tax  statute  applicable 
to  all  persons  is  applicable  to  a  joint- 
stock  association,  and  hence  it  is  tax- 
able as  such,  and  in  this  respect  dif- 
fers from  a  partnership.  Being  taxa- 
ble as  such,  it  would  seem  that  the 
shareholders  in  New  York  are  exempt 
from  taxation  under  the  statute  men- 
tioned above.  It  has  been  held  in 
New  York  that  where  the  sinking 
fund  of  a  Massachusetts  corporation 
consists  of  personal  property  and  is 
held  by  trustees  in  New  York,  such 
sinking  fund  may  be  taxed  in  New 
York,  so  far  as  it  has  a  value  in  ex- 


cess of  the  debt  to  be  paid  from  it. 
People    V.    Assessors    of    Albany,    40 
N.  Y.  154  (1869). 
^  See  §  622/,  supra. 

2  Smith  V.  Anderson,  L.  R.  15  Ch.  D. 
247  (1880).  The  same  rule  pre- 
vails in  unincorporated  joint-stock 
associations.  See  Smith  v.  Virgin,  33 
Me.  148  (1851).  See  also  Waterbury 
V.  Merchants'  Union  Exp.  Co.,  50  Barb. 
157  (1867),  holding  that  such  a  com- 
pany will  not  be  wound  up  merely 
because  the  directors  have  been  guilty 
of  a  breach  of  trust.  See  also  Howe 
V.  Morse,  174  Mass.  491  (1899),  and 
§  622/,  supra. 

3  Re  Padstow,  etc.  Assoc,  L.  R.  20 
Ch.  D.  137  (1882). 

*  Perry,  Trusts,  §  920. 

5  Perry,  Trusts,  §§  816-853. 

«  See  Baring  v.  Dix,  1  Cox,  Ch.  213 
(1786);  Bailey  v.  Ford,  13  Sim.  495 
(1843) ;  Jennings  v.  Baddeley,  3  K.  & 
J.  78  (1856),  where  insolvent  co- 
partnerships were  wound  up,  though 
the  time  for  which  they  were  to  exist 
had  not  yet  expired.  See  also  Sieg- 
hortner  v.  Weissenborn,  20  N.  J.  Eq. 
172  (1869) ;  Howell  v.  Harvey,  5  Ark. 
270  (1843);  Van  Ness  v.  Fisher,  5 
Lans.  236  (1871);  Brien  v.  Harriman, 
1  Tenn.  Ch.  467  (1873) ;    HoUaday  v. 


1888 


CH.  XXXVII. 


ELECTIONS 


CORPORATE   MEETINGS. 


[§  623. 


A  contributor  to  a  fund  to  be  invested  by  syndicate  managers  in 
stocks  and  otlier  property  has  not  such  an  interest  in  the  stocks  as  enables 
him  to  maintain  a  suit  in  the  state  where  the  corporations  are  organized 
as  against  the  non-resident  syndicate  managers.^  A  national  bank 
which  has  taken  as  security  for  a  debt  and  then  acquired  shares  of  stock 
in  an  unincorporated  association,  formed  for  speculative  purposes,  is 
not  Uable  on  said  stock,  its  acquisition  having  been  ultra  vires} 

Perhaps  the  most  notable  instance  of  a  voluntary  association  to 
acquire,  hold,  and  vote  shares  of  stock  is  "  The  Mackay  Companies." 
Somewhat  similar  is  the  plan  of  having  trustees  hold  property  for 
many  certificate  holders,  as  is  the  case  of  the  "  Great  Northern  Iron 
Ore  Properties."  ^ 

§  623.  Who  may  he  a  director  or  corporate  officer  —  Qualification 
shares.  —  If  the  charter  or  statutes  require  a  director  to  be  a  stock- 
holder, one  who  holds  stock  transferred  to  him  in  trust  for  the  express 
purpose  of  qualifying  him  for  the  position,  may  serve.*    And  where  a 


EUiott,  8  Oreg.  84  (1879) ;  Bagley  v. 
Smith,  10  N.  Y.  489  (1853).  In  Sib- 
ley V.  Minton,  27  L.  J.  (Ch.)  53  (1858), 
the  court  held  that,  in  an  action  by 
an  adventurer  in  a  cost-book  mining 
company  to  wind  up  the  company  and 
adjust  the  losses,  all  the  co-adventur- 
ers were  necessary  parties.  A  syndi- 
cate operation  was  involved  in  Hogg 
V.  Hoag,  107  Fed.  Rep.  807  (1901), 
where  certain  stocks  and  property 
were  transferred  to  a  trustee,  who 
issued  certificates  therefor  to  the 
members  of  the  syndicate.  A  part  of 
the  subscribers  did  not  pay,  and  the 
vendor  of  the  property  took  the  trus- 
tee certificates  of  such  non-paying 
subscribers,  and  on  the  death  of  the 
trustee  a  bill  was  filed  to  have  the 
court  substitute  a  new  trustee,  and 
one  of  the  subscribers  filed  a  cross- 
bill for  an  accounting.  The  court 
decreed  a  winding  up  of  the  syndicate 
and  appointed  a  receiver.  The  court 
held  that  a  partial  payment  made  to 
the  vendor  of  the  stocks  was  legal, 
even  though  all  the  property  was  not 
conveyed  to  the  trustee,  as  contem- 
plated, and  that  the  vendor's  accept- 
ance of  the  certificates  of  non-paying 
subscribers  obligated  him  to  pay  there- 
for, although  such  trustee's  certificates 
had  become  worthless,  the  transac- 
tion being  in  connection  with  the  Ore- 
gon Pacific  Railroad  Company.     The 


court  said  that  the  syndicate  was  in 
substance,  though  not  technically,  a 
joint-stock  company. 

1  Jones  V.  Gould,  141  Fed.  Rep.  698 
(1905) ;   aff'd,  149  Fed.  Rep.  153. 

2  Merchants'  National  Bank  v. 
Wehrmann,  202  U.  S.  295  (1906). 

'  A  synopsis  of  the  indenture  above 
referred  to  is  found  in  77  N.  Y.  Misc. 
Rep.  325,  326.  A  stockholder's  suit 
to  compel  his  railroad  company  to 
take  back  certain  stocks,  bonds,  mines, 
etc.,  in  which  the  railroad  had  no 
power  to  invest  and  which  the  railroad 
had  transferred  to  other  companies, 
and  asking  that  such  property  when 
taken  back  shall  be  sold  and  the  assets 
distributed  among  the  stockholders,  is 
not  multifarious,  and  on  its  face  makes 
out  a  ease,  it  being  charged  that  part 
of  the  property  had  been  put  into  a 
trusteeship  and  trust  certificates  there- 
for issued  to  stockholders  of  the  rail- 
road company,  even  though  the  transac- 
tion is  eight  years  old.  Venner  v. 
Great  Northern  Ry.,  117  Minn.  447 
(1912).  For  form  of  certificate  of  un- 
incorporated association  or  trustee- 
ship,see  vol.  V,in/ra.   101  N.E.  Rep.  949. 

^Budd  V.  Munroe,  18  Hun,  316 
(1879).  Contra,  Bartholomew  v.  Bent- 
ley,  1  Ohio  St.  37  (1852).  Where  an 
agent  of  a  corporation  purchases  with 
corporate  funds,  without  authority, 
stock  in  another  company,   and  sells 


(119) 


1889 


§  623. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII, 


person  has  the  right  to  vote  on  stock  as  a  stockholder,  he  is  eUgible 
to  any  corporate  office  to  which  any  stockholder  is  eligible,  and  accord- 
ingly may  be  elected  a  director,  even  though  an  assignee  in  bankruptcy 
has  been  appointed  of  his  estate.^  He  may  obtain  stock  in  any  way 
and  become  thereby  qualified. ^  Although  the  charter  requires  the  direc- 
tors to  be  stockholders,  it  has  been  held  that  the  transferee  and  holder 
of  a  certificate  of  stock  is  qualified,  even  though  the  stock  itself  stands 
on  the  books  of  the  company  in  the  name  of  his  transferrer.^     But  a 


one  of  the  shares  to  a  person  in  order 
to  enable  the  latter  to  qualify  as  a 
director  in  such  company  the  person 
receiving  the  one  share  is  protected 
in  his  title,  and  the  first-named  cor- 
poration cannot  compel  him  to  give 
it  up,  even  though  the  agent  had  no 
power  to  sell,  the  purchaser  having 
purchased  in  good  faith.  Hence,  his 
acts  as  a  director  are  valid.  Scarlett 
V.  Ward,  52  N.  J.  Eq.  197  (1893).  Al- 
though the  statute  requires  a  director 
to  be  a  stockholder,  it  is  no  objection 
that  a  qualification  share  was  put 
in  a  director's  name  merely  for  the 
purpose  of  qualifying  him.  Re  Leslie, 
58  N.  J.  L.  609  (1896).  In  a  stock- 
holder's suit  to  enjoin  the  corporation 
from  entering  into  a  consolidation,  he 
cannot  question  the  right  of  the  di- 
rectors to  hold  office  on  the  ground 
that  the  qualification  shares  did  not 
really  belong  to  them.  Langan  v. 
Francklyn,  20  N.  Y.  Supp.  404  (1892). 
Stock  may  be  given  to  a  person  to 
qualify  him  as  a  director.  Louisville, 
etc.  Co.  V.  Kaufman,  105  Ky.  131 
(1898).  Where  four  shares  of  stock 
are  transferred  to  a  person  by  the 
corporation  to  qualify  him  as  a  di- 
rector, and  he  agrees  to  return  the 
same  to  the  corporation  when  ceasing 
to  be  a  director,  but  thereafter,  and 
before  he  ceases  to  be  a  director,  he 
agrees  with  the  indorsers  of  his  note 
that  they  shall  have  the  stock  as  col- 
lateral security,  they  are  protected, 
even  though  the  stock  was  actually  de- 
livei'ed  to  them  after  they  had  notice 
of  the  first  agreement,  it  being  shown, 
however,  that  they  had  no  notice  of 
such  agreement  at  the  time  they  be- 
came sureties.  Dueber,  etc.  Co.  v. 
Daugherty,  62  Ohio  St.  589  (1900). 
Where  one  share  of  stock  is  trans- 
ferred to  a  person  to  qualify  him  as 


a  director  and  he  knows  nothing  about 
it,  he  is  not  a  legal  director.  Barthol- 
omew V.  Bentley,  1  Ohio  St.  37  (1882). 

1  State  V.  Ferris,  42  Conn.  560 
(1875). 

2  A  stockholder  may  have  pur- 
chased stock  with  a  view  of  becom- 
ing a  director,  or  have  obtained  it 
by  gift,  or  he  may  hold  it  upon  a  trust, 
and  be  qualified  to  be  a  director.  He  is 
qualified  unless  the  "title  was  put  in 
him  colorably,  with  a  view  to  qualify 
him  to  be  a  director  for  some  dishonest 
purpose,  in  furtherance  of  some  fraud- 
ulent scheme  touching  the  organization 
or  control  of  the  company,  or  to  carry 
into  effect  some  fraudulent  arrange- 
ment with  the  company."  Re  St. 
Lawrence  Steamboat  Co.,  44  N.  J.  L. 
529  (1882).  A  person  is  qualified  who 
buys  stock  in  his  own  name  with  his 
wife's  money  and  transfers  the  certifi- 
cate to  her,  but  afterwards,  and  before 
registry,  keeps  the  stock  for  himself. 
Re  St.  Lawrence  Steamboat  Co.,  44 
N.  J.  L.  529  (1882).  If  the  director  has 
sufficient  stock  registered  in  his  name, 
it  is  immaterial  that  he  does  not  own 
it.  Pulbrook  v.  Richmond,  etc.  Co., 
L.  R.  9  Ch.  D.  610  (1878) ;  Bainbridge 
V.  Smith,  41  Ch.D.  462  (1889).  Where 
stock  is  transferred  to  a  man  by  his 
wife,  in  order  to  qualify  him  to  act  as  a 
director  in  a  national  bank,  the  agree- 
ment between  them  that  the  stock  shall 
still  continue  to  be  hers  is  legal. 
Citizens'  Nat.  Bank  v.  Sturgis  Nat. 
Bank,  81  S.  W.  Rep.  550  (Tex.  1904). 

3  State  V.  Smith,  15  Oreg.  98  (1887). 
The  corporate  books  are  not  conclu- 
sive as  to  the  qualification  of  a  person 
to  act  as  a  director.  If  he  owns  stock 
he  is  qualified,  even  though  he  does  not 
appear  as  a  stockholder  on  the  corpo- 
rate books,  and  vice  versa.  The  in- 
spectors  cannot   reject   votes   on   the 


1890 


CH.  XXXVII.] 


ELECTIONS 


CORPORATE   MEETINGS. 


623. 


person  who  has  merely  an  executory  contract  for  the  deHvery  of  stock 
is  not  a  stockholder  sufficient  to  be  a  director,  as  required  by  statute.^ 

In  general,  any  one  who  may  be  an  agent  may  be  elected  a  director 
of  a  private  corporation ;  and  at  common  law  it  is  not  necessary  that 
a  director  be  a  stockliolder.-  A  director  need  not  be  a  citizen  of  the 
state  by  which  the  corporation  is  created.^  The  constitutionality  of  a 
statute  which  prohibits  the  citizens  of  other  states  from  being  directors 
in  a  corporation  may  well  be  doubted.^  An  alien  may  be  a  stockholder 
and  director  in  a  corporation  if  the  statutes  do  not  prohibit  it.^     A 


ground  that  the  candidate  is  not 
qualified.  Re  St.  Lawrence  Steam- 
boat Co.,  44  N.  J.  L.  529  (1882).  An 
owner  of  stock  is  qualified  to  act  as 
director,  even  though  the  stock  has  not 
been  transferred  to  him  on  the  books. 
Re  Schwartz  &  Gray,  77  N.  J.  L.  415 
(1909).  Under  the  statutes  of  North 
Dakota  an  unregistered  holder  of  stock 
is  not  qualified  to  be  elected  a  director. 
Re  Argus  Printing  Co.,  1  N.  D.  434 
(1891). 

iHeartt  v.  Sherman,  229  111.  581 
(1907). 

2  State  V.  McDaniel,  22  Ohio  St.  354, 
367  (1872) ;  McDowall  v.  Sheehan,  129 
N.  Y.  210  (1891);  Wight  v.  Spring- 
field, etc.  R.  R.,  117  Mass.  226  (1875) ; 
Wright  V.  Floyd,  43  Ind.  App.  546 
(1909).  Re  St.  Lawrence  Steamboat 
Co.,  44  N.  J.  L.  529  (1882) ;  Hoyt  v. 
Bridgewater,  etc.  Co.,  6  N.  J.  Eq.  253, 
274  (1847) ;  Bristol,  etc.  Trust  Co.  v. 
Jonesboro,  etc.  Trust  Co.,  101  Tenn. 
545  (1898) ;  Ex  parte  Stock,  33  L.  J. 
(Ch.)  731  (1864);  Bartholomew  v. 
Bentley,  1  Ohio  St.  37  (1852) ;  People 
V.  Northern  R.  R.,  42  N.  Y.  217 
(1870) ;  Cammaver  v.  United,  etc. 
Churches,  2  Sandf.  Ch.  186,  249 
(1844) ;  Hurrell  &  Hyde  on  Directors 
and  Officers,  2;  State  v.  Swearingen, 
12  Ga.  23  (1852)  —  a  municipal  corpo- 
ration case.  The  charter  or  by-laws 
may,  however,  provide  otherwase. 
Despatch  Line  v.  Bellamy  Mfg.  Co., 
12  N.  H.  205  (1841).  See  also  Cum- 
ming  V.  Prescott,  2  Younge  &  C. 
(Exch.)  488  (1837).  It  is  not  nec- 
essary that  the  directors  should  be 
either  subscribers  to  the  stock  or  cor- 
porators. Densmore  Oil  Co.  v.  Dens- 
more,  54  Pa.  St.  43  (1877) ;  Re  British 
I*rovldent,  etc.  Assoc,  L.  R.  5  Ch.  D. 


306  (1877).  It  has  been  doubted 
whether  the  by-laws  of  a  company  may 
require  directors  to  be  stockholders. 
People  V.  Albany,  etc.  R.  R.,  55  Barb. 
344,  373  (1869) ;  aflf'd,  57  N.  Y.  161. 
Cf.  Cross  V.  West  Virginia,  etc.  Ry., 
37  W.  Va.  342  (1892). 

3  Kerchner  v.  Gettys,  18  S.  C.  521 
(1882).  A  citizen  of  one  state  may 
be  a  stockholder  and  director  in  a 
corporation  incorporated  in  another 
state.  Commonwealth  v.  Detwiller, 
131  Pa.  St.  614  (1890).  Directors  of 
a  national  bank  "are  not  required  to 
reside  at  the  bank's  place  of  business." 
Robinson  v.  Hall,  59  Fed.  Rep.  648 
(1894).  The  directors  of  a  corpora- 
tion need  not  be  residents  of  the  state 
unless  the  statutes  expressly  require 
it.  North,  etc.  Rolling-stock  Co.  v. 
People,  147  111.  234  (1893).  It  is  no 
ground  for  a  receiver  that  the  majority 
of  the  directors  are  non-residents  and 
have  moved  the  books  out  of  the  state. 
Thoroughgood  v.  Georgetown,  etc. 
Co.,    77   Atl.    Rep.    720    (Del.    1910). 

<  See  §  813,  infra,  to  the  effect  that 
such  a  statute  as  regards  trustees  in 
a  mortgage  deed  of  trust  is  unconsti- 
tutional and  void.  A  constitutional 
pro\ision  requiring  directors  to  be 
stockholders  does  not  apply  to  a  con- 
solidated railroad  company  existing 
as  one  corporation  in  two  states.  Ohio, 
etc.  Ry.  V.  People,  123  111.  467  (1888). 
•  5  Commonwealth  r.  Hemmingway, 
131  Pa.  St.  614  (1890).  The  mere 
fact  that  directors  are  aliens  does  not 
prevent  a  corporation  which  is  a 
domestic  corporation  from  holding 
title  to  land.  Cammayer  v.  United 
German,  etc.  Churches,  2  Sandf.  Ch. 
186,  250  (1844). 


1891 


623. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


married  woman  is  not  at  common  law  qualified  to  act  as  an  incorpora- 
tor nor  as  treasurer/  but  under  the  usual  statutes  conferring  rights 
upon  her  she  is  qualified  to  act  as  a  director  or  officer.^  An  executor 
may  be  a  director.^  A  trustee  is  qualified  to  act  as  a  director,  even 
though  the  charter  required  each  director  to  hold  stock  "  in  his  own 
right,"  but  where  a  director's  trustee  in  bankruptcy  claims  the  stock 
the  director  is  no  longer  qualified.'*  Even  though  the  agent  of  a  stock- 
holder is  elected  a  director  to  protect  the  latter's  -interest,  yet  that 
duty  must  be  subordinate  to  his  independent  and  impartial  judgment 
as  a  director,  and  any  contract  to  the  contrary  is  void.^  A  corporation 
cannot  be  a  director.^  Under  the  New  Jersey  statute,  if  the  directors 
neglect  to  produce  at  the  annual  election  an  alphabetical  list  of  the 
stockholders  and  their  residences  and  holdings,  their  election  as  direc- 
tors will  be  set  aside  even  though  the  stock  and  transfer  books  were 
present.^ 

Votes  cast  for  a  person  not  eligible  to  the  office  cannot  elect  him. 
He  is  not  even  a  de  facto  director,  and  he  may  be  ousted  by  legal  pro- 
ceedings.^   Such  votes,  however,  are  not  to  be  ignored  so  as  to  elect 


1  9  Ry.  «fe  Corp.  L.  J.  197.  Cf.  note 
1,  p.  43,  supra. 

2  People  V.  Webster,  10  Wend.  554 
(1833). 

»  Re  Santa  Eulalia  S.  Min.  Co.,  4 
N.  Y  Supp.  174  (1889).  An  executor 
may  be  a  director  even  though  the 
stock  does  not  stand  in  his  name. 
Schmidt  v.  MitcheU,  101  Ky.  570 
(1897) ;  Re  Santa  Clara,  etc.  Co., 
N.  Y.  Daily  Reg.,  June  19,  1888.  A 
charter  provision  that  directors  shall 
own  a  certain  amount  of  stock  is 
satisfied  by  a  director  holding  stock  as 
executor,  even  though  he  has  co- 
executors  and  all  the  stock  is  held  in 
their  names  as  executors.  Grundy  v. 
Briggs,  [1910]  1  Ch.  444. 

'  Sutton  V.  English,  etc.  Co.,  [1902] 
2  Ch.  502. 

^  Singers-Bigger  v.  Young,  166  Fed. 
Rep.  82  (1908). 

*"  Corporations  are  organized  by 
natural  persons,  acting  under  the 
direction  of  a  statute,  and  they  only 
can  become  corporators,  directors,  or 
officers.  'Artificial  persons,'  without 
brain  or  body,  existing  only  on  paper 
through  legislative  command  and  in- 
capable of  thought  or  action  except 
through  natural  persons,  cannot  create 
other    'artificial   persons,'    and    those. 


others  still,  until  the  line  is  so  extended 
and  the  capital  stock  so  duplicated 
and  reduplicated,  as  to  result  in  eon- 
fusion  and  fraud."  Schwab  v.  Potter, 
194  N.  Y.  409  (1909). 

'  Re  Schwartz  &  Gray,  77  N.  J.  L. 
415  (1909). 

8  The  election  of  a  person  not  quali- 
fied does  not  make  him  even  a  de 
facto  director.  Re  Neweomb,  18  N.  Y. 
Supp.  16  (1891) ;  Hamley's  Case,  L.  R. 
5  Ch.  D.  705  (1877);  Jenner's  Case, 
L.  R.  7  Ch.  D.  132  (1877).  A  director 
who  is  not  a  stockholder  cannot  com- 
plain that  a  meeting  of  the  directors 
was  held  without  notice  to  him.  An- 
derson, etc.  Co.  V.  Pungs,  127  Mich. 
543  (1901).  In  a  stockholder's  suit 
in  behalf  of  the  corporation,  a  request 
to  the  legal  board  of  directors  to 
bring  the  suit  is  necessary,  even 
though  it  is  alleged  that  a  majority 
of  the  directors  are  involved  in  the 
fraud  complained  of,  where  it  appears 
that  such  directors  were  not  qualified 
to  act  as  directors  by  reason  of  not 
being  stockholders,  and  never  had 
acted  as  such.  Loomis  v.  Missouri,  etc. 
Ry.,  165  Mo.  469  (1901).  Where  a 
director  was  not  qualified  and  a  new 
director  has  been  elected  in  his  place, 
the  former  cannot  have  mandamus  to 


1892 


CH.  XXXVII. 


ELECTIONS 


CORPORATE   MEETINGS. 


[§  623. 


a  candidate  who  receives  a  minority  of  all  the  votes  cast.^  The  elec- 
tion is  good  as  to  those  who  were  eligible.-  Even  though  the  board  of 
directors  consists  of  five,  and  the  stockholders  at  an  election  cast  all 
their  votes    for    two,   those    two    are    elected,   leaving   three   vacan- 


allow  him  to  inspect  the  company's 
books  and  exercise  other  rights  of 
a  director,  even  though  for  a  time 
he  was  permitted  to  act  as  director. 
People  V.  N.  Y.,  etc.  Co.,  34  N.  Y.  Misc. 
Rep.  326  (1901).  Where  cumulative 
voting  prevails,  and  the  statutes  re- 
quire three  directors  to  be  residents, 
and  all  votes  cast  are  cumulated 
on  non-residents  excepting  thirty-two, 
which  are  cast  for  three  residents,  the 
three  residents  are  elected,  and  the 
remaining  directors  are  those  of  the 
non-residents  who  received  the  high- 
est number  of  votes.  Horton  v.  Wil- 
der, 48  Kan.  222  (1892).  Where  di- 
rectors must  be  stockholders  qualified 
to  vote,  a  stockholder  not  qualified 
to  vote  by  reason  of  not  owning  his 
stock  for  thirty  days  before  the  elec- 
tion is  not  qualified  to  be  a  director. 
His  election  does  not  make  him  even 
a  de  facto  director.  Re  Newcomb,  18 
N.  Y.  Supp.  16  (1891).  Where  an 
election  is  "conceived  in  fraud  and 
conducted  contrary  to  law,"  the  call 
being  insufficient,  the  notice  con- 
cealed, the  instigators  having  sold  and 
transferred  their  certificates  of  stock, 
the  purpose  of  the  election  being  to 
steal  the  control  from  one  who  really 
owned  all  the  stock,  and  two  of  the 
alleged  new  directors  not  being  stock- 
holders as  required  by  law,  there  are 
no  directors  de  facto,  even  though 
they  take  possession  and  drive  away 
the  contractor  who  is  building  the 
road.  Johnston  v.  Jones,  23  N.  J.  Eq. 
216  (1872).  In  Barber's  Case,  L.  R. 
5  Ch.  D.  963  (1877),  arising  under 
similar  facts,  the  court  said:  "Mr. 
Barber  was  not  qualified  to  be  elected 
a  director,  and  his  election  was  abso- 
lutely null  and  void.  ...  If  he 
had  acted  as  a  director,  there  might 
have  been  an  estoppel."  The  board 
of  directors  cannot,  even  under  a  by- 
law authorizing  them  to  fill  vacancies, 
oust  a  director  on  the  ground  that  he 
was  ineligible  when  elected,  and  then 
proceed   to   fill   his   place.     Common- 


wealth V.  Detwiller,  131  Pa.  St.  614 
(1890).  A  director  who  is  not  a  stock- 
holder cannot  sign  a  statutory  notice 
of  a  meeting  to  increase  the  capital 
stock.  Re  Wheeler,  2  Abb.  Pr.  (N.  S.) 
361  (1866).  It  formerly  was  held  in 
England  that  the  election  of  one  not  a 
shareholder  as  a  director  in  a  corpora- 
tion in  which  it  is  required  that  the 
directors  be  owners  of  a  certain  amount 
of  stock  is  valid ;  and  such  a  person, 
upon  acceptance  of  the  directorship,  is 
bound  to  take  and  pay  for  the  required 
number  of  shares.  But  the  later 
decisions  have  established  the  rule  that 
by  accepting  the  directorship  he  does 
not  thereby  become  liable  as  a  sub- 
scriber for  stock  to  the  amount  of 
qualification  shares.  See  §  52,  supra. 
The  election  of  a  disqualified  person  as 
director  is  voidable,  not  void.  People 
V.  Albany,  etc.  R.  R.,  55  Barb.  344, 
373  (1869);   aff'd,  57  N.  Y.  161. 

1  See  §  620,  supra.  Even  though 
the  statutes  require  directors  to  be 
stockholders,  yet  the  fact  that  a  man 
is  a  director  does  not  prove  that  he  is  a 
stockholder  in  a  suit  by  a  judgment 
creditor  of  the  corporation  to  hold 
him  liable  as  a  stockholder.  McFar- 
land  V.  Martin  &  Moodie,  86  S.  W. 
Rep.  639  (Tex.  1905).  Even  though 
the  directors  who  were  declared  elected 
were  ineligible,  because  in  violation 
of  the  New  Jersey  statute  they  did 
not  produce  the  stock-books  at  the 
election,  yet  the  court  will  not  neces- 
sarily declare  elected  those  who  re- 
ceived a  minority  of  the  votes,  but 
will  order  a  new  election  if  there  was 
no  fraud  or  improper  motive  in  fail- 
ing to  obey  the  statute.  Stratford 
V.  Mallory,  70  N.  J.  L.  294  (1904). 

2  Schmidt  v.  Mitchell,  101  Ky.  570 
(1897).  In  the  case  In  re  Jersey  City 
Paper  Co.,  69  N.  J.  L.  594  (1903), 
where  the  directors  were  ineligible 
under  the  statute  by  reason  of  their 
not  producing  the  transfer  books  at 
the  election,  the  court  ordered  a  new 
election. 


1893 


I  623.]  ELECTIONS  —  CORPORATE   MEETINGS.  [cH.  XXXVII. 

cies.^  Although  the  statutes  require  a  director  to  be  a  stockholder,  yet  a 
person  not  a  stockholder  may  be  elected,  and  may  then  acquire  one  or 
more  shares  of  stock  before  acting  as  director.  This  satisfies  the  law.^ 
But  in  California  it  is  held  that  where  the  by-laws  require  directors  to 
own  ten  shares  of  stock,  votes  for  a  director  who  holds  but  eight  will  not 
be  considered,  but  a  properly  qualified  person  receiving  the  next  less 
number  of  votes  will  be  declared  elected  even  though  the  former  candi- 
date acquired  three  more  shares  the  next  day.^  A  statute  requiring 
directors  to  be  stockholders  does  not  apply  to  directors  named  in  the 
certificate  of  incorporation  for  the  first  year.^ 

Where  a  person  not  eligible  to  the  office  is  declared  elected,  and  no 
stockholder  objects  or  takes  legal  proceedings  to  test  the  right  to  the 
office,  and  such  person  is  allowed  to  perform  the  duties  of  his 
office,  he  becomes  an  officer  de  facto.  As  such  his  acts  cannot  be  ob- 
jected to  on  the  ground  that  he  was  not  a  legally  elected  director. 
Neither  corporate  creditors,  nor  the  corporation,  nor  the  stockholders, 
nor  the  director  himself,  are  allowed  to  raise  this  objection  in  that 
manner.  The  remedy  is  to  oust  him  by  quo  warra7ito  or  to  enjoin  him 
as  a  usurper.  But  after  he  is  allowed  to  become  a  de  facto  director, 
his  title  to  office  cannot  be  attacked  collaterally,  nor  can  his  acts  be 
repudiated  on  that  ground.^  A  director,  as  a  de  facto  director,  may 
bind  the  company  by  his  acts,  if  allowed  to  continue  in  his  position.^ 

1  Gilchrist  v.  Collopy,  119  Ky.  110  ban,  129  N.  Y.  200  (1891);  Partal  v. 
(1904).     See  also  §  608,  supra.  Emmons,  L.  R.   1  C.  P.  D.  664,  667 

2  Greenough  v.  Alabama,  etc.  R.  R.,  (1876).  The  New  York  statute  that 
64  Fed.  Rep.  22  (1894).  Where  only  one  incorporator  need  be  a  resi- 
directors  must  be  stockholders,  a  per-  dent  repeals  by  implication  the  prior 
son  elected  director  without  his  knowl-  statute  that  two  directors  for  the  first 
edge  and  owning  no  stock,  and  who  year  must  be  residents.  People  v. 
never  acted  as  a  director  for  ten  years,  McDonough,  28  Misc.  Rep.  652  (1899). 
is  not  a  director,  even  though  a  share  Even  though  there  are  but  three  stock- 
of  stock  was  given  to  him  shortly  holders,  and  the  law  requires  the 
after  his  election  and  he  took  the  directors  to  be  stockholders,  _  yet  if 
same.  Hence  he  may  purchase  cor-  there  has  been  no  election  of  directors 
poration  property  at  a  judicial  sale,  the  three  stockholders  are  not  directors. 
Rozeerans  Gold  Min.  Co.  v.  Morey,  HI  Grand  Rapids,  etc.  Co.  v.  Grand,  etc. 
Cal.    114    (1896).     A    person    who    is  Co.,  11  Wyo.  128  (1903). 

a  registered  holder  of  stock,  but  has  ^  See  §  713,  infra. 

no  interest  in  it,  is  not  eligible,  under  ^  Quoted  and  approved  in  Werle  v. 

the  New  York  statute,   even   though  Northwestern,  etc.  Co.,  125  Wis.  534 

he  acquires  the  full  title  thereto  after  (1905).     A  director  who  sells  his  stock 

the    election.     Matter    of    Elias,     17  ceases  to  be  a  de  jure  director.     If  he 

N.  Y.  Misc.  Rep.  718  (1896).  continues  and  is  permitted  to  act  he 

'  Waterbury  v.  Temescal,  etc.  Co.,  is    a    director    de  facto.     Beardsley    v. 

II  Cal.  App.  632  (1909).  Johnson,  121  N.  Y.  224  (1890).     Even 
*  Hamilton  T.   Co.   v.   Clemes,    163  though  an  amendment  to  the  charter 

N.  Y.  423  (1900) ;  Camden,  etc.  Co.  whereby  the  number  of  directors  is 
V.  Burlington,  etc.  Co.,  33  Atl.  Rep.  increased  is  not  for  several  months 
479  (N.  J.  1895) ;    McDowall  v.  Shee-    recorded  in  a  public  office,  as  required 

1894 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  623. 


Where  the  charter  requires  the  directors  to  be  stocldiolders,  a  direc- 
tor  must  continue  to  hold  stock  during  his  term  of  office.  If  he  sells 
all  his  stock  in  the  company,  he  thereby  becomes  disqualified  and  ceases, 
ipso  facto,  to  be  a  director.^     But  even  though  the  statutes  require 


by  statute,  yet  if  the  increased  num- 
ber of  directors  is  elected  their  acts 
bind  the  corporation.  Werle  v.  North- 
western, etc.  Co.,  125  Wis.  534  (1905). 
Where  a  consolidation  of  a  domestic 
with  a  foreign  railroad  company 
is  to  be  in  accordance  with  the  laws 
of  the  other  state,  irregularities  as 
to  making  up  the  board  of  directors, 
etc.,  as  required  by  the  laws  of  such 
other  state,  will  not  be  inquired 
into  collaterally.  Smith  v.  Cleveland, 
etc.  Ry.,  170  Ind.  382  (1907).  A 
citizen  of  a  city  cannot  maintain  a 
suit  to  have  a  water-works  company 
put  in  the  hands  of  a  receiver  on  the 
ground  that  all  of  its  stock  is  owned 
by  the  city  and  the  city  has  not 
elected  directors  having  the  neces- 
sary qualification.  Kirch  v.  City  of 
Louisville,  125  Ky.  391  (1907).  The 
legality  of  an  election  and  the  regu- 
larity of  its  procedure  as  well  as  the 
qualifications  of  its  directors  cannot 
be  attacked  collaterally  by  a  stock- 
holder trying  to  enjoin  a  proposed 
sale  of  property  by  such  directors. 
Jones  V.  Bonanza,  etc.  Co.,  32  Utah, 
440  (1907).  Even  though  directors 
are  not  stockholders  as  requu-ed  by 
law,  yet  they  may  join  in  a  petition  for 
voluntary  dissolution  of  the  corpora- 
tion. Matter  of  Manoea,  etc.  Ass'n, 
128  N.  Y.  App.  Div.  796  (1908). 
Even  though  the  directors  are  dummies 
and  have  sold  their  stock  to  the  presi- 
dent, yet  this  does  not  invalidate  their 
acts  as  directors  in  voting  a  salary  to 
him,  no  fraud  being  shown.  Cowell 
V.  M'Millin,  177  Fed.  Rep.  25  <1910). 
1  Quoted  and  approved  in  Oudin, 
etc.  Co.  V.  Conlan,  34  Wash.  216 
(1904).  Where  the  statutes  require 
the  director  to  be  a  stockholder,  it 
follows  "that  as  soon  as  a  director 
parts  with  all  beneficial  interest  in, 
and  control  over,  the  stock  which  he 
is  required  to  hold,  and  causes  the 
officers  of  the  corporation  to  have 
knowledge  of  such  fact  by  a  request 
that  a  proper  transfer  be  made  on  the 


books  of  the  company,  he  no  longer 
possesses  the  qualifications  which  the 
statute  declares  to  be  essential,"  and 
hence  he  ceases  ipso  facto  to  be  a 
director  and  is  no  longer  liable  on 
a  director's  statutory  liability.  "The 
statute  executing  itself  operated  to 
divest  him  of  title  to  the  office." 
Chemical  Nat.  Bank  v.  Colwell,  132 
N.  Y.  250  (1892).  Notes  issued  by 
directors  who  are  disqualified  by  hav- 
ing sold  their  stock  and  as  a  scheme 
to  create  a  liability  on  the  part  of  the 
stockholders  are  not  good,  especially 
where  the  meeting  of  the  directors 
was  not  properly  called.  Close  v.  Pot- 
ter, 155  N.  Y.  145  (1898).  Where  a 
director  must  be  a  stockholder,  and 
there  is  a  statutory  liability  attached 
to  the  directorship,  the  director  may 
transfer  his  stock  in  order  to  cease  to 
be  a  director  and  in  order  to  avoid 
such  liability.  Sinclair  v.  Fuller,  158 
N.  Y.  607  (1899).  Where  directors 
must  be  stockholders,  and  some  of 
them  sell  their  stock,  they  cease  to  be 
directors,  and  are  not  liable  on  the 
statutory  liability  of  directors.  Staf- 
ford V.  St.  John,  164  Ind.  277  (1905). 
A  dummy  director  in  whose  name  on 
the  books  one  share  of  stock  stands, 
but  who  had  indorsed  it  in  blank  and 
delivered  it  back,  cannot  maintain  a 
suit  for  a  receiver  of  the  corporation. 
Hoopes  V.  Basic  Co.,  69  N.  J.  Eq.  679 
(1905).  The  fact  that  a  director  sells 
his  stock  does  not  ipso  facto  vacate 
his  office  as  director.  Howie  v. 
Searbrough,  138  Ala.  148  (1903). 
Nathan  v.  Tompkins,  82  Ala.  437 
(1887),  holds  that  he  may  be  re- 
moved, but  does  not  cease  to  be  a 
director  by  the  mere  act  of  selling 
his  stock.  To  same  effect.  Atlas  Nat. 
Bank  ;;.  F.  B.  Gardner  Co.,  8  Biss. 
537  (1879);  s.  c,  2  Fed.  Cas.  187. 
Although  the  statute  requires  three 
directors,  who  shall  be  stockholders, 
and  one  assigns  his  stock,  and  the 
other  two  authorize  and  execute  a 
corporate  mortgage  at  a  meeting  held 


1895 


§  623.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[cH.  xxxvir. 


directors  to  be  stockholders  and  a  director  has  parted  with  his  stock, 
yet  if  he  continues  to  act,  his  acts  are  not  void  as  to  third  persons.^ 
The  provision  in  the  New  York  statutes  that  "  if  a  director  should  cease 
to  be  a  stockholder  his  office  shall  become  vacant  "  is  self-executing.^ 


without  notice  to  the  other,  yet  the 
mortgagee,  having  no  knowledge  of 
these  facts,  is  protected.  Kuser  v. 
Wright,  52  N.  J.  Eq.  825  (1895),  rev'g 
Wright  V.  First  Nat.  Bank,  52  N.  J. 
Eq.  392.  Where  a  director  sells  and 
delivers  all  his  stock,  he  ceases  to  be 
an  officer  de  jure,  the  statute  requir- 
ing him  to  be  a  stockholder ;  and 
where  the  whole  board  of  directors 
have  sold  their  stock,  their  acts  as  a 
board  of  directors  are  not  binding  on 
the  corporation.  Orr,  etc.  Co.  v. 
Reno  Water  Co.,  17  Nev.  166  (1882). 
"Can  a  director  part  with  his  qualifi- 
cation shares?"  See  on  this  subject, 
8  Ry.  &  Corp.  L.  J.  99.  A  person  may 
purchase  stock  although  such  stock 
constitute  the  qualification  shares  of 
the  vendor  as  a  director.  Kern  v. 
Day,  45  La.  Ann.  71  (1893).  A 
motion  declaring  the  office  vacant  and 
electing  another  person  before  the 
director  has  really  sold  his  stock  is  void. 
Craw  V.  Easterly,  54  N.  Y.  679 
(1873). 

1  Robinson  v.  Blood,  151  Cal.  504 
(1907).  Even  though  directors  are 
not  residents  as  required  by  statute, 
a  mortgage  authorized  by  them  is  legal. 
Copper,  etc.  Co.  v.  Costello,  12  Ariz. 
318  (1909). 

2  Sinclair  v.  Fuller,  158  N.  Y.  607 
(1899).  The  New  York  court  of 
appeals  has  recently  held  that  where 
a  statute  requires  directors  to  be 
stockholders  it  is  not  sufficient  that 
stock  be  transferred  to  a  person  to 
qualify  him,  if  he  at  once  returns 
to  the  transferrer  the  certificate  in- 
dorsed in  blank  by  him,  and  that 
although  such  a  director  may  bind  the 
company  as  a  de  facto  director  so  far  as 
third  persons  are  concerned,  yet  that 
his  election  may  be  set  aside  at  the 
instance  of  a  stockholder,  under  the 
New  York  statute  authorizing  the 
courts  to  pass  upon  elections  in  a 
summary  way.  Matter  of  George 
Ringler  &  Co.,  204  N.  Y.  30  (1912). 
In    this   case   the   court    stated    that 


even  though  the  certificate  was  trans- 
ferred back  after  the  election  yet 
that  this  did  not  satisfy  the  law, 
although  the  rule  would  be  other- 
wise if  the  person  retained  the  cer- 
tificate although  the  transfer  had  been 
made  to  him  for  the  sole  purpose 
of  qualifying  him.  A  by-law  that  a. 
director  upon  parting  with  his  stock 
shall  cease  to  be  a  director  is  self- 
executing  and  if  he  transfers  his  certifi- 
cate of  stock  this  is  equivalent  to  a- 
resignation.  Matter  of  George  Ringler 
&  Co.,  204  N.  Y.  30  (1912).  The 
court  will  order  corporate  officers  to 
allow  a  director  to  examine  the  books, 
even  though  he  is  but  a  dummy  direc- 
tor, and  an  injunction  against  their 
removing  the  books  does  not  suspend 
the  general  and  ordinary  business  of 
the  corporation,  within  the  meaning  of 
the  New  York  statute.  People  v. 
Bonwit  Bros.,  69  N.  Y.  Misc.  Rep.  70 
(1910).  A  stockholder  cannot  main- 
tain a  suit  in  equity  to  enjoin  an 
alleged  director  from  acting  on  the 
ground  that  a  majority  of  the  directors 
are  mere  dummies  and  do  not  actually 
own  any  stock,  as  required  by  statute, 
and  that  they  were  elected  under  an 
agreement  by  which  the  vendor  of 
a  majority  of  the  stock  caused  the 
old  directors  to  resign  and  new  ones 
to  be  named  by  the  vendee,  and  that 
the  resignation  of  one  director  was 
withdrawn  before  it  was  accepted,  but 
was  afterwards  accepted  and  a  suc- 
cessor appointed  by  the  board  of 
directors,  and  that  a  majority  of  the 
stock  is  now  opposed  to  the  existing 
board  of  directors.  The  remedy  is 
quo  warranto  instituted  by  the  Attor- 
ney-General in  the  name  of  the  people. 
Moir  V.  Provident  Sav.  etc.  Soc,  127 
N.  Y.  App.  Div.  591  (1908).  A 
statute  that,  upon  an  officer  in  a 
bank  borrowing  money  of  the  bank 
without  security,  his  office  shall  be- 
come vacant  and  he  shall  cease  to 
be  a  director,  is  self-executing.  His 
continuance   in   office    may   bind   the 


1896 


CH.  XXXVII.] 


ELECTIONS 


CORPORATE   MEETINGS. 


[§  624. 


Where  the  charter  requires  directors  to  be  stockholders,  and  three  of 
the  seven  are  clerks,  to  each  of  whom  one  share  of  stock  is  transferred, 
and  the  certificate  therefor  is  at  once  retransferred  to  the  real  parties 
in  interest,  this  is  good  ground  for  a  forfeiture  of  the  charter.^  The  di- 
rector does  not  become  disqualified  by  reason  of  his  pledging  his  stock.^ 
The  secretary,  treasurer,  or  other  officer  of  a  corporation  need  not  be  a 
stockholder  or  resident  or  citizen  unless  the  statute  requires  it.^  "  It  is 
not  uncommon  for  a  single  individual  to  hold  several  offices  in  a  cor- 
poration." ^ 

A  corporation  may  pass  a  by-law  prescribing  the  qualifications  of 
its  directors,  and  may  prescribe  that  a  person  who  is  an  attorney  against 
it  in  a  suit  shall  not  be  a  director.^ 

§  624.  Acceptance  and  resignation  of  office  and  failure  to  elect 
directors  —  Removal  of  directors.  —  An  acceptance  of  the  office  by 
one  who  is  elected  director  is  necessary  to  constitute  him  a  director. 
Some  direct  and  positive  act  of  acceptance  is  necessary.^ 


corporation  by  his  acts,  but  does 
not  prevent  a  creditor  attacking  an 
assignment  for  creditors  made  by 
him  in  behalf  of  the  bank.  Cupit  v. 
Park  City  Bank,  20  Utah,  292  (1899). 

1  Lorillard  v.  Clyde,  142  N.  Y.  456 
(1894). 

2  Cummings  v.  Prescott,  2  Y.  &  C. 
Exch.  488  (1837).  This  was  held  in 
a  case  where  the  qualification  shares 
were  to  be  held  by  the  directors  in 
their  own  right.  Pulbrook  v.  Rich- 
mond, etc.  Mining  Co.,  L.  R.  9  Ch.  D. 
610  (1878).  The  court,  in  Ex  parte 
Littledale,  24  L.  J.  (Bankr.)  N.  S.  9 
(1855),  assumed  that  a  director  be- 
came disqualified  where  he  had 
pledged  his  stock,  even  though  the 
transfer  was  not  recorded. 

3  Kerchner  v.  Gettys,  18  S.  C.  521 
(1882) ;  McCall  v.  Byram  Mfg.  Co.,  6 
Conn.  428  (1827).  But  in  Matthews  v. 
Trustees,  2  Brewst.  (Pa.)  541  (1869), 
the  court  enjoined  the  company  from 
compelling  its  resident  treasurer  to 
turn  over  funds  to  a  newly  elected 
non-resident  treasurer.  Neither  the 
president  nor  the  treasurer  of  an  unin- 
corporated joint-stock  association  need 
be  stockholders  unless  the  charter  so 
provides.  National  Casket  Co.  v. 
Stolts,  135  Fed.  Rep.  534  (1905). 

*  Manhattan  Co.  v.  Kaldenberg,  165 
N.  Y.  1  (1900). 

^  Quoted   and   approved   in   People 


V.  Ittner,  165  111.  App.  360,  365  (1911). 
Cross  V.  West  Virginia,  etc.  Ry.,  37 
W.  Va.  342  (1892).  A  national  bank 
may  by  by-law  provide  that  the  presi- 
dent shall  be  elected  from  the  directors. 
Rankin  v.  Tygard,  198  Fed.  Rep.  795 
(1912). 

*  Osborne,  etc.  Co.  v.  Croome,  14 
Hun,  164  (1878) ;  aff'd,  77  N.  Y.  629  ; 
Cameron  v.  Seaman,  69  N.  Y.  396 
(1877) ;  Rozecrans,  etc.  Co.  v.  Morey, 
111  Cal.  114  (1896).  An  "honorary 
director,"  who  sits  with  the  board, 
makes  up  a  quorum  and  accepts  pay, 
is  subject  to  the  disabilities  and  lia- 
bilities of  a  director  as  to  being  in- 
terested in  contracts  with  the  com- 
pany. There  is  no  such  thing  in  law 
as  an  "honorary  director."  Ex  parte 
Stears,  Johns.  V.-C.  480  (1859).  It 
is  a  question  for  the  jury  whether  a 
person  accepted  a  directorship.  The 
mere  fact  that  as  an  adviser  he  met 
with  the  directors  and  made  motions 
is  not  conclusive  if  he  declined  to 
accept.  Blake  v.  Bay  ley,  82  Mass.  531 
(1860).  Acceptance  is  presumed. 
Lockwood  V.  Mechanics',  etc.  Bank,  9 
R.  I.  308  (1869).  But  may  be  dis- 
proved, even  though  the  person  at- 
tended directors'  meetings.  Blake  v. 
Bayley,  82  Mass.  531  (1860).  The 
fact  that  a  dh-ector  does  not  attend 
meetings  or  signify  his  acceptance  of 
the  office  does  not  justify  the  board  in 


1897 


624. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[cH.  xxxvir. 


A  director  may  resign,  and  no  formal  acceptance  or  entry  thereof 
on  the  minute-book  of  the  corporation  is  necessary  to  complete  the 
resignation.^  The  directors  may  accept  the  resignation  of  a  director 
and  elect  his  successor.^  A  director  who  resigns,  the  resignation  to  take 
effect  on  acceptance,  may  continue  to  act  until  it  is  accepted.^  Though 
the  president  resigns,  yet  if  he  acquiesces  in  the  refusal  of  the  directors 
to  accept  the  resignation  and  continues  to  act  as  president  and  direc- 


deelaring  his  office  vacant.  Accept- 
ance is  presumed.  Halpin  v.  Mutual, 
etc.  Co.,  20  N.  Y.  App.  Div.  583  (1897). 
Notice  of  a  directors'  meeting  need  not 
be  given  to  a  director  who  has  never 
accepted  the  office.  United  Growers' 
Co.  V.  Eisner,  22  N.  Y.  App.  Div.  1 
(1897).  Directorship  is  not  proved 
by  an  annual  report  signed  and 
sworn  to  by  the  president.  Bank,  etc. 
V.  Faber,  38  N.  Y.  App.  Div.  159 
(1899) ;  aff'd,  167  N.  Y.  184.  A  di- 
rector who  acts  as  such  cannot  de- 
fend against  his  statutory  liability  on 
the  ground  that  he  was  irregularly 
elected.  Union,  etc.  Bank  v.  Scott, 
53  N.  Y.  App.  Div.  65  (1900).  A  per- 
son who  is  elected  director,  but  who 
does  not  accept  or  qualify ,  or  act  as 
director,  except  that  several  years 
afterwards  he  attended  a  meeting  and 
later  represented  that  he  was  a  di- 
rector, is  not  a  director.  Bramblet 
V.  Commonwealth,  etc.  Co.,  83  S.  W. 
Rep.  .599  (Ky.  1904). 

1  Movius  V.  Lee,  30  Fed.  Rep.  298 
(1887) ;  aff'd,  141  U.  S.  132 ;  Smith  v. 
Danzig,  64  How.  Pr.  320  (1883) ; 
Chandler  v.  Hoag,  2  Him,  613  (1874) ; 
aff'd,  63  N.  Y.  624 ;  Blake  v.  Wheeler, 
18  Hun,  496  (1879) ;  aff'd,  80  N.  Y. 
128.  A  resignation  to  take  effect  on 
the  termination  of  the  term  for  which 
a  director  is  elected  is  effectual,  and 
he  does  not  hold  over  though  no  suc- 
cessor is  elected.  Van  Amburgh  v. 
Baker,  81  N.  Y.  46  (1880).  A  resigna- 
tion releases  a  director  if  laid  before 
the  board  of  directors,  and  it  is 
effective,  though  not  accepted,  where 
it  has  been  duly  presented.  Mait- 
land's  Case,  4  De  G.,  M.  &  G.  769 
(1853).  A  director  or  officer  may 
resign  at  any  time.  Ehret  v.  Ringler 
&  Co.,  70  N.  Y.  Misc.  Rep.  627  (1911). 
Even    though    an    officer    resigns    for 


the  purpose  of  preventing  service 
upon  the  company,  yet,  if  the  resig- 
nation is  accepted,  service  cannot 
be  made  upon  him.  Sturgis  v.  Cres- 
cent, etc.  Co.,  10  N.  Y.  Supp.  470 
(1890).  A  director  may  resign  after 
the  company  and  officers  have  been  en- 
joined from  interfering  with  the  cor- 
porate assets,  and  may  then  pursue 
his  remedies  as  a  corporate  creditor. 
Mexican,  etc.  Co.  v.  Mexican,  etc.  Co., 
47  Fed.  Rep.  351  (1891).  A  resigna- 
tion takes  effect  upon  its  delivery, 
even  though  not  accepted.  Inter- 
national Bank  v.  Faber,  86  Fed.  Rep. 
443  (1898).  A  resignation  may  be 
effective  without  acceptance.  Noble 
V.  Euler,  20  N.  Y.  App.  Div.  458  (1897). 
Where  a  treasurer  and  general  man- 
ager tenders  his  resignation  to  take 
effect  upon  acceptance,  his  salary 
ceases  upon  the  date  of  acceptance. 
Savannah  C.  Mills  v.  Cunningham,  100 
Ga.  468  (1897).  Even  though  a 
director  resigns  for  the  sole  purpose  of 
avoiding  a  statutory  liability  and 
causes  his  son  to  be  elected  director 
in  his  place  and  continues  to  be  the 
agent  and  manager  of  the  business, 
nevertheless  he  is  not  liable  under  the 
statute.  Brown  v.  Clow,  158  Ind.  403 
(1902).  A  resignation  is  complete 
when  it  is  tendered,  and  its  validity 
does  not  depend  upon  acceptance  by 
the  directors  or  the  election  of  a  suc- 
cessor. Manhattan  Co.  v.  Kaldenberg, 
165  N.  Y.  1  (1900). 

2  Seal  of  Gold  Mining  Co.  v.  Slater, 
120  Pac.  Rep.  15  (Cal.  1911). 

3  Seal  of  Gold  Mining  Co.  v.  Slater, 
161  Cal.  621  (1911).  A  resignation 
to  take  effect  in  a  certain  contingency 
does  not  take  effect  unless  that  con- 
tingency happens.  Denver,  etc.  Co. 
V.  Elkins,  179  Fed.  Rep.  922,  927 
(1909). 


1898 


CH.  XXXVII.] 


ELECTIONS 


CORPOILYTE   MEETINGS. 


[§  624. 


tor,  he  continues  in  ofBce.^  Even  though  an  officer  resigns  for  the  pur- 
pose of  preventing  service  being  made  upon  him,  yet  such  resignation 
is  sufficient.^ 

A  director  may  resign  by  an  oral  statement  to  that  effect,  and  his 
resignation  may  be  accepted  in  the  same  manner  by  the  president.' 
But  a  mere  statement  of  a  director  that  he  will  have  nothing  more  to  do 
with  the  office  is  not  a  sufficient  resignation."*  A  resignation  may  be 
effectual  even  though  it  is  not  accepted ;  ^  but  it  has  been  doubted 
whether  all  the  directors  can  resign,  thereby  leaving  the  corporation 

1  Re  Guanaeevi,  etc.  Co.,  201  Fed.  resignation  of  a  general  manager 
Rep.  316  (1912).  must  be  clearly  proved  as  a  defense  to 

2  Continental,  etc.  Co.  v.  Voight,  a  suit  by  him  for  salary.  Blum  v. 
etc.  Co.,  106  Fed.  Rep.  550  (1900).  Nebraska,  etc.  Co.,  82  Neb.  110 
Where  by  the  by-laws  an  officer  (1908).  A  director  of  a  corpora- 
shall  continue  to  hold  office  until  tion  may  resign  at  any  time.  His 
his  successor  is  elected  and  quali-  resignation  may  be  oral  or  in  writing, 
fied,  an  officer  does  not  cease  to  be  The  fact  that  a  statute  says  directors 
an  officer  by  a  mere  resignation,  and  shall  continue  until  their  successors 
hence  service  of  process  may  still  are  appointed  does  not  prevent  a 
be  made  upon  him  as  such  officer,  director  resigning  at  any  time.  Fear- 
Colorado,  etc.  Corp.  V.  Lombard,  etc.  ing  v.  Glenn,  73  Fed.  Rep.  116  (1896). 
Co.,  66  Kan.  251  (1903).  But  not  Service  upon  the  president  is  good 
"where  the  by-laws  are  silent  on  this  although  he  testifies  that  he  had  re- 
question.  Yorkville  Bank  v.  Henry,  signed,  there  being  proof  to  the  con- 
etc.  Co.,  80  N.  Y.  App.  Div.  578  (1903).  trary  and  that  he  afterwards  acted  as 
Even  though  a  secretary  has  resigned,  president.  Mott  Iron  Works  v.  West 
yet  if  he  continues  to  act  as  secre-  Coast,  etc.  Co.,  113  Cal.  341  (1896). 
tary  and  is  treated  as  such  by  the  *  A  mere  statement  by  one  director 
stockholders,  service  of  process  may  to  another  that  he  would  have  no 
be  upon  him.  Cameron  &  Co.  v.  more  to  do  with  the  office  is  not  a 
Jones,  41  Tex.  Civ.  App.  4  (1905).  resignation.  Kindberg  v.  Mudgett, 
Process  served  on  the  president  after  24  N.  Y.  Week.  Dig.  229  (1886).  A 
he  has  resigned  is  not  good.  York-  statement  by  a  director  to  the  secre- 
ville  Bank  v.  Zeltner  B.  Co.,  80  N.  Y.  tary  and  treasurer  at  the  time  of 
App.  Div.  578  (1903).  Service  maybe  transferring  all  his  stock  that  he  sev- 
en a  director  who  has  resigned,  if  ered  aU  connection  with  the  company 
his  resignation  was  never  acted  upon  is  not  a  resignation,  so  far  as  corpo- 
and  he  continued  to  act  as  director,  rate  creditors'  rights  are  concerned. 
Venner  v.  Denver,  etc.  Co.,  40  Colo.  Chemical  Nat.  Bank  v.  Colwell,  9 
212  (1907).  A  managing  agent  may  N.  Y.  Supp.  285  (1890);  Chemical 
be  served,  even  though  he  has  tendered  Nat.  Bank  v.  Colwell,  9  N.  Y.  Supp. 
his  resignation  in  writing,  but  offers  to  288  (1890) ;  reversed  on  other  grounds, 
continue  to  act  until  an  agent  is  132  N.  Y.  250.  Application  to  sue  may 
appointed,  the  resignation  not  having  be  made  to  the  president  though  he 
been  accepted  or  a  new  agent  appointed,  claims  to  have  resigned.  Averill  v.  Bar- 
Rath  V.  Ohio,  etc.  Co.,  132  N.  Y.  App.  ber,6N.Y.Supp.255(1889).204Fed.577. 
Div.  692  (1909).  *  A  resignation  from  a  corporation 

'  Briggs  v.  Spaulding,  141  U.  S.  132,  takes  effect  without  acceptance,  even 

150    (1891).     A    resignation    may    be  though  the  charter  provides  that  the 

oral,  and  the  election  of  an  officer  con-  officer  shall  hold  until  his  successor  is 

stitutes  an  acceptance  of  such  resig-  elected.     Re  McNaughton's  will,   138 

nation.       Johnson    v.    Griswold,     177  Wis.  179  (1909). 
Mass.    34     (1900).     An    alleged    oral 

1899 


624. 


'ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


helpless.^  A  managing  director  having  presented  his  written  resigna- 
tion cannot  then  withdraw  it  except  with  the  consent  of  the  directors.^ 

A  director  whose  resignation  has  been  accepted  cannot  afterwards 
vote  at  a  meeting  as  a  director.^  The  fact  of  the  resignation  need  not 
be  pubUshed  or  made  known  to  corporate  creditors.^ 

In  England  it  has  been  held  that  the  resignation  of  a  director  must 
be  presented  to  a  meeting  of  the  stockholders  in  order  to  be  effective, 
unless  the  by-laws  allow  the  directors  to  accept  it.  It  is  not  sufficient 
to  present  the  resignation  to  a  meeting  of  the  board  of  directors.  Hence, 
although  a  resignation  is  sent  in  in  the  middle  of  the  year,  and  is  not 
accepted  until  the  stockholders'  meeting  later  in  the  year,  the  director 
continues  to  be  such  until  such  acceptance.^  The  stockholders  may  fill 
a  vacancy  in  the  board  of  directors  caused  by  death. ^  The  by-laws 
generally  give  the  board  of  directors  the  power  to  accept  resignations 
and  to  fill  vacancies  in  the  board. ^  It  is  legal  for  the  board  of  directors 
to  resign  and  substitute  in  their  places  the  purchasers  of  a  majority  of 
the  stock,  provided  no  actual  fraud  is  involved.^  A  statutory  provision 
that  directors  may  fill  any  vacancy  in  the  board  for  the  unexpired  por- 
tion of  the  term,  does  not  give  the  directors  power  to  elect  new  directors 
on  an  increase  of  the  number.^ 

The  insolvency  of  a  director  does  not  vacate  his  office.^"    A  director 


1  Carnaghan  v.  Exporters',  etc.  Co., 
11  N.  Y.  Supp.  172  (1890).  Resigna- 
tions of  all  the  officers  and  directors,  in 
order  to  have  a  receiver  appointed  under 
the  New  York  statute  and  wind  up  the 
corporate  affairs,  are  illegal.  Zeltner  v. 
Zeltner,  etc.  Co.,  174  N.  Y.  247  (1903), 

2Giossop  V.  Glossop,  [1907]  2  Ch. 
370.  A  stockholder  cannot  maintain 
a  suit  in  equity  to  enjoin  an  alleged 
director  from  acting  on  the  ground  that 
a  majority  of  the  directors  are  mere 
dummies  and  do  not  actually  own  any 
stock,  as  required  by  statute,  and 
that  they  were  elected  under  an  agree- 
ment by  which  the  vendor  of  a  ma- 
jority of  the  stock  caused  the  old 
directors  to  resign  and  new  ones  to 
be  named  by  the  vendee,  and  that  the 
resignation  of  one  director  was  with- 
drawn before  it  was  accepted,  but  was 
afterwards  accepted  and  a  successor 
appointed  by  the  board  of  directors, 
and  that  a  majority  of  the  stock  is 
now  opposed  to  the  existing  board  of 
directors.  The  remedy  is  quo  ivarranto 
instituted  by  the  Attorney-General 
in  the  name  of  the  people.     Moir  v. 


Provident  Sav.  Soc.  etc.,  127  N.  Y. 
App.  Div.  591  (1908). 

'  Wickersham  v.  Crittenden,  93  Cal. 
17  (1892). 

*  Bruce  v.  Piatt,  80  N.  Y.  379  (1880). 

^  Municipal,  etc.  Land  Co.  v.  Poll- 
ington,  63  L.  T.  Rep.  238  (1890). 
Where  the  by-laws  give  the  directors 
power  to  fill  vacancies  in  the  board, 
they  may  fill  vacancies  due  to  the 
original  directors  refusing  to  serve. 
La  Compagnie  de  Mayville  v.  Whitley, 
[1896]  1  Ch.  788. 

«  Sylvania,  etc.  R.  R.  v.  Hoge,  129 
Ga.  734  (1907).  Where  a  majority 
of  the  directors  have  sold  and  trans- 
ferred their  stock  the  stockholders 
may  at  a  meeting  called  for  that 
purpose  elect  their  successors.  Sov- 
ereen,  etc.  Co.  v.  Whiteside,  8  Ont. 
W.  R.  (Can.)  582  (1906). 

^  See  §  603,  supra,     v 

'  See  §  622a,  supra. 

9  Gold  Blufif,  etc.  Co.  v.  Whitlock,  75 
Conn.669(1903).  See  108 L.T. Rep. 665. 

JO  Atlas  Nat.  Bank  v.  F.  B.  Gardner 
Co.,  8  Biss.  537  (1879);  s.  c,  2  Fed. 
Cas.  187. 


1900 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  624. 


does  not  lose  his  seat  by  absence.'     But  the  by-laws  may  provide  other- 
where the  by-laws  provide  that  "  the  office  of  director  is  va- 


wise.- 


cated  if  a  director  be  concerned  in  any  contract,"  a  director  ceases  ipso 
facto  to  be  a  director  upon  his  being  secretly  interested  in  the  profits 
of  a  contract  with  the  corporation,  but  if  he  is  re-elected  at  the  next 
election  he  then  again  becomes  a  director,  and  hence  the  company  can- 
not recover  back  the  salary  paid  to  him  except  for  a  period  from  the 
date  of  the  contract  to  the  next  election.^ 

A  director,  unless  he  has  resigned,  continues  to  be  such  until  his 
successor  is  elected,  even  though  he  never  attends  meetings  and  is  never 
consulted.* 

A  reduction  in  the  number  of  directors  does  not  ipso  facto  oust  any 
of  the  directors,  and  it  becomes  effective  only  when  a  sufficient  number 
resign*  or  their  term  of  office  expires.''  A  reduction  in  the  number  of 
trustees  may  be  valid,  although  the  statutory  certificate  is  not  filed, 
so  far  as  corporate  creditors  are  concerned.^  The  failure  to  have  the 
number  of  directors  required  by  statute  does  not  invalidate  their  acts.^ 

The  stockholders  have  no  power  to  remove  directors  before  the 
expiration  of  their  term  of  office  unless  the  charter  or  by-laws  expressly 
give  that  power. ^    Nor  can  they  remove  the  president.^    The  presi- 


1  Phelps  V.  Lyle,  10  Ad.  &  E.  113 
(1839). 

2  Wilson  V.  Wilson,  6  Scott,  540 
(1838),  holding  that  an  absconding 
director  becomes  "unable  to  act" 
within  the  meaning  of  the  by-laws. 
Sturges  V.  Vanderbilt,  73  N.  Y.  384 
(1878) ;  s.  c,  below,  sub  nom.  Stnrgis 
V.  Drew,  11  Hun,  136.  Where  by  the 
by-laws  a  director  is  to  forfeit  his 
office  if  he  becomes  bankrupt,  he 
forfeits  it  if  he  asks  his  creditors  to 
compromise  their  debts.  James  v. 
Rockwood,  etc.  Co.,  106  L.  T.  Rep. 
128  (1912). 

3  Re  Bodega  Co.,  Ltd.,  [1904]  1  Ch. 
276. 

■^  First  Nat.  Bank  v.  Lamon,  130 
N.  Y.  336  (1891). 

^  Matter  of  Manoca,  etc.  Ass'n,  128 
N.  Y.  App.  Div.  796  (1908). 

6  Wallace  v.  Walsh,  125  N.  Y.  26 
(1890). 

'  See  §  713a,  infra. 

8  See  §  711,  infra.  Laughlin  v. 
Geer,  121  111.  App.  534  (1905).  A 
director  cannot  be  excluded  from  his 
duties  as  such,  nor  can  his  election 
be  declared  invalid,  merely  because  of 


what  he  may  contemplate  doing  as  a 
director.  Ohio,  etc.  Co.  v.  State,  49 
Ohio  St.  668  (1892).  A  charter  provis- 
ion giving  the  stockholders  power  to 
remove  the  "officers"  refers  to  di- 
rectors only.  Deposit  Bank,  etc.  v. 
Hearne,  104  Ky.  819  (1898).  Every 
corporation  at  common  law  has  the 
power  to  remove  its  officers  but  usually 
only  for  cause  and  after  notice  and 
hearing,  unless  the  statute  or  by-laws 
provide  otherwise.  Wolf  v.  Gegen- 
seitige,  etc.,  149  Wis.  576  (1912). 

9  Ohio,  etc.  Co.  v.  State,  49  Ohio  St. 
668  (1892).  A  contract  between  a 
company  and  a  person  that  he  shall 
be  the  managing  director  for  ten  years 
does  not  prevent  the  corporation  from 
dismissing  him.  Bainbridge  v.  Smith, 
L.  R.  41  Ch.  D.  462  (1889).  A  volun- 
tary unincorporated  association,  with- 
out articles,  constitution,  or  rules, 
may  remove  its  president  or  other 
officer  at  any  time  and  without  notice, 
except  that  the  meeting  held  for  that 
purpose  must  be  duly  held,  and  can- 
not expel  a  member  without  notice. 
Ostrom  V.  Greene,  161  N.  Y.  353 
(1900),  the  court  saying:    "The  hold- 


1901 


§624. 


ELECTIONS  —  CORPORATE   MEETINGS. 


[CH.  XXXVII. 


dent  is  elected  by  the  directors,^  and  after  election  the  directors  cannot 
remove  him.^  Nevertheless,  the  stockholders  are  not  always  helpless 
in  such  circumstances  as  these.  The  stockholders  may,  at  a  meeting 
called  for  that  purpose,  amend  the  by-laws  so  as  to  increase  the  number 
of  directors,  and  at  the  same  meeting  may  elect  such  additional  direc- 
tors where  the  number  of  directors  is  not  fixed  by  the  charter.^  The 
stockholders  may  also,  at  a  special  meeting  duly  called,  amend  the  by- 
laws so  as  to  authorize  the  board  of  directors  to  remove  the  president 
and  treasurer,  and  the  board  of  directors  may  subsequently  make  such 
removal  under  the  amended  by-laws.^ 


ing  of  an  office  unprotected  by  rules 
is  not  an  individual  right,  but  is  sub- 
ject to  change  at  the  pleasure  of  the 
association." 

^  The  stockholders  have  no  power  to 
elect  the  president.  Their  action  is  a 
nullity.  Walsenburg  Water  Co.  v. 
Moore,  5  Colo.  App.  144  (1894).  Nor 
the  state. 

2  Where  three  out  of  five  directors 
met  without  notice  to  the  other  two, 
and  deposed  the  president  and  author- 
ized a  mortgage,  their  acts  are  void. 
Hatch  V.  Johnson  L.  &  T.  Co.,  79  Fed. 
Rep.  828  (1895).  Where  the  statute 
prescribes  that  officers  and  agents 
shall  hold  their  places  during  the 
pleasure  of  the  board,  the  board  may 
oust  the  secretary  and  treasiirer  at 
any  time.  Darrah  v.  Wheeling,  etc. 
Co.,  50  W.  Va.  417  (1901).  A  going 
corporation  may  purchase  stock 
owned  by  its  president  in  order  to 
terminate  his  contract  of  employment 
and  obtain  his  resignation  as  presi- 
dent, where  the  contract  is  a  fair  one 
and  another  party  had  agreed  to  pur- 
chase such  stock  from  the  corporation 
at  once  and  subscribe  for  further  cap- 
ital stock.  Joseph  v.  Raff,  82  N.  Y. 
App.  Div.  47  (1903) ;  aff'd,  176  N.  Y. 
611.  Where  a  treasurer  has  been 
expelled  by  the  board  of  directors  for 
irregularities  in  his  accounts,  the 
corporation  may  maintain  quo  warranto 
to  oust  him  from  office  and  obtain 
possession  of  its  money  and  books. 
Commonwealth  v.  Jankovic,  216  Pa. 
St.  615  (1907).  Where  a  treasurer  was 
elected  in  June  at  an  annual  salary 
and  the  by-laws  provide  that  the 
directors  shovdd  elect  officers  in  Sep- 
tember,   which,     however,     they    fail 


to  do,  they  may  remove  him  in  Jan- 
uary of  the  following  year,  especially 
where  the  statutes  authorize  the  cor- 
poration to  remove  officers  at  any 
time.  O'Neal  v.  F.  A.  Neider  Co.,  118 
Ky.  62  (1904).  A  secretary  and  treas- 
urer elected  for  a  year  cannot  be  ar- 
bitrarily removed  and  his  salary 
stopped,  if  the  salary  is  by  the  year. 
Even  if  he  takes  part  in  selling  out 
the  company,  yet  if  it  is  understood 
that  the  new  company  was  to  continue 
him  he  may  collect  the  salary.  Das- 
pit  V.  Holmes  Co.,  120  La.  86  (1907). 
A  by-law  authorizing  directors  to 
remove  any  one  of  the  directors  is 
illegal,  and  a  director  may  enjoin 
his  being  removed  under  such  a  by- 
law. Laughlin  v.  Geer,  121  111.  App. 
534  (1905). 

^  In  re  Griffing  Iron  Co.,  63  N.  J.  L. 
168  (1898);  aff'd,  63  N.  J.  L.  357 
(1899).  Stockholders  may  amend 
the  by-laws  so  as  to  increase  the  num- 
ber of  directors,  and  may  at  the  same 
meeting  elect  the  additional  directors. 
Gold  Bluff,  etc.  Co,  v.  Whitlock,  75 
Conn.  669  (1903). 

*  In  re  Griffing  Iron  Co.,  63  N.  J.  L. 
168  (1898);  aff'd,  63  N.  J.  L.  357 
(1899).  Where  a  directors'  by-law, 
confirmed  by  the  stockholders,  fixes 
their  term  of  office  at  one  year,  the 
stockholders  cannot,  by  amending  the 
by-law,  turn  the  directors  out  during 
the  year.  Stephenson  v.  Vokes,  27 
Ont.  (Can.)  691  (1896).  Where  the 
by-laws  authorise  the  board  of  direc- 
tors to  discharge  an  officer  for  a 
cause,  they  may  discharge  the  vice- 
president  upon  his  selling  all  his 
stock.  Selley  v.  American,  etc.  Co., 
119  Iowa,  591   (1903). 


1902 


CH.  XXXVII.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§  624. 


In  New  York  under  the  statute  authorizing  the  attorney-general 
to  bring  suit  to  remove  directors  and  other  corporate  officers  for  mis- 
conduct, he  may  commence  suit  to  remove  them  as  directors  and  also 
as  officers  for  issuing  stock  without  consideration.^  The  express  au- 
thority of  an  officer  to  execute  a  contract  is  not  affected  by  a  change 
in  the  board  of  directors.-  A  failure  to  elect  directors  at  the  stated 
time  does  not  work  a  dissolution  of  the  corporation.  The  old  directors 
continue  in  office  until  their  successors  are  duly  elected.^  But  in  Eng- 
land it  is  held  that  where  the  by-laws  provide  that  the  directors  shall 
be  elected  annually,  and  shall  hold  office  for  one  year,  they  cannot  hold 
over.  They  cease  to  be  directors  at  the  end  of  the  year,  and  insurance 
assessments  levied  by  them  after  the  year  are  invalid.*  Even  though 
the  failure  to  elect  has  extended  over  a  period  of  several  years,  and  there 
are  by  reason  thereof  no  directors  in  office,  the  old  directors  having  wholly 
abandoned  their  trust,  the  stockholders  may  at  any  time,  in  a  lawful 
manner,  proceed  to  the  election  of  a  new  board  of  directors.^     But  if 

282  (1894).  For  purposes  of  making 
service  a  director  and  president  of  a 
railroad  company  is  presumed  to  con- 
tinue as  such,  even  though  elected  an- 
nually and  the  year  has  expired. 
Buell  V.  Baltimore,  etc.  R.  R.,  39 
N.  Y.  App.  Div.  236  (1899).  A  hold- 
over director  is  liable  on  a  statutory 
liability,  and  the  fact  that  he  was  a 
director  may  be  proved  by  the  corpo- 
rate books.  St.  George,  etc.  Co.  v. 
Fritz,  48  N.  Y.  App.  Div.  233  (1900). 
Hold-over  directors  may  continue  to 
act.  Hatch  v.  Lucky  Bill  Min.  Co.,  25 
Utah,  405  (1903).  Where  the  annual 
report  required  by  the  statutes  to  be 
filed  within  thirty  days  after  an  elec- 
tion of  directors,  giving  their  names, 
is  not  filed,  the  presumption  is  that 
the  directors'  named  in  the  last  report 
that  was  filed  are  holding  over.  Ap- 
pleton  V.  American  Malting  Co.,  65 
N.  J.  Eq.  375  (1903).  See  also  §  713, 
infra. 

^  Tyne,  etc.  Assoc,  v.  Brown,  74 
L.  T.  Rep.  283  (1896). 

6  People  V.  Twaddell,  18  Hun,  427 
(1879).  In  Reilly  v.  Oglebay,  25 
W.  Va.  36,  43  (1884),  it  is  held  that 
where  there  is  no  board  of  directors 
the  stockholders  themselves  may, 
pending  a  regular  election,  lawfully 
assume  and  perform  the  duties  which 
ordinarily  belong  to  a  board  of 
directors.     But  see  §  709,  infra. 


1  People  V.  Lvon,  119  N.  Y.  App. 
Div.  361  (1907) ;  aff'd,  189  N.  Y.  544. 
The  attorney-general  cannot  maintain 
a  suit  to  recover  back  funds  and  to 
remove  directors  of  a  street  railway 
company  on  account  of  their  using 
corporate  funds  to  bribe  public  officers 
and  obtain  franchises.  State  v.  Mil- 
waukee, etc.  Co.,  136  Wis.  179  (1908). 

2  Kidd  V.  New  Hampshire,  etc.  Co., 
74  N.  H.  160  (1907). 

estate  V.  Bonnell,  35  Ohio  St.  10, 
17  (1878),  in  which  an  election  of 
directors  being  held  invalid,  those  pre- 
viously in  office  were  restored  to  office 
as  being  entitled  to  hold  until  their 
successors  were  qualified.  Hugenot 
Nat.  Bank  v.  Studwell,  6  Daly,  13 
(1875) ;  reversed  on  other  grounds,  74 
N.  Y.  621  (1878) ;  and  see  §  631,  infra. 
Holding  over  may  also  arise  from  act- 
ing as  a  director.  Sanborn  v.  Lefferts, 
58  N.  Y.  179  (1874).  Hold-over  direc- 
tors may  hold  meetings,  fill  vacancies 
in  the  board,  and  vote  to  sell  property, 
the  same  as  though  regular  elections 
had  been  held.  Kent  County  Agr.  Soc. 
V.  Houseman,  81  Mich.  609  (1890). 
Directors  who  hold  over  are  liable  on 
the  'Statutory  liability  of  directors. 
Jenet  v.  Nims,  7  Colo.  App.  88  (1895). 
A  hold-over  president  and  manager 
for  sixteen  years  may  institute  a  suit 
in  behalf  of  the  corporation.  Lucky 
Queen  Min.  Co.  v.  Abraham,  26  Oreg. 


1903 


§  625.]  ELECTIONS  —  CORPORATE   MEETINGS.  [cH.  XXXVII. 

the  majority  fail  or  refuse  to  hold  an  election,  and  the  corporate  property 
is  thereby  endangered,  a  court  of  equity  may  appoint  a  receiver  to  take 
charge  of  it,^  and  will  in  a  proper  case  authorize  a  winding  up.^ 

A  director  is  an  "  officer  "  of  the  corporation  in  the  usual  meaning 
of  that  term.^  No  officers  are  necessary  other  than  directors  where 
the  stockholders  acquiesce  in  the  directors  transacting  all  the  business.* 
A  director  is  entitled  at  all  times  to  examine  the  books  and  papers  of 
the  company.^ 

Questions  relative  to  the  meetings  of  directors  are  considered  else- 
where.^ The  treasurer,  secretary,  and  all  other  minor  officers  of  a  busi- 
ness corporation  may  be  removed  by  the  board  of  directors  at  any  time, 
the  same  as  any  other  employee.^  Where  the  treasurer  of  a  corporation 
uses  its  money  for  his  own  purposes  he  may  be  sued  therefor,  even  though 
he  continues  to  be  treasurer.^  The  cost  of  defending  an  unsuccessful 
suit  to  oust  an  officer  may  be  paid  by  the  corporation.^ 

§  625.  Stockholders  can  act  only  at  corporate  meetings.  —  Stock- 
holders can  hold  elections  and  transact  the  other  business  which  they 
as  a  body  are  qualified  to  transact  only  at  a  corporate  meeting  duly 
called  and  convened.  Consequently,  all  votes  taken  elsewhere  than 
at  such  a  meeting,  and  all  separate  consents,  either  oral  or  in  writing, 
whereby  the  stockholders  assume  to  bind  the  company,  are  invalid  and 
void.^"    A  stockholder  may  object  to  a  vote  being  taken  by  mail.^^ 

1  Lawrence  v.  Greenwich  F.  Ins.  Co.,  *  Marlborough  Assoc,  v.  Peters,  179 
11  Paige,  587  (1829).  See  also  §  617,  Mass.  61  (1901).  See  also  §648, 
supra.     Under  the  statutes  of  Califor-    supra. 

Bia  where  a  bank  becomes  insolvent  ^  Stendell    v.    Longshoremen's,   etc. 

the   court    may   appoint    directors    to  Assoc,  116  La.  974  (1906).     See  also 

fill    vacancies.     Braslan     v.     Superior  §  879,  infra. 

Court,  etc.,  124  Cal.  123  (1899).  i"  Commonwealth  v.  CuUen,  13  Pa. 

2  Brown  v.  Union  Ins.  Co.,  3  La.  St.  133  (1850) ;  Finley  Shoe,  etc.  Co. 
Ann.  177,  182  (1848),  in  which  the  v.  Kurtz,  34  Mich.  89  (1876) ;  Peirce 
neglect  for  nearly  ten  years  to  appoint  v.  New  Orleans  Building  Co.,  9  La. 
officers  being  to  the  injury  of  the  397,  404  (1836) ;  Livingston  v.  Lynch, 
creditors,  the  court  appointed  a  man-  4  Johns.  Ch.  573,  597  (1820) ;  Torrey 
ager  to  wind  up  the  affairs  of  the  v.  Baker,  83  Mass.  120  (1861) ;  Ex 
company.  parte  Johnson,  31  Engl.  &.  L.  Eq.  430 

3  See  §  10,  supra.  A  statute  author-  (1854) ;  Shortz  v.  Unangst,  3  Watts  & 
izing  the  directors  to  remove  any  S.  (Pa.)  45  (1841).  Cf.  Graham  v. 
officer  does  not  authorize  them  to  re-  Boston,  etc.  R.  R.,  118  U.  S.  161 
move  one  of  the  directors.  Laughlin  (1886) ;  Granger  v.  Grubb,  7  Phila. 
V.  Geer,  121  111.  App.  534  (1905).  350  (1870).     For  the  rule  relative  to 

*  Buck  V.  Troy,  etc.  Co.,  76  Vt.  75  du-ectors'  meetings,  see  §  713a,  infra. 

(1903).  An  assignment  of  all  the  company's 

^  See  §  511,  swpra.  property     would     not   be   within   the 

6  See  §  713a,  infra.  power     of     the     stockholders,     even 

7  Brindley  v.  Walker,  221  Pa.  St.  though  all  signed  it,  without  formal 
287  (1908).                      -  action  at  a  meeting  held  for  that  pur- 

"  McMillan  v.  he  Roi,  etc.  Co.,  Ltd.,  [1906]  1  Ch.  331. 
1904 


CH.  XXXV 


II.] 


ELECTIONS  —  CORPORATE   MEETINGS. 


[§§  626,  627. 


§§  626,  627.  Stockholders  cannot  carry  on  the  business  of  or  enter 
into  contracts  for  the  corporation.  —  This  subject  is  fully  considered 
elsewhere.' 


pose.  De  La  Verge,  etc.  Co.  v.  Ger- 
man, etc.  Inst.,  175  U.  S.  40  (1899). 
A  lease  authorized  upon  a  two 
thirds  vote  of  the  stockholders  can- 
not be  effected  by  two  thirds  consent- 
ing thereto  in  writing  without  a 
meeting.  Reiff  v.  Western,  etc.  Tel. 
Co.,  49  N.  Y.  Super.  Ct.  441  (1883). 
The  separate  assent  of  stockholders 
to  an  act  is  not  valid.  Their  acts 
must  be  in  meeting  assembled.  Duke 
V.  Markham,  105  N.  C.  131  (1890). 
The  agreement  of  a  majority  of  the 
stockholders  separately,  that  the  cor- 
poration should  pay  for  certain  work 
and  that'  they  would  vote  for  a  reso- 
lution to  that  effect  at  the  next  meet- 
ing, does  not  bind  the  corporation, 
Nicholstone  City  Co.  v.  Smalley,  21 
Tex.  Civ.  App.  210  (1899).  An  actual 
meeting  of  the  stockholders  is  not 
necessary  if  all  consent,  even  though 
the  statute  require  a  meeting.  A  sub- 
sequent creditor  cannot  complain. 
Coe  V.  East,  etc.  R.  R.,  52  Fed.  Rep. 
531(1892).  An  informal  agreement  of 
all  the  stockholders  and  officers  to 
wind  up  the  company  and  distribute 
the  assets  will  be  enforced  by  a  court 
of  equity,  even  though  there  were  no 
formal  meetings.  Strickland  v.  Jolly, 
136  Ga.  885  (1911).  Where  the  statute , 
requires  that  a  mortgage  of  a  mining 
company  must  be  ratified  by  the  stock- 
holders, a  mortgage  given  without 
such  ratification  is  void  at  the  instance 
of  the  corporation  itself  or  its  stock- 
holders, but  the  ratification  may  be  by 
the  stockholders  of  record  given  in  any 
unequivocal  way,  as,  for  instance, 
where  the  director  executing  the 
mortgage  owned  over  two  thirds  of  the 
stock.  Royal,  etc.  Mining  Co.  v. 
Royal  Consol.  Mines,  157  Cal.  737 
(1910).  In  Re  George  Newman  &  Co., 
[1895]  1  Ch.  674,  686,  the  court  said : 
i' Individual   assents   given   separately 


may  preclude  those  who  give  them 
from  complaining  of  what  they  have 
sanctioned ;  but,  for  the  purpose  of 
binding  a  company  in  its  corporate 
capacity,  individual  assents  given  sep- 
arately are  not  equivalent  to  the  assent 
of  a  meeting."  A  separate  consent  of 
stockholders  is  not  sufficient.  Hill  v. 
Atlantic,  etc.  R.  R.,  143  N.  C.  539 
(1906).  WTiere  there  are  but  a  few 
stockholders  in  a  corporation  and 
without  any  formal  corporate  action 
they  turn  a  part  of  the  capital  stock 
into  preferred  stock  and  thereafter  di- 
vide the  profits  among  themselves 
without  declaring  technical  dividends 
with  the  knowledge  and  consent  of  all 
the  stockholders,  no  one  of  them  nor 
the  corporation  itself  can  subse- 
quently complain  and  defeat  a  suit  by 
one  of  them  for  the  amount  so  cred- 
ited to  him  on  the  books,  corporate 
creditors  not  being  injured.  Breslin  v. 
Fries-Breslin  Co.,  70  N.  J.  L.  274 
(1904).  The  court  said:  "In  the 
present  case  we  apply  this  doctrine  to 
the  non-observance  of  legal  forms  re- 
specting the  creation  of  preferred 
stock,  the  abandonment  by  preferred 
stockholders  of  voting  powers,  the  res- 
ignation of  directors,  the  reduction 
of  the  number  of  directors  from  six  to 
three,  and  the  apportionment  of  divi- 
dends as  between  the  stockholders  en- 
titled thereto.  In  respect  to  these 
matters  the  jury  was  fully  justified  in 
finding  that  unanimous  consent  of  the 
stockholders  of  the  defendant  com- 
pany had  been  given,  and  had  been 
acted  on  in  good  faith  by  the  plaintiff 
and  others  concerned  during  a  course 
of  years,  and  that  plaintiff  could  not 
be  restored  to  the  status  quo  ante 
were  the  assent  of  his  fellow  stock- 
holders and  of  the  company  to  be  now 
withdrawn."  See  also  §  709,  infra. 
1  See  §  709,  etc.,  infra. 


(120) 


1905 


CHAPTER   XXXVIII. 


DISSOLUTION,  FORFEITURE,  AND  IRREGULAR  INCORPORATION. 


§  628.  Methods  of  dissolution. 
629,  630.  Dissolution  by  the  stock- 
holders —  A  court  of  equity 
has  no  power  to  dissolve  a 
corporation  —  Receiver,  and 
distribution  of  assets  by 
court  of  equity  —  Statutory 
dissolution. 

631.  Acts   which   do   not   constitute 

dissolution. 

632.  Only    the    attorney-general    is 

authorized  to  institute  a  suit 
to  forfeit  a  charter. 

633.  Forfeiture    for    misuser  —  Acts 

which  constitute  a  misuser  — 
Ultra  vires  acts  and  usurpa- 
tion of  franchises. 

634.  Forfeiture  for  non-user  —  For- 


feiture   for    failure    to    com- 
plete a  railroad  or  enterprise. 
§  635.  Injunction   at   the   instance   of 
the  state. 

636.  State  may  waive  forfeiture. 

637.  Who    may    set    up    forfeiture, 

dissolution,  or  non-legal  in- 
corporation —  De  facto  cor- 
porations. 

638.  Lapse  of  charter  by  failure  to 

comply  with  conditions. 

639.  640.  Repeals      of      charters  — 

Right  of  stockholders  to  ob- 
ject. 

641.  The  assets  upon  dissolution  — 

Distribution. 

642,  The    liabilities     upon     dissolu- 

tion, consolidation,  or  sale. 


§  628.  Methods  of  dissolution.  —  The  dissolution  of  a  corporation 
may  be  brought  about  by  reason  of  (1)  the  forfeiture  of  its  franchises 
by  the  adjudication  of  a  court ;  ^  (2)  the  loss  of  its  charter  by  a  charter 
provision  to  that  effect,  in  case  the  corporation  fails  to  do  certain 
things  within  a  certain  time ;  ^  (3)  the  repeal  of  its  charter  under  the 
reserved  power  of  the  state ;  ^  (4)  the  voluntary  surrender  of  the  fran- 
chises by  the  stockholders ;  or  (5)  the  expiration  of  the  time  limited  for 
its  existence  in  the  charter.^  Upon  dissolution  by  any  one  of  these 
methods  the  stockholders  have  certain  rights  in  the  corporate  assets. 
Where  a  special  charter  is  granted,  and  nothing  is  prescribed  as  to  the 
duration  of  the  corporation,  the  charter  is  perpetual.^ 


1  See  §§  632-637,  infra. 

2  See  §  638,  infra. 

'  This  subject  is  considered  in  §  639, 
infra. 

*  "The  dissolution  of  corporations  is 
or  may  be  effected  by  expirations  of 
their  charters,  by  failure  of  any  es- 
sential part  of  the  corporate  organiza- 
tions that  cannot  be  restored,  by  dis- 
solution and  surrender  of  their  fran- 
chises with  the  consent  of  the  state, 
by  legislative  enactment  within  con- 
stitutional authority,  by  forfeiture  of 
their  franchises  and  judgment  of  dis- 
solution   declared    in   regular   judicial 


proceedings,  or  by  other  lawful 
means."  Swan,  etc.  Co.  v.  Frank,  148 
U.  S  603,  611  (1893).  In  Michigan 
all  charters  except  those  of  railroads, 
canals,  and  turnpikes  are  limited  by 
the  constitution  to  thirty  years.  "The 
evident  intent  of  this  section  was  to 
prevent  the  perpetuation  of  corporate 
power  and  corporate  wealth  so  as  to 
place  it  practically  beyond  the  reach 
of  the  people  or  the  legislature."  It 
does  not  apply  to  a  county-fair  cor- 
poration. Kent  County  Agr.  Soc.  v. 
Houseman,  81  Mich.  609  (1890). 

^  State  V.  Ladies  of  Sacred  Heart,  99 


1906 


CH.  XXXVIII. 


DISSOLUTION,    FORFEITURE,    ETC. 


[§629. 


§  629.  Dissolution  hy  the  stockholders  —  A  court  of  equity  has  no 
power  to  dissolve  a  corporation  — Receiver,  and  distribution  of 
assets  by  court  of  equity  —  Statutory  dissolution.  —  It  is  an  un- 
questioned rule  that  all  the  stockliolders,  by  unanimous  consent,  may 
effect  a  dissolution  of  the  corporation  b}^  the  surrender  of  the  corporate 
franchises.^  Upon  dissolution  a  receiver  will  not  be  appointed  to  take 
the  place  of  an  agent  appointed  by  the  stockholders  to  wind  up,  excepting 
in  an  extreme  case.-  An  informal  agreement  of  all  the  stockholders 
and  officers  to  wind  up  the  company  and  distribute  the  assets  will  be 
enforced  by  a  court  of  equity,  even  though  there  were  no  formal  meet- 
ings.^ 

Greater  difficulty  is  found  in  determining  whether  a  majority  of 
the  stockholders  may  dissolve  a  corporation.  It  has  been  held  that 
the  majority  in  interest  of  the  stockholders  of  a  corporation  may  dis- 
solve it  by  a  voluntary  surrender  of  its  franchises,  even  though  a  minority 
of  the  stockholders  are  opposed  to  the  dissolution.'* 


Mo.  533  (1889).  A  corporation  with- 
out limit  of  time  in  its  charter  as  to 
duration  is  perpetual.  Snell  v.  Chi- 
cago, 133  lU.  413  (1890).  See  also 
§  2,  supra  and  §  913,  infra.  A  grant 
by  a  city,  under  authority  of  a  statute 
to  a  water-works  company  to  lay  pipes 
in  the  streets  is  perpetual,  where 
no  limit  of  time  is  expressly  stated, 
and  is  irrevocable  when  acted  upon. 
National  Water-works  Co.  v.  Kansas 
City,  65  Fed.  Rep.  691  (1895). 

1  Mobile,  etc.  R.  R.  v.  State,  29  Ala. 
573,  586  (1857) ;  Savage  v.  Walshe,  26 
Ala.  619  (1855) ;  Attorney-General  v. 
Clergy  Society,  10  Rich.  Eq.  (S.  C.) 
604  (1859);  Chesapeake,  etc.  Canal 
Co.  V.  Baltimore,  etc.  R.  R.,  4  Gill  &  J. 
(Md.)  1,  121  (1832) ;  Mclntyre  Poor 
School  V.  Zanesville  Canal,  etc.  Co.,  9 
Ohio,  203  (1839);  La  Grange,  etc. 
R.  R.  V.  Rainey,  7  Coldw.  (Tenn.)  420 
(1870) ;  Slee  v.  Bloom,  19  Johns.  456 
(1822);  Webster  v.  Turner,  12  Hun, 
264  (1877) ;  Houston  v.  Jefferson  Col- 
lege, 63  Pa.  St.  428  (1869) ;  Denike  v. 
New  York,  etc.  Co.,  80  N.  Y.  599,  606 
(1880).  Although  a  stockholder  has 
sued  in  the  federal  court  to  wind  up 
a  Connecticut  corporation,  neverthe- 
less it  seems  that  such  corporation 
may  dissolve  voluntarily.  Kessler  v. 
Continental,  etc.  Co.,  42  Fed.  Rep.  258 
(1890).  A  benevolent  institution  hav- 
ing a  capital  stock  has  no  power  of 


voluntary  dissolution.  Summer  Lodge 
V.  Odd  FeUows'  Home,  77  N.  J.  Eq. 
386  (1910). 

2  Blades  i;.  Billings,  etc.  Co.,  154 
Mo.  App.  350  (1911). 

3  Strickland  v.  Jolly,  136  Ga.  885 
(1911).  Where  the  purchaser  of  half 
the  capital  stock  claims  that  there 
was  fraud,  and  a  compromise  is  made 
by  which  the  company  is  to  be  dissolved 
and  the  property  sold  and  the  price 
paid  by  him  for  the  stock  is  to  be 
first  paid  out  of  the  proceeds,  he  may 
compel  the  carrying  out  of  this  agree- 
ment. Burne  v.  Lee,  156  Cal.  221 
(1909). 

^  Quoted  and  approved  in  State  v. 
Chilhowee,  etc.  Mills,  115  Tenn.  266 
(1905).  Treadwell  v.  Salisbury  Mfg. 
Co.,  73  Mass.  393  (1856) ;  Hancock  v. 
Holbrook,  9  Fed.  Rep.  353  (1881)  (re- 
versed on  another  point,  112  U.  S. 
229) ;  Wilson  v.  Central  Bridge,  9  R.  I. 
590  (1870).  Compare,  however,  dic- 
tum in  Denike  v.  New  York,  etc.  Co., 
80  N.  Y.  .599,  606  (1880),  citing  eases, 
and  in  Mobile,  etc.  Co.  v.  State,  29  Ala. 
573,  586  (1857),  citing  New  Orleans, 
etc.  Co.  V.  Harris,  27  Miss.  517  (1854) ; 
Ward  t'.  Society,  etc.,  1  Collier,  370 
(1844) ;  Angell  &  Ames,  Corp.,  §  772. 
See  also  Berry  v.  Broach,  65  Miss.  450 
(1888),  where  the  business  was  a 
losing  one. 


1907 


§  629.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


Such,  undoubtedly,  is  the  case  where  the  corporation  is  insolvent 
or  is  doing  a  failing  business,  and  is  manifestly  unable  to  accomplish 
the  purposes  of  its  organization.^  But  where  such  is  not  the  case, 
and  where  the  term  during  which  the  corporation  was  to  exist  has  not 
expired ;  ^  or  where  the  dissolution  is  desired  in  order  to  obtain  a  new 
charter  for  a  different  object ;  ^  or  where  the  dissolution  is  merely  a  de- 
vice to  effect  a  consolidation  which  otherwise  would  be  ultra  vires,'^ 
—  it  has  been  held  that  the  majority  cannot  dissolve  the  corporation  in 
opposition  to  the  wishes  of  the  minority.^  Stockholders  owning  only 
a  minority  of  the  stock  cannot,  at  common  law,  compel  a  dissolution 
before  the  expiration  of  the  time  limited  in  the  charter  for  the  existence 
of  the  corporation.^    The  directors  of  a  corporation  cannot  dissolve  it.^ 

1  The  majority  have  a  right  to  have 
the  business  wound  up  and  sold  when 
such  business  cannot  be  advanta- 
geously carried  on.  Price  v.  Holeomb, 
89  Iowa,  123  (1893).  See  also  §  670, 
infra.  A  majority  may  cause  the  cor- 
poration to  dissolve  before  it  has  pur- 
chased any  property  or  incurred  any 
debts  or  done  any  corporate  business 
State  V.  Chilhowee,  etc.,  Mills,  115 
Tenn.  266  (1905). 

2  Kean  v.  Johnson,  9  N.  J.  Eq.  401 
(1853) ;  Zabriskie  v.  Hackensack,  etc. 
R.  R.,  18  N.  J.  Eq.  178  (1867); 
Mowrey  v.  Indianapolis,  etc.  R.  R.,  4 
Biss.  78  (1866) ;  s.  c,  17  Fed.  Cas.  930  ; 
Lauman  v.  Lebanon,  etc.  R.  R.,  30  Pa. 
St.  42  (1858).  See  also  Von  Schmidt 
V.  Huntington,  1  Cal.  55  (1850).  Dis- 
solution of  a  solvent  corporation  be- 
fore its  charter  time  has  elapsed  can- 
not be  had  except  by  unanimous 
consent  of  the  stockholders.  Barton  v. 
Enterprise,  etc.  Assoc,  114  Ind.  226 
(1887).  In  Louisiana  a  majority  of 
the  stockholders  have  the  power  to 
wind  up  the  affairs  of  the  corporation 
even  though  it  is  solvent.  Pringle  v. 
Eltringham,  etc.  Co.,  49  La.  Ann.  301 
(1897).  In  Tennessee  it  is  held  that 
where  a  hotel  company  cannot  raise 
sufficient  capital  to  build,  and  it  has 
become  impracticable  and  undesirable 
to    proceed,     and    the    enterprise    is 


clearly  a  failure,  a  minority  stock- 
holder may  force  a  winding  up  and 
distribution.  O'Connor  v.  Knoxville 
Hotel  Co.,  93  Tenn.  708  (1894).  It 
seems  that  a  company  cannot  dissolve 
itself  by  a  vote  of  a  majority  of  the 
stockholders  without  judicial  action 
before  the  expiration  of  the  charter. 
Economy,  etc.  Assoc,  v.  Paris,  etc.  Co., 
113  Ky.  246  (1902). 

3  Ward  V.  Society  of  Attornies,  1 
Coll.  370  (1844). 

^See  pp.  1916-1917,  infra,  and 
§  670,  infra. 

^  Polar  Star  Lodge  v.  Polar  Star 
Lodge,  16  La.  Ann.  53  (1861) ;  Curien 
V.  Sentini,  16  La.  Ann.  27  (1861).  See 
also  dictum  in  Mobile,  etc.  R.  R.  v. 
State,  29  Ala.  573  (1857).  Even  a 
majority  of  the  stockholders  and 
directors  cannot  maintain  a  suit  in 
equity  to  have  the  property  sold  on 
the  ground  that  it  is  to  the  interest  of 
the  corporation  so  to  do.  Stockholders 
etc.  V.  Jefferson,  etc.  Assoc,  136  N.  W. 
Rep.  672  (Iowa,  1912). 

6  Denike  v.  New  York,  etc.  Co.,  80 
N.  Y.  599  (1880)  (citing  cases) ;  Fol- 
ger  V.  Columbian  Ins.  Co.,  99  Mass. 
267  (1868) ;  Pratt  v.  Jewett,  75  Mass. 
34  (1857),  where  dissolution  was  denied, 
although  the  business  was  a  losing 
one  and  the  single  person  holding  a 
majority  of  the  stock  was  mismanag- 


^  Lake  Ontario,  etc.  Bank  v.  Onon- 
daga Bank,  7  Hun,  549  (1876) ;  Jones 
V.  Bank  of  Leadville,  10  Colo.  464 
(1888) ;  Ward  v.  Sea  Ins.  Co.,  7  Paige, 
294  (1838) ;   Abbot  v.  American  Hard 


Rubber  Co.,  33  Barb.  578  (1861).  Cf. 
Bank  of  Switzerland  v.  Bank  of  Tur- 
key, 5  L.  T.  (N.  S.)  549  (1862),  where 
the  directors  repaid  sums  advanced  to 
an  abortive  company. 


1908 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


629. 


A  court  of  equity  has,  In  the  absence  of  statutory  power,  no  juris- 
diction over  corporations  for  the  purpose  of  decreeing  their  dissolution 
and  the  distribution  of  their  assets  among  the  individual  corporators  at 
the  suit  of  one  or  more  of  the  stockholders.^     But  while  a  court  of 


ing  the  business ;  Croft  v.  Lumpkin, 
etc.  Min.  Co.,  61  Ga.  465  (1878),  where 
the  eorpx)ration  was  solvent,  but  made 
no  effort  to  transact  business  or  pro- 
ceed ;  Waterbury  v.  Merchants'  Union 
Exp.  Co.,  50  Barb.  177  (1867),  holding 
that  misconduct  of  the  corporate  offi- 
cers is  no  cause  for  dissolution  at  the 
suit  of  the  minority.  To  same  effect, 
Belmont  v.  Erie  Ry.,  52  Barb.  637 
(1869).  A  stockholder  has  no  right 
to  bring  an  action  for  the  dissolution 
of  the  corporation.  Byrne  v.  New 
York  Brick,  etc.  Co.,  16  Week.  Dig. 
139  (1882).  A  stockholder  cannot 
cause  a  receiver  to  be  appointed 
merely  on  the  ground  that  the  liabili- 
ties exceed  the  assets  and  the  com- 
pany has  ceased  to  do  business.  Mur- 
ray V.  Superior  Court,  129  Cal.  628 
(1900).  A  minority  stockholder  of  an 
alien  corporation  cannot  file  a  bill  in 
equity  to  have  the  company  wound  up 
and  its  assets  distributed,  even  though 
he  complains  of  the  management,  and 
even  though  the  main  purpose  of  the 
corporation  is  to  acquire  land  in  the 
state,  it  being  shown  that  the  corpora- 
tion is  solvent.  Sidway  v.  Missouri, 
etc.  Co.,  101  Fed.  Rep.  481  (1900). 
Where  the  stockholders  of  a  bank 
have  legally  ordered  the  winding  up 
of  its  business,  and  for  three  years 
thereafter  the  officers  still  continue 
to  do  business  at  a  great  loss,  appar- 
ently without  any  effort  to  wind  up 
its  affairs,  a  stockholder  may  file  a 
biU  for  an  accounting  and  the  appoint- 
ment of  a  receiver,  and  no  request  to 
the  corporation  to  bring  the  suit  need 
be  made.  Matthews  v.  Bank  of  Allen- 
dale, 60  S.  C.  183  (1901).  Even 
though  a  corporation  has  lost  most  of 
its  assets  and  has  abandoned  its  busi- 
ness, yet  a  minority  stockholder  can- 
not have  a  receiver  appointed,  except 
for  mismanagement,  especially  where 
the  object  of  the  receivership  is  to 
bring  suits  against  the  directors, 
which  the  stockholder  himself  may 
bring.     Clark  v.  National,  etc.  Co.,  105 


Fed.  Rep.  787  (1900).  A  minority 
stockholder  cannot  compel  a  dissolu- 
tion and  winding  up,  even  though  the 
corporation  has  lost  money.  Manu- 
facturers', etc.  Co.  V.  Cleary,  121  Ky. 
403  (1905). 

1  U.  S.  Trust  Co.  V.  N.  Y.,  etc.  R.  R., 
101  N.  Y.  478  (1896) ;  Taylor  v.  De- 
catur, etc.  Co.,  112  Fed.  Rep.  449 
(1901);  Oldham  v.  Mt.  Sterling  Imp. 
Co.,  103  Ky.  529  (1898).  Verplanck 
V.  Mercantile,  etc.  Co.,  1  Edw.  Ch. 
84  (1831);  Hardon  v.  Newton,  14 
Blatchf.  376  (1878);  s.  c,  11  Fed. 
Cas.  500;  Fountain  Ferry,  etc.  Co. 
V.  Jewell,  8  B.  Mon.  (Ky.)  140  (1848) ; 
Ferris  v.  Strong,  3  Edw.  Ch.  127 
(1837).  See  also  Strong  v.  McCagg, 
55  Wis.  624  (1882);  Latimer  v. 
Eddy,  46  Barb.  61  (1864).  But  see 
dictum  in  Benedict  v.  Columbus,  etc. 
Co.,  49  N.  J.  Eq.  23,  36  (1891) ;  Barton 
V.  International,  etc.  Alliance,  85  Md. 
14  (1897) ;  Wallace  v.  Pierce- Wallace, 
etc.  Co.,  101  Iowa,  313  (1897) ;  People 
V.  Weigley,  155  111.  491  (1895) ;  State, 
etc.  Ins.  Co.  v.  San  Francisco  Super. 
Ct.,  101  Cal.  135  (1894).  A  court  of 
equity  has  no  power  to  sequestrate  the 
property  of  a  corporation  by  means  of 
a  receiver.  Matter  of  Coleman,  174 
N.  Y.  373  (1903).  Re  Bingham  ton 
Gen.  Elec.  Co.,  143  N.  Y.  261  (1894). 
A  receiver  will  not  be  appointed  for  a 
benevolent  society  in  a  suit  by  a  mem- 
ber charging  that  illegal  expulsions 
have  been  made  and  illegal  election 
held,  even  though  the  illegal  officers 
are  running  the  business ;  nor  will  a 
receiver  be  appointed,  although  the 
purpose  of  the  company  is  impracti- 
cable, the  member  bringing  the  suit 
having  been  a  party  thereto.  Equity 
will  not  interfere,  although  the  com- 
pany is  wholly  illegal  and  unauthorized. 
The  remedy  is  at  law.  Crombie  v. 
Order  of  Solon,  157  Pa.  St.  588  (1893). 
A  court  of  equity  has  no  inherent  power 
to  dissolve  a  corporation.  State  v. 
Foster,  225  Mo.  171  (1909).  White  v. 
Davis,  134  Ga.  274  (1910).     A  minor- 


1909 


629. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


chancery  has  no  inherent  jurisdiction  to  dissolve  a  corporation  by  for- 
feiting its  franchise,  yet  if  it  becomes  insolvent,  it  may  administer  its 

ity  stockholder  may  have  a  receiver 
appointed  where  the  majority  are 
grossly  mismanaging  the  company 
and  refusing  to  give  her  access  to  the 
corporate  books  and  are  keeping  false 
books  and  are  threatening  not  to  pay 
dividends  and  allowing  the  expenses 
to  be  increased  unreasonably,  but  she 
is  not  entitled  to  dissolution  and 
distribution.  Ashton  v.  Penfield,  233 
Mo.  391  (1911).  A  court  of  equity  has 
no  power  to  wind  up  a  corporation 
and  distribute  its  assets  at  the  instance 
of  a  stockholder  or  other  private 
person.  Lyon  v.  M'Keefrey,  171  Fed. 
Rep.  384  (1909).  A  stockholder  can- 
not have  the  company  wound  up  on  the 
ground  that  it  had  not  fully  complied 
with  the  statute  in  its  incorporation 
proceedings.  Troutman  v.  Council 
Bluffs,  etc.  Co.,  142  Iowa,  140  (1909). 
A  court  of  equity  has  no  power  to 
accept  a  voluntary  surrender  of  the 
charter  of  a  corporation.  White  v. 
Davis,  134  Ga.  274  (1910).  A  court 
of  equity  has  no  power  to  dissolve  a 
corporation,  and  hence  it  cannot 
appoint  a  receiver  and  sequestrate  its 
property  and  distribute  its  assets.  A 
receiver  appointed  by  a  state  court 
under  such  circumstances  does  not 
prevent  the  bankruptcy  court  taking 
possession.  Re  Electric  Supply  Co., 
175  Fed.  Rep.  612  (1909).  The  court 
will  not  appoint  a  receiver  and  wind 
up  a  solvent  corporation  merely  be- 
cause the  directors  have  misbehaved. 
SeUman  v.  German,  etc.  Co.,  184  Fed. 
Rep.  977  (1909).  A  court  of  equity 
has  no  inherent  power  to  dissolve  the 
corporation  and  distribute  its  assets 
at  the  instance  of  one  or  more  of  its 
stockholders.  Pride  v.  Pride  Lumber 
Co.,  84  Atl.  Rep.  989  (Me.  1912). 
A  court  of  equity  has  no  power  at  the 
instance  of  a  stockholder  to  wind  up 
an  insolvent  corporation.  Common- 
weath  V.  Richardson,  94  S.  W.  Rep. 
639  (Ky.  1906).  A  court  of  equity  has 
no  power  to  dissolve  a  corporation. 
People  V.  District  Court,  33  Colo.  293 
(190.5).  Mismanagement  is  not  a  good 
cause  for  the  appointment  of  a  receiver 
with  a  view  to  winding  up  the  business 


and  distributing  the  assets.  A  court 
of  equity  has  no  such  power.  Ulmer 
V.  Maine,  etc.  Co.,  93  Me.  324  (1899). 
A  court  of  equity  has  no  power  to  wind 
up  a  solvent  corporation  and  dis- 
tribute its  assets  simply  on  the  ground 
of  dissensions  among  the  stock- 
holders. Sternberg  v.  Wolff,  56  N.  J. 
Eq.  555  (1898).  See  s.  c,  56  N.  J. 
Eq.  389  (1897).  A  court  of  equity 
has  no  jurisdiction  to  appoint  a 
receiver  of  and  dissolve  a  solvent 
beneficial  assessment  association  on 
the  ground  of  mismanagement,  fraud, 
and  the  abuse  of  corporate  powers. 
Mason  v.  Equitable  League,  77  Md.  483 
(1893).  A  stockholder  cannot  file  a 
bill  for  the  dissolution  of  an  insolvent 
corporation.  Heap  v.  Heap  Mfg.  Co., 
97  Mich.  147  (1893).  But  the  court 
will  appoint  a  receiver  to  preserve  the 
corporate  assets  where  the  majority  do 
not  elect  officers.  Lawrence  v.  Green- 
wich Fire  Ins.  Co.,  1  Paige,  587  (1829). 
Where,  upon  voluntary  dissolution, 
the  stockholders  appoint  two  of  their 
number  to  administer  the  assets,  the 
court  will  not  displace  them  and 
appoint  a  receiver.  FoUett  v.  Field,  30 
La.  Ann.  161  (1878).  A  single  stock- 
holder in  an  insolvent  corporation 
cannot  have  it  dissolved  in  a  court  of 
equity.  Merryman  v.  Carroll,  etc.  Co., 
4  Ry.  &  Corp.  L.  J.  12  (1888).  A  cor- 
poration cannot  be  dissolved  except 
by  judicial  sentence  or  sovereign 
power.  A  court  of  equity  has  no  in- 
herent power  to  decree  dissolution.  A 
member  cannot  sue  for  his  part  of  the 
assets  until  a  dissolution  is  had. 
Magee  v.  Geneseo  Academy,  17  N.  Y. 
St.  Rep.  221  (1888).  A  stockholder 
cannot  have  the  corporation  wound  up 
in  equity.  Hinckley  v.  Pfister,  83 
Wis.  64  (1892).  "  The  power  to  declare 
a  forfeiture  of  corporate  franchises 
was  originally,  in  England,  vested  in  the 
courts  of  law,  and  was  exercised  in  a 
proceeding  brought  by  the  attorney- 
general  in  the  name  of  the  sovereign. 
The  court  of  chancery  never  assumed 
jurisdiction  in  such  cases  until  it  was 
conferred  by  act  of  parliament.  It 
declined,  until  the  power  was  conferred 


1910 


CH.  XXXVIII. 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  629. 


assets  and  sell  them  through  a  receiver  without  any  dissolution.^  And 
where  a  corporation  has  abandoned  its  business  and  it  is  evident  that 
it  cannot  ever  carry  it  on,  the  stockholders  may  file  a  bill  in  equity  to 
distribute  the  assets  and  wind  it  up.^  A  receiver  may  hold  directors 
liable  for  illegal  dividends  under  the  Idaho  statute  even  though  the 
company  has  not  been  dissolved.^  And  where  the  directors  of  a  cor- 
poration have  misappropriated  the  funds  of  the  company,  created 
fraudulent  debts,  levied  assessments  upon  the  stock,  caused  the  stock 
to  be  forfeited  for  non-paj^ment,  and  judgment  to  be  entered  on  said 
debts  and  the  property  to  be  sold  out,  a  stockholder  may  file  a  bill  to 
set  aside  all  the  transactions  and  to  compel  the  directors  to  account  and 
wind  up  the  company.* 


by  statute,  to  sequestrate  corporate 
property  through  the  medium  of  a  re- 
ceiver or  to  dissolve  corporate  bodies, 
or  to  restrain  the  usurpation  of  cor- 
porate powers."  Decker  v.  Gardner, 
124  N.  Y.  334  (1890).  In  the  absence 
of  statutory  authority,  a  court  of 
equity  has  no  jurisdiction  to  dissolve 
a  corporation.  Wheeler  v.  Pullman 
Iron,  etc.  Co.,  143  111.  197  (1892). 

1  Cobe  V.  Guyer,  237  111.  516  (1908). 

2  Minona,  etc.  Co.  v.  Reese,  167  Ala. 
485  (1910).  Where  a  corporation 
organized  to  build  a  town  and  sell 
lots  finds  that  its  plans  are  impos- 
sible, and  it  owes  no  debts  and  has 
been  practically  abandoned  by  its 
stockholders,  and  the  officers  each 
year  sell  a  little  of  the  land  to  pay 
taxes,  some  of  the  stockholders,  even 
though  they  are  a  minority,  may  file 
a  bill  to  have  the  court  wind  up  the 
affairs  of  the  company  and  distribute 
the  proceeds,  it  being  shown  that 
there  are  a  great  number  of  stock- 
holders scattered  throughout  the 
country,  and  that  it  is  impossible  to 
get  a  majority  of  them  together. 
Noble  V.  Gadsden,  etc.  Co.,  133  Ala. 
250  (1902).  Where  a  corporation  has 
abandoned  business  for  many  years 
and  its  property  has  deteriorated,  and 
the  officers  are  not  serving,  a  stock- 
holder may  file  a  bill  to  liquidate  its 
affairs  and  to  obtain  an  adjudication 
as  to  the  validity  of  certain  stock  in 
order  that  the  distribution  may  be 
made  to  those  stockholders  who  are 
entitled  to  the  assets.  Central  Land 
Co.  V.  Sullivan,  152  Ala.  360  (1907). 


In  a  suit  by  a  stockholder  to  dis- 
solve a  corporation,  where  it  has 
failed  in  its  purposes  and  objects,  all 
the  stockholders  are  necessary  parties 
defendant.  Ross  v.  American  Banana 
Co.,  150  Ala.  268  (1907).  In  Ten- 
nessee, where  a  corporation  has  aban- 
doned business  for  many  years,  and 
has  no  known  board  of  directors,  a 
stockholder  may  file  a  bill  to  wind  up 
its  affairs,  but  he  should  not  join  the 
corporation  as  a  complainant  with 
himself.  In  such  a  case  no  request  to 
the  directors  is  necessary.  Tennes- 
see, etc.  Co.  V.  Ayers,  43  S.  W.  Rep. 
744  (Tenn.  1897).  Where  for  twenty- 
five  years  incorporation  has  been 
abandoned  and  its  property  has  been 
held  by  a  trustee'  a  stockholder  may 
file  a  bill  in  equity  to  have  the  property 
sold  and  the  assets  distributed,  even 
though  there  has  been  no  dissolution. 
Greenleaf  v.  Land,  etc.  Co.,  146  N.  C. 
505  (1908).  The  court  will  not  at 
the  instance  of  minority  stockholders 
cause  the  corporate  property  to  be 
sold  for  abandonment  of  the  business 
where  the  acts  complained  of  do  not 
clearly  indicate  any  such  intent. 
Sullivan  v.  Central  Land  Co.,  173  Ala. 
426  (1911). 

3  Stoltz  V.  Scott,  129  Pac.  Rep.  340 
(Idaho,  1912).  •   . 

*  Jellenik  v.  Huron,  etc.  Co.,  177 
U.  S.  1  (1899).  A  suit  for  the  appoint- 
ment of  a  receiver  and  an  accounting 
and  the  liquidation  of  the  affairs  of  a 
corporation,  lies  at  the  instance  of  a 
stockholder  where  it  appears  that  the 
board  of  directors  and  a  majority  of 


1911 


§  629. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


In  proving  dissolution  of  a  foreign  corporation  it  is  not  sufficient  to 
prove  the  decree  of  a  court  to  that  effect.  The  statutory  power  of  the 
court  to  dissolve  must  also  be  proved.^ 


the  stockholders  are  guilty  of  mis- 
management and  gross  negligence. 
Klugh  V.  Coronaca,  etc.  Co.,  66  S.  C. 
100  (1903).  Where  a  majority  of  the 
directors  are  in  jail,  and  they  have  been 
guilty  of  fraud,  and  their  stock  was 
fraudulently  issued,  a  stockholder  may 
have  a  receiver  appointed  and  may 
have  the  directors  removed  by  the 
court  and  the  corporation  wound  up. 
California,  etc.  Ass'n  v.  Superior 
Court,  8  Cal.  App.  711  (1908).  Mi- 
nority stockholders  may  have  the  cor- 
poration wound  up  where  the  majority 
stockholders  have  been  guilty  of  mis- 
management and  nothing  can  be  rea- 
sonably expected  from  them.  Chisolm 
V.  Carolina  Agency  Co.,  88  S.  C. 
438  (1911).  Under  a  prayer  for  gen- 
eral relief  in  a  judgment  creditor's 
suit  the  court  may  wind  up  the  affairs 
of  the  corporation.  Barber  v.  Inter- 
national Co.,  73  Conn.  587  (1901). 
Sequestration  is  taking  of  property 
from  the  owner  for  a  time  till  the 
rents,  issues,  and  profits  satisfy  a 
demand.  The  judgment  in  such  case 
does  not  dissolve  the  corporation. 
Proctor  V.  Sidney,  etc.  Co.,  8  N.  Y. 
App.  Div.  42  (1896).  A  collusive  suit 
by  olficers  for  dissolution  and  the 
appointment  of  a  receiver  does  not  pre- 
vent a  creditor  filing  an  independent 
bill.  Taber  v.  Royal,  etc.  Co.,  124 
Ala.  681  (1899).  A  pledgee  of  bonds 
of  an  insolvent  corporation,  the  interest 
not  having  been  paid,  may  maintain 
a  suit  to  wind  up  the  company,  and 
change  the  trustees  of  the  mortgage 
(even  though  the  existing  trustee 
was  appointed  by  a  state  court  after 
the  pledgee's  suit  was  commenced) 
and  have  a  receiver  appointed  and 
cancel  fraudulent  bonds,  but  the 
pledgor  is  a  necessary  party  defendant. 
Service  on  non-resident  bondholders 
may  be  by  publication.  State  Nat. 
Bank,  etc.  v.  Syndicate  Co.,  178  Fed. 
Rep.  359  (1910).  Where  a  company 
has  been  dissolved  because  there 
were  only  two  directors  by  the  charter 
and  one  had  resigned  and  the  stock- 


holders divided  evenly  and  could  not 
elect  a  successor,  one  faction  cannot 
hold  the  other  responsible  in  damages 
for  the  result.  Weymouth  v.  Oudin, 
56  Wash.  315  (1909).  A  federal 
court  winding  up  a  corporation  at  the 
instance  of  its  stockholders  may  order 
a  sale  of  its  land  in  another  district. 
Clark  V.  Iowa,  etc.  Co.,  185  Fed.  Rep. 
604  (1911).  Where  for  seven  years  a 
stockholder  who  owned  a  majority 
of  the  stock  elected  himself  and  two 
of  his  dummies  as  directors  of  the  com- 
pany, and  caused  the  board  to  vote 
a  large  salary  to  himself  as  president 
and  manager,  and  had  leased  to  the 
company  his  property  at  a  large 
rental,  the  salary  and  rental  were 
declared  illegal  and  void.  Where  the 
same  company  had  failed  to  pay  its 
dividends  by  reason  of  such  acts,  a 
court  of  equity,  upon  the  suit  of 
another  stockholder,  ordered  the  pres- 
ident to  account,  and  appointed  a 
receiver  of  the  company  and  directed 
that  its  affairs  be  wound  up.  Miner 
V.  BeUe  Isle  Ice  Co.,  93  Mich.  97  (1892). 
The  appellate  court,  in  Florida  Const. 
Co.  V.  Young,  59  Fed.  Rep.  721  (1892), 
refused  to  reverse  an  order  in  an  action 
brought  by  stockholders  in  a  construc- 
tion company  for  an  accounting 
between  the  company  and  a  railroad 
company,  and  a  distribution  of  the 
assets  of  the  former.  The  order 
appointed  a  receiver  of  the  former  and 
granted  an  injunction.  A  stockholder 
in  a  corporation  which  has  sold  aU 
its  property  cannot  sue  for  his  part  of 
the  assets,  the  corporation  stiU  being 
in  existence,  even  though  it  has  never 
issued  certificates  of  stock.  Harton  v. 
Johnson,  166  Ala.  317  (1910).  A 
preferred  stockholder  cannot  have  the 
company  wound  up  even  though  the 
same  parties  own  the  common  stock 
and  the  corporate  debts  and  have 
tried  to  squeeze  him  out  by  insolvency 
proceedings.  Shaffer  v.  McCuUoch, 
192  Fed.  Rep.  801  (1911). 

1  Olds  V.  City,  etc.  Co.,  185  Mass. 
500  (1904). 


1912 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


629, 


Sometimes  the  corporation,  after  paying  its  debts,  distributes  its 
assets  among  its  stockliolders  without  any  dissolution.^ 

In  many  of  the  states  and  in  England  there  are  statutes  regulating 
the  dissolution  of  a  corporation.  These  statutes  generally  specify 
what  parties  may  bring  suit  for  dissolution,  on  what  grounds  dissolu- 
tion will  be  decreed,  and  what  proceedings  must  be  taken  to  obtain 
the  decree.  Such  a  statutory  dissolution  is  hardly  a  voluntary  dissolu- 
tion, and  yet  it  approaches  that  kind  of  dissolution  more  nearly  than  any 
other.  Various  decisions  under  the  New  York  statute  and  the  statutes 
of  other  states  and  the  English  statutes  are  given  in  the  notes  below.^ 


iSee  §§670-672,  infra,  and  §548, 
supral 

2  Thus,  in  New  York,  elaborate  pro- 
vision is  made.  The  majority  of  the 
directors  may  apply  for  dissolution. 
See  Code  Civ.  Pro.,  §§  2419,  etc.  As 
also  may  a  creditor  or  stockholder. 
Code  Civ.  Pro.,  §§  1784,  etc.  .Under 
the  New  York  statute  the  court  will 
order  the  dissolution  of  a  corporation 
where  a  majority  of  the  directors  and 
stockholders  wish  it,  where  the  inter- 
ests are  discordant,  and  a  dissolu- 
tion will  be  beneficial.  Re  Importers', 
etc.  Exchange,  132  N.  Y.  212  (1892). 
Where  a  reduction  of  the  number  of 
directors  is  attempted,  but  not  made 
in  compliance  with  the  statute,  an 
attempt  at  voluntary  dissolution  by  a 
majority  of  the  directors  as  reduced  is 
not  legal,  they  not  being  a  majority 
of  the  original  number  of  directors. 
Matter  of  Dolgeville,  etc.  Co.,  160 
N.  Y.  500  (1899).  Under  the  old 
statute,  part  of  the  stockholders  might 
compel  a  dissolution  where  there  had 
been  a  failure  to  elect  officers.  Ward 
V.  Sea  Ins.  Co.,  7  Paige,  294  (1838). 
Where  a  majority  of  the  directors  and 
stockholders  apply  for  dissolution  the 
court  wiU  presume  that  it  should  be 
granted.  Re  Niagara  Ins.  Co.,  1 
Paige,  258  (1828).  In  general,  see 
also  Re  Pyrolusite,  etc.  Co.,  29  Hun, 
429  (1883) ;  Re  Boynton,  etc.  Co.,  34 
Hun,  369  (1884).  Corporate  credi- 
tors cannot,  before  judgment,  apply  for 
a  dissolution  of  the  corporation.  Cole 
V.  Knickerbocker,  etc.  Ins.  Co.,  23 
Hun,  255  (1880) ;  aff'd,  91  N.  Y.  641. 
In  a  stockholders'  suit  to  dissolve  and 
wind  up  a  corporation  the  books  of  the 
company  are  not  admissible  as  against 


them,  being  mere  declarations  in  its 
favor.  Matter  of  Dittman,  65  N.  Y. 
App.  Div.  343  (1901).  It  is  legal 
for  a  person  to  contract  with  the  direc- 
tors of  an  insurance  company  to  pur- 
chase at  least  sixty-five  per  cent,  of 
the  stock  of  the  company,  the  same 
offer  being  made  to  all  the  stockholders, 
even  though  it  is  proposed  to  thereupon 
wind  up  the  company.  Garrett  Co. 
V.  Morton,  65  N.  Y.  App.  Div.  366 
(1901).  In  this  case  the  lower  court 
has  held  (35  N.  Y.  Misc.  Rep.  10  — 
1901)  that  under  the  New  York  statute 
it  is  illegal  for  an  insurance  company 
to  transfer  its  business  and  liquidate 
its  affairs  without  dissolution  pro- 
ceedings in  accordance  with  the  statute, 
and  hence  the  purchaser  of  the  busi- 
ness cannot  maintain  a  suit  for  false 
representations  as  to  the  condition  of 
the  company.  A  de  facto  director 
may  sign  an  application  for  statutory 
dissolution.  MacMahon  v.  Stepney 
etc.  140  N.  Y.  App.  Div.  554  (1910). 
The  court  may  set  aside  its  own  order 
for  a  voluntary  dissolution  of  a  cor- 
poration. Matter  of  Automatic 
Chain  Co.,  134  N.  Y.  App.  Div.  863 
(1909);  aff'd,  198  N.  Y.  618.  The 
court  in  statutory  dissolution  pro- 
ceedings cannot  enjoin  the  foreclos- 
ure of  a  mortgage.  Matter  of  Tarry- 
town,  etc.  R.,  133  N.  Y.  App.  Div. 
297  (1909).  Even  though  directors 
are  not  stockholders  as  required  by 
law,  yet  they  may  join  in  a  petition  for 
voluntary  dissolution  of  the  corpora- 
tion. Matter  of  Manoca,  etc.  Ass'n, 
128  N.  Y.  App.  Div.  796  (1908). 
Even  after  dissolution  proceedings 
have  been  commenced  under  the 
statute  the  court  may  authorize  their 


1913 


629. 


DISSOLUTION,    FORFEITURE,    ETC. 


[c 


H.  XXXVIII. 


A  bill  filed  by  a  stockholder  under  the  terms  of  a  statute  to  bring  about 
a  dissolution  and,  winding  up  of  the  corporation  will  be  dismissed  where 

discontinuance  although  the  minority 
stockholders  object.  Matter  of  Auto- 
matic, etc.  Co.,  64  N.  Y.  Misc.  Rep. 
280  (1909). 

Where,  pending  an  application  by 
a  shareholder  for  a  receiver  of  a  corpo- 
ration which  has  become  insolvent 
by  the  misconduct  of  the  directors, 
the  directors  cause  voluntary  dissolu- 
tion proceedings  to  be  commenced, 
and  their  representatives  to  be  elected 
liquidators,  the  court  will  remove 
them  and  appoint  a  receiver.  Fitz- 
gerald V.  State,  etc.  Assoc,  74  N.  J. 
Eq.  440  (1908).  Where  the  stock- 
holders arQ  dissolving  a  company 
under  a  statute,  the  court  wiU  not 
appoint  a  receiver,  there  being  no 
charge  of  insolvency  or  mal-adminis- 
tration.  Hegeman  v.  Atlantic,  etc.  Co., 
73  N.  J.  Eq.  29.5  (1907).  Although 
a  charter  allows  dissolution  on  a  two- 
thirds  vote  of  all  stockholders,  yet  a 
subsequent  amendment  requiring  a 
two-thirds  vote  of  the  subscribed  cap- 
ital stock  is  binding  under  a  constitu- 
tional provision  that  all  charters  are 
subject  to  alteration  or  repeal.  Re 
College,  etc.  Assoc,  157  Cal.  596 
(1910).  In  Ohio  there  'is  a  statute 
authorizing  dissolution  by  the  court 
on  application  of  minority  stockholders 
based  on  the  fact  that  dividends  have 
not  been  paid  and  are  not  likely  to  be 
paid,  and  hence  where  for  thirteen 
years  the  company  has  had  no  sub- 
stantial earning  capacity  and  the 
value  of  its  stock  is  practically  the 
"value  of  its  assets,  dissolution  may  be 
declared.  Summers  v.  Thomas  Mfg. 
Co.,  82  Ohio  St.  338  (1910).  Where 
a  company  may  be  dissolved  on  a  vote 
of  two  thirds  of  the  stock  represented 
at  a  meeting  called  for  that  purpose, 
this  does  not  mean  two  thirds  of  the 
entire  capital  stock.  Dreifus  v.  Colo- 
nial, etc.  Co.,  123  La.  61  (1909).  In 
a  statutory  proceeding  to  dissolve  a 
corporation,  provisions  of  the  statute 
as  to  parties  defendant  and  notice 
must  be  complied  with.  Golden  v. 
Averill,  31  Nev.  2,50  (1909).  A 
transfer  of  certificates  of  stock  on  the 
corporate  books  by  a  stockholder  to  his 


children  may  be  attacked  by  one  of 
them  after  his  death  on  the  ground  of 
undue  influence  and  unsound  mental 
condition,  but  such  a  suit  to  set  aside 
the  transfers  should  not  be  joined  with 
one  for  the  dissolution  of  the  corpo- 
ration and  a  receivership.  Bannon 
V.  Bannon,  etc.  Co.,  136  Ky.  556 
(1909).  Where  a  company  has  been 
dissolved  voluntarily  under  a  statute, 
and  the  officers  do  not  proceed  to  wind 
up  its  affairs,  a  stockholder  and  cred- 
itor may  maintain  a  suit  to  have  a 
receiver  appointed  for  that  purpose. 
Seering  v.  Black,  140  Wis.  413  (1909). 
Under  the  statutes  of  New  Jersey  a 
stockholder  or  a  creditor  may  apply 
for  a  receiver  of  an  embarrassed  cor- 
poration, even  though  its  condition 
is  due  to  his  misconduct.  McMuUin 
V.  McArthur,  etc.  Co.,  73  N.  J.  Eq. 
527  (1907). 

Under  a  statute  authorizing  the 
court  to  dissolve  any  corporation  on 
good  cause  shown,  a  minority  stock- 
holder may  file  a  bill  to  have  the  cor- 
poration dissolved  for  purchasing 
unnecessary  real  estate.  Bixler  v. 
Summerfield,  195  111.  147  (1902). 
Where  the  minority  stockholders  file 
a  bill  for  the  dissolution  of  a  corpora- 
tion the  court  may  refuse  to  proceed 
unless  the  stockholders  at  large  are 
brought  in.  McKJeroy  v.  Gadsen, 
etc  Co.,  126  Ala.  184  (1900).  Where 
the  statute  provides  that  two  thirds 
of  the  stockholders  may  cause  the  cor- 
poration to  be  wound  up,  their  right 
to  do  so  is  absolute  and  cannot  be 
controlled  by  the  court.  Watkins  v. 
Lawrence  Nat.  Bank,  51  Kan.  254 
(1893).  Under  a  statute  authorizing 
dissolution  for  good  cause  shown,  the 
court  ^all  not  order  dissolution  at  the 
instance  of  the  minority  merely  because 
the  business  is  not  conducted  satis- 
factorily to  them  and  successfully. 
Platner  v.  Kirby,  138  Iowa,  259  (1908). 
The  voluntary  dissolution  of  a  com- 
pany under  the  statute,  but  without 
ten  days'  notice  required  by  the  stat- 
ute, is  not  such  a  dissolution  as  to 
prevent  creditors  from  attaching  the 
property   of   the   company   as   though 


1914 


CH.  XXXVIII.]                       DISSOLUTION,    FORFEITURE,    ETC.  [§  629. 

it  is  shown  that  the  suit  is  brought  in  the  interest  of  rival  corporations. 

The  reason  for  dismissal  is  that  the  suit  is  a  fraud  upon^the  court.^ 

no  dissolution  had  been  had.  Cleve-  In  re  Empire,  etc.  Co.,  95  Fed.  Rep. 
land,  etc.  Co.  v.  Taylor,  etc.  Co.,  54  957  (1899).  Where  the  bill  does  not 
Fed.  Rep.  82  (1893).  But  the  dis-  specify  any  act  which  is  illegal,  fraud- 
solution  cannot  be  enjoined  by  cred-  ulent,  or  ultra  vires,  nor  show  any 
itors  in  the  absence  of  fraud.  Cleve-  effort  on  the  part  of  the  minority 
land,  etc.  Co.  v.  Taylor,  etc.  Co.,  54  stockholder  to  change  the  manage- 
Fed.  Rep.  85  (1893).  Under  statutes  ment,  the  court  ■nail  not  appoint  a 
in  some  of  the  states,  an  information  receiver  and  will  not  decree  dissolu- 
in  the  nature  of  quo  ivarranto  may  be  tion  of  the  corporation.  Worth,  etc. 
filed  at  the  relation  of  a  shareholder  Co.  r.  Bingham,  116  Fed.  Rep.  785 
against  an  illegally-existing  corpora-  (1902).  In  West  Virginia  one  third 
tion  to  compel  a  dissolution.  Albert  in  interest  of  the  stockholders  may 
V.  State,  65  Ind.  413  (1879).  Under  apply  to  the  court  for  a  dissolution, 
the  National  Banking  Act,  see  Ken-  See  Hurst  v.  Coe,  30  W.  Va.  158  (1887). 
nedy  v.  Gibson,  8  Wall.  498  (1869)  ;  Under  the  English  act  it  has  been 
Bank  of  Bethel  v.  Pahquioque  Bank,  held  that  the  majority  cannot  insist 
14  Wall.  383  (1871) ;  Bank  v.  Ken-  upon  dissolution,  though  the  business 
nedy,  17  Wall.  19  (1872) ;  Re  Piatt,  1  is  a  losing  one.  Re  Suburban  Hotel 
Ben.  534  (1867) ;  s.  c,  19  Fed.  Cas.  Co.,  L.  R.  2  Ch.  737  (1867).  But  the 
815.  A  resolution  of  two  thirds  of  court  may  grant  it  under  such  circum- 
the  stockholders  in  a  national  bank  stances  even  to  a  few  stockholders, 
to  go  into  liquidation  does  not  dis-  Re  Factage  Parisien,  34  L.  J.  (Ch.) 
solve  the  corporation.  Merchants'  140  (1865).  In  determining  whether 
Nat.  Bank  v.  Gaslin,  41  Minn.  552  to  order  a  winding  up  the  court  will 
(1889).  Where  a  statute  provides  not  consider  possible  future  profits, 
that  on  a  certain  vote  a  corporation  Re  European,  etc.  Soc,  L.  R.  9  Eq. 
may  be  dissolved  and  a  liquidator  122  (1869).  For  an  application  to 
appointed  by  the  stockholders  and  such  have  a  winding  up  because  business 
action  is  taken,  the  liquidator  may  had  not  been  commenced  within 
file  a  bill  in  a  court  of  equity  to  take  a  year,  see  Re  Tumacaeori,  L.  R.  17 
charge  of  such  liquidation  and  enjoin  Eq.  534  (1874).  If  the  corporation 
creditors'  suits  and  supervise  the  acts  has  sold  its  property  and  ceased  busi- 
of  the  liquidators.  In  re  Grant,  etc.  ness  the  court  will  order  a  distribu- 
Co.,  51  La.  Ann.  1254  (1899).  Under  a  tion  of  the  assets.  Cramer  v.  Bird, 
statute  a  court  may  decree  dissolution  L.  R.  6  Eq.  143  (1868).  The  mere  fact 
where  the  stockholders  are  evenly  that  the  company  is  losing  money  is 
divided  and  cannot  agree  and  no  elec-  not  sufficient  to  have  a  winding  up. 
tions  are  being  held.  State  v.  Oudin,  Re  Joint-stock  Coal  Co.,  L.  R.  8  Eq. 
etc.  Co.,  48  Wash.  196  (1908).  Under  146  (1869).  The  court  has  a  judicial 
the  statutes  of  Louisiana  a  state  may  discretion,  and  will  not  ordinarily 
file  a  bill  in  equity  to  enjoin  a  corpora-  order  a  winding  up  at  the  instance  of 
tion  from  acting  as  a  corporation,  its  one  stockholder  in  opposition  to  all  the 
organization  being  defective,  and  may  others.  Re  London  Suburban  Bank, 
also  ask  that  the  charter  by  forfeited  L.  R.  6  Ch.  641  (1871).  But  if  the 
for  violation  of  law,  even  though  it  company  is  insolvent  or  is  doing  a 
had  been  legally  organized.  The  incor-  ruinous  business,  with  no  prospect  of 
porators  and  officers  need  not  be  made  a  change,  the  court  will  order  a  winding 
parties  defendant.  New  Orleans,  etc.  up  on  the  petition  of  a  minority.  Re 
Co.  V.  Louisiana,  180  U.  S.  320  (1901).  Great  Northern,  etc.  Min.  Co.,  17 
Proceedings  for  the  dissolution  of  a  cor-  W.  R.  462  (1869).  Where  the  main 
poration  are  not  an  act  of  bankruptcy,  purpose  of  a  corporation    is   the  fur- 

1  Watson  V.  Le  Grand,  etc.  Co.,  177  lU.  203  (1898). 
1915 


629. 


DISSOLUTION,    FORFEITURE,    ETC. 


[cH.  XXXVIII. 


But  where  the  statutes  authorize  dissolution  on  a  certain  vote  of  the 
stockholders,  a  dissolution  so  voted  is  legal,  irrespective  of  the  motives 
of  the  stockholders  in  voting  it.^     Hence  a  stockholder  may  vote  for 


nishing  of  lodgings  and  refreshments 
at  the  queen's  jubilee,  a  stockholder 
has  the  right  to  have  the  company 
dissolved  after  the  jubilee,  even  though, 
under  general  clauses,  the  objects  of 
the  company  are  to  furnish  lodgings 
and  refreshments  generally,  and  even 
though  the  directors  intend  to  continue 
the  business.  Re  Amalgamated  Syn- 
dicates, Ltd.,  [1897]  2  Ch.  600.  Where 
a  company  is  organized  to  work  gold 
mines  in  a  specified  place  as  well  as 
elsewhere,  and  the  company  actually 
works  mines  elsewhere,  but  not  in  the 
specified  place,  the  main  purpose  of  the 
company  is  not  carried  out  and  a  dis- 
solution may  be  had.  Re  Coolgardie, 
etc.  Mines,  Ltd.,  76  L.  T.  Rep.  269 
(1897).  Where  a  corporation  has  been 
enjoined  from  using  its  name,  this  is 
cause  for  a  dissolution.  Re  Thomas, 
etc.  Sons,  Ltd.,  [1897]  1  Ch.  406.  A 
court  has  no  jurisdiction  to  wind  up 
a  corporation  where  a  company  was 
never  incorporated,  one  of  the  requisite 
incorporators  not  having  signed  the 
articles  of  incorporation.  Re  National, 
etc.  Corp.  [1891]  2  Ch.  505.  See  also 
in  general,  under  this  winding-up 
act.  Re  Factage  Parisien,  34  L.  J.  (Ch.) 
140  (1865);  Re  Exmouth  Docks  Co., 
L.  R.  17  Eq.  181  (1873) ;  Re  Sanderson's 
Patents  Assoc,  L.  R.  12  Eq.  188  (1871 ) ; 
Re  Bradford  Navigation  Co.,  L.  R.  10 
Eq.  331  (1870);  Princess  of  Reuss  v. 
Bos,  L.  R.  5  H.  L.  176  (1871);  Re 
Commercial  Bank,  L.  R.  6  Eq.  517 
(1868) ;  Re  London  India  Rubber  Co., 
L.  R.  1  Ch.  329  (1866) ;  Re  Pen-y-Van 
Colliery  Co.,  L.  R.  6  Ch.  D.  477  (1877) ; 
Re  United  Service  Co.,  L.  R.  7  Eq.  76 
(1868);  Re  German  Date  Coffee  Co., 
L.  R.  20  Ch.  D.  169  (1882),  holding 
that  where  a  company  was  organized 
and  chartered  to  engage  in  manufac- 
ture and  sale  of  goods  under  a  certain 
patent,  when  in  fact  there  was  no 
patent  such  as  was  referred  to,  and  an 
application  for  such  a  patent  was 
refused,  held,  that  the  substratum 
upon  which  the  company  was  based 
or  main  object  for  which  it  was  formed 


not  being  in  existence,  the  company 
must  be  dissolved  on  petition  of  a 
shareholder,  notwithstanding  it  was 
profitably  engaged  in  the  manufac- 
ture and  sale  of  the  commodity  mth- 
out  any  patent,  and  notwithstanding 
a  very  large  majority  of  the  company 
desired  to  have  the  company  continue 
in  business.  To  same  effect,  under 
somewhat  similar  circumstances,  Re 
Haven  Gold  Min.  Co.,  L.  R.  20  Ch.  D. 
151  (1882).  A  lender  of  money 
to  a  benefit  building  society  cannot 
petition  to  wind  it  up.  Ex  parte 
Williamson,  L.  R.  5  Ch.  309  (1869). 
Mortgage  bondholders  cannot  insti- 
tute winding-up  proceedings  under 
the  English  act.  Re  Uruguay,  etc. 
Ry.,  L.  R.  11  Ch.  D.  372  (1879).  For 
many  cases  relative  to  the  question 
of  when  a  court  will  order  a  winding 
up  and  when  not,  under  the  English 
statute,  see  Healey,  Companies  Law 
and  Practice,  pp.  446,  etc. 

1  The  "right  to  have  the  business 
carried  on  until  the  natural  death  of 
the  corporation  is  subject  to  the  will 
of  the  majority  of  two  thirds  provided 
for  in  the  statute."  Beling  v.  Ameri- 
can, etc.  Co.,  72  N.  J.  Eq.  32  (1907). 
Under  the  act  of  Congress  two  thirds 
in  interest  of  the  stockholders  of  a 
national  bank  may  liquidate  it  at  any 
time,  and  the  minority  cannot  com- 
plain that  it  is  a  conspiracy,  even 
though  two  thirds  of  stock  is  held  by 
the  directors  and  executive  officers. 
Green  v.  Bennett,  110  S.  W.  Rep.  108 
(Tex.  1908).  Where  by  statute  a 
corporation  may  be  dissolved  at  any 
time  by  the  board  of  directors,  a 
stockholder  cannot  prevent  it,  even 
though  the  corporation  is  solvent, 
there  being  no  bad  faith  or  violation 
of  duty,  and  the  reason  being  that  the 
directors  deem  it  expedient  to  discon- 
tinue the  business.  White  v.  Kincaid, 
149  N.  C.  415  (1908).  But  even 
though  the  motive  of  directors  in  dis- 
solving a  corporation  in  accordance 
with  the  statute  are  fraudulent,  yet 
this  is  not  cause  for  setting  aside  the 


1916 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


629. 


the  dissolution  of  the  corporation  as  allowed  by  the  statute,  even  though 
his  object  is  to  terminate  a  contract  which  he  has  with  the  corporation.^ 
A  guaranty  by  one  corporation  of  dividends  on  the  stock  of  another 
corporation,  so  long  as  the  stock  shall  be  "  outstanding,"  ceases  upon 
the  dissolution  of  the  latter  corporation,  even  though  such  dissolution 
was  brought  about  by  the  former  corporation.-  There  has  been  much 
doubt  as  to  whether  minority  stockholders  may  prevent  a  dissolution 
under  a  statute,  where  the  purpose  is  to  sell  the  property  to  another 
company.  The  weight  of  authority  seems  to  hold  that  such  a  dissolu- 
tion is  legal,  if  no  actual  fraud  is  shown  and  if  a  public  sale  of  the  prop- 
erty is  provided  for.^ 


dissolution  at  the  instance  of  a  minority 
stockholder.  Knickerbocker  v.  Gro- 
ton,  etc.  Co.,  Ill  N.  Y.  App.  Div. 
145  (1906).     See  also  §  736,  infra. 

1  Wiudmuller  v.  Standard,  etc.  Co., 
11.5  Fed.  Rep.  748  (1902).  In  the  ease 
Robotham  v.  Prudential  Ins.  Co., 
64  N.  J.  Eq.  673  (1903),  the  court 
approved  the  decision  in  WindmuUer 
V.  Standard,  etc.  Co.,  but  said  that 
if  the  complaint  had  been  framed  on 
a  different  theory,  and  "if  the  com- 
plainants had  attacked  the  action  of 
the  directors  in  instituting  the  pro- 
ceedings for  dissolution  as  the  prod- 
uct of  bribery  or  improper  influence 
of  any  kind,  or  of  favoritism  to  the 
majority  stockholder,  who  had  ap- 
pointed the  directors,  a  very  different 
case  would  have  been  presented.  If 
the  complainants  had  also  charged 
that  the  directors,  their  trustees,  had 
not  only  committed  a  gross  and  fla- 
grant breach  of  duty,  but  that  the 
majority  stockholder  had  instigated 
them  to  do  it,  a  strong  case,  appar- 
ently, would  have  been  made  out,  in 
which  to  hold  the  majority  stock- 
holder liable  for  damages." 

2  Bijur  V.  Standard,  etc.  Co.,  74 
N.  J.  Eq.  546  (1908).  A  guarantee  of 
dividends  on  stocks,  so  long  as  the  cer- 
tificates are  outstanding,  but  not  to 
exceed  the  period  for  which  the  com- 
pany was  incorporated,  ceases  upon 
the  dissolution  of  the  company,  even 
though  the  guarantor  owns  a  major- 
ity of  the  stock  of  the  company  and 
brings  about  the  dissolution,  unless 
the  dissolution  was  for  the  purpose 
of   escaping   this   liability.     Mason   v. 


Standard,  etc.  Co.,  85  N.  Y.  App.  Div. 
520  (1903). 

^  Voluntary  dissolution  of  a  New 
York  corporation  under  the  New  York 
statute  cannot  be  enjoined  at  the  in- 
stance of  minority  stockholders,  even 
though  they  allege  that  the  purpose  is 
to  have  a  sale  of  the  propertj'  and 
enable  the  majority  to  purchase  the 
same,  no  actual  fraud  being  shown. 
Elbogen  t'.  Gerbereux,  etc.  Co.,  50 
N.  Y.  App.  Div.  623  (1900),  rev'g  30 
N.  Y.  Misc.  Rep.  264.  Where  the 
articles  of  association  of  an  unincor- 
porated joint-stock  association  author- 
ize dissolution  at  any  time  upon  the 
vote  of  a  majority  in  interest,  such 
dissolution  may  be  had,  although  it  is 
for  the  purpose  of  transferring  all  the 
assets  to  a  foreign  corporation  for 
stock  of  the  latter,  the  privilege,  how- 
ever, being  given  to  each  stockholder 
to  receive  payment  in  cash  on  the  basis 
of  a  certain  valuation  of  the  assets, 
which  valuation  is  fair  and  adequate. 
Francis  v.  Tavlor,  31  N.  Y.  Misc.  Rep. 
187  (1900) ; "  aff'd,  52  N.  Y.  App. 
Div.  631.  In  the  case  Arents  v.  Black- 
well's,  etc.  Co.,  101  Fed.  Rep.  338 
(1900),  where  the  holders  of  159,769 
shares  out  of  160,000  shares  of  the  stock 
of  a  tobacco  company  wished  to  accept 
the  offer  of  another  company  to  buy  it 
out  for  .S2,800,000,  and  a  person  had 
purchased  one  share  for  the  purpose  of 
stopping  the  sale  and  having  the  char- 
ter repealed,  the  court  appointed  a 
receiver  to  sell  the  property  as  pre- 
liminary to  a  dissolution  and  distribu- 
tion of  the  assets.  Where  a  statute 
authorizes     dissolution     on    a     three 


1917 


§  629. 


DISSOLUTION,    FORFEITURE,    ETC. 


CH.  XXXVIII. 


Where  a  dissolution  is  being  obtained  or  has  been  obtained  by  fraud 
and  an  inequitable  overbearing  of  the  rights  of  a  stockholder,^  a  court 


fourths  vote,  the  court  cannot  prevent 
such  dissolution,  even  though  the  pur- 
pose was  to  sell  the  property  to  another 
corporation.     Slattery  v.  Greater  New 
Orleans,  etc.  Co.,  128  La.  871  (1911). 
Dissenting  stockholders  may  object  to 
a  dissolution  where  it  is  merely  a  device 
to  effect  the  consolidation  which  other- 
wise  would   be    ultra   vires.     Black   v. 
Delaware,   etc.   Canal    Co.,    22   N.  J. 
Eq.    403    (1871).     A    minority    stock- 
holder may  enjoin  a  public  sale  of  the 
property  of  a  prosperous  corporation, 
even   though   the  company   has   been 
dissolved,  under  the  New  York  statute, 
where  he  shows  that  the  public  sale  is 
not  being  fairly  advertised  and  con- 
ducted, and  shows  also  that  the  dis- 
solution is  for  the  purpose  of  reorganiz- 
ing under  the  laws   of  another  state 
and  freezing  out  the  minority,  and  that 
information  could  not  be  obtained  as 
to  the  actual  condition  of  the  company. 
Treadwell  v.  United,  etc.  Co.,  47  N.  Y. 
App.  Div.  613  (1900).     Even  though  a 
New  York  mining  company  dissolves 
and  sells  its  property  to  a  West  Virginia 
company  in  order  to  avoid  New  York 
taxes,  a  share  of  stock  and  some  bonds 
in  the  new  company  being  given  for 
each  share  of  stock  in  the  old  company, 
and  even  though  a  dissenting  stock- 
holder is  entitled  to  have  a  public  sale 
of  the  property,  yet  if  when  the  time 
for  depositing  the  stock  was  about  to 
expire  he  sells  most  of  his  stock  to  a 
business  associate  who  makes  the  ex- 
change,  he   cannot   then   insist   on   a 
public  sale,  especially  where  such  sale 
would    destroy   a   profitable    concern; 
but  the  court  will  order  that  he  be 
allowed   to  participate,  notwithstand- 
ing that  the  time  has  expired,  or  that 
he   be   paid    the   value   of   his   stock. 
Treadwell  v.  United,  etc.  Co.,  134  N.  Y. 
App.  Div.  394  (1909).     Dissolution  by 
a  two  thirds  vote  of  the  stockholders 
under  a  statute  may  be  enjoined  by  a 
dissenting  stockholder,  where  the  cor- 
poration is  a  going  solvent  concern  and 
the  purpose  of    the  dissolution  is    to 
transfer  the  property  to  another  cor- 
poration.    Theis  V.  Spokane,  etc.  Co., 
34  Wash.  23  (1904).     A  majority  of  the 


stockholders  in  a  New  Jersey  corpora- 
tion cannot  dissolve  it  under  the  statute 
for  the  purpose  of  selling  the  assets  to  a 
Massachusetts  corporation,  inasmuch 
as  such  a  consolidation  is  not  author- 
ized by  the  New  Jersey  statutes. 
Riker  &  Son  Co.  v.  United  Drug  Co., 
79  N.  J.  Eq.  580  (1912),  rev'g  78  N.  J. 
Eq.  319  (1911).  A  depositor  in  a 
savings  bank  may  maintain  a  bill  in 
equity  to  prevent  dissolution  thereof, 
where  the  purpose  is  to  turn  over  the 
business  to  a  trust  company.  Barrett 
V.  Bloomfield  Sav.  Inst.,  64  N.  J.  Eq. 
425  (1903).  See  also  §  670,  infra. 
The  supreme  court  of  the  United 
States  has  decided  that  the  majority 
stockholders  have  no  right,  upon  dis- 
solution, to  sell  the  corporate  property 
to  a  new  corporation  for  stock  in  the 
latter,  and  then  say  to  the  minority  : 
."We  have  formed  a  new  company  to 
conduct  the  business  of  this  old  cor- 
poration, and  we  have  fixed  the  value 
of  the  shares  of  the  old  corporation. 
We  propose  to  take  the  whole  of  it  and 
pay  you  for  your  shares  at  that  valua- 
tion, unless  you  come  into  the  new  cor- 
poration, taking  shares  in  it  in  pay- 
ment of  your  shares  in  the  old  one.'* 
Mason  v.  Pewabic  Min.  Co.,  133  U.  S. 
50  (1890).  See  also  §  671,  infra. 
Where  the  articles  of  association  of  an 
unincorporated  joint-stock  association 
authorize  dissolution  at  any  time  upon 
the  vote  of  a  majority  in  interest,  such 
dissolution  may  be  had,  although  it 
is  for  the  purpose  of  transferring  all 
the  assets  to  a  foreign  corporation  for 
stock  of  the  latter,  the  privilege,  how- 
ever, being  given  to  each  stockholder 
to  receive  payment  in  cash  on  the  basis 
of  a  certain  valuation  of  the  assets 
which  valuation  is  fair  and  adequate 
Francis  v.  Taylor,  31  N.  Y.  Misc.  Rep. 
187  (1900) ;  aff'd,  52  N.  Y.  App.  Div. 
631.  For  an  article  on  the  power  of 
majority  stockholders  to  dissolve  a 
corporation  under  a  statute,  by  William 
H.  Fain,  see  XXV  Harvard  Law  Rev. 
(1912). 

1  People  V.  Hektograph  Co.,  10  Abb. 
N.  Cas.  3.58  (1882).  A  stockholder, 
who   has   been   induced   by   fraud    to 


1918 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  629. 


of  equity  will,  at  the  instance  of  the  latter,  enjoin  or  set  aside  the  dis- 
solution.^ A  dissolution  may  be  set  aside  where  the  corporation  con- 
cealed the  existence  of  a  large  claim  against  it  and  such  creditor  was 
not  aware  of  the  dissolution  proceedings.-  But  a  stockholder  who  has 
voted  for  dissolution  cannot  thereafter  complain  that  it  was  brought 
about  by  another  stockholder  having  directors  in  common  with  the 
dissolved  corporation.^  A  dissolution  cannot  be  attacked  collaterally 
on  the  ground  that  it  was  obtained  by  a  false  statement.^  Resignations 
of  all  the  officers  and  directors  in  order  to  have  a  receiver  appointed 
under  the  New  York  statute  and  wind  up  the  corporate  affairs,  are 
illegal.^ 

The  courts  of  one  state  cannot  dissolve  a  corporation  created  by  an- 
other state,®  but  may  appoint  a  receiver  of  the  corporate  assets  within 
the  jurisdiction.^     An  American  court  has  no  power  to  dissolve  an 


consent  to  a  dissolution,  may  hold 
the  guilty  parties  liable.  Vogt  v. 
Vogt,  119  N.  Y.  App.  Div.  518  (1907). 

1  Re  Beaujolais  Wine  Co.,  L.  R.  3 
Ch.  15  (1867) ;  Re  London,  etc.  Dis- 
count Co.,  L.  R.  1  Eq.  277  (1865). 
Not  even  a  statute  could  authorize 
the  court  to  dissolve  a  corporation  and 
appoint  a  receiver  on  the  application 
of  one  tenth  in  interest  of  the  stock- 
holders without  notice  to  the  others 
or  to  the  corporation.  Hettel  v.  First, 
etc.  Court,  30  Nev.  382  (1908).  In 
Stupart  V.  Arrowsmith,  3  Sm.  &  G. 
176  (1855),  a  bill  filed  by  a  share- 
holder on  behalf  of  himself  and  others 
to  set  aside  a  dissolution,  after  three 
years'  acquiescence,  no  fraud  or  im- 
position being  alleged,  was  dismissed 
with  costs.  Cf.  Kent  v.  Jackson,  2 
De  G.,  M.  &  G.  49  (1852) ;  Bailey's 
Appeal,  96  Pa.  St.  253  (1880),  where 
certain  stockholders  procured  the  dis- 
solution of  a  corporation  by  fraud. 
They  were  held  to  be  trustees  ex 
maleficio  for  the  bona  fide  stockholders, 
and  as  such  liable  to  account  to  them 
for  the  assets  of  the  company.  By 
statute  an  English  court  has  power  to 
declare  void  a  dissolution  which  is 
inequitable  towards  creditors  in  de- 
priving them  of  recourse  to  the  assets. 
Re  Spottiswoode,  Dixon  and  Hunting, 
Ltd.,  [1912]  1  Ch.  410. 

-  SuUivan  Co.  R.  R.  v.  Connecticut, 
etc.  Co.,  76  Conn.  464  (1904). 

^  Bijur  V.  Standard,  etc.  Co.,  74 
N.  J.  Eq.  546  (1908). 


^  Grossman  v.  Vivienda,  etc.  Co.,  150 
Cal.  575  (1907). 

5  Zeltner  v.  Zeltner,  etc.  Co.,  174 
N.  Y.  247  (1903). 

6  Baker  v.  Backus,  32  111.  79,  110 
(1863).  A  Canadian  court  has  no 
authority  to  wind  up  a  West  Virginia 
corporation  which  has  no  property, 
officer  or  agent  in  Canada  and  has 
not  transacted  business  there.  Matter 
of  Great  Northern,  etc.  Co.,  50  N.  Y. 
Misc.  Rep.  467  (1906).  A  Texas 
stockholder  in  a  New  Jersey  corpora- 
tion cannot  maintain  a  suit  in  Texas  to 
wind  up  the  company  and  distribute 
its  assets  where  dissolution  proceedings 
have  already  been  instituted  in  New 
Jersey.  Groom  v.  Mortimer  Land 
Co.,  192  Fed.  Rep.  849  (1912).  A 
suit  to  wind  up  the  affairs  of  the  com- 
pany must  be  instituted  in  the  state 
where  it  was  organized.  Miller  v. 
Hawkeye,  etc.  Co.,  137  N.  W.  Rep.  507 
(Iowa,  1912). 

^  See  §  865,  infra.  A  non-resident 
stockholder  in  a  non-resident  corpo- 
ration may  institute  suit  asking  that 
the  property  in  the  state  be  applied 
to  the  debts,  showing  that  otherwise 
it  would  be  lost  by  attachments  and 
by  the  extravagant  management  of 
the  officers.  Culver,  etc.  Co.  v.  Cul- 
ver, 81  Ark.  102  (1906).  A  Texan 
stockholder  in  an  Indiana  corporation, 
owning  land  in  Texas,  cannot  have  a 
receiver  appointed  in  Texas  on  the 
ground  that  preferred  stock  had  been 
fraudulently  issued  and  corporate  funds 


1919 


§  630.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


English  corporation  and  wind  up  its  business.  A  resolution  to  that 
effect  by  the  stockholders  may  be  declared  invalid.  But  the  American 
courts  will  not  enjoin  a  dissolution  and  winding  up  of  the  company  in 
England  in  accordance  with  P^nglish  laws.^  The  United  States  court 
has  jurisdiction  to  wind  up  an  insolvent  corporation  at  the  instance 
of  a  simple  creditor,  as  authorized  by  statute  of  the  state  in  which  the 
court  is  sitting.^ 

§  630.  There  has  been  some  doubt  whether  a  voluntary  dissolu- 
tion by  all  or  a  majority  of  the  stockholders  is  completed  by  a  mere 
vote  of  the  stockliolders,  or  whether  a  decree  of  a  court  is  needed  and 
is  sufficient ;  or  whether  a  legislative  acceptance  and  confirmation  of  the 
dissolution  is  essential.  The  better  opinion  is  that  the  resolution  of 
the  stockliolders  to  dissolve  will  effect  a  dissolution  only  after  the  legis- 
lature has  accepted  it  and  ordained  it,  or  a  court  duly  authorized  by 
statute  to  accept  a  voluntary  dissolution  has  entered  a  decree  to  that 
effect.^    Where  a  charter  expires  no  adjudication  of  dissolution  is  neces- 


diverted,  etc.,  the  purpose  of  the  bill 
being  to  wind  up  the  affairs  of  the  com- 
pany and  sell  its  property  and  pay  its 
debts.  American,  etc.  Co.  v.  Schuler, 
34  Tex.  Civ.  App.  560  (1904).  A 
judgment  creditor  of  a  foreign  corpora- 
tion may  maintain  a  creditor's  action 
to  conserve  its  property  within  the 
state  and  apply  it  to  the  payment  of 
claims.  Lehr  v.  Murphy,  136  Wis.  92 
(1908).  A  court  of  equity  has  no 
power  to  dissolve  or  appoint  a  re- 
ceiver of  a  solvent  foreign  corporation, 
even  though  there  is  dissension  among 
the  stockholders.  Pearce  v.  Suther- 
land, 164  Fed.  Rep.  609  (1908). 

1  Republican,  etc.  Mines  v.  Brown, 
58  Fed.  Rep.  644  (1893). 

2McGraw  v.  Mott,  179  Fed.  Rep. 
646  (1910).  A  suit  by  a  stockholder 
to  have  a  West  Virginia  corporation 
wound  up  under  the  West  Virginia 
statute  for  non-user  and  mismanage- 
ment was  sustained  in  Stevens  v. 
Empire,  etc.  Co.,  180  Fed.  Rep.  283 
(1910).  The  federal  court  of  equity 
has  no  authority  to  dissolve  a  West 
Virginia  corporation  under  a  statute 
of  that  state  authorizing  the  state 
court  to  decree  such  dissolution  on  the 
application  of  one  third  in  interest  of 
the  stockholders.  Hirsch  v.  Indepen- 
dent Steel  Co.,  196  Fed.  Rep.  104 
(1911),  distinguishing  cases  to  the 
contrary.    See  note  2,  p.  1921,  infra. 


'  Portland  Dry  Dock,  etc.  Co.  v. 
Trustees  of  Portland,  12  B.  Mon. 
(Ky.)  77  (1851);  La  Grange,  etc. 
R.  R.  t'.  Rainey,  7  Coldw.  (Tenn.)  420 
(1870) ;  Harris  v.  Muskingum  Mfg. 
Co.,  4  Blackf.  (Ind.)  267  (18.36); 
Town  V.  Bank  of  River  Raisin,  2 
Doug.  (Mich.)  530  (1847)  ;  Curien 
V.  Santini,  16  La.  Ann.  27  (1861); 
Norris  v.  Smith ville,  1  Swan  (Tenn.), 
164  (1851);  Bradt  v.  Benedict,  17 
N.  Y.  93,  99  (1858) ;  Boston  Glass  Mfy. 
V.  Langdon,  41  Mass.  49  (1841) ;  Wil- 
son V.  Central  Bridge,  9  R.  I.  590 
(1870) ;  Penobscot  Boom  Corp.  v. 
Lamson,  16  Me.  224  (1839) ;  Enfield 
Toll  Bridge  Co.  v.  Connecticut  River 
Co.,  7  Conn.  28,  45  (1828) ;  Mumma  v. 
Potomac,  etc.,  8  Pet.  281,  287.  A  cor- 
poration cannot  legally  dissolve  itself 
except  with  the  consent  of  the  state. 
In  re  North  American,  etc.  Co.,  99 
Minn.  475  (1906).  An  acceptance  by 
the  state  of  a  surrender  of  a  charter 
is  necessary  in  order  to  complete  a 
dissolution  by  voluntary  surrender. 
Atty.-Gen.  v.  Superior,  etc.  Ry.,  93 
Wis.  604  (1896).  A  mere  resolution 
of  the  stockholders  is  ineffectual. 
New  York,  etc.  Works  v.  Smith,  4 
Duer,  362  (1855);  Powell  v.  Ore- 
gonian  Ry.,  38  Fed.  Rep.  187  (1889). 
A  notice  of  the  resolution  sent  to 
the  governor  is  ineffectual.  Me- 
chanics'   Bank  v.  Heard,    37    Ga.  401 


1920 


CH.   XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  631. 


sary.^  A  federal  court  may  have  jurisdiction  of  a  suit  by  a  stockholder 
to  wind  up  an  insolvent  corporation,  as  allowed  by  a  state  statute.^ 

§  631.  Acts  which  do  not  constitute  dissolution.  —  There  are  certain 
acts  and  facts  which  do  not  in  themselves  constitute  a  dissolution.  A 
dissolution  is  not  effected  by  a  failure  to  elect  officers ;  ^   nor  by  a  sale 

(1867) ;  Revere  v.  Boston,  etc.  Co.,  32  power.  Conklin  v.  United  States,  etc. 
Mass.  351  (1834).  By  a  statute  the  Co.,  140  Fed.  Rep.  219  (1905).  See 
acceptance  may  be  made  by  a  proc-  note2,p.l920,supra.  203 Fed.  Rep. 858. 
lamation.  Campbell  v.  Mississippi  '  Quoted  and  approved  in  Elliott 
Union  Bank,  7  Miss.  625,  681  (1842).  v.  Sullivan  156  Mo.  App.  496  (1911). 
The  judgment  of  a  court  of  law  in  Speer  v.  Colbert,  200  U.  S.  130  (1906) ; 
such  a  case  is  ineffectual.  Chesa-'  Rose  v.  Turnpike  Co.,  3  Watts  (Pa.), 
peake,  etc.  Co.  v.  Baltimore,  etc.  46  (1834) ;  Lehigh  Bridge  Co.  v. 
R.  R.,  4  Gill  &  J.  (Md.)  1,  107  (1832).  Lehigh  Coal,  etc.  Co.,  4  Rawle  (Pa.), 
In  England  the  surrender  at  common  8,  23  (1832) ;  Commonwealth  v. 
law  was  to  the  king,  and  had  to  be  Cullen,  13  Pa.  St.  133  (1850) ; 
accepted  by  him  in  order  to  work  Hoboken  Building,  etc.  Assoc,  v. 
dissolution.  Rex  v.  Amery,  2  T.  R.  Martin,  13  N.  J.  Eq.  427  (1861); 
515,  531  (1788) ;  Rex  v.  Gray,  8  Mod.  Evarts  v.  Killingworth  Mfg.  Co.,  20 
358  (1825).  Cf.  Bruce  v.  Piatt,  80  Conn.  447  (1850) ;  Nashville  Bank 
N.  Y.  379  (1880).  A  voluntary  dissolu-  v.  Petway,  3  Humph.  (Tenn.)  522 
ticn  need  not  be  accepted  by  the  state.  (1842) ;  Boston  Glass  Mfy.  v.  Lang- 
Merchants',  etc.  Line  v.  Waganer,  71  don,  41  Mass.  49  (1841) ;  Russell  v. 
Ala.  581  (1882).  The  case  of  Web-  McLeUan,  31  Mass.  63  (1833) ;  Cahill 
ster  I'.  Turner,  12  Hun,  264  (1877),  v.  Kalamazoo,  etc.  Ins.  Co.,  2  Doug, 
can  be  upheld  only  in  connection  with  (Mich.)  124,  140  (1845) ;  Harris  v. 
§  631,  infra.  A  court  of  equity  has  no  Mississippi  Valley,  etc.  R.  R.,  51  Miss, 
power  to  accept  a  voluntary  surrender  602  (1875) ;  People  v.  Runkle,  9 
of  the  charter  of  a  corporation.  White  Johns.  147  (1812);  Philips  v.  Wick- 
V.  Davis,  134  Ga.  274  (1910).  State  ham,  1  Paige,  590  (1829);  Slee  v. 
V.  Foster,  225  Mo.  171  (1909).  See  Bloom,  5  Johns.  Ch.  366  (1821) ;  s.  c, 
also  cases  in  notes  supra,  to  effect  that  19  Johns.  456  (1822) ;  St.  Louis,  etc. 
a  court  cannot  decree  a  dissolution  at  Loan  Assoc,  v.  Augustin,  2  Mo.  App. 
the  instance  of  stockholders.  Many  123  (1876) ;  Knowlton  v.  Ackley,  62 
states  now  have  statutes  expressly  Mass.  93  (1851) ;  Mendota  v.  Thomp- 
giving  to  courts  such  authority.  The  son,  20  111.  197  (1858) ;  People  v. 
statutes  may  of  course  make  a  volun-  Wren,  5  111.  269  (1843).  Nor  will  a 
tary  dissolution  effectual  without  resignation  of  all  the  officers  dissolve 
legal  proceedings.  the     corporation.      Muscatine      Turn 

»  People  V.  James,  5  N.  Y.  App.  Div.  Verein  v.  Funck,  18  Iowa,  469  (1865) ; 

412    (1896),   holding  also   that  where  Evarts  v.   Killingworth  Mfg.   Co.,  20 

the  statute  provides  for  the  directors  Conn.     447     (1850).     The     corporate 

-winding  up  the  company  the  attorney-  rights  and   franchises   are,   in  such  a 

general  cannot  maintain  an  action  for  case,  merely  dormant  until  other  of- 

that  purpose  in  behalf  of  the  state.  ficers    are    elected.     Philips    v.    Wick- 

2  Briggs  V.  Traders'   Co.,   145  Fed.  ham,  1  Paige,  590  (1829).     Cf.  Lea  f. 

Rep.  254   (1906).     Where  by  a  state  American  Atlantic,  etc.  Canal  Co.,  3 

statute  a  stockholder   may  apply  for  Abb.   Pr.    (N.   S.)    1    (1867).     Failure 

dissolution    the   suit    may   be    in    the  to  elect  officers  does  not  dissolve  the 

federal    courts.     Jacobs     v.     Mexican  corporation  nor  terminate  the  term  of 

Sugar  Co.,  130  Fed.  Rep.  589  (1904).  office   of   existing   officers.     Youree   v. 

Even  though  by  statute  a  state  court  Home,  etc.  Co.,  180  Mo.  153  (1904). 

of  equity  is  given  power  to  dissolve  Failure  to  elect  directors  is  not  dis- 

a  corporation,  yet  the  United  States  solution.     Drake  v.  Herndon,  122  Ky. 

court  in  equity  cannot  exercise  this  206  (1906).  A  corporation  which  for  a 
(121)                      .                  1921 


§  631.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[c 


H.  XXXVIII. 


or  assignment  of  all  the  corporate  property ;  ^  nor  by  the  fact  that  one 
person  owns  all  the  shares  of  stock ;  ^  nor  by  a  cessation  of  all  corpo- 
rate business  and  acts ;  ^  nor  by  the  death  of  its  stockholders  ;  ^  nor  by 


long  time  was  abandoned  and  which  is 
unable  to  tell  who  its  stockholders  are 
may  file  a  bill  in  equity  to  ascertain 
who  its  stockholders  are  and  to  cancel 
illegal  certificates  and  determine  the 
rights  of  conflicting  claims  to  the  stock. 
Geneva,  etc.  Co.  v.  Steele,  111  N.  Y. 
App.  Div.  706  (1906). 

1  Quoted  and  approved  in  State  v. 
Mitchell,  104  Tenn.  336,  343  (1898) ; 
Barclay  v.  Talman,  4  Edw.  Ch.  123 
(1842)";  De  Camp  v.  Alward,  .52  Ind. 
468  (1876) ;  Reichwald  v.  Commercial 
Hotel  Co.,  106  111.  439  (1883) ;  Rollins 
I'.  Clay,  33  Me.  132  (1851);  Kansas 
City  Hotel  Co.  v.  Sauer,  65  Mo.  279 
(1877);  Troy,  etc.  R.  R.  v.  Kerr,  17 
Barb.  581  (1854),  where  a  railroad 
corporation  had  leased  the  entire 
property  to  another  corporation ; 
State  V.  Merchant,  37  Ohio  St.  251 
(1881) ;  Smith  v.  Gower,  2  Duv.  (Ky.) 
17  (1865).  To  same  effect.  State  v. 
Rives,  5  Ired.  L.  (N.  C.)  297  (1844) ; 
Bruffett  V.  Great  Western  R.  R.,  25 
111.  353  (1861).  A  corporation  con- 
tinues to  exist  even  though  it  has  sold 
all  its  property.  Tatum  v.  Lehigh,  136 
Ga.  791  (1911).  The  fact  that  the 
company  sells  its  property  and  that 
one  person  acquires  all  the  stock  does 
not  dissolve  the  corporation.  Parker 
i;.  Bethel  Hotel  Co.,  96  Tenn.  252 
(1896).  Even  though  all  the  prop- 
erty of  the  corporation  has  been  sold 
by  a  foreclosure  in  pais,  the  corpora- 
tion continues  in  existence,  but  is  not 
liable  for  the  negligence  of  a  lessee 
of  the  purchaser  at  such  foreclosure 
sale.  Williard  v.  Spartanburg,  etc. 
R.  R.,  124  Fed.  Rep.  796  (1903). 
Where  a  statute  provides  for  dissolu- 
tion by  transferring  all  the  corporate 
property  and  such  conveyance  is  made, 
this  in  itself  constitutes  dissolution. 
State  V.  Grant  University,  1 15  Tenn. 
238  (1905). 

2  See  §  709,  infra.  A  railroad  com- 
pany which  acquires  all  the  stock  of 


another  railroad  company  and  then 
files  a  certificate  with  the  secretary 
of  state  under  the  New  York  statute, 
which  prescribes  that  thereupon  the 
former  succeeds  to  the  property  of  the 
latter,  practically  dissolves  the  latter. 
Rochester  Railway  v.  Rochester,  205 
U.  S.  236  (1907),  aff'g  182  N.  Y.  116. 
'  Quoted  and  approved  in  EUiott 
V.  Sullivan,  156  Mo.  App.  496  (1911). 
Attorney-General  v.  Bank  of  Niagara, 
Hopk.  Ch.  403  (1825) ;  Harrington  v. 
Connor,  51  Neb.  214  (1897) ;  Baptist 
Meeting-house  v.  Webb,  66  Me.  398 
(1877);  Rollins  v.  Clay,  33  Me.  132 
(1851);  Harris  v.  Nesbit,  24  Ala.  398 
(1854);  Kansas  City  Hotel  Co.  v. 
Sauer,  65  Mo.  279,  288  (1877); 
Nimmons  v.  Tappan,  2  Sweeney 
(N.  Y.),  6.52  (1870);  Mickles  r. 
Rochester  City  Bank,  11  Paige,  118 
(1844);  State  v.  Barron,  58  N.  H. 
370  (1878) ;  Re  Jackson  M.  Ins.  Co., 
4  Sandf.  Ch.  559  (1847) ;  West  v.  Caro- 
lina, etc.  Co.,  31  Ark.  476  (1876); 
Baehe  v.  Horticultural  Soc,  10  Lea 
(Tenn.),  436  (1882);  Brandon  Iron 
Co.  V.  Gleason,  24  Vt.  228  (1852); 
Atlanta  v.  Gate,  etc.  Co.,  71  Ga.  106 
(1883) ;  Law  v.  Rich,  47  W.  Va.  634 
(1900).  Mere  non-user  does  not  dis- 
solve a  corporation.  A  proceeding  in 
behalf  of  the  state  is  first  necessary. 
Bloch  V.  O'Connor,  etc.  Co.,  129  Ala. 
528  (1900).  Dissolution  may  exist  by 
cessation,  etc.,  so  far  as  the  reversion 
of  property  given  to  the  coporation 
is  concerned.  Stone  v.  Framingham, 
109  Mass.  303  (1872).  A  cessation  of 
business  with  the  understanding  that 
the  company  is  dissolved,  the  property 
having  been  transferred  to  the  stock- 
holders, does  not  work  a  dissolution. 
Suits  may  be  instituted  against  the 
company.  Carnaghan  v.  Exporters', 
etc.  Co.,  11  N.  Y.  Supp.  172  (1890). 
A  foreclosure  sale  of  all  the  property 
and  franchises  of  a  corporation  will 
close  out  and  foreclose  the  whole  in- 


*  Boston  Glass  Mfy.  v.  Langdon,  41  Mass.  49,  52   (1841) 
Lellan,  31  Mass.  63,  69  (1833). 

1922 


Russell  V.  Mc- 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  631. 


insolvency ;  ^  nor,  in  all  cases,  by  a  consolidation  with  another  corpora- 
tion under  statutory  authority.-  Nor  is  it  dissolved  by  the  appoint- 
ment of  a  receiver,^  or  the  foreclosure  of  a  mortgage,^  nor  by  failure  to 
file  reports.^  The  fact  that  there  are  less  stockholders  than  the  charter 
requires  does  not  invalidate  the  acts  of  the  corporation.^  For  certain 
purposes,  however,  such  as  rendering  stockholders  liable  on  their  statu- 
tory liability,^  or  relieving  directors  from  a  penal  liability,^  dissolution 
is  held  to  arise  by  some  of  these  acts.^  Failure  to  pay  an  incorporation 
fee  to  the  state  does  not  forfeit  a  charter,  even  though  the  statute  pro- 
hibits it  from  doing  business  until  such  fee  is  paid.^°  A  foreign  business 
corporation  doing  business  in  Colorado  ceases  to  be  a  corporation  in 
that  state  after  twenty  years,  even  though  by  its  charter  it  was  to  exist 
fifty  years,  the  Colorado  statutes  allowing  incorporation  for  twenty 
years  only.^^ 


terest  of  the  stockholders  therein. 
Vatable  v.  New  York,  etc.  R.  R.,  96 
N.  Y.  49  (1884) ;  Thornton  i;.  Wabash 
Ry.,  81  N.  Y.  462,  467  (1880).  See 
also  SuUivan  v.  Portland,  etc.  R.  R., 
94  U.  S.  806  (1876).  As  to  reorganiza- 
tion, see  eh.  LII,  irifra. 

^  Stolze  V.  Manitowoc,  etc.  Co.,  100 
Wis.  208  (1898);  Geneva,  etc.  Co.  v. 
Coursey,  45  N.  Y.  App.  Div.  268 
(1899);  Moseby  v.  Burrow,  52  Tex. 
396  (1880);  Valley  Bank,  etc.  Inst. 
f;.  Sewing  Soc,  28  Kan.  423  (1882). 
Such  is  the  case  though  a  receiver 
has  been  appointed.  State  v.  Mer- 
chant, 37  Ohio  St.  251  (1881) ;  National 
Bank  v.  Insurance  Co.,  104  U.  S.  54 
(1881);  Kincaid  v.  Dwinelle,  59 
N.  Y.  548  (1875).  The  insolvency  of 
a  corporation  and  the  appointment  of 
a  receiver  do  not  constitute  dissolu- 
tion. Chemical  Nat.  Bank  v.  Hart- 
ford Deposit  Co.,  161  U.  S.  1  (1896). 

2  See  ch.  LIII,  infra. 

^  The  appointment  of  a  receiver 
does  not  dissolve  a  corporation. 
Nothing  but  the  expiration  of  the 
charter  or  the  judgment  of  a  court 
can  do  that.  Hasselman  v.  Japanese, 
etc.    Co.,    2    Ind.    App.    180    (1891). 

«  Smith  V.  Gower,  2  Duv.  (Ky).  17 
(1865);  White,  etc.  R.  R.  v.  White, 
etc.  R.  R.,  50  N.  H.  50  (1870).  In 
Pennsylvania  it  seems  to  be  held  that 
the  foreclosure  sale  of  all  the  assets 
of  the  company  extinguishes  the  com- 
pany itself.  Reynolds  v.  Cridge,  1  Pa. 
Dist.  693  (1892) ;    New  Castle  North- 


ern Ry.  V.  New  Castle,  etc.  R.  R.,  1 
Pa.  Dist.  768  (1892).  Where  a  rail- 
road company's  property  has  been 
foreclosed,  and  for  twenty-six  years 
it  has  owned  no  property  and  kept 
up  no  existence,  it  wiU  be  presumed 
to  have  been  dissolved,  and  service 
upon  it  wiU  be  set  aside.  Combes 
V.  Keyes,  89  Wis.  297  (1895).  A 
corporation  is  not  dissolved  by  the 
fact  that  it  has  lost  all  its  property. 
Weigand  v.  Alliance  Supply  Co.,  44 
W.  Va.  133  (1897).  A  corporation 
is  not  dissolved  by  reason  of  its  prop- 
erty being  sold  out  under  a  mortgage. 
Bump  V.  Butler  County,  93  Fed.  Rep. 
290  (1899). 

*  Failure  to  file  a  report  does  not 
work  a  forfeiture  of  the  charter. 
State  V.  Brownstown,  etc.  Co.,  120  Ind. 
337  (1889). 

^  Welch  V.  Importers',  etc.  Bank, 
122  N.  Y.  177  (1890).  The  facts  that 
the  corporate  officers  are  dead,  and  the 
number  of  stockholders  is  less  than  the 
number  required  for  incorporation,  do 
not  dissolve  the  corporation.  Re 
Belton,  47  La.  Ann.  1614  (1895). 

'  See  Slee  v.  Bloom,  19  Johns.  456 
(1822),  and  §  219,  supra.  Cf.  Bradt 
V.  Benedict,  17  N.  Y.  93  (1858). 

8  Loseer.BuIlard,79N.Y.404  (1880). 

'  Quoted  and  approved  in  Elliott 
V.  Sullivan,  156  Mo.  App.  496  (1911). 

10  Murphy  v.  Wheatley,  102  Md.  501 
(1896). 

"  Iron,  etc.  Co.  v.  Cowie,  31  Colo. 
450  (1903). 


1923 


632. 


DISSOLUTION,    FORFEITURE,    ETC. 


[cH.  XXXVIII. 


§  632.  Only  the  attorney-general  is  authorized  to  institute  a  suit 
to  forfeit  a  corporate  charter.  —  Such  unquestionably  is  the  law.  It 
is  for  the  state  alone  to  withdraw  the  charter  which  the  state  has  given. 
A  stockliolder  cannot  institute  the  suit ;  ^  nor  a  corporate  creditor ;  ^ 
nor  can  the  municipal  authorities  by  reason  of  a  change  of  route  by 
a  railroad ;  ^  nor  can  a  person  who  is  overcharged  on  a  turnpike  bring 
suit  to  forfeit  the  company's  charter.^  In  a  suit  in  equity  by  a  toll 
road  company  to  enjoin  the  municipality  from  interfering  with  the 
erection  of  its  gates  and  fence,  its  franchise  cannot  be  declared  forfeited.^ 
The  secretary  of  state  cannot  forfeit  a  charter,  even  though  the  statute 
prescribes  forfeiture  for  non-payment  of  taxes ;  ^  but  it  is  constitutional 
to  provide  by  statute,  as  is  the  case  in  New  Jersey,  that  the  charter  and 
all  corporate  powers  shall  be  void  and  cease  upon  the  non-payment  of 
taxes. ^  A  stockholder  in  a  corporation  cannot  sustain  a  bill  to  have  the 
charter  forfeited  and  the  corporation  wound  up  on  the  ground  that  it 
was  formed  to  purchase  and  combine  various  competing  linseed-oil 
mills  for  the  purpose  of  forming  a  monopoly.  The  state  alone  can 
ask  for  such  a  forfeiture.  Moreover,  the  stockholder,  by  being  a 
stockholder,  is  estopped  from  complaining,  and  is  presumed  to  have 
had  knowledge  of  the  facts  from  the  time  that  he  became  a  stock- 


1  North  V.  State,  107  Ind.  356 
(1886);  Baker  v.  Backus,  32  111.  79 
(1863) ;  Commonwealth  v.  Union  Ins. 
Co.,  5  Mass.  230  (1809);  State  v. 
Paterson,  etc.  Turnp.  Co.,  21  N.  J.  L. 
9  (1847) ;  Murphy  v.  Farmers'  Bank, 
20  Pa.  St.  415  (18.53);  Rice  v.  Na- 
tional Bank,  126  Mass.  300  (1879); 
Folger  V.  Columbian,  etc.  Ins.  Co.,  99 
Mass.  267  (1868),  where  the  court 
refused  to  recognize  a  dissolution  de- 
creed by  a  New  York  court  at  the 
instance  of  a  stockholder ;  Raisbeck 
V.  Oesterrieher,  4  Abb.  N.  Cas.  444 
(1878),  where  the  plaintiff  claimed 
that  the  incorporation  was  irregular. 

-  Gaylord  v.  Fort  Wayne,  etc.  R.  R., 
6  Biss.  286  (1875) ;  s.  c,  10  Fed.  Cas. 
121.  A  judgment  forfeiting  the  char- 
ter of  a  private  corporation,  where 
the  state  is  not  a  party  to  the  suit, 
is  a  nullity.  Pickett  v.  Abney,  84 
Tex.  645  (1892). 

3  Moore  v.  Brooklyn,  etc.  R.  R.,  108 
N.  Y.  98  (1888). 

*  Commonwealth  v.  Allegheny 
Bridge  Co.,  20  Pa.  St.  185  (1852)  : 
State  V.  White's,  etc.  Co.,  3  Tenn.  Ch. 
164  (1876),  where  the  bill  purported 
to  be  in  the  attorney-general's  name. 


A  shipper  of  freight  cannot  by  bill 
in  equity  compel  a  canal  company 
to  repair  and  render  its  canal  navi- 
gable. Only  the  state  can  complain. 
Buck,  etc.  Co.  v.  Lehigh,  etc.  Co.,  50 
Pa.  St.  91  (1865).  The  statutes  of  a 
state,  however,  sometimes  change 
these  rules  of  law. 

^  Bridge  Street,  etc.  Co.  v.  Hoga- 
done,  150  Mich.  638  (1908). 

6  Fox  V.  Bobbins,  62  S.  W.  Rep.  815 
(Tex.  1901).  The  secretary  of  state 
has  no  inherent  power  to  forfeit  a 
charter  for  non-payment  of  taxes. 
Rippstein  v.  Haynes,  etc.  Ry.,  85 
S.  W.  Rep.  314  (Tex.  1905).  A  statute 
of  West  Virginia  stating  that  char- 
ters shall  be  forfeited  if  corporate 
taxes  are  not  paid  does  not  authorize 
the  secretary  of  state  to  declare  cor- 
porate charters  forfeited.  Forfeiture 
can  be  made  only  in  a  suit  by  the 
state  brought  for  that  purpose.  Green- 
brier Lumber  Co.  v.  Ward,  30  W.  Va. 
43  (1887). 

^  See  General  Corporation  Act  of 
New  Jersey,  L.  1896,  p.  319.  As  to 
such  a  provision  being  self-executing, 
see  §  638,  infra. 


1924 


CH.   XXXVIII 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  633. 


holder.^  Where  a  public  corporation,  vested  with  state  property  for 
pubHc  use,  makes  a  lease  of  it  which  is  ultra  vires,  a  private  person 
cannot  sustain  a  suit  to  contest  it ;  this  can  be  done  only  by  the  state 
or  the  corporation.-  The  attorney-general  has  inherent  power  from 
his  office  to  institute  a  quo  warranto  proceeding  against  a  corpora- 
tion abusing  or  misusing  its  franchise.^ 

§633.  Forfeiture  for  misuser — Acts  which  constitute  a  mis- 
user —  Ultra  vires  acts  and  usurpation  of  franchises.  —  The  law  is 
clear  that,  if  a  corporation  misuses  its  powers,  the  state  may  by  a 
suit  withdraw  the  charter  which  it  has  given.  Great  difficulty,  however, 
arises  in  determining  what  constitutes  a  misuser.  A  clear  idea  can  be 
obtained  only  by  a  study  of  the  cases  themselves.^    One  of  the  most 


^  Coquard  v.  National  L.  0.  Co.,  171 
lU.  480  (1898). 

^  Directors,  as  such,  of  such  cor- 
poration, cannot  sustain  such  a  suit. 
Smith  V.  Cornelius,  41  W.  Va.  59 
(1895). 

2  Attorney-General  v.  New  York, 
etc.  R.  R.,  197  Mass.  194  (1908). 

*  A  corporation  organized  to  manu- 
facture railway  cars  has  no  power  to 
lay  out  a  town  around  its  works  and 
build  twenty-two  hundred  homes  to 
lease  to  its  employees,  to  build  and 
run  a  hotel  and  saloon,  and  also  a 
theater,  a  gas  plant,  a  system  of  water- 
works and  a  brick  plant,  and  to  own 
and  run  a  farm  for  supplies  to  sell,  and 
for  its  employees,  and  to  own  stock 
in  other  corporations  manufacturing 
and  selling  bar  iron  and  railroad 
spikes ;  but  may  erect  an  office  build- 
ing containing  more  space  than  it  re- 
quires at  the  time,  and  may  purchase 
more  real  estate  than  it  actually  re- 
quires at  the  time,  and  may  supply 
liquor,  etc.,  to  passengers  on  its  cars, 
and  may  sell  surplus  steam  power. 
The  state  may  bring  quo  warranto 
proceedings  to  forfeit  the  charter.  It 
is  no  defense  that  the  usurpations 
had  continued  for  many  years  to  the 
knowledge  of  the  state,  or  that  a 
legislative  committee  had  reported 
that  the  real  estate  was  properly 
taxed.  People  v.  Pullman's  Palace 
Car  Co.,  175  111.  125  (1898).  The 
state  may  forfeit  a  charter  for  a  failure 
of  the  officers  to  file  the  annual  report 
and  of  the  stockholders  to  pay  in  the 
capital  stock  as  required  by  statute. 


It  is  immaterial  that  the  state's  action 
was  induced  by  parties  who  were 
themselves  responsible  for  the  failure 
to  comply  with  the  statute.  People 
V.  Buffalo,  etc.  Co.,  131  N.  Y.  140 
(1892).  It  is  cause  for  forfeiture 
that  some  of  the  directors,  all  of 
whom  were  required  to  be  stockholders, 
held  but  one  share  each,  the  certifi- 
cates for  which  shares  were  trans- 
ferred back  at  once  to  the  real  parties 
in  interest,  thus  leaving  the  directors 
disqualified ;  also  that  required  cer- 
tificates had  not  been  filed ;  also  that 
annual  elections  had  not  been  held ; 
also  that  the  corporation  had  done 
business  xdtra  vires.  But  unless  pub- 
lic interest  so  requires,  the  attorney- 
general  should  not  bring  suit  at  his 
own  instance.  Lorillard  v.  Clyde,  142 
N.  Y.  456  (1894).  A  water-works 
charter  may  be  forfeited  where  it  wil- 
fully and  persistently  charges  more  for 
water  than  its  charter  specifies.  State 
V.  New  Orleans,  etc.  Co.,  107  La.  1 
(1901).  See  s.  c,  185  U.  S.  336.  A 
gas  charter  will  not  be  forfeited  be- 
cause some  of  the  customers  use  it 
also  for  heating.  People  v.  Los 
Angeles,  etc.  Co.,  150  Cal.  557 
(1907). 

In  the  case  State  v.  Hogan,  163 
Mo.  43  (1901),  it  was  held  that  an 
option  to  buy  a  mine  is  not  property 
for  which  stock  may  be  issued,  under 
the  constitution  and  statutes  of  the 
state  of  Missouri,  there  being  no  proof 
that  the  person  giving  the  option 
owned  it.  Hence  where  $90,000  of 
stock  was  issued  for  the  option  and 


1925 


§  633. 


DISSOLUTION,    FORFEITURE,    ETC. 


[cH.  XXXVIII. 


frequent  uses  of  quo  warranto  during  the  past  twenty  years  has  been 
in  destroying  combinations  in  restraint  of  trade,  especially  where  there 

for  services  in  inspecting  the  mine,  were  forfeited  if  deferred  payments 
and  $30,000  of  the  stock  was  turned  were  not  made,  and  that  they  pro- 
back  for  treasury  stock,  the  court  vided  for  cancellation  at  fifty  per 
held  that  the  state  might  maintain  cent,  on  the  amount  paid,  and  that 
a  bill  to  forfeit  the  charter.  The  de-  they  were  redeemable  in  numerical 
cision  of  the  Virginia  courts  forfeit-  order  in  six  years  and  that  it  would 
ing  the  charter  of  a  club  because  it  be  impossible  for  the  company  to  pay 
violated  the  liquor  laws  is  valid,  even  them.  The  same  conclusion  was 
though  the  liquor  laws  were  passed  reached  in  State  v.  Louisiana,  etc.  Co., 
after  the  charter  had  been  granted  to  51  La.  Ann.  1795  (1899).  Where  a 
the  club.  Cosmopolitan  Club  v.  Vtr-  corporation  is  authorized  to  com- 
ginia,  208  U.  S.  378  (1907).  The  menee  business  only  when  $100,000  of 
decision  of  the  supreme  court  in  stock  has  been  subscribed,  and  it  does 
Missouri  to  the  effect  that  a  Missouri  commence  business  prior  to  such  sub- 
corporation  had  forfeited  its  charter  seription  being  made,  the  state  may 
by    non-user    and    misuser  under  the  file  a  bill  to  forfeit  its  charter.     State 


laws  of  that  state  in  a  proceeding 
instituted  by  the  attorney-general,  will 
not  be  reviewed  by  the  supreme  court 
of  the  United  States.  Delmar,  etc. 
Club  V.  Missouri,  210  U.  S.  324  (1908). 


V.  Debenture,  etc.  Co.,  51  La.  Ann. 
1874  (1899).  In  the  case  State  v. 
Portage  City,  etc.  Co.,  107  Wis.  441 
(1900),  the  court  stated  that  a  con- 
tract   between   a    city    and    a    water- 


Under  the  statutes  of  Alabama  in  works  company,  giving  to  the  latter 
reference  to  watered  stock,  quo  ivar-  the  right  to  use  the  streets  for  its 
ranto  lies  where  $1,000,000  of  stock  water  pipes,  was  a  franchise,  and 
is  issued  for  the  possibility  of  patents  that  quo  warranto  would  lie  to  forfeit 
to  be  thereafter  granted.  In  such  quo  such  franchise  for  failure  to  supply 
warranto  proceedings  stockholders  water  in  accordance  with  its  terms. 
need   not  be  made  parties.     State   v.  Where    an    unauthorized    lease    of 

Webb,  97  Ala.  HI  (1893).  A  charter  competing  lines  has  been  made,  the 
of  a  consolidated  street  railway  com-  state  may  forfeit  the  charter  of  the 
pany  will  not  be  forfeited  merely  be-  lessor  and  cause  a  receiver  of  the 
cause  the  common  stockholders  in  the  charter  to  be  appointed,  and  such  pro- 
old  company  received  six  shares  of  ceedings  will  lie  even  six  years  after 
stock  in  the  new  for  every  share  they  the  lease  has  been  made.  Eel  River 
have  in  one  of  the  old  companies,  and  R.  R.  v.  State,  155  Ind.  433  (1900). 
the  stock  and  bonds  were  increased  The  state  cannot  oust  a  foreign  rail- 
thereby  over  $2,000,000.  State  v.  road  corporation  from  operating  a 
Lincoln  Traction  Co.,  90  Neb.  535  railroad  in  the  state  on  the  ground 
(1912).  In  the  case  State  v.  New  that  the  railroad  in  the  state  had 
Orleans,  etc.  Co.,  51  La.  Ann.  1827  been  leased  to  the  foreign  company 
(1899),  the  subscribers  to  the  stock  of  a  without  the  consent  of  the  stock- 
debenture  company  paid  ninety-five  holders,  as  required  by  statute,  it  ap- 
per  cent,  of  their  subscription  by  bor-  pearing  that  such  stockholders  did  not 
rowing  that  amount  from  the  company  object.  Louisville  &  N.  R.  R.  v.  State, 
on  their  notes,  and  thereupon  full-paid  154  Ala.  156  (1907).  In  quo  warranto 
stock  was  issued  to  them,  although  the  against  a  turnpike  company  the  burden 
statute  prohibited  the  issue  of  stock  of  proof  is  on  the  company  to  prove  its 
until  paid  for.  The  state  brought  suit  title,  and  deeds  from  other  companies 
to  set  aside  the  charter  and  liquidate  without  seals  and  not  acknowledged  as 
the  company.  The  court  held  that  corporate  deeds  are  insufficient. 
under  the  constitution  of  Louisiana  Lyons,  etc.  Co.  v.  People,  29  Col.  434 
the  incorporation  was  illegal.  The  (1902).  The  charter  of  a  plank-road 
court  held  also  that  the  charter  was  company  for  failure  to  keep  the  road 
illegal,  in   that   the  debentures   issued    in   repair    was    forfeited    in    the    case 

1926 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  633. 


has  been  a  violation  of  the  anti-trust  statutes  of  the  various  states. 
The  remedy  of  the  United  States  government  in  such  cases  is  a  bill  of 


People  V.  Detroit,  etc.  Co.,  131  Mich. 
30  (1902).  For  failure  to  keep  a  part 
of  its  road  in  repair,  or  to  rebuild  a 
burned  bridge,  or  for  abandoning  a 
part  of  its  road,  a  plank-road  com- 
pany's charter  may  be  forfeited.  Peo- 
ple V.  Plainfield,  etc.  Co.,  10.5  Mich.  9 
(1895).  The  charter  of  a  water-works 
company  may  be  forfeited  when,  in 
violation  of  its  charter,  it  does  not  fur- 
nish pure  water  and  does  not  increase 
its  source  of  supply.  It  is  no  defense 
that  the  municipality  had  elected  to 
take  over  the  property  as  pro^aded 
in  the  original  ordinance,  or  that  the 
municipality  had  the  right  to  annul 
the  contract  between  the  municipality 
and  the  company.  Capital  City  Water 
Co.  V.  State,  105  Ala.  406  (1894).  To 
a  qtio  warranto  to  forfeit  a  water- 
works charter  because  it  failed  to 
supply  sufficient  water,  it  is  no  an- 
swer that  the  company  had  intended 
to  enlarge,  but  had  not  done  so  be- 
cause the  city  had  declared  its  inten- 
tion to  exercise  its  option  to  buy  the 
works.  State  v.  Capital  City  Water 
Co.,  102  Ala.  231  (1894).  It  has  been 
held  to  be  misuser  to  file  a  false  cer- 
tificate that  the  capital  stock  has  been 
paid  up,  Eastern,  etc.  Co.  v.  Regina, 
22  Eng.  L.  &  Eq.  328  (1853) ;  or  to 
establish  a  branch  bank  where  the 
charter  authorizes  only  a  principal 
banking  place.  People  i'.  Oakland 
County  Bank,  1  Doug.  (Mich.)  282 
(1843) ;  or  for  an  insurance  companj' 
to  take  risks  which  it  cannot  pay 
if  required,  Ward  v.  Farwell,  97  111. 
593  (1881);  or  for  taking  "grave- 
yard" insiu-ance,  State  v.  Central,  etc. 
Assoc,  29  Ohio  St.  399  (1876),  the 
person  receiving  the  insurance  hav- 
ing no  insurable  interest  in  the  per- 
son insured ;  or  for  not  keeping  tracks 
in  a  condition  required  by  the  char- 
ter. State  V.  Madison  Street  Ry.,  72 
Wis.  612  (1888) ;  or  for  a  canal  com- 
pany to  allow  the  canal  to  become 
out  of  repair,  State  v.  Pennsylvania, 
etc.  Canal  Co.,  23  Ohio  St.  121  (1872) ; 
or  for  a  ferry  company  to  be  guilty 
of  the  same  neglect.  State  v.  Council 
Bluffs,  etc.  Co.,  11  Neb.  354  (1881); 


or  for  filing  false  and  fraudulent  ar- 
ticles of  association.    State  v.    Bailey, 
16  Ind.  46   (1861),  holding  also  that 
mere  insolvency  is   no  cause  for  for- 
feiture ;   or  for  accepting  subscriptions 
by    persons    who    are  notoriously  in- 
solvent, Holman  v.  State,  105  Ind.  569 
(1885) ;    or  for  a  failure  of  a  river- 
improvement    company    to    make    an 
improvement    as    commanded    by    a 
statute.   People  v.   Improvement  Co., 
103  111.  491  (1882) ;    or  for  a  bank  to 
loan   to   its   directors   in   \aolation   of 
a   statute,    Bank   Com'rs   v.   Bank   of 
Buffalo,  6  Paige,  497   (1837) ;    or  for 
a    charitable     corporation     to     divide 
with  a  lobbyist  an  appropriation  ob- 
tained   from    the     legislature.    People 
V.  Dispensary,  etc.  Soc,  7  Lans.  304 
(1873) ;    or  for  an  insurance  company 
to    insure   in   a   manner   contrary    to 
statute    and    to    delay    payments    of 
losses,  State  v.  Standard,  etc.  Assoc, 
38  Ohio  St.  281    (1882);    for  a  bank 
to  contract  debts  beyond  the  charter 
limits,  and  to  make  dividends  before 
resuming  specie  payments.  State  Bank 
V.  State,   1  Backf.   (Ind.)  267   (1823); 
or    for    persistently     taking     usurious 
interest.   Commonwealth   v.   Commer- 
cial   Bank,    28    Pa.    St.    383    (1857); 
State  V.  Commercial  Bank,  33  Miss. 
474    (1857) ;     or   for   a    mutual   relief 
association  to  be  run  for  the  benefit 
of  its  officers  only.  State  t'.  People's, 
etc  Assoc,  42  Ohio  St.   579   (1885); 
or  for  a  bank  to  suspend  specie  pay- 
ments. State  V.  Bank  of  South  Caro- 
lina, 1  Spears,  L.  (S.  C.)  433  (1841) ; 
Commercial  Bank  v.   State,    14  Miss. 
599  (1846) ;   but  see  State  v.  New  Or- 
leans,   etc.    Co.,    2    Rob.     (La.)    529 
(1842) ;    or  for   a   turnpike   company 
to  allow  its  road  to  be  out   of  repair, 
Washington,  etc  T.  Co.  v.  State,   19 
Md.  239  (1862);    Coon  i'.  Plymouth, 
etc.  Co.,  32  Mich.  248  (1875) ;   Darnell 
t'.   State,   48  Ark.  321    (1887);    State 
V.  Pawtucket,  etc.  Corp.,  8  R.  I.  182 
(1865),  where  the  company  neglected 
a  part  of  its  road  which  it  had  sold 
to  a  mimicipality.     Not  every  neglect 
is  fatal.     The  question  is  for  the  jury. 
People  V.  Royalton,  etc.  Turnp.  Co., 


1927 


§  633.] 


DISSOLUTION,    FORFEITURE,    ETC. 


CH.  XXXVIII. 


injunction,  inasmuch  as  the  charters  of  these  great   corporations  are 
granted  by  the  different  states,  but  where  a  state  itself  attacks  a  corpo- 


11  Vt.  431  (1839).  And  it  is  no  de- 
fense to  forfeiture  for  neglect  that 
the  road  has  been  sold  on  an  execu- 
tion sale.  Commonwealth  v.  Tenth, 
etc.  Turnp.  Co.,  59  Mass.  509  (1850). 
Nor  is  it  a  defense  that  the  state  has 
authorized  a  competing  line.  Turn- 
pike Co.  V.  State,  3  Wall.  210  (1865). 
In  State  v.  Essex  Bank,  8  Vt.  489 
(1836),  the  court  refused  to  decree 
a  forfeiture,  since  the  public  were  not 
injured,  though  the  corporation  was 
clearly  guilty  of  misuser.  If  a  gas 
company  is  ordered  by  a  municipality 
imder  a  statutory  power  to  reduce  the 
price  of  gas,  it  may  defend  against 
forfeiture  for  non-compliance  by  as- 
serting that  the  municipality  was 
fraudulently  induced  to  act.  State  v. 
Cincinnati,  etc.  Co.,  18  Ohio  St.  262 
(1868).  If  a  company  has  incorpo- 
rated under  a  general  act,  but  for 
a  purpose  not  authorized  by  it,  a 
suit  for  forfeiture  lies.  State  v.  Beck, 
81  Ind.  501  (1882),  where  a  turnpike 
company  incorporated  to  purchase 
turnpikes,  a  purpose  not  authorized 
by  the  statute.  The  state  may  create 
causes  for  the  forfeiture  of  insurance 
companies'  charters.  Chicago,  etc. 
Ins.  Co.  V.  Needles,  113  U.  S.  574 
(1885).  Where  the  state  sues  to  for- 
feit the  charter  of  a  railroad  company 
which  has  leased  its  road,  the  latter 
cannot  institute  a  suit  to  test  the 
validity  of  that  lease.  Ogdensburgh, 
etc.  R.  R.  V.  Vermont,  etc.  R.  R.,  4 
Hun,  712  (1875) ;  s.  c,  63  N.  Y.  176. 
If  quo  warranto  is  brought  for  not 
making  reports,  the  corporation  may 
offer  to  make  the  reports.  State  v. 
Barron,  57  N.  H.  498  (1876);  s.  c, 
58  N.  H.  370.  By  statute,  forfeiture 
may  be  decreed  where  the  court  de- 
cides that  a  continuance  of  business 
by  an  insurance  company  will  be 
hazardous  to  the  community.  Ward 
V.  Farwell,  -97  111.  593  (1881).  The 
legislature  cannot  amend  a  charter 
by  forfeiting  the  charter  if  specie  pay- 
ments are  not  made  within  a  specified 
time.  State  v.  Tombeckbee  Bank,  2 
Stew.  (Ala.)  30  (1829).  It  cannot 
provide    that    charters    shall    be    for- 


feited for  non-payment  of  corporate 
obligations  so  far  as  corporations 
existing  before  the  statute  are  con- 
cerned. Aurora,  etc.  Co.  v.  Holt- 
house,  7  Ind.  59  (1855).  But  it  may 
prescribe  that  the  charter  be  repealed 
unless  within  a  certain  time  the  com- 
pany do  certain  things  —  here  make 
good  its  capital.  Lothrop  v.  Stedman, 
42  Conn.  583  (1875).  And  may  force 
the  dissolution  of  insolvent  insurance 
corporations,  or  corporations  whose 
continuance  of  business  wiU  be  dan- 
gerous to  the  public.  Ward  v.  Far- 
weU,  97  111.  593  (1881);  Chicago 
Life  Ins.  Co.  v.  Auditor,  101  111.  82 
(1881).  So  also  as  to  banks.  The 
remedy  "for  a  violation  of  duty  may 
be  altered  and  changed  by  legislative 
provisions  if  the  power  of  accomplish- 
ing the  same  objects  by  any  means  is 
within  the  legitimate  scope  of  legis- 
lative authority."  Commonwealth  v. 
Farmers',  etc.  Bank,  38  Mass.  542 
(1839).  Quo  warranto  does  not  lie 
against  a  corporation  for  ultra  vires 
acts,  such  as  issuing  watered  stock  or 
purchasing  its  own  stock.  "Acts  in 
excess  of  power  may  undoubtedly  be 
carried  so  far  as  to  amount  to  a  mis- 
user of  the  franchise  to  be  a  corpo- 
ration and  a  ground  for  its  forfeiture." 
The  courts  refuse  to  define  what  ultra 
vires  acts  will  and  what  will  not  sus- 
tain quo  warranto  proceedings.  They 
must  be  acts  which  "so  derange  or 
destroy  the  business  of  the  corporation 
that  it  no  longer  fulfills  the  end  for 
which  it  was  created."  State  v. 
Minnesota,  etc.  Co.,  40  Minn.  213 
(1889).  A  suit  by  a  state  to  enjoin 
the  defendant  railroad  company  from 
being  managed  by  directors  elected  by 
the  votes  of  stock  of  the  company 
owned  by  a  foreign  railroad  corpora- 
tion ultra  vires,  and  also  to  declare  such 
votes  and  elections  void,  and  also  for  a 
receiver,  or  in  lieu  of  all  this  for  a  for- 
feiture of  the  charter,  is  not  demurrable. 
State  V.  Port  Royal,  etc.  Ry.,  45  S.  C. 
470  (1895). 

The  following  acts  and  facts  do  not 
constitute  a  misuser :  Where,  eight 
years    after    the    organization    of    a 


1928 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  633. 


ration  for  having  violated  the  laws  against  combinations,  the  remedy  is 
generally  a  quo  warranto  proceeding.^ 


water-works  company,  the  attorney- 
general  applies  for  leave  to  bring  suit 
to  forfeit  the  charter  on  account  of 
the  issue  of  watered  stock  and  bonds, 
and  of  violations  of  city  ordinances, 
and  for  not  keeping  accurate  books 
of  account,  the  city  having  the  right 
to  buy  the  works  at  the  end  of  seven 
years,  the  court  will  not  allow  the 
suit  to  be  commenced.  The  court 
said:  "Unless  there  is  a  clear,  wilful 
misuse,  abuse,  or  non-use  of  the  fran- 
chises sought  to  be  forfeited,  or  vio- 
lation of  law,  —  something  that  strikes 
at  the  very  groundwork  of  the  con- 
tract between  the  corporation  and  the 
sovereign  power ;  something  that 
amounts  to  a  plain,  wilful  abuse  of 
power  or  \'iolation  of  law,  within  the 
meaning  of  the  statute  on  the  subject, 
whereby  the  corporation  fails  to  ful- 
fill the  very  design  and  purpose  of 
its   organization,  —  leave  wiU   not  be 


granted  by  the  court  to  resort  to  the 
extraordinary  remedy  for  a  forfeiture 
of  its  franchises."  State  v.  Janesville 
Water  Co.,  92  Wis.  496,  501  (1896). 
A  water-works  company's  charter  will 
not  be  forfeited  because  another  com- 
pany has  piirchased  a  majority  of  its 
stock  and  illegally  placed  a  mortgage 
upon  its  property.  Commonwealth  v. 
Punxsutawney,  etc.  Co.,  197  Pa.  569 
(1901).  The  fact  that  a  corporation 
has  levied  illegal  assessments  on  its 
stockholders  is  no  ground  for  a  dis- 
solution at  the  instance  of  the  state. 
People  V.  Rosenstein,  etc.  Co.,  131  Cal. 
153  (1900).  Where  a  company  is 
granted  power  by  the  city  to  build 
tracks  on  the  streets  on  condition 
that  the  tracks  conform  to  the  street 
grade,  and  on  condition  that  the  com- 
pany pay  for  the  paving  between  its 
tracks,  its  failure  to  comply  with 
such  conditions  is  no  ground  for  de- 


1  The  Missouri  anti-trust  act  was 
applied  in  State  v.  Standard  Oil  Co., 
218  Mo.  1  (1909);  aff'd,  224  U.  S. 
270,  which  was  a  proceeding  to  for- 
feit the  charter  of  a  local  com- 
pany and  at  the  same  time  revoke 
the  licenses  of  two  foreign  companies 
doing  business  in  the  state,  and  the 
court  held  that  the  fact  that  a  holding 
company  owned  a  majority  of  the  stock 
of  the  defendants  does  not  prove 
absolutely  an  unlawful  combination 
but  tends  to  prove  that  fact.  The 
court  held  also  that  corporate  franchises 
are  always  subject  to  forfeitiire  at 
the  instance  of  the  state  for  misuser 
(such  as  restricting  or  stifling  com- 
petition) or  non-user,  even  though  the 
statute  makes  the  acts  a  criminal 
offense.  The  court  fvirther  held  that 
in  a  suit  by  a  state  to  forfeit  the  charter 
of  a  company  which  has  violated  an 
anti-trust  statute  if  the  corporation  is 
found  guilty  the  court  may  suspend 
judgment  of  ouster  on  the  condition 
that  the  corporation  withdraw  from 
the  combination.  The  attorney- 
general  may  by  an  information  ob- 
tain a  decree  declaring  void  an  agree- 
ment of  insxirance  companies  to  regu- 


late insurance  rates  and  to  eliminate 
competition,  and  may  enjoin  them  from 
continuing  to  act  under  such  agree- 
ment. McCarter  v.  Firemen's  Ins. 
Co.,  73  Atl.  Rep.  80  (N.  J.  1909), 
rev'g  70  N.  J.  Eq.  291.  The  state 
will,  at  the  instance  of  the  attorney- 
general,  forfeit  the  charter  of  the  cor- 
poration whose  stockholders  have  en- 
tered into  a  "trust"  with  the  stock- 
holders of  competing  corporations,  for 
the  purpose  of  forming  a  monopoly  in 
and  raising  the  price  of  sugar.  The 
"trust"  is  not  a  joint-stock  associa- 
tion. It  is  of  the  character  of  a  trust 
estate.  People  v.  North  River  Sugar 
Ref.  Co.,  121  N.  Y.  582  (1890).  Quo 
warranto  lies  against  a  corporation 
formed  to  purchase  substantially  all 
the  distilleries  in  the  country.  Dis- 
tilling, etc.  Co.  V.  People,  156  111.  448 
(1895).  Where  a  railroad  leases  its 
line  in  violation  of  a  constitutional 
provision  prohibiting  the  consolidation 
of  parallel  lines,  it  is  subject  to  for- 
feiture. So  also  where  it  issues 
"watered  stock"  in  violation  of  the 
constitution.  State  i'.  Atchison,  etc. 
R.  R.,  24  Neb.  143  (1888)  ;  s.  c,  38 
Neb.  437.     See  also  ch.  XXIX,  infra. 


1929 


§  633.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


In  Ohio  it  has  been  held  that  a  statute  giving  to  a  court  the  power 
to  forfeit  the  franchises  of  turnpike  companies  for  being  out  of  repair 

daring  a  forfeiture  of  the  company's  trons,  and  gives  free  passage  in  pay- 
charter.  State  V.  Omaha,  etc.  Co.,  91  ment  for  land  and  fails  to  file  re- 
Iowa,  517  (1894).  A  state  may  for-  quired  statements.  Commonwealth  v. 
feit  the  charter  of  a  corporation  which  Alleghany,  etc.  Co.,  20  Pa.  St.  18.5 
is  engaged  in  the  lottery  business.  (1852) ;  or  on  the  ground  that  the 
State  V.  Nebraska,  etc.  Co.,  66  Neb.  corporation  has  incorporated  also  in 
349  (1902).  An  action  by  the  state  another  state.  Commonwealth  v. 
against  a  stock  exchange  in  San  Pittsburg,  etc.  R.  R.,  58  Pa.  St.  26 
Francisco,  to  annul  its  charter  on  the  (1868) ;  or  that  required  statements 
ground  that  it  was  a  gambling  insti-  are  not  filed,  State  v.  Barron,  58 
tution,  failed  in  People  v.  San  Fran-  N.  H.  370  (1878).  Though  a  corpora- 
cisco  Public  Stock  Exchange,  33  Pac.  tion  take  more  interest  than  allowed  by 
Rep.  785  (Cal.  1893),  because  the  charter  it  may  recover.  The  only  pen- 
complaint  did  not  clearly  allege  gam-  alty  is  such  as  the  usury  law  pre- 
bling  acts.  There  is  no  misuser  of  scribes.  Grand  Gulf  Bank  v.  Archer, 
franchises  by  a  corporation  where  16  Miss.  151  (1847).  For  a  vigorous 
tha  objectionable  act  was  by  a  cashier  and  interesting  but  futile  effort  to 
in  du-eet  violation  of  orders  given  to  oust  a  going  railroad  company  from 
him  by  the  directors.  State  v.  Com-  its  franchises  for  all  kinds  of  mis- 
mercial  Bank,  6  Sm.  &  M.  (Miss.)  feasances,  malfeasances,  and  non- 
218  (1846);  or  where  a  railroad  or  feasances,  see  International,  etc.  Ry. 
turnpike  company  has  constructed  its  v.  State,  75  Tex.  356  (1889) ;  and  for 
road  over  land  without  obtaining  the  a  successful  case  in  the  same  line, 
right  of  way.  State  v.  Kill  Buck  see  East  Line,  etc.  Ry.  v.  State,  75 
Turnp.  Co.,  38  Ind.  71  (1871) ;  People  Tex.  434  (1889).  It  is  not  for  the 
V.  Hillsdale,  etc.  Turnp.  Co.,  2  Johns,  state  to  institute  an  action  to  dissolve 
190  (1807) ;  or  where  the  company  and  wind  up  a  mutual  benefit  and 
deviates  slightly  from  its  route,  fails  building  corporation  merely  because 
to  file  a  map  of  the  route,  and  neglects  some  of  the  members  are  dissatisfied, 
to  elect  new  directors,  Harris  v.  Mis-  People  v.  Lowe,  117  N.  Y.  175,  190 
sissippi,  etc.  R.  R.,  51  Miss.  602  (1889).  No  quo  warranto  lies  for 
(1875) ;  or  fails  to  file  a  statement  of  using  an  abbreviated  corporate  name, 
its  condition  as  required  by  statute.  People  v.  Bogart,  45  Cal.  73  (1872). 
the  object  of  such  filing  having  The  averments  of  misuser  must  be 
ceased.  People  v.  Improvement  Co.,  definite  and  certain.  Danville,  etc. 
103  111.  491  (1882) ;  or  where  the  pub-  Pr.  Co.  v.  State,  16  Ind.  456  (1861). 
lie  are  compelled  to  open  a  draw-  And  the  misuser  must  be  wilful, 
bridge  for  themselves.  Commonwealth  State  v.  Columbia,  etc.  Co.,  2  Sneed 
V.  Breed,  21  Mass.  460  (1827);  or  (Tenn.),  254  (1854);  Baltimore  v. 
where  a  bank  has  assigned  its  assets  Connellsville,  etc.  Ry.,  6  Phila.  190 
to  trustees  to  pay  its  debts.  State  v.  (1866).  In  charging  misuser  the 
Commercial  Bank,  21  Miss.  569  word  "wilful"  is  not  necessary.  State 
(1850) ;  or  for  the  insolvency  of  a  v.  Equitable  L.  etc.  Co.,  142  Mo.  325 
"bank,  it  having  since  then  become  (1897).  Concerning  the  pleadings  in 
solvent,  People  v.  Bank  of  Niagara,  6  quo  warranto,  see  People  v.  Stanford, 
Cow.  196  (1826) ;  People  v.  Washing-  77  Cal.  360  (1888).  An  information 
ton,  etc.  Bank,  6  Cow.  212  (1826) ;  but  in  the  nature  of  quo  warranto  to  for- 
the  contrary  has  been  held  as  regards  feit  the  charter  of  a  temperance  enter- 
a  suspension  of  specie  payments  and  prise  is  not  definite  enough  in  its 
a  subsequent  resumption.  Commercial  charges  when  it  charges  a  perversion 
Bank  v.  State,  14  Miss.  599  [1846] ;  of  funds.  People  v.  Dashaway  Assoc, 
Planters'  Bank  v.  State,  15  Miss.  163  84  Cal.  114  (1890),  containing  also 
[1846]  ;  or  where  a  bridge  company  a  discussion  on  the  pleadings  and 
gives   reduced   rates    to   constant   pa-  practice.     Where  the  state  has  brought 

1930 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


633. 


for  the  preceding  six  months,  without  having  a  jury  pass  upon  the  ques- 
tion and  without  appeal,  is  unconstitutional.^  A  statute  prescribing 
that  the  charter  of  a  railroad  company  shall  be  forfeited  if  it  allows  a 
competing  road  to  use  its  tracks,  unless  the  freight  rates  on  coal  from 
points  in  certain  other  states  shall  be  as  low  as  on  the  competing  rail- 
road, is  illegal,  as  an  attempt  to  regulate  interstate  commerce.- 

A  charter  will  not  be  forfeited  merely  because  the  corporation  was 
incorporated  in  one  state  and  all  its  officers  and  stockholders  reside  in 
another  state ;  nor  because  it  keeps  its  books  out  of  the  state,  in  viola- 
tion of  a  statute.^ 


suit  to  forfeit  the  charter  of  a  rail- 
road company  on  the  ground  that  a 
majority  of  its  stock  is  held,  contrary 
to  the  statutes  and  constitution  of  the 
state,  by  another  railroad  company, 
the  case  may  be  removed  to  the  fed- 
eral court  if  the  latter  company  is  an 
instrument  of  interstate  commerce 
and  purchased  the  stock  for  interstate 
commerce  purposes.  It  is  also  re- 
movable where  the  latter  company 
claims  that  its  charter  existed  before 
such  constitution  and  statutes,  and 
give  it  a  right  to  own  such  stock. 
South  Carolina  v.  Port  Royal,  etc.  Ry., 
56  Fed.  Rep.  333  (1893). 

1  Salt  Creek  Val.  Turnp.  Co.  v. 
Parks,  50  Ohio  St.  568  (1893).  The 
legislature  may  authorize  county  com- 
missioners to  institute  proceedings  to 
forfeit  the  charters  of  plank-road 
companies  which  do  not  keep  their 
plank  roads  in  repair.  Davis  v.  Ver- 
non, etc.  Co.,  103  Ga.  491  (1898).  In 
a  proceeding  under  a  statute  to  for- 
feit a  railroad  franchise  and  charter 
for  not  maintaining  the  property  in 
good  repair  the  railroad  is  entitled 
to  trial  by  jury.  Louisiana,  etc. 
R.   R.   V.  State,   75  Ark.   345    (1905). 

2  State  V.  Cumberland,  etc.  R.  R., 
105  Md.  478  (1907),  holding  also  that 
in  a  suit  to  forfeit  a  railroad  charter 
for  allowing  its  tracks  to  be  used  by  a 
competing  railroad  in  violation  of  the 
statute  the  answer  may  be  demurred 
to  if  insufficient. 

3  North,  etc.  Stock  Co.  v.  People, 
147  lU.  234  (1893).  The  court  may 
exercise  its  discretion  as  to  forfeit- 
ing a  charter  for  misfeasance  or  non- 
feasance, which  is  not  expressly  made 
a  ground   of  forfeiture   by   the   char- 


ter, and  the  court  will  not  decree  a 
forfeiture  where  the  violation  is 
doubtful  and  no  public  necessity  re- 
quires forfeiture.  Hence  the  court 
will  not  forfeit  a  charter  for  failure 
to  keep  the  corporate  books  at  the 
principal  office,  as  required  by  its 
charter,  nor  for  the  failure  to  make 
the  first  annual  report,  the  omissions 
not  having  been  wilful.  State  v. 
United  States,  etc.  Co.,  140  Ala.  610 
(1904).  In  Kansas  the  charter  of  a 
corporation  may  be  forfeited  at  the 
instance  of  the  state  if  the  corpora- 
tion fails  to  keep  its  general  office 
and  the  office  of  its  treasurer  within 
the  state  in  accordance  with  the 
terms  of  the  statutes.  State  v.  Topeka 
Water  Co.,  59  Kan.  151  (1898). 
Where  a  corporation  removes  all  its 
offices  from  the  state,  a  stockholder 
may  apply,  under  a  statute,  for  a  dis- 
solution on  the  ground  of  an  abuse 
of  powers.  Simmons  v.  Norfolk,  etc. 
Steamboat  Co.,  113  N.  C.  147  (1893). 
In  State  v.  Park,  etc.  Lumber  Co.,  58 
Minn.  330  (1894),  the  court  forfeited 
the  charter  of  a  company  that  had 
been  incorporated  in  Minnesota  for 
the  purpose  evidently  of  doing  all  its 
business  in  Wisconsin.  The  charter 
was  forfeited  on  the  ground  that  the 
company  had  not  complied  with  the 
statute  in  having  its  place  of  busi- 
ness and  keeping  its  books  within 
the  state.  The  court  also  approved 
of  a  decision  in  Wisconsin  to  the  ef- 
fect that  at  common  law  a  charter 
may  be  forfeited  where  the  corpora- 
tion keeps  its  principal  office,  books, 
and  records  out  of  the  state  to  such 
an  extent  that  it  is  impossible  for 
the  state  and  its  courts  to  have  full 


1931 


§  633.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[cH.  XXXVIIT. 


A  charter  will  be  forfeited  where  it  authorizes  a  medical  school  but 
is  actually  used  to  sell  medical  diplomas.^  The  attorney-general  may, 
by  information  in  the  nature  of  quo  warranto,  cause  to  be  forfeited 
the  charter  of  a  corporation  which  was  organized  for  fair-ground  and 
race-track  purposes,  but  which  is  actually  engaged  in  gambling.^  The 
state  by  quo  warranto  may  oust  a  railroad  from  discriminations  in 
favor  of  oil  shipped  in  tank  cars.^  An  exemption  from  taxation  is  not 
a  franchise.  Hence,  quo  warranto  does  not  lie  to  oust  the  corporation 
from  such  exemption.*  Quo  warranto  does  not  lie  at  the  instance  of 
the  state  to  prevent  a  railroad  company  from  making  an  additional 
charge  for  the  use  of  switch  tracks.^  The  state  may  obtain  a  judgment 
of  ouster  against  persons  claiming  to  be  a  corporation  organized  to  own 
land  where  the  statute  does  not  authorize  incorporation  for  that  purpose.^ 

Quo  warranto  lies  against  a  railroad  corporation  to  recover  back  to 
the  state  canal  lands  which  the  railroad  is  using.^  Quo  warranto 
or  an  information  in  the  nature  thereof  is  the  proper  remedy  where  the 
corporation  has  not  been  legally  incorporated.^  Quo  warranto  at  the 
instance  of  the  state  does  not  lie  merely  because  a  street  railway  com- 


jurisdietion  and  visitorial  power  over 
the  corporation.  To  same  effect 
where  the  company  kept  its  books 
and  place  of  business  out  of  the  state. 
State  V.  Milwaukee,  etc.  Ry.,  45  Wis. 
590  (1878). 

1  Illinois,  etc.  University  v.  People, 
166  111.  171  (1897).  The  charter  of  a 
medical  college  will  be  forfeited  at 
the  instance  of  a  state  where  it  is 
shown  that  the  college  is  carried  on 
chiefly  to  sell  medical  diplomas.  Inde- 
pendent, etc.  College  v.  People,  182 
111.  274  (1899).  Where  an  athletic  cor- 
poration is  but  a  scheme  for  running 
a  saloon,  the  charter  will  be  forfeited. 
State  V.  Rose  Hill,  etc.  Club,  121  Mo. 
App.  81  (1906).  Where  a  corporation 
organized  as  a  social  club  is  used  to 
violate  the  liquor  laws,  the  state  may 
have  its  charter  annulled.  Hanger 
V.  Commonwealth,  107  Va.  872  (1908). 
Where  several  persons  organized  a 
corporation  with  a  capital  stock  of 
$100,  to  buy  and  sell  oil  lands,  etc., 
and  it  incurred  debts  to  the  amoimt 
of  nearly  $20,000,  the  highest  court 
in  Kentucky  held  that  it  was  not  a 
complete  corporation  but  a  mere  pre- 
liminary step  and  the  promoters  were 
liable  as  partners  for  the  debts.  San- 
ders, etc.  V.  Herndon,  128  Ky.  437(1908). 


2  State  V.  Delmar  Jockey  Club,  200 
Mo.  .34  (1906) ;  aff'd,  210  U.  S.  324. 
In  the  case  Attorney-General  v.  Pre- 
ferred Mercantile  Co.,  187  Mass.  516 
(1905),  the  charter  of  a  corporation 
was  forfeited  because  its  sole  business 
was  to  sell  for  cash  its  contracts  to 
deliver  diamonds  to  the  oldest  holders 
of  such  contracts,  the  sole  source  of 
revenue  being  the  price  received  for 
the  contracts.  The  court  held  that 
this  was  not  a  lottery,  but  was  in  viola- 
tion of  the  statute  prohibiting  obliga- 
tions redeemable  in  numerical  order 
or  in  any  arbitrary  order. 

^  State  V.  Cincinnati,  etc.  R.  R., 
47  Ohio  St.  130  (1890). 

*  International,  etc.  Ry.  v.  State, 
75  Tex.  356  (1889). 

estate  V.  Atchison,  176  Mo.  687 
(1903). 

6  People  V.  Shedd,  241  111.  155 
(1909). 

'  Ohio  V.  Railway  Co.,  53  Ohio  St. 
189  (1895). 

*  The  state  may  forfeit  a  charter 
where  the  statute  required  five  per- 
sons to  sign  and  acknowledge  the  arti- 
cles, but  only  four  of  the  five  actually 
did  acknowledge  them.  People  v. 
Montecito  Water  Co.,  97  Cal.  276 
(1893).     In   quo  warranto  proceedings 


1932 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  633. 


pany  has  been  given  street  rights  in  perpetuity  by  a  municipality,  while 
the  statute  limits  its  corporate  existence  to  thirty  years. ^ 

Quo  warranto  lies  against  foreign  corporations  doing  business  ille- 
gally in  the  state.^ 


on  the  ground  that  the  company  was 
not  properly  incorporated,  the  corpo- 
ration itself  is  a  necessary  party  de- 
fendant. People  V.  Montecito  Water 
Co.,  97  Cal.  276  (1893).  A  charter  of 
the  company  will  be  forfeited  at  the 
instance  of  the  state  where  some  of 
the  parties  who  are  alleged  to  join  in 
the  corporation  did  not  so  join,  but 
their  names  were  inserted  without 
their  sanction  or  authority.  Such 
parties  are  not  liable  as  stockholders. 
La  Banque  d'Hochelaga  v.  Murray, 
L.  R.  15  App.  Cas.  414  (1890).  See 
also  §§  236,  237,  supra.  In  a  quo  war- 
ranto proceeding  to  declare  void  an 
alleged  charter  the  corporation  is  a 
necessary  party  defendant.  People  v. 
FUnt,  64  Cal.  49  (1883).  After  the 
attorney-general  institutes  quo  war- 
ranto proceedings  and  much  testi- 
mony is  taken,  and  then  the  proceed- 
ing is  discontinued,  and  the  company 
proceeds  to  expend  money  and  make 
contracts,  the  attorney-general  will 
not  be  allowed  to  institute  new  pro- 
ceedings. Re  Equity  Gas-Light  Co., 
10  N.  Y.  Supp.  801  (1890).  See  141 
N.  Y.  232  (1894).  In  quo  warranto 
charging  defendants  with  usurping  a 
public  franchise  to  operate  a  ferry, 
where  they  attempted  to  defend  on 
the  ground  that  they  had  a  legal 
right  to  use  the  ferry,  the  burden  was 
on  them  to  show  a  valid  title.  Gun- 
terman  v.  People,  138  111.  518  (1891). 
Where  an  incorporation  is  for  several 
objects,  one  of  which  is  illegal,  the 
charter  will  be  forfeited,  the  objects 
not  being  clearly  separable.  People 
V.  Chicago  Gas  T.  Co.,  130  111.  268 
(1889).  The  issuing  of  transferable 
certificates  of  stock  is  not  assuming 
the  functions  of  a  corporation.  Rice 
V.  Rockefeller,  56  Hun,  516  (1890); 
reversed  on  other  points  in  134  N.  Y. 
174.  A  suit  instituted  by  the  state 
to  forfeit  a  charter  cannot  be  removed 
to  the  federal  court  on  the  ground 
that  a  contract  exists  between  the 
corporation  and   the   state,   and   that 


such  contract  will  be  violated.  Com- 
monwealth V.  Louisville  Bridge  Co., 
42  Fed.  Rep.  241  (1890).  A  corpora- 
tion incorporated  for  an  illegal  pur- 
pose, such  as  buying  a  majority  or  aU 
of  the  stock  in  each  of  four  competing 
gas  corporations,  and  thereby  creat- 
ing a  monopoly,  is  subject  to  having 
its  charter  forfeited  at  the  instance 
of  the  attorney-general.  People  v. 
Chicago  Gas  Trust  Co.,  130  111.  268 
(1889).  In  quo  warranto  proceedings 
against  a  turnpike  company,  the  lat- 
ter has  the  burden  of  proof  to  show 
by  what  authority  it  is  exercising  its 
privileges.  People  v.  Volcano,  etc.  Co., 
100  Cal.  87  (1893). 

1  Attorney-General  v.  Detroit  Sub- 
urban Ry.,  96  Mich.  65  (1893). 

2  State  V.  Western,  etc.  Ins.  Co.,  47 
Ohio  St.,  167  (1890) ;  State  v.  Fidelity, 
etc.  Co.,  39  Minn.  538  (1888).  State 
V.  Standard  Oil  Co.  218  Mo.  1 
(1909)  afif'd,  224  U.  S.  270.  Quo 
warranto  against  a  foreign  corpora- 
tion illegally  doing  business  in  the 
state  must  be  against  the  corpora- 
tion as  such  and  not  merely  against 
its  officers  and  agents.  State  v.  Som- 
erby,  42  Minn.  55  (1899).  Where  a 
foreign  corporation  has  not  complied 
with  reasonable  regulations  by  the 
state  as  a  condition  of  its  doing  busi- 
ness in  the  state,  quo  warranto  lies 
to  oust  it  of  its  claim  of  right  to  do 
business  in  the  state.  State  v.  Amer- 
ican, etc.  Co.,  65  Kan.  847  (1902). 
Where  a  foreign  telephone  company 
by  inadvertence  does  not  file  an 
abstract  of  its  charter  in  each  of  the 
counties  in  which  it  does  business,  as 
required  by  statute,  it  will  not  be 
ousted  from  doing  business  at  the  in- 
stance of  the  state,  inasmuch  as  the 
statutes  do  not  make  such  omission  a 
cause  of  forfeiture.  State  v.  Cumber- 
land, etc.  Co.,  114  Tenn.  194  (1905). 
Quo  warranto  lies  on  the  relation  of  a 
private  individual  to  compel  a  for- 
eign corporation  to  show  its  existence 
as    a    corporation    and    its    authority 


1933 


I  633.]  DISSOLUTION,    FORFEITURE,    ETC.  [cH.  XXXVIII. 

In  an  action  by  the  state  to  forfeit  a  railroad  charter  the  state  must 
prove  not  only  that  a  cause  of  forfeiture  did  exist,  but  that  it  still  con- 
tinues to  exist.  Moreover  some  public  interest  must  be  involved  in 
obtaining  the  forfeiture.^  The  attorney-general  may  file  an  informa- 
tion in  quo  warranto  without  leave  of  the  court.^  Quo  warranto  for 
claiming  to  be  a  corporation  should  be  against  the  officers  of  the  cor- 
poration as  individuals.^ 

Under  the  Massachusetts  statutes  any  person  who  is  injured  by  a 
corporation  may  file  an  information  in  the  nature  of  quo  warranto 
against  the  corporation.*  But  at  common  law  an  information  to  for- 
feit a  charter  does  not  lie  for  wrongs  to  creditors  and  stockholders  and 
it  lies  only  for  ultra  vires  acts,  wilful  and  continued,  and  relating  to 
some  franchise  granted.^  Where  a  steam  railroad  is  buying  the  stocks 
and  bonds  of  street  railroads,  the  attorney-general  under  the  Massa- 
chusetts statute  may  file  an  information  in  equity  to  prevent  the  exer- 
cise of  that  particular  power,  instead  of  applying  for  a  mandamus  or  an 
information  at  law  in  the  nature  of  quo  warranto.^ 

Frequently  a  corporation  does  acts  which  its  charter  does  not  authorize 
it  to  do,  or  which  its  charter  or  a  statute  expressly  prohibits  it  from 
doing.  The  question  then  arises.  What  is  the  remedy  of  the  state  ? 
The  right  of  a  stockholder,  or  the  corporation  itself,  or  a  person  contract- 
ing with  the  corporation,  to  object  to  such  acts  is  discussed  elsewhere.^ 
But  may  the  state  object  ?  Undoubtedly  it  may.  It  seems  that  the 
state  has  four  remedies.  Its  legislature  may  repeal  the  charter  of  the 
corporation  under  the  reserved  right  of  the  state  to  repeal ;  ^  or  the  state 

for  doing  business  in  the   state,   and  ^  state  v.  Equitable  Loan,  etc.  Co., 

may    attack    its    corporate    existence  142  Mo.  325  (1897). 

as    being    an  illegal  trust.     Attorney-  ^  state    v.     Fleming,     147    Mo.     1 

General   v.   Booth   &   Co.,    143   Mich.  (1898).      Quo      warranto      proceedings 

89  (1906).     A  state  by  a    proceeding  by  the  state  against  a  corporation  to 

in    the   nature   of   quo   warranto   may  declare   that   it   was   fraudulently   in- 

oust  a  foreign  corporation  from  doing  eorporated   may   be   against   the   eor- 

business  in  the    state,    no    license  for  poration  without  joining  the  officers, 

that  purpose  having    been    issued  by  State  v.  Inner  Belt  Ry.,  74  Kan.  413 

that  state.     State  v.  Kansas,  etc.  Co.,  (1906).     The  information  should  not 

71    Kan.   785    (1905).     An  injunction  be  against  the  corporation  in  its  own 

lies  at  the  instance  of  the  state  against  name    because    that    admits  its  exist- 

foreign  corporations.     See  §  635,  infra,  ence.     State   v.   City   of   South  Park, 

1  People  V.  Ulster,  etc.  R.  R.,   128  34  Wash.  162  (1904). 

N.    Y.   240    (1891).     See   also    §    634,  ^  Hartnett     v.     Plumber's     Supply 

infra.     A  corporation  will  not  be  dis-  Assoc,  169  Mass.  229  (1897). 

solved    at    the    instance    of    a    stock-  ^  State  v.  Southern,  etc.  Assoc,  132 

holder    because    it    purchased    a    half  Ala.  .50  (1902). 

acre  of  land  ultra  vires,  where  it  sold  ^  Attorney-General    v.    New    York, 

the  same  immediately  upon  complaint  etc  R.  R.,  197  Mass,  194  (1908). 

being   made.     Bixler   v.    Summerfield,  '  See  Part  IV,  infra. 

210  111.  66  (1904).  8  See  §  639,  infra. 

1934 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  633. 


may  institute  a  proceeding  to  forfeit  the  charter  for  misuse  of  powers ; 
or  such  proceeding  may  be  only  to  oust  the  corporation  from  the  exer- 
cise of  the  usurped  powers;  or,  according  to  some  authorities,  a  suit 
may  be  commenced  in  equity  for  an  injunction  restraining  the  corpo- 
ration from  committing  the  ultra  vires  acts.^  Taking  up  first  the  sub- 
ject of  quo  warranto,  it  seems  that  the  judgment  in  an  ordinary  quo 
warranto  proceeding  may  be  either  a  forfeiture  of  all  the  corporate 
franchises  and  of  the  charter,  or  may  be  a  forfeiture  only  of  the  right  to 
continue  to  do  the  illegal  acts,  and  that  it  is  within  the  discretion  of 
the  court  to  say  which  judgment  shall  be  rendered.-     It  has  been  held 


^  See  §  635,  infra. 

-  State  V.  People's,  etc.  Assoc,  42 
Ohio  St.  579  (1885),  where  only  a  dis- 
continuance of  the  acts  complained  of 
was  ordered ;  People  v.  Improvement 
Co.,  103  111.  491  (1882),  where  a  com- 
plete forfeiture  of  charter,  etc.,  was 
decreed.  See  also  People  v.  Utiea  Ins. 
Co.,  15  Johns.  357  (1818),  where  an 
insurance  company  had  engaged  in 
banking  contrary  to  statute.  A  par- 
tial ouster  does  not  seem  to  differ 
much  from  an  injunction  at  the 
instance  of  the  state.  See  §  635, 
infra.  Where  a  telephone  company 
charges  more  than  its  original  grant 
from  a  city  authorized,  its  franchises 
cannot  be  forfeited,  but  it  may  be 
ousted  from  the  enjoyment  of  the 
grant.  People  v.  Chicago,  etc.  Co., 
220  111.  238  (1906).  In  State  v.  Build- 
ing Assoc,  35  Ohio  St.  258  (1879)  the 
court  said  that  where  the  corporation 
is  guilty  of  an  offense  which  by  stat- 
ute is  cause  for  forfeiture  of  its  fran- 
chise as  a  corporation,  the  court  will 
decree  that  forfeiture;  but  where  the 
cause  of  forfeiture  is  outside  of  those 
prescribed  in  the  statutes,  then  the 
court  may  decree  either  a  forfeiture 
of  the  franchise  to  be  a  corporation 
or  an  ouster  from  the  powers  and  acts 
illegally  assumed  or  done.  There 
may  be  a  judgment  of  ouster  of  a 
particular  franchise,  and  not  of  the 
whole  charter.  State  v.  Old  Town 
Bridge  Corp.,  85  Me.  17  (1892). 
Where  two  competing  gas  companies 
agree  on  rates  to  be  charged  the  pub- 
lic and  agree  not  to  interfere  with 
each  other's  patrons,  the  state  may 
forfeit  their  charters,  or  the  court  may 
in  its   discretion    declare  a  forfeiture 


or  ouster  of  the  right  of  the  defendants 
to  carry  out  the  illegal  acts.  State  v. 
Portland,  etc.  Co.,  153  Ind.  483  (1899). 
Where  the  criminal  law  has  penalties 
for  abuse  of  franchises  by  a  tm-npike 
company,  the  court  will  not  forfeit 
its  charter  for  such  abuses,  if  it  is  in 
position  to  correct  them.  Common- 
wealth V.  Newport,  etc.  Co.,  97  S.  W. 
Rep.  375  (Ky.  1906).  Forfeiture  of  a 
water-works  grant  from  the  city  will 
not  be  decreed  except  in  a  clear  case, 
and  where  no  other  punishment  will 
adequately  remedy  the  mischief.  City 
of  Ashland  v.  Ashland,  etc.  Co.,  110 
Wis.  94  (1901).  The  court  may  for- 
feit the  charter  of  a  railroad  corpora- 
tion for  illegally  leasing  its  road,  and 
need  not  merely  enjoin  the  continua- 
tion of  the  lease.  East  Line,  etc 
R.  R.  V.  State,  75  Tex.  434  (1889).  "Cor- 
porate charters  are  not  forfeited  ia 
fragments,  or  annulled  as  damages 
for  the  violation  of  private  contracts." 
In  condemnation  proceedings  the 
defendant  cannot  set  up  that  the  char- 
ter has  been  violated.  Re  Long 
Island,  R.  R.,  143  N.  Y.  67  (1894). 
In  Pennsylvania,  where  the  state  filed 
an  information  to  declare  ultra  vires 
a  contract  between  a  canal  company 
and  a  coal  company,  whereby  one 
half  of  the  canal  facilities  were  monop- 
olized by  the  latter,  the  court  held 
that  an  information  was  a  proper 
remedy,  and  that  the  court,  in  its 
judgment  in  favor  of  the  state,  might 
order  the  corporation  to  discontinue 
the  unauthorized  act,  and  that  the 
judgment  need  not  oust  the  corpora- 
tion from  its  charter  and  franchises. 
Commonwealth  v.  Delaware,  etc.  Canal 
Co.,  43  Pa.  St.  295  (1862).  Although 


1935 


633. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


in  a  well-considered  case,  that  where  a  corporation  is  exercising  a  power 
which  it  has  no  charter  right  to  exercise,  a  judgment  may  oust  it  from 
exercising  that  particular  power,  but  where  the  corporation  has  been 
guilty  of  acts  which  by  statute  are  made  the  cause  of  forfeiture,  the 
whole  charter  may  be  forfeited.^  The  state  may  object  to  a  steam  rail- 
road owning  the  stock  and  controlling  a  street  railway  which  extends 
beyond  the  termini  fixed  in  the  steam  railroad  company's  charter,  there 
being  nothing  in  such  charter  authorizing  it  to  purchase  stock  of  other 
railroads.  The  court,  however,  will  merely  oust  the  railroad  company 
from  the  franchises  it  has  unlawfully  usurped.  "  In  the  absence  of 
mala  fides  or  a  stubborn  persistence  in  the  usurpation,  there  would  seem 
to  be  no  reasonable  ground  for  declaring  the  corporate  existence  and 
legitimate  franchises  of  the  company  to  be  forfeited."  ^  Quo  warranto 
lies  to  forfeit  the  exclusive  feature  of  a  franchise  without  forfeiting  the 
remainder  of  the  franchise.^  The  nature  of  scire  facias,  quo  warranto, 
and  information  in  the  nature  of  a  quo  warranto,  is  explained  in  the 
notes  below.^ 


the  state  proves  the  case,  yet  the  court 
will  not  adjudge  a  forfeiture  unless 
justice  requires  it.  State  v.  Essex 
Bank,  8  Vt.  489  (1836).  State  v. 
United  States,  etc.  Co.,  140  Ala.  610 
(1904). 

1  Marion  Bond  Co.  v.  Mexican,  etc. 
Co.,  160  Ind.  558  (1902).  In  quo 
warranto  proceedings  the  court  has 
discretion  to  render  a  general  judg- 
ment of  ouster  or  an  ouster  from  exer- 
cising the  particular  act  complained 
of,  or  may  give  a  suspensive  judg- 
ment of  ouster  with  a  fine  accom- 
paniment or  simply  a  fine,  especially 
where  the  act  complained  of  has  been 
abandoned.  State  v.  Armour  Packing 
Co.,  173  Mo.  356  (1903).  Where  a 
railroad  company  has  been  adjudi- 
cated to  have  no  power  to  own  ware- 
houses it  may  lease  them.  State  v. 
New  Orleans,  etc.  Co.,  109  La.  64 
(1902).  In  the  case  State  v.  Syndi- 
cate Land  Co.,  142  Iowa,  22  (1909), 
a  land  company  was  found  guilty  of 
acting  beyond  its  powers  and  illegally, 
and  the  lower  court  held  that  it  had  a 
large  legitimate  business  and  hence 
entered  a  decree  that  it  must  abandon 
its  illegal  business  and  the  court  denied 
a  receivership,  but  the  higher  court 
reversed  the  decision  and  held  that  the 
company  should  be  dissolved  under  the 
statute,     it    having    published    false 


statements,  and  conducted  its  affairs 
extravagantly,  and  had  no  substan- 
tial business,  and  had  not  enough 
funds  to  pay  its  outstanding  contracts, 
and  it  appeared  that  the  stockholders 
and  creditors  could  be  protected  on 
dissolution. 

2  State  V.  Atlantic,  etc.  R.  R.,  77 
N.  J.  Eq.  465  (1909). 

3  Commonwealth  v.  Sturtevant,  182 
Pa.  St.  323  (1897). 

*  Professor  Dwight  explained  these 
as   follows : 

"Scire  facias  is  resorted  to  where 
there  is  original  defect  in  the  charter, 
as  if,  e.  g.,  Sb  grant  obtained  by  fraud. 
It  may  be  used  also  in  the  case  where 
the  charter  was  valid  but  the  powers 
of  a  corporation  have  been  abused. 
The  distinction  taken  in  England  is 
this :  that  a  scire  facias  may  be 
resorted  to  where  a  legal  corporation 
in  full  possession  of  its  powers  abuses 
them,  while  a  quo  warranto  is  appli- 
cable where  a  corporation,  from  a 
defect  in  its  constitution,  such  as  a 
loss  of  part  of  its  members  which  are 
integral  to  its  existence,  becomes  an 
imperfect  body,  but  nevertheless  con- 
tinues to  act  as  a  corporation.  See 
Grant  on  Corporations,  296. 

"Writ  of  quo  warranto.  This  is 
an  ancient  writ,  employed  by  the  king 
against  any  one  who  claims  or  usurps 


1936 


CH.   XXXVIII. 


DISSOLUTION,  ■  FORFEITURE,    ETC. 


[§  633. 


Although  quo  warranto  can  be  only  for  acts  committed  within  five 
years  in  Ohio,  yet  it  serves  to  oust  a  company  from  exercising  a  power 


an  office  or  franchise,  or  who,  having 
had  a  right  to  the  franchise,  neglects 
to  exercise  it,  to  inquire  by  what 
warrant  he  still  claims  to  exercise 
it.  The  theory  of  the  writ  is,  there 
is  an  unlawful  encroachment  upon  the 
royal  prerogative,  and,  being  a  dilatory 
proceeding  and  technical,  it  is  not  now 
so  much  employed  as  the  succeeding 
remedy. 

"Information  in  the  nature  of  a  quo 
warranto.  This  is  in  form  of  a  crim- 
inal proceeding.  There  were  two 
proceedings  in  the  criminal  law  for 
the  conviction  of  criminals.  One  is 
termed  an  information  and  the  other 
an  indictment.  They  differ  in  this 
respect :  that  while  an  indictment  is 
found  by  a  grand  jury,  an  information 
is  simply  the  allegation  of  an  officer  who 
files  it.  In  this  case  the  attorney- 
general  proceeds  on  twofold  ground, 
both  to  punish  the  usurper  and  to 
prevent  the  unlawful  exercise  of  its 
franchises.  In  the  case  of  a  corpora- 
tion the  main  object  is  to  interfere 
with  the  exercise  of  the  franchise. 
The  inquiry  is  the  same  as  in  the 
writ  of  quo  warranto;  that  is,  by  what 
warrant  the  franchise  is  exercised. 
The  reason  why  it  is  more  resorted 
to  is  that  it  is  easy  and  simple  of  appli- 
cation. 

"Under  the  New  York  code  the  pro- 
ceeding is  simply  an  action  brought 
by  the  attorney-general  governed  by 
the  same  general  rules  as  an  action 
at  common  law.  If  judgment  goes 
against  the  corporation  it  is  liable  to 
be  dissolved.  This  proceeding  in  Eng- 
land was  instituted  in  the  great  crim- 
inal court,  the  king's  or  queen's  bench, 
and  in  New  York  in  tlie  supreme  court 
only,  which  represents  the  queen's 
bench." 

The  origin  and  nature  of  the  writ  of 
quo  warranto  and  the  remedy  by  infor- 
mation in  the  nature  of  a  writ  of  quo 
warranto,  which  suceeedeed  the  former, 
was  considered  in  Brooks  v.  State,  79 
Atl.  Rep.  790  (Del.  1911),  and  it  was 
held  that  under  it  the  title  of  a  director 
to  his  office  in  a  private  corporation 
could  be  tested  by  such  a  proceeding 


in  the  name  of  the  state  upon  the  rela- 
tion of  the  attorney-general.  The 
opinion  in  that  case  also  discussed  the 
procedure  and  form  of  pleadings. 
Pleadings  in  an  information  in  the 
nature  of  a  quo  warranto  should  con- 
form to  pleadings  at  common  law. 
An  information  in  the  nature  of  a  quo 
ivarranto  simply  calls  on  the  defendant 
to  show  under  what  authority  it  exer- 
cises privileges.  People  v.  Central, 
etc.  Tel.  Co.,  232  111.  260  (1908). 
A  quo  luarranto  is  not  such  a  criminal 
proceeding  as  to  require  the  degree 
of  certainty  as  is  required  in  criminal 
proceedings.  Independent,  etc.  Col- 
lege V.  People,  182  111.  274  (1899).  In 
the  case  State  v.  Merchants',  etc.  Trust 
Co.,  8  Humph.  (Tenn.)  235  (1847),  the 
court  said:  "By  the  common  law 
the  forfeiture  of  a  charter  can  be  en- 
forced in  a  court  of  law  only  ;  and  the 
proceeding  to  repeal  it  is  by  a  scire 
facias  or  an  information  in  the  nature 
of  a  writ  of  quo  warranto.  A  scire 
facias  is  the  proper  remedy  where  there 
is  a  legal  existing  body  capable  of  act- 
ing, but  which  had  been  guilty  of  an 
abuse  of  the  power  intrusted  to  it ;  a 
quo  warranto  where  there  is  a  body 
corporate  de  facto,  which  takes  upon 
itself  to  act  as  a  body  corporate,  but 
from  some  defect  in  its  constitution 
it  cannot  legally  exercise  the  power  it 
affects  to  use."  Citing  8  Wheat.  483, 
484.  For  the  ancient  learning  as  to 
scire  facias  in  forfeiting  charters,  see 
State  V.  Moore,  19  Ala.  514  (1851). 
When  the  information  has  for  its  object 
to  oust  the  defendants  from  acting 
as  a  corporation,  and  to  test  the  fact 
of  their  incorporation,  it  must  be  filed 
against  individuals.  When  the  object 
is  to  effect  a  dissolution  of  a  corpora- 
tion which  has  had  an  actual  existence, 
or  to  oust  such  corporation  of  some 
franchise  which  it  has  unlawfully  exer- 
cised, the  information  must  be  filed 
against  the  corporation.  People  v. 
Rensselaer,  etc.  R.  R.,  15  Wend.  113 
(1836).  Quo  loarranto  against  a  cor- 
poration in  its  corporate  name  admits 
that  it  was  legally  incorporated.  North, 
etc.  Stock  Co.  V.  People,  147  111.  234 


(122) 


1937 


§634.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


which  it  has  not  exercised  continuously  for  twenty  years.^  A  state 
cannot  maintain  quo  warranto  against  a  lumber  company  that  for 
years  with  the  knowledge  of  the  state  has  manufactured  salt  in  con- 
nection with  its  lumber  business,  using  its  lumber  mill  and  sawdust, 
etc.,  for  that  purpose.^  The  court  has  no  power  to  appoint  a  receiver 
in  quo  warranto  proceedings.  A  receiver  can  be  appointed  only  in  a 
suit  in  equity  unless  a  statute  provides  otherwise.^ 

§  634.  Non-user  as  a  cause  for  forfeiture  —  Forfeiture  for  fail- 
ure to  complete  a  railroad  or  enterprise.  —  Non-user  of  its  franchise 
is  a  cause  for  forfeiture  where  a  corporation  is  possessed  not  only  of 
its  franchise  to  be  a  corporation,  but  also  other  franchises,  such  as  a 
right  of  way,  which  the  public  are  interested  in  having  kept  in  active 
use.  Thus,  where  a  charter  required  a  street  railway  company  to  lay 
its  track  on  certain  streets,  and  the  company  did  so  on  a  part  of  such 


(1893).  A  state  may  maintain  quo 
warranto  to  have  a  corporation  declared 
non-existing  where  the  charter  was  not 
recorded  in  the  office  of  the  recorder 
of  deeds  as  required  by  statute  within 
the  two  years  during  which  the  statute 
required  the  corporation  to  be  organ- 
ized, even  though  the  corporation 
went  through  the  form  of  organization 
soon  after  filing  its  charter  in  the  office 
of  the  secretary  of  state.  People  v. 
Mackey,  255  111.  144  (1912).  Where 
the  charter  states  that  100  per  cent, 
of  the  capital  stock  subscribed  has  been 
paid  in,  but  in  fact  only  twenty  per 
cent,  had  been  paid  in,  the  state  may 
forfeit  the  charter.  Floyd  v.  State, 
59  S.  Rep.  280  (Ala.  1912).  Quo  war- 
ranto for  usurpation  of  powers  should 
be  against  the  corporation,  but  for 
not  having  a  corporate  existence  it 
should  be  against  the  individuals. 
State  V.  Lincoln  Traction  Co.,  90  Neb. 
535  (1912).  As  to  the  pleadings  in 
quo  warranto,  see  Distilling,  etc.  Co.  v. 
People,  156  111.  448  (1895) ;  People  v. 
Stanford,  77  Cal.  360  (1888).  In  a 
suit  by  an  electric  light  company  in 
the  name  of  the  state  attacking  the 
legality  of  the  incorporation  of  another 
electric  light  company,  as  allowed  by 
statute,  it  is  insufficient  to  allege  that 
the  defendant  is  a  "pretended  corpora- 
tion." State  V.  Minahan,  etc.  Co.,  141 
Wis.  400  (1909).  As  to  the  pleadings 
in  quo  warranto  against  a  street  railway 
company  assuming  to  be  a  corporation, 


see  Smith  v.  State,  140  Ind.  343  (1895). 
For  pleadings  in  quo  warranto  proceed- 
ings by  the  state  to  oust  a  corporation 
from  usurped  franchises  and  to  forfeit 
a  railroad  charter,  see  People  v.  Stan- 
ford, 77  Cal.  360  (1888),  holding  also 
that  the  statute  of  limitations  is  no 
bar.  The  state  cannot  file  a  quo  war- 
ranto proceeding  to  forfeit  a  charter, 
where  a  receiver  is  already  in  charge, 
unless  the  consent  of  the  court  is  first 
obtained.  Wayne  Pike  Co.  v.  State, 
134  Ind.  672  (1893).  In  a  quo  war- 
ranto proceeding  by  a  state  against  a 
corporation  it  may  be  compelled  to 
produce  its  books.  State  v.  Standard 
Oil  Co.,  116  S.  W.  Rep.  902  (1909); 
218  Mo.  1 ;  aff'd,  224  U.  S.  270.  A 
demurrer  will  lie  to  an  information  in 
the  nature  of  quo  warranto  filed  by  the 
state  to  forfeit  a  charter  for  non-user 
or  misuser.  State  v.  Grimm,  220  Mo. 
483  (1909).  The  supreme  court  in 
Florida  has  jurisdiction  to  forfeit  the 
charter  of  a  water-works  company  on 
quo  warranto  proceedings  but  will  not 
exercise  that  power  where  there  are 
complicated  issues  of  fact  to  be  tried 
and  such  trial  may  be  had  in  the  court 
below.  State  v.  Tampa,  etc.  Co.,  57 
Fla.  533  (1908). 

1  State  V.  Standard  Oil  Co.,  49  Ohio 
St.  137  (1892). 

2  People  V.  Buckley,  etc.  Lumber  Co., 
164  Mich.  625  (1911). 

3  Commonwealth  v.  Order  of  Vesta, 
156  Pa.  St.  531  (1893). 


1938 


CH.  XXXVIIl.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  634. 


streets  and  then  removed  them,  and  for  many  years  operated  no  cars 
thereon  at  all,  the  court  held  that  the  charter  might  be  forfeited  at  the 
instance  of  the  state. ^  Where  a  street  railway  does  not  run  its  cars  as 
required  by  the  ordinance,  the  state,  at  the  instance  of  the  city,  may  by 
quo  warranto  proceedings  oust  the  company  from  its  rights  in  said 
ordinance.  The  remedy  in  such  a  case  is  not  in  equity.^  A  street 
railway  grant  from  the  city  may  be  forfeited  at  the  instance  of  the  state 
where  the  company  runs  but  one  car  a  day  in  order  to  hold  the  franchise. 
It  may  also  be  forfeited  for  failure  to  construct  the  entire  line  within 
the  time  specified  by  statute.^ 

It  is  good  cause  for  forfeiture  of  a  charter  by  judicial  decree  that  a 
railroad  company  does  not  complete  its  road,  or  does  not  complete  it 
within  a  prescribed  time.'^    And  such  a  forfeiture  at  the  instance  of  the 


1  People  V.  Broadway  R.  R.,  126 
N.  Y.  29  (1891).  A  suit  for  forfeiture 
lies  where  a  railroad  company  takes  up 
part  of  its  track.  State  v.  West,  etc. 
Ry.,  34  Wis.  197  (1874) ;  s.  c,  36  Wis. 
466  (1874).  Or  where  a  railroad  com- 
pany constructs  but  part  of  its  road, 
has  no  station  or  freight-houses  and  no 
passenger  coaches,  but  engages  only 
in  getting  out  coal  from  beds  owned 
by  those  interested  in  the  company. 
State  V.  Railway  Co.,  40  Ohio  St.  504 
(1884).  But  the  suit  does  not  lie  on 
the  ground  that  the  company  does  not 
intend  to  complete  its  road.  State  v. 
Kingan,  51  Ind.  142  (1875);  State 
V.  Beck,  81  Ind.  501  (1882).  No 
forfeiture  is  decreed  because  a  rail- 
road company  discontinues  passenger 
trains  over  a  branch  line  which  is 
run  at  a  loss  by  reason  of  horse-car 
competition.  Commonwealth  v.  Fitch- 
burg  R.  R.,  78  Mass.  180  (1858).  The 
lessee  of  a  railroad  is  a  proper  party 
defendant  to  a  suit  to  forfeit  fran- 
chises for  non-user.  People  v.  Albany, 
etc.  R.  R.,  77  N.  Y.  232  (1879) ;  State 
V.  Minnesota  Cent.  Ry.,  36  Minn.  246 
(1886).  An  assignment  of  all  cor- 
porate assets  to  others,  thereby  ren- 
dering the  corporation  incapable  of 
continuing  business,  is  cause  for  for- 
feiture. State  V.  Real  Estate  Bank, 
5  Ark.  595  (1843).  A  bank  which 
ceases  to  do  business  and  to  file  state- 
ments, and  which  makes  improper 
loans  to  its  directors,  is  liable  to  for- 
feiture of  charter.  State  v.  Seneca 
County  Bank,  5  Ohio  St.  171   (1856). 


It  is  not  a  non-user  for  a  county  fair 
corporation  to  rent  its  grounds.  Kent 
County  Agr.  Soc.  v.  Houseman,  81 
Mich.  609  (1890).  Where  the  statute 
prescribes  that  non-user  for  a  year 
shall  be  cause  for  forfeiture,  a  non- 
user  for  a  few  days  is  insufficient. 
People  V.  Atlantic,  etc.  R.  R.,  125 
N.  Y.  513  (1891).  A  railroad  which 
is  leased  to  another  company  without 
statutory  provisions  to  do  so  is  sub- 
ject to  forfeitiu-e  at  the  instance  of 
the  state.  State  v.  Atchison,  etc.  R.  R., 
24  Neb.  143  (1888) ;  s.  c,  38  Neb.  437. 
As  to  a  failure  of  a  railroad  corpora- 
tion to  complete  its  road,  see  §  638, 
infra.  The  abandonment  of  the  right 
of  way  by  the  railroad  is  no  gro\md 
for  an  action  of  trespass  by  the  former 
owner  to  recover  it.  Logan  v.  Vernon, 
etc.  R.  R.,  90  Ind.  552  (1883).  See, 
on  this  subject,  §  906,  infra. 

2  In  this  case  the  company  had  not 
run  its  ears  for  three  years.  State  v. 
East  Fifth  St.  Ry.,  140  Mo.  539 
(1897). 

3  People  V.  Sutter  St.  Ry.,  117  Cal. 
604  (1897),  holding  also  that  the 
court  may  impose  a  fine  instead  of 
forfeiting  the  rights. 

^  The  failure  of  a  railroad  corpora- 
tion to  complete  its  line  as  laid  down 
in  the  charter  is  ordinarily  good  cause 
for  forfeiture  of  its  charter,  but  the 
state  may  waive  it.  People  v.  Ulster, 
etc.  R.  R.,  128  N.  Y.  240  (1891).  See 
also  New  York,  etc.  R.  R.  v.  New 
York,  N.  H.  etc.  R.  R.,  52  Conn.  274, 
284  (1884).     A  railroad  may  construct 


1939 


§  634. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


state,  by  reason  of  the  failure  of  the  corporation  to  complete  its  enter- 
prise as  required  by  charter,  has  often  been  decreed.^ 


its  line  long  subsequently  to  the  date 
of  its  charter,  there  being  no  limit 
in  its  charter  as  to  time  of  construc- 
tion. Western,  etc.  R.  R.'s  Appeal, 
104  Pa.  St.  399  (1883) ;  Union  Canal 
Co.  V.  Young,  1  Whart.  (Pa.)  410 
(1836).  If  the  time  limited  for  the 
completion  of  the  road  has  expired, 
this  is  a  defense  to  eminent  domain 
proceedings.  Morris,  etc.  R.  R.  v. 
Central,  etc.  R.  R.,  31  N.  J.  L.  205 
(1865).  Cf.  §637,  infra.  The  state 
may  forfeit  the  charter  where  the 
road  is  not  constructed  within  the 
time  fixed  by  the  charter  and  amend- 
ments ;  also  where  it  abandons  a  part 
of  its  lines.  State  v.  Nonconnah  Turnp. 
Co.,  17  S.  W.  Rep.  128  (Tenn.  1875). 
Where  a  railroad  company  mortgages 
such  part  of  its  road  as  is  completed, 
and  the  mortgage  is  foreclosed,  the 
purchasers  are  not  bound  to  go  on  and 
complete  the  road.  Failure  on  their 
part  to  complete  it  is  no  defense  to  an 
action  on  a  subscription.  Chartiers  Ry. 
V.  Hodgens,  85  Pa.  St.  501  (1877).  The 
court  will  not  forfeit  the  municipal 
grant  to  a  water-works  company,  even 
though  the  latter  does  not  extend  its 
mains  as  required  by  the  charter. 
Mayidamus  is  the  proper  remedy. 
City  of  Topeka  v.  Topeka  Water 
Co.,  58  Kan.  349  (1897).  Cf.  §931, 
infra. 

'  People  V.  Kingston,  etc.  Turnp. 
Co.,  23  Wend.  193  (1840),  where  the 
road  was  not  constructed  as  required ; 
Thompson  v.  People,  23  Wend.  537 
(1840),  reversing  21  Wend.  235,  hold- 
ing that  an  immaterial  omission  is 
not  fatal ;  People  v.  National  Sav. 
Bank,  11  N.  E.  Rep.  170  (111.  1887); 
aff'd,  129  III.  618  (1889),  forfeiting  for 
failure  to  complete  subscriptio'ns  as 
required  by  charter  ;  Eastern,  etc.  Co. 
V.  Regina,  22  Eng.  L.  &  Eq.  328  (1853) ; 
for  failure  to  pay  in  capital  stock  as 
required  by  charter ;  People  v.  City 
Bank,  7  Colo.  226  (1883),  to  same 
effect.  See  People  v.  Jackson,  etc. 
P.  R.  Co.,  9  Mich.  285  (1861),  for  a  case 
of  the  construction  of  a  road  in  sec- 
tions. And  where  the  charter  pre- 
scribes that  a  certain  number  of  miles 


shall  be  completed  within  a  certain 
time,  but  does  not  prescribe  that  the 
effect  of  non-compliance  shall  be  a 
forfeiture,  then  the  only  way  of  for- 
feiting the  charter  is  by  a  suit  and  a 
decree  of  a  court.  Hughes  v.  North- 
ern Pac.  Ry.,  18  Fed.  Rep.  106  (1883) ; 
Arthur  v.  Commercial  Bank,  17  Miss. 
394,  430  (1848).  The  fact  that  a  cor- 
poration commences  business  in 
another  state  within  a  year  suffices  for 
a  charter  provision  that  it  must  com- 
mence business  within  a  year.  Re 
Capital  F.  Ins.  Co.,  L.  R.  21  Ch.  L. 
209  (1882);  People  v.  Kankakee 
Improvement  Co.,  103  111.  491  (1882). 
In  this  case  the  charter  required  the 
proposed  improvements  to  be  com- 
pleted within  eight  years  as  far  east 
as  the  state  line.  The  company 
completed  as  far  east  as  Kankakee 
City,  and  claimed  the  right  to  exer- 
cise the  option  of  making  or  not 
making  further  improvements  between 
that  point  and  the  state  line.  The 
court  said  :  "The  non-compliance  with 
the  requirements  was  per  se  a  misuser, 
and  a  cause  of  forfeiture  of  the  fran- 
chise as  for  condition  broken ;" 
and  "we  can  see  here  but  one  entire 
franchise  for  the  improvement  of  these 
streams,  and  that  this  obligation  to 
make  the  improvements  above  Kan- 
kakee City  was  a  condition  annexed  to 
this  entire  franchise.  .  .  .  We 
think  the  non-compliance  with  the 
requirement  in  question  was  a  cause 
of  forfeiture  of  the  entire  franchise." 
The  bondholders  of  the  company  take 
the  risk  of  this  forfeiture  of  the  charter 
for  non-compliance  with  conditions. 
Silliman  v.  Fredericksburg,  etc.  R.  R., 
27  Gratt.  (Va.)  119  (1876),  where, 
however,  the  corporate  officers  were 
endeavoring  to  enforce  fraudulent 
bonds.  Some  of  the  English  railway 
acts  are  plainly  not  obligatory,  but 
only  enabling ;  and  it  is  held  that  the 
evident  intention  of  parliament  was  to 
permit  the  companies  to  complete  their 
lines  as  far  as  possible  or  desirable 
before  the  limit  of  time  set,  and  to 
abandon  the  remaining  portion.  York, 
etc.  Ry.  V.  The  Queen,  1  El.  &  Bl.  858 


1940 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  634. 


A  forfeiture  for  non-user  by  a  gas  company  of  its  right  to  lay  mains 
in  the  streets  can  only  be  effectuated  by  a  suit  by  the  state. ^  A  water- 
works charter  will  be  forfeited  where  the  company  has  abandoned  busi- 
ness and  attempted  to  sell  out.^  It  is  not  the  duty  of  the  attorney- 
general,  however,  to  lie  in  wait  for  all  corporations  which  have  not 
fully  or  technically  complied  with  all  the  requisites  of  their  charters.^ 
A  bill  filed  by  the  attorney-general  to  enjoin  the  construction  of  an 
electric  street  railroad  will  be  dismissed  where  it  was  filed  really  at  the 
instance  of  rival  companies.^ 

Turning  now  to  purely  private  corporations  which  do  not  exercise 
any  quasi-public  franchises,  it  is  the  rule  here  too  that  for  non-user 
quo  warranto  will  lie.'    Thus  where  a  river-improvement  company 


(1853),  reversing  same  case,  1  El.  & 
Bl.  178;  Great  Western  Ry.  v.  The 
Queen,  1  El.  &  Bl.  874  (1853),  reversing 
same  ease,  1  El.  &  Bl.  253 ;  Edinburgh, 
etc.  Rv.  V.  Philip,  2  Maeq.  H.  L.  Cas. 
514,  526  (18.57);  Scottish  N.  E.  Ry. 
V.  Stewart,  3  Macq.  H".  L.  Cas.  382, 
414  (1859).  See  also  Rex  v.  Birming- 
ham Canal,  2  W.  Bl.  708  (1780), 
by  Lord  ]Mansfield ;  Blakemore  v. 
Glamorganshire  Canal,  1  Myl.  &  K. 
162  (1832),  by  Lord  Eldon;  The  Queen 
V.  Eastern  Counties  Ry.,  10  Ad.  & 
El.  531  (1839) ;  The  Queen  v.  Lanca- 
shire, etc.  Ry.,  1  El.  &  Bl.  228  (1852). 

1  Gaslight  Co.  v.  Borough  of  South 
River,  77  N.  J.  Eq.  487  (1910). 

2  City  Water  Co.  v.  State,  33  S.  W. 
Rep.  259  (Tex.  1895).  A  state  can- 
not have  a  bridge  company's  franchise 
forfeited  on  the  ground  that  the  city 
owns  the  entire  stock  and  charges  no 
tolls  and  manages  the  property  as  its 
own.  Commonwealth  v.  Monongahela, 
etc.  Co.,  216  Pa.  St.  108  (1906).  A 
citizen  of  a  city  cannot  maintain  a 
suit  to  have  a  water-works  company 
put  in  the  hands  of  a.  receiver  on  the 
ground  that  all  of  its  stock  is  owned 
by  the  city  and  the  city  has  not  elected 
directors  having  the  necessary  qualifi- 
cation. Kirch  V.  City  of  Louisville, 
125  Ky.  391  (1907). 

3  People  V.  De  Grauw,  133  N.  Y.  254 
(1892);  People  v.  Equity  G.  L.  Co., 
141  N.  Y.  232  (1894);  Lorillard  v. 
Clyde,  142  N.  Y.  456,  465,  466  (1894) ; 
People  V.  Ulster,  etc.  R.  R.,  128  N.  Y. 
240  (1891);  United  States  v.  San 
Jacinto  Tin  Co.,  125  U.  S.  273  (1888). 


^  People  V.  General  Electric  Ry., 
172  111.  129  (1898).  A  bill  filed  by  a 
stockholder  under  the  terms  of  a 
statute  to  bring  about  a  dissolution 
and  winding  up  of  the  corporation 
will  be  dismissed  where  it  is  shoMoi 
that  the  suit  is  brought  in  the  interest 
of  rival  corporations.  The  reason  for 
dismissal  is  that  the  suit  is  a  fraud 
upon  the  court.  Watson  v.  Le  Grand, 
etc.  Co.,  177  111.  203  (1898).  The 
state  cannot  bring  quo  ivarranto  to 
prevent  a  street  railway  company 
from  carrying  freight  where  the  pro- 
ceedings are  instituted  at  the  instance 
of  a  competitor  for  the  purpose  of 
preventing  competition.  State  v.  Day- 
ton, etc.  Co.,  64  Ohio  St.  272 
(1901). 

5  The  state  may  forfeit  a  charter 
for  wilful  non-user,  although  the  cor- 
poration is  a  private  one.  People  v. 
Milk  Exchange,  133  N.  Y.  565  (1892) ; 
Edgar  Coll.  Inst.  v.  People,  142  111. 
363  (1892).  See  Attorney-General  v. 
Simonton,  78  N.  C.  57  (1878),  holding 
that  the  suit  will  not  lie,  although 
only  five  shares  of  stock  were  sub- 
scribed for  and  no  other  act  done  by 
the  corporation;  State  v.  Soeiete 
Republicaine,  etc.,  9  Mo.  App.  114 
(1880),  holding  the  same,  though  the 
company  was  dormant.  But  the  ease 
State  V.  Pipher,  28  Kan.  128  (1882), 
forfeited  the  charter  of  an  agricul- 
tural college  for  non-user  for  nineteen 
years.  And  see  dicta  in  Terrett  v. 
Taylor,  9  Cranch,  43,  51  (1815); 
State  V.  Commercial  Bank,  21  Miss. 
569  (1850).     In  New  York  by  statute 


1941 


§  634.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[cH.  XXXVIII. 


that  has  received  a  land  grant  from  the  state  for  the  purpose  of  improv- 
ing the  river  has  long  ceased  operations,  and  the  parties  interested  in 
it  departed,  an  injunction  and  dissolution  at  the  instance  of  the  state 
may  be  obtained.^ 

Where  by  statute  on  the  sale  of  corporate  property  the  corporation 
"  shall  cease  to  exist,"  the  state  may  maintain  quo  warranto  to  forfeit 
the  charter.^  But  the  charter  of  a  company  formed  to  carry  on  an 
opera  house  will  not  be  forfeited  merely  because  it  leases  the  opera 
house.^  A  corporation  is  not  bound  to  exercise  all  the  powers  contained 
in  its  charter.^  A  gas  company  organized  under  the  general  law  to 
furnish  gas  in  the  cities,  towns,  and  places  in  specified  counties  may  after 
furnishing  gas  in  a  certain  town  for  a  series  of  years  discontinue  and  take 
away  its  plant  if  it  has  not  made  any  contract  with  the  town  or  its  citi- 
zens to  the  contrary.^  An  electric  light  company  may  discontinue 
service  that  the  public  interest  no  longer  requires.^  Even  though  the 
property  of  a  private  corporation  is  sold  out  on  execution  and  it  does  no 
business  for  eight  years,  yet  it  may  resume  business."    Where  a  bridge 


such  a  suit  will  lie.  Code  Civ.  Pro., 
§  1798.  See  also  Re  Jackson,  etc.  Ins. 
Co.,  4  Sandf.  Ch.  559  (1847).  Where 
a  corporation  has  abandoned  its 
authorized  business  and  engaged  in 
another  it  will  be  wound  up.  This  is 
different  from  a  ease  where  the  direc- 
tors have  merely  and  incidentally 
committed  ultra  vires  acts.  Re  Crown, 
etc.  Bank,  L.  R.  44  Ch.  D.  634  (1890). 
An  abandonment  by  a  corporation  of 
part  of  the  purposes  of  its  incorpora- 
tion is  no  cause  for  dissolution.  Nor- 
wegian Titanic  Iron  Co.,  35  Beav. 
223  (1865),  where,  its  purpose  being 
to  purchase  EngUsh  and  Norway 
mines,  it  sold  the  English  mines.  By 
the  terms  of  a  new  constitution,  all 
corporations  which  have  failed  to 
organize  before  its  adoption  may  be 
deemed  to  have  forfeited  their  fran- 
chises thereby.  Chincleclamanch,  etc. 
Co.  V.  Commonwealth,  100  Pa.  St. 
438  (1882).  Even  though  a  land  cor- 
poration does  no  business  for  many 
years  except  to  hold  the  title  to  a  tract 
of  land  which  it  has  purchased,  yet 
this  is  not  cause  for  dissolution  at  the 
instance  of  a  stockholder  under  the 
Virginia  statute.  Radford,  etc.  Co.  v. 
Cowan,  101  Va.  632  (1903) 

'  State  V.   Cannon,  etc.  Assoc,  67 
Mian.  14  (1896). 


2  Commonwealth  v.  Lumber,  etc. 
Co.,  225  Pa.  St.  317  (1909). 

3  People  V.  Walker,  etc.  Co.,  249 
111.  106  (1911). 

*  Illinois,  etc.  Bank  v.  Doud,  105 
Fed.  Rep.  123  (1900).  A  corporation 
organized  to  furnish  power  as  well  as 
electric  light,  and  which  does  fur- 
nish the  electric  light  within  the 
time  fixed  by  its  charter,  need  not 
complete  its  plant  to  furnish  power 
unless  there  is  a  demand  for  the  power. 
Proceedings  by  the  state  to  forfeit  its 
right  to  furnish  power  will  fail.  State 
V.  Twin,  etc.  Co.,  98  Me.  214  (1903). 
The  charter  of  a  corporation  formed 
to  conduct  agricultural  fairs  and  oper- 
ate a  race-track,  may  be  forfeited  if 
it  confines  itself  to  the  race-track  busi- 
ness. State  V.  Delmar,  etc.  Club, 
200  Mo.  34  (1906). 

^  East,  etc.  Co.  v.  City  of  Akron, 
81  Ohio  St.  33  (1909).  A  natural 
gas  company  may  cease  operations  in 
a  certain  district  and  customers  can- 
not compel  it  to  continue.  Germania, 
etc.  Co.  V.  Alum,  etc.  Co.,  226  Pa.  St. 
438  (1910). 

fi  Weld  V.  Gas,  etc.  Com'rs,  197 
Mass.  556   (1908). 

^  Geneva,  etc.  Co.  v.  Coursey,  45 
N.  Y.  App.  Div.  268  (1899).  See  also 
§  631,   supra. 


1942 


CH.  XXXVIII. I 


DISSOLUTION,    FORFEITURE,    ETC. 


635. 


was  originally  incorporated  for  ordinary  public  travel  as  well  as  rail- 
road tracks,  but  for  nearly  thirty  years  has  been  used  exclusively  for 
railroad  tracks,  the  state  cannot  by  mandamus  compel  such  an  altera- 
tion in  the  bridge  as  to  make  a  toll  bridge  for  general  travel.^ 

§  635.  Injunction  at  the  instance  of  the  state.  —  Turning  now  to 
the  subject  of  injunction  as  a  remedy,  it  is  very  doubtful  whether  the 
state  may  file  a  bill  in  equity  to  enjoin  a  corporation  from  committing 
an  ultra  vires  act.  The  remedy  of  the  state  is  quo  warranto?  In 
England,  however,  a  bill  has  been  sustained  to  restrain  a  railroad  cor- 
poration from  engaging  in  the  coal  business.^  And  an  injunction  lies 
to  enjoin  a  corporation,  the  same  as  an  individual,  from  creating  a 
public  nuisance.'*  A  corporation  in  possession  of  a  mine  which  is  on 
fire  may  be  compelled  by  mandamus  to  try  to  extinguish  it,  but  where 
it  has  exhausted  all  its  funds  in  doing  so  a  court  of  equity  cannot 
compel  it  to  do  more.*"  The  state  may  enjoin  a  railroad  corporation 
from  purchasing  a  competing  line  in  violation  of  the  constitution.^ 


*  Attorney-General,  etc.  v.  Boon- 
ville,  etc.  Co.,  206  Mo.  74  (1907). 

2  In  quo  warranto  proceedings  it  is 
not  necessary  to  forfeit  the  whole 
charter  or  none.  There  may  be  judg- 
ment of  ouster  from  particular  powers. 
See  §  633,  supra. 

3  Attorney-General  v.  Great  North- 
ern Ry.,  1  Dr.  &  Sm.  154  (1860).  But 
the  attorney-general  cannot  enjoin  a 
corporate  act  merely  because  it  is 
ultra  vires.  Some  injury  to  the  public 
must  be  involved.  The  attorney- 
general's  suit,  at  the  instance  of  a 
manufacturer,  to  enjoin  one  railroad 
from  leasing  its  rolling  stock  to  another 
failed.  Attorney-General  v.  Great 
Eastern  Ry.,  L.  R.  11  Ch.  D.  449 
(1879).  A  court  of  equity  cannot  com- 
pel a  corporation  to  cease  collecting 
tolls,  although  it  has  not  improved 
a  stream  as  required  by  its  charter. 
Pixley  V.  Roanoke,  etc.  Co.,  75  Va. 
320  (1881).  In  Attorney-General  v. 
Mid-Kent  Ry.,  L.  R.  3  Ch.  App.  100 
(1867),  a  mandatory  injunction  requir- 
ing the  defendant  to  construct  a  bridge 
was  granted.  The  case  Attorney-Gen- 
eral V.  North,  etc.  Tramways  Co., 
72  L.  T.  Rep.  340  (1895),  was  an 
action  brought  by  the  attorney-general 
at  the  relation  of  several  car  manufac- 
turers to  restrain  a  street  railway  com- 
pany from  manufacturing  and  selling 
rolling-stock  to    other  companies,   on 


the  ground  that  such  acts  were  ultra 
vires. 

*  Attorney-General ;;.  Jamaica  Pond, 
etc.  Corp.,  133  Mass.  361  (1882).  A 
corporation  may  be  enjoined  from 
doing  criminal  acts  —  In  this  case 
prize-fighting  —  and  a  receiver  may 
be  put  in.  Columbian  Athletic  Club 
V.  State,  143  Ind.  98  (1895).  A  state 
may  maintain  a  suit  to  compel  a 
receiver  of  a  street  railway  to  remove 
the  street  railway  tracks  from  the 
streets  on  account  of  the  tracks  having 
become  a  public  nuisance  by  not  being 
properly  maintained,  and  the  railroad 
company  itself  is  not  a  necessary  party 
defendant.  City  of  New  York  v. 
Montague,  145  N.  Y.  App.  Div.  172 
(1911). 

5  McCabe  v.  Watt,  224  Pa.  St.  253 
(1909). 

8  Louisville,  etc.  R.  R.  v.  Common- 
wealth, 97  Ky.  675  (1895);  aff'd  in 
161  U.  S.  677  (1896),  sub  nom.  Louis- 
ville, etc.  Ry.  V.  Kentucky.  In  Massa- 
chusetts by  statute  the  attorney- 
general  may  enjoin  a  railroad  from 
committing  an  idtra  vires  act,  i.  e.,  the 
illegal  holding  of  street  railway  stocks. 
Attorney-General  v.  New  York,  etc. 
R.  R.,  198  Mass.  413  (1908).  A  court 
of  equity  has  no  jurisdiction  to  for- 
feit the  franchises  of  a  corporation, 
but  it  may,  at  the  instance  of  the 
attorney-general,  enjoin  the  abuse  or 


1943 


§  635.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


Where  a  steam  railroad  is  buying  the  stocks  and  bonds  of  street  rail- 
roads, the  attorney-general  under  the  Massachusetts  statute  may  file 
an  information  in  equity  to  prevent  the  exercise  of  that  particular  power, 
instead  of  applying  for  a  inandamus  or  an  information  at  law  in  the 
nature  of  quo  warranto.^  In  Wisconsin  it  is  held  that  the  attorney- 
general  may  enjoin  railroad  companies  from  taking  greater  rates  than 
are  prescribed  by  statute ;  ^  and  in  some  of  the  states  such  a  bill  will 
lie  by  statute.^  The  attorney-general  may  file  a  bill  to  restrain  a  rail- 
road company  from  laying  its  tracks  on  the  street,  and  it  is  not  neces- 
sary for  him  to  prove  any  injury  to  the  public.'*  A  state  may  maintain 
a  suit  for  an  injunction  against  an  elevator  company  using  all  its  capac- 
ity for  the  benefit  of  its  stockholders,  where  the  objection  is  not  raised 
that  there  is  an  adequate  remedy  at  law.^ 

The  weight  of  authorit}',  however,  is  that  the  remedy  of  the  state 
is  by  quo  warranto  and  not  by  a  bill  in  equity  for  an  injunction.^    As, 


misuse  of  corporate  franchises.  State 
V.  American,  etc.  Assoc,  64  Minn. 
349  (1896).  In  the  case  Trust  Co. 
etc.  V.  State,  109  Ga.  736  (1900), 
there  is  a  dictum  that  the  state  may 
enjoin  a  corporation  from  illegally 
purchasing  shares  of  stock  in  other 
corporations  where  it  is  shown  that  an 
injury  to  the  public  is  involved.  The 
court  said  that  while  injunction  was 
not  the  proper  remedy  for  an  act 
which  was  merely  ultra  vires,  yet  where 
some  public  interest  intervened,  such 
an  injunction  would  lie.  See  §  633, 
supra. 

1  Malone  v.  New  York,  etc.  R.  R., 
197  Mass.  194  (1908). 

2  Attorney-General  v.  Railroad  Cos., 
35  Wis.  523,  553  (1874),  reviewing 
many  cases ;  but  cf.  Strong  v.  McCagg, 
55  Wis.  624  (1882).  The  attorney- 
general  may  enjoin  a  railroad  from 
charging  higher  rates  than  those  which 
have  been  established  by  the  legisla- 
ture. State  t^.  Boston,  etc.  R.  R.,  75 
N.  H.  327  (1909).  That  a  bill  in 
equity  will  lie,  at  the  instance  of  the 
United  States  government,  to  declare 
invalid  a  violation  of  a  federal  charter, 
see  U.  S.  V.  Western  U.  Tel.  Co.,  50 
Fed.  Rep.  28  (1892) ;  aff'd,  160  U.  S. 
1  (1895).  The  attorney-general  may 
maintain  a  suit  in  equity  to  enjoin 
express  companies  from  charging  higher 
rates  than  are  fixed  by  statute.  State 
V.  Pacific,  etc.  Co.,  80  Neb.  823  (1908). 


^  State  V.  Merchants',  etc.  Co.,  8 
Humph.  (Tenn.)  254  (1874),  where 
an  insurance  company  was  restrained 
from  banking.  So  also  in  New  York 
Bank  Com'rs  v.  Bank  of  Buffalo,  6 
Paige,  496  (1837);  Brinckerhoff  v. 
Bostwick,  88  N.  Y.  52  (1882),  explain- 
ing the  difference  between  this  class 
of  cases  and  cases  where  other  parties 
are  complainants.  Concerning  the 
power  of  the  state  to  object  to  an 
ultra  vires  act  of  a  private  corporation 
by  any  proceeding  other  than  quo 
warranto,  see  People  v.  Ballard,  134 
N.  Y.  269  (1892),  a  carefully  considered 
case. 

*  Grey  v.  Greenville,  etc.  Co.,  60 
N.  J.  Eq.  153  (1900).  And  although  a 
private  owner  of  land  who  is  not  injured 
in  any  way  different  from  the  rest  of 
the  public  cannot  file  such  a  bill,  yet 
such  private  owner  may  be  relator 
in  an  information  filed  by  the  attorney- 
general.  Grey  v.  Greenville,  etc.  Ry., 
59  N.  J.  Eq.  372  (1900). 

5  Central  Elevator  Co.  v.  People,  174 
111.  203  (1898).  A  state  has  no  right 
to  enjoin  a  railroad  from  discontinu- 
ing the  operation  pf  its  elevators  as 
public  warehouses  where  it  has  no 
power  to  act  as  a  public  warehouseman. 
People  V.  Illinois,  etc.  Co.,  233  111. 
378  (1908). 

^  Attorney-General  v.  Utica  Ins.  Co., 
2  Johns.  Ch.  371  (1817);  Attorney- 
General  V,  Bank  of  Niagara,  Hopk.  Ch. 


1944 


CH.   XXXVIII. 


DISSOLUTION,    FORFEITURE,    ETC. 


635. 


for  instance,  the  attorney-general  cannot  enjoin  a  gas  company  from 
laying  its  pipes,  even  though  he  claims  that  the  charter  was  void  by 
reason  of  the  company  not  having  commenced  work  within  the  pre- 
scribed time.^  Quo  warranto  may  be  the  remedy  of  the  state  where 
"  watered  "  stock  has  been  illegally  issued.- 

An  injunction  does  not  he  at  the  instance  of  the  state  against  a 
corporation  doing  business,  on  the  ground  that  its  stock  was  not  prop- 
erly issued  and  that  there  was  no  intent  to  do  any  business  within  the 
state  or  to  have  an  office  therein ;  nor  does  an  injunction  he  at  the  in- 
stance of  the  state  to  restrain  a  corporation  from  transacting  business, 
even  though  it  vras  formed  to  bring  about,  by  conditions  imposed  upon 
selling  agents,  a  monopoly  in  the  cigarette  business,  and  had  largely 
succeeded  in  doing  so.^    But  the  United  States  government  may  enjoin 


354  (1825).  But  see  People  v.  Ballard, 
134  N.  Y.  269  (1892).  In  Attorney- 
General  V.  Tudor  lee  Co.,  104  Mass. 
239  (1870),  an  injunction  restraining 
an  ice  company  from  importing  teas 
was  denied.  A  state  creating  a  cor- 
poration has  no  visitorial  power  over 
it  —  i.  e.,  power  to  correct  corporate 
abuses  —  except  "  (1)  where  municipal, 
charitable,  religious,  or  eleemosynary 
corporations,  public  in  their  nature, 
had  abused  their  franchises,  perverted 
the  purpose  of  their  organization,  or 
misappropriated  their  funds ;  and  as 
they,  from  the  nature  of  their  corporate 
functions,  were  more  or  less  under 
government  supervision,  the  attorney- 
general  proceeded  against  them  to 
obtain  correction  of  the  abuse ;  or  (2) 
where  private  corporations  chartered 
for  private  and  limited  purposes  had 
exceeded  their  powers,  and  were 
restrained  or  enjoined  in  the  same  man- 
ner from  the  further  violation  of  the 
limitation  to  which  their  powers  were 
subject."  Hence  the  United  States, 
as  the  creator  of  the  Union  Pacific 
Railroad,  cannot  exercise  visitorial 
power  over  it  in  respect  to  frauds  in 
its  management.  U.  S.  v.  Union  Pa- 
cific R.  R.,  98  U.  S.  569,  617  (1878). 
Cf.  Attorney-General  v.  Wilson,  1 
Cr.  &  Ph.  1   (1840),  holding  that  the 


Foundling  Hospital,  2  Ves.  Jr.  42 
(1793).  See  the  Pennsylvania  cases 
in  §  314,  supra,  where  the  state 
enjoined  an  illegal  purchase  of  stock 
by  a  corporation. 

1  People  V.  Equity  Gas  Light  Co., 
141  N.  Y.  232  (1894).  The  attorney- 
general  cannot  maintain  an  injunc- 
tion against  a  combination  of  insurance 
companies  to  fix  rates  and  com- 
missions, inasmuch  as  insurance  busi- 
ness is  not  a  public  or  quasi-public 
business,  nor  does  it  concern  a  staple 
of  life.  Queen  Ins.  Co.  v.  State,  86 
Tex.  250  (1893). 

*  See  §  37,  supra.  Even  though  a 
person  who  has  a  contract  with  a 
street  railway  company  that  the  lat- 
ter will  lease  its  street  railway  on 
certain  terms,  turns  over  such  con- 
tract to  a  new  corporation  for  $900,- 
000  of  stock  of  the  latter,  and  the 
latter  then  assumes  the  lease,  and 
even  though  such  stock  is  illegal 
under  the  constitution  and  statutes 
of  Pennsylvania,  yet  where  the 
state  delays  three  years  in  filing  a 
bill  to  declare  it  void,  and  meanwhile 
the  stock  has  passed  into  bona  fide 
hands,  and  not  until  five  years  there- 
after are  the  real  oA\Tiers  of  the  stock 
made  parties  defendant,  the  bill  will 
be  dismissed.    Commonwealth  v.  Read- 


court  had  jurisdiction  over  charitable    ing,  etc.  Co.,  204  Pa.  St.  151  (1902). 


corporations,  and  that  when  the  trus- 
tees of  them  abuse  their  trust  the  court 
would  take  notice  of  such  abuse  by 
reason  of  its  visitorial  powers.  Also, 
on    this    point,    Attorney-General    v. 


The  remedy,  if  any,  is  by  quo  war- 
ranto. The  court  reviewed  the  cases 
wherein  injunction  would  lie.  Stock- 
ton V.  American,  etc.  Co.,  55  N.  J.  Eq. 
352  (1897). 


1945 


§  635.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


corporations  from  combining  in  violation  of  the  anti-trust  act  of  con- 
gress of  July  2,  1890.^  The  state  may  enjoin  foreign  corporations  from 
doing  business  illegally  in  the  state.^  A  highway  commissioner  cannot 
be  authorized  by  statute  to  stop  a  toll  road  company  from  collecting 
tolls  until  it  repairs  its  road,  because  that  is  a  judicial  function.^  A  cor- 
poration may  be  compelled  to  produce  its  books  and  papers  for  examina- 
tion by  a  grand  jury,  even  though  it  is  charged  with  a  criminal  violation 
of  a  statute,  but  where  there  is  no  act  of  congress  authorizing  such  ex- 
amination, a  subpoena  duces  tecum  requiring  it  to  produce  all  its  books 
and  papers  before  a  grand  jury  is  unreasonable  and  as  indefensible  as 
a  search  warrant  would  be  if  couched  in  similar  terms. ^     A  receiver  will 


*  See  §  503a,  supra. 

2  Where  a  New  Jersey  corporation 
has  brought  about  an  illegal  combina- 
tion and  trust  of  fertilizer  corpora- 
tions and  has  obtained  permission  to 
do  business  in  South  Carolina,  a  suit 
lies  against  it  at  the  instance  of  the 
state  to  cancel  the  conveyances  of 
property  to  it  in  the  state  and  to  have 
receivers  appointed  of  the  South 
Carolina  corporations  that  entered 
into  the  combination,  and  to  set  aside 
all  illegal  contracts  and  to  revoke  the 
license  to  the  New  Jersey  corporation 
to  do  business  in  the  state.  State  v. 
Virginia-Carolina,  etc.  Co.,  71  S.  C. 
544  (1905).  A  lease  by  a  domestic 
railroad  company  of  its  railroad  to  a 
foreign  railroad  corporation  is  illegal, 
especially  where  it  is  expressly  prohib- 
ited by  statute.  The  court  will  enjoin 
the  lease  upon  the  application  of  the 
attorney-general  where  the  effect  of 
the  lease  would  be  to  create  a  combina- 
tion in  the  transportation  of  coal  and 
to  destroy  competition  in  production 
and  sale.  Stockton  v.  Central  R.  R. 
of  N.  J.,  50  N.  J.  Eq.  52  (1892).  A 
state  may  cancel  the  license  granted 
to  a  foreign  corporation  to  do  business 
in  the  state  where  the  company  is 
violating  the  anti-trust  act,  or  the 
state  may  prohibit  it  from  doing  cer- 
tain specific  acts  and  retain  the  case 
for  further  orders  from  time  to  time. 
State  V.  International,  etc.  Co.,  81 
Kan.  610  (1910).  The  state  may 
enjoin  a  foreign  railroad  company 
from  carrying  on  the  warehouse  busi- 
ness, except  so  far  as  the  same  is  inci- 
dental   to    the   railroad    business,    the 


charter  of  such  company  not  including 
warehouse  business  as  a  business  in 
itself.  State  v.  Southern,  etc.  Co.,  52 
La.  Ann.  1822  (1900).  The  Tennessee 
statute,  prohibiting  foreign  corpora- 
tions from  doing  business  in  the  state 
where  they  have  combined  to  lessen 
competition  and  influence  prices,  is 
legal,  and  the  state  may  file  a  bill  to 
restrain  foreign  corporations  from  doing 
business  in  the  state  where  they  have 
violated  such  statute.  State  v.  Schlitz, 
etc.  Co.,  104  Tenn.  715  (1900).  As  to 
quo  warranto  against  foreign  corpora- 
tions, see  §  633,  supra. 

3  Bridge  Street,  etc.  Co.  v.  Hoga- 
done,  150  Mich.  638  (1908). 

^Hale  V.  Henkel,  201  U.  S.  43 
(1906).  Officers  of  a  corporation  can- 
not excuse  their  failure  to  produce 
books  and  papers  called  for  by  a 
subpoena  duces  tecrirn  in  a  proceeding 
before  the  grand  jury  on  the  ground 
that  such  books  and  papers  are  not  in 
their  possession  or  under  their  control, 
and  they  cannot  object  on  the  ground 
that  the  books  and  papers  are  imma- 
terial. Nelson  v.  United  States,  201 
U.  S.  92  (1906).  A  subpoena  duces 
tecum  commanding  the  secretary  and 
treasurer  of  a  corporation,  which  is 
charged  with  violating  an  anti-trust 
act,  to  appear  and  produce  practically 
all  the  correspondence  and  documents 
of  the  corporation  since  its  organization, 
in  order  to  enable  the  district  attorney 
to  prove  a  violation  of  the  statute,  is 
an  unreasonable  search  and  seizure 
of  papers,  which  is  prohibited  by  the 
fourth  amendment  of  the  Constitu- 
tion of  the  United  States.     In  re  Hale, 


1946 


CH,  XXXVIII.] 


DISSOLUTIOxNf,    FORFEITURE,    ETC. 


[§  636. 


not  be  appointed  even  though  the  promoters  have  elected  directors  in 
violation  of  promises  made,  and  purchased  stock  for  the  company,  it 
appearing  that  they  endeavored  to  correct  these  acts  when  objected 
to  by  the  attorney-general.^  An  electric  light  company  cannot  enjoin 
another  electric  light  company  from  doing  business  on  the  ground 
that  the  latter  was  illegally  incorporated.^ 

§  636.  The  state  may  waive  its  right  to  forfeit  a  charter.  —  Vari- 
ous acts  have  been  held  to  constitute  such  a  waiver.  "  When  a  legis- 
lature has  full  power  to  create  corporations,  its  act  recognizing  as  valid 
a  de  facto  corporation,  whether  private  or  municipal,  operates  to  cure 
all  defects  in  steps  leading  up  to  the  organization,  and  makes  a  de  jure 
out  of  what  before  was  only  a  de  facto  corporation."  There  must, 
however,  be  a  de  facto  organization  upon  which  this  recognition  may 
act.3  Numerous  instances  of  acts  of  the  legislature  which  constitute  a 
waiver  are  set  forth  in  detail  in  the  notes  below  .^ 


139  Fed.  Rep.  496  (1905) ;  aff'd,  201 
U.  S.  43.  For  other  decisions  to  the 
effect  that  there  is  a  very  decided 
limit  to  the  powers  oif  the  legislature 
or  executive  branches  of  the  govern- 
ment to  compel  the  production  of  the 
private  books  and  papers  of  a  cor- 
poration for  inspection,  and  that  there 
is  also  a  limit,  even  in  judiciary  pro- 
ceedings, see  Matter  of  Application  of 
Pacific  Railway  Commission,  32  Fed. 
Rep.  241  (1887) ;  Kilbourn  v.  Thomp- 
son, 103  U.  S.  168  (1880).  Cf.  Inter- 
state Commerce  Commission  v.  Brim- 
son,  154  U.  S.  447  (1894) ;  In  re  Chap- 
man, 166  U.  S.  661  (1897). 

1  State  t'.  People's,  etc.  Bank,  197 
Mo.  574  (1906). 

2  Geneva,  etc.  Co.  v.  Economic,  etc. 
Co.,  136  N.  Y.  App.  Div.  219  (1910). 

3  Comanche  County  v.  Lewis,  133 
U.  S.  198  (1890). 

*  A  legislative  recognition  of  a 
charter  may  cure  any  unconstitution- 
ality in  the  statute  creating  it.  Snell 
V.  Chicago,  133  111.  413  (1890).  The 
extension  of  time  to  complete  rail- 
roads applies  so  as  to  prevent  for- 
feiture for  non-completion  within  the 
original  time.  State  v.  Bergen  Neck 
Ry.,  53  N.  J.  L.  108  (1890).  Although 
suit  is  brought  to  forfeit  a  street- 
railway  franchise  for  using  electric 
power  without  authority,  the  legis- 
lature may  cure  the  defect  of  power. 
To  forfeit  for  not  commencing  work 


within  a  year  the  pleading  must 
allege  when  the  work  was  com- 
menced. People  V.  Los  Angeles,  etc. 
Ry.,  91  Cal.  338  (1891).  An  amend- 
ment to  a  charter  is  a  waiver  of  any 
forfeiture  thereof  due  to  not  com- 
mencing business  within  the  pre- 
scribed time.  Farnsworth  v.  Lime 
Rock,  etc.  R.  R.,  83  Me.  440  (1891). 
Although  the  act  requires  the  certifi- 
cate of  incorporation  to  specify  the 
termini,  and  the  certificate  merely 
says  the  termini  are  in  a  certain  city, 
yet  if  the  legislature  subsequently,  by 
special  act,  recognizes  the  company, 
the  legality  of  its  existence  cannot  be 
questioned.  Koch  v.  North  Ave.  Ry., 
75  Md.  222  (1892).  In  this  case  the 
organization  was  under  the  general 
railroad  law.  Under  such  a  charter 
the  route  and  its  termini  are  to  be 
determined  by  the  mayor  and  city 
council  "under  their  general  power  of 
control  and  regulation  of  the  streets." 
A  statute  authorizing  a  corporation 
to  reduce  its  capital  stock  waives  in- 
formalities in  its  incorporation,  and 
such  waiver  may  extend  to  an  illegal 
issue  of  watered  stock.  State  v.  Webb, 
110  Ala.  214  (1896).  A  waiver  may 
be  express  or  by  statutes  recognizing 
its  continued  existence,  Re  New  York 
El.  R.  R.,  70  N.  Y.  327,  338  (1877) ; 
People  V.  Manhattan  Co.,  9  Wend. 
352,  380  (1832);  or  requiring  it  to 
make   alterations    on   its  road,   Atty. 


1947 


§  637.] 


DISSOLUTION,    FOKFEITURE,    ETC, 


[cH.  XXXVIII. 


§  637.  Who  may  allege  that  forfeiture  or  non-incorporation  or 
dissolution  exists — De  facto  corporations.  —  It  has  already  been 
shown  that  no  one  but  the  state  can  institute  a  suit  to  declare  a  for- 
feiture.^ Also,  that  no  one  can  institute  a  suit  in  equity  to  dissolve 
a  corporation.-     The  question  now  arises  whether  the  state  or  any 


Gen.  V.  Petersburg,  etc.  R.  R.,  6 
Ired.  L.  (N.  C.)  470  (1846) ;  or  authoriz- 
ing a  transfer  of  its  property  and  fran- 
chises to  another  corporation,  Ches- 
apeake, etc.  Canal  Co.  v.  Baltimore, 
etc.  R.  R.,  4  G.  &  J.  (Md.)  1,  127 
(1832) ;  or  requiring  a  bank  to  re- 
sume specie  payments  by  a  certain 
date.  Commercial  Bank  v.  State,  6 
Sm.  &  M.  (Miss.)  599,  622  (1846). 
But  waiver  as  to  terminus  is  not  a 
waiver  of  an  abandonment  of  part 
of  the  road,  nor  of  a  defect  as  to  the 
width  of  the  turnpike.  People  v. 
Fishkill,  etc.  Co.,  27  Barb.  445  (1857). 
Waiver  may  arise  by,  a  statute  ex- 
tending the  corporate  powers.  People 
V.  Ottawa,  etc.  Co.,  115  111.  281  (1885) ; 
Central,  etc.  R.  R.  v.  Twenty-third, 
etc.  R.  R.,  54  How.  Pr.  168,  186 
(1877) ;  or  by  authorizing  a  change 
of  route.  State  v.  Fourth,  etc.  Co.,  15 
N.  H.  162  (1844);  or  by  expressly 
waiving  the  cause  for  forfeiture. 
Lumpkin  v.  Jones,  1  Ga.  27  (1846). 
The  legislature  may  expressly  waive 
a  cause  for  forfeiture  arising  from 
suspension  of  specie  payments.  Atch- 
afalaya  Bank  v.  Dawson,  13  La.  497 
(1839).  May  waive  by  extending  the 
time  for  completion.  La  Grange,  etc. 
R.  R.  V.  Rainey,  7  Coldw.  (Tenn.)  420 
(1870).  Amending  charter,  etc.,  is  a 
waiver.  White's,  etc.  Co.  v.  Davidson 
County,  3  Tenn.  Ch.  396  (1877).  An 
act  reviving  a  corporation  is  a  waiver, 
even  though  the  act  was  fraudulently 
passed.  Re  Mechanics'  Soc,  31  La. 
Ann.  627  (1879).  The  waiver  pro- 
tects a  turnpike  corporation  from 
an  indictment  for  obstructing  the  road. 
State  V.  Godwinsville,  etc.  Co.,  44 
N.  J.  L.  496  (1882).  But  the  waiver 
must  have  been  clearly  intended. 
People  V.  Kingston,  etc.  Co.,  23 
Wend.  193  (1840).  The  appoint- 
ment of  a  corporate  officer  by  the  gov- 
ernor and  senate  is  not  a  waiver.  Peo- 
ple  V.   Phoenix   Bank,   24  Wend.   431 


(1840).  Long  delay  in  bringing  the 
quo  xoarranto  may  be  a  waiver.  Peo- 
ple V.  Williamsburgh,  etc.  Co.,  47  N.  Y. 
586  (1872);  People  v.  Oakland,  etc. 
Bank,  1  Doug.  (Mich.)  282  (1843). 
Cf.  §  633,  notes,  supra.  Dictum,  that 
the  state  may  waive  forfeiture. 
Briggs  V.  Cape  Cod,  etc.  Co.,  137  Mass. 
71  (1884),  citing  cases.  A  special 
act  amending  the  charter  waives  de- 
fects in  the  articles  of  association  as 
filed.  Basshor  v.  Dressel,  34  Md.  503 
(1871).  An  amendment  to  a  charter 
waives  the  right  of  forfeiture  for 
fraud,  non-user,  and  misuser.  People 
V.  Ottawa,  etc.  Co.,  115  111.  281  (1886). 
An  amendment  of  the  charter  is  a 
waiver.  Attorney-General  v.  Peters- 
burg, etc.  R.  R.,  6  Ired.  L.  (N.  C.)  456 
(1846) ;  Charles  River  Bridge  Co.  v. 
Warren  Bridge,  24  Mass.  344  (1829). 
The  waiver  may  be  express.  State  v. 
Bank  of  Charleston,  2  McMull.  (S.  C.) 
439  (1843) ;  Enfield  Bridge  Co.  v.  Con- 
necticut, etc.  Co.,  7  Conn.  28  (1828) ; 
Kanawha  Coal  Co.  v.  Kanawha,  etc. 
Co.,  7  Blatchf.  391  (1870) ;  s.  c,  14 
Fed.  Cas.  108.  Where  the  incorpora- 
tion had  been  irregular,  the  recog- 
nition of  a  corporation  by  the  legis- 
lature is  equivalent  to  a  charter.  Mc- 
Auley  V.  Columbus,  etc.  Ry.,  83  111.  348 
(1876) ;  Cowell  v.  Colorado  Springs 
Co.,  3  Colo.  82  (1876) ;  Mead  v.  New 
York,  etc.  R.  R.,  45  Conn.  199  (1877) ; 
Kanawha  Coal  Co.  v.  Kanawha,  etc. 
Co.,  7  Blatchf.  391  (1870) ;  s.  c,  14 
Fed.  Cas.  108;  St.  Louis  R.  R.  v. 
Northwestern,  etc.  Ry.,  2  Mo.  App.  69 
(1876) ;  Atlantic,  etc.  R.  R.  v.  St. 
Louis,  66  Mo.  228  (1877);  State  v. 
Morris,  73  Tex.  435  (1889).  Contra, 
where  charters  must  be  granted  by 
general  laws,  Oroville,  etc.  R.  R.  v. 
Supervisors,  37  Cal.  354  (1869).  But 
see  Brent  v.  State,  43  Ala.  297  (1869). 

1  §  632,  supra. 

2  §  629,  supra. 


1948 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  637. 


person,  either  as  plaintiff  or  defendant,  may  allege  forfeiture  or  dis- 
solution or  non-incorporation  where  there  have  been  no  quo  warranto 
proceedings  instituted  and  prosecuted  by  the  state  to  judgment.  With 
a  few  exceptions  such  an  allegation  is  not  allowed. 

A  creditor  of  a  supposed  corporation  cannot  ordinarily  hold  the 
stockholders  liable  as  partners  although  they  did  not  legally  incor- 
porate.^ It  is  true  that  in  certain  cases,  where  a  stockholder  is  made 
liable  to  corporate  creditors  upon  the  dissolution  of  the  corporation,  a 
dissolution  is  held  to  exist  where  the  corporation  is  hopelessly  insol- 
vent.^ But  as  a  rule  no  one  is  allowed  to  assert  that  the  corporation 
CIS  dissolved,  or  its  franchise  forfeited,  or  its  incorporation  illegal,  until  ■■■. 
after  such  a  result  has  been  decreed  by  a  court  in  a  proceeding  instituted.';^ 
for  that  purpose  by  the  state.  Thus,  a  stockholder  sued  on  his  sub- 
scription cannot,  unless  his  subscription  was  made  previous  to  the  in- 
corporation, set  up  that  the  company  was  not  legally  incorporated.^ 

The  corporation  is  called  a  de  facto  corporation,  and  only  the  state 
is  allowed  to  question  its  existence. 

If  there  is  a  law  authorizing  incorporation,  and  a  company  has  at- 
tempted to  organize  under  it  and  has  acted  as  a  corporation,  it  is  a 
de  facto  corporation,  and  its  de  jure  existence  can  be  questioned  only 
by  the  state."*     In  condemnation  proceedings,  instituted  by  a  corpora- 


1  See  ch.  XIII,  supra. 

2  See  §  631,  supra. 

3  §§  183-186,  supra.    Concerning  the 

r question  of  who  can  complain  of  mis- 
takes,   irregularities,     and    illegalities 
in  the  corporation,  see  also  ch.  I,  §  5, 
■■   supra. 

*  Quoted  and  approved  in  Central, 
etc.  Ry.  V.  Union,  etc.  Ry.,  144  Ala.  639 
(1905).  Independent  Order  v.  United 
Order,  94  Wis.  234  (1896).  "The  test 
of  a  de  facto  corporation  is  this  :  Was 
there  a  law  under  which  there  might ' 
have  been  a  de  jure  corporation  of 
the  kind,  character,  and  class  to 
which  the  organization  in  question 
apparently  belongs?"  Toledo,  etc. 
R.  R.  V.  Continental  Trust  Co.,  95  Fed. 
Rep.  497,  508  (1899).  A  corporation 
is  a  de  facto  one  where  the  law  author- 
izes such  a  corporation  and  where 
the  company  has  made  an  effort 
to  organize  under  that  law  and  is 
transacting  business  in  the  corporate 
name.  Marshall  v.  Keach,  227  111. 
35  (1907).  In  proving  a  de  facto 
corporation  the  meetings  and  the 
issue    of    stock    and    the    transaction 


of  business  may  be  proved  by  parol 
without  producing  the  books.  John- 
son V.  Okerstrom,  70  Minn.  303  (1897). 
A  de  facto  corporation  exists  where 
the  company  might  have  incorporated 
under  the  statutes  and  has  acted  as  a 
corporation.  Methodist,  etc.  Church 
t-.  Pickett,  19  N.  Y.  482  (1859). 
Estoppel  as  to  corporate  existence 
seems  to  mean  that  the  corporation 
is  obliged  to  prove  only  a  de  facto 
existence,  and  need  not  prove  the 
details  of  incorporation.  Leonards- 
ville  Bank  v.  Willard,  25  N.  Y.  574 
(1862).  No  one  but  the  state  can 
question  the  regularity  of  incorporation 
where  the  company  has  endeavored  to 
incorporate  and  is  actually  acting  as  a 
corporation.  Bond  v.  Scott  Lumber 
Co.,  128  La.  818  (1911).  A  corpora- 
tion may  be  de  facto  even  though  its 
charter  omitted  certain  essential  fea- 
tures required  by  statute.  Healey 
V.  Steele,  etc.  Assoc,  115  Minn.  451 
(1911).  A  stockholder  cannot  have 
the  company  wound  up  on  the  ground 
that  it  had  not  fully  complied  with  the 
statute   in   its   incorporation   proceed- 


1949 


§  637.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  xxxvin. 


tion,  the  property  owner  may  set  up  the  defense  that  the  corporation 
is  neither  a  de  facto  nor  a  de  jure  corporation,^  but  if  its  de  facto  exist- 
ence is  clear,  no  question  can  be  raised  in  that  proceeding  as  to  its  de 
jure  existence.^ 


? 


ings.  Troutman  v.  Council  Bluffs, 
etc.  Co.,  142  Iowa,  140  (1909). 
The  validity  of  the  organiza- 
tion of  an  irrigation  company  cannot 
be  tested  by  injunction  by  a  land 
owner  to  prevent  the  issue  of  bonds 
by  it.  Tyree  v.  Crystal,  etc.  Co., 
126  Pac.  Rep.  605  (Oreg.  1912).  One 
water-works  company  cannot  enjoin 
another  such  company  from  taking 
the  water  of  a  certain  river  on  the 
ground  that  the  latter  has  no  charter 
right  to  do  so  and  is  an  illegal  corpora- 
tion. The  remedy  is  quo  warranto. 
Community  Ditches,  etc.  v.  Tularosa 
Community  Ditch,  120  Pac.  Rep. 
301  (N.  Mex.  1911).  It  is  no  defense 
to  a  condemnation  by  a  railroad  that 
the  company  fraudulently  procured 
its  charter.  Chapman  v.  Trinity, 
etc.  Ry.,  138  S.  W.  Rep.  440  (Tex. 
1911). 

1  Re  Brooklyn,  etc.  Ry.,  72  N.  Y. 
245  (1878) ;  Re  New  York  Cable  Co. 
V.  Mayor,  etc.,  104  N.  Y.  1  (1887).  In 
condemnation  proceedings  the  de- 
fense may  be  set  up  that  the  charter 
illegally  combined  public  and  private 
purposes.  Bayou,  etc.  Co.  i».  Doullut, 
111  La.  517  (1904).  It  is  a  defense 
to  condemnation  proceedings  that  the 
corporation  has  no  resources  to  carry 
out  the  purposes  of  its  charter.  New 
Orleans  Terminal  Co.  v.  Teller,  113 
La.  733  (1904).  In  a  condemnation 
proceeding  by  a  foreign  telephone 
company  against  a  railroad  the  tele- 
phone company  must  prove  that  it 
was  legally  organized,  and  it  is  a 
good  defense  that  it  was  not  legally 
organized.  Cumberland,  etc.  Co.  v. 
St.  Louis,  etc.  Ry.,  117  La.  199  (1906). 
In  condemnation  proceedings  the  de- 
fendant may  show  that  the  articles 
of  incorporation  of  a  railroad  did 
not  comply  with  the  statute.  Kins- 
ton,  etc.  R.  R.  V.  Stroud,  132  N.  C. 
413  (1903). 

2  Central,  etc.  Ry.  v.  Union,  etc.  Ry., 
144  Ala.  639  (1905).  Re  Brooklyn, 
etc.  R.  R.,  125  N.  Y.  434  (1891).     It 


is  no  defense  to  condemnation  pro- 
ceedings that  the  company  had  not 
commenced  work  within  the  time 
fixed  by  statute  nor  expended  the 
capital  required  by  statute.  Thomas 
V.  South  Side,  etc.  R.  R.,  218  111.  571 
(1905).  In  condemnation  proceed- 
ings the  defense  that  the  corporation 
has  ceased  to  exist  for  failure  to  com- 
plete its  road  within  ten  years  is  not 
good,  inasmuch  as  the  corporate  ex- 
istence can  be  attacked  only  in  a 
direct  proceeding  for  that  purpose. 
Morrison  v.  Forman,  177  111.  427 
(1898).  It  is  no  defense  to  condemna- 
tion proceedings  that  the  railroad  was 
an  illegal  consolidation  of  two  other 
railroads.  Oregon,  etc.  Co.  v.  Wil- 
k-inson,  188  Fed.  Rep.  363  (1911).  It 
is  no  defense  to  condemnation  proceed- 
ings that  the  charter  of  a  railroad  is 
void  in  accordance  with  the  statute 
because  it  has  not  expended  a  certain 
amount  of  its  capital  stock  and 
finished  its  road  within  a  certain  time. 
Cluthe  V.  Evansville,  etc.  Ry.,  95 
N.  E.  Rep.  543  (Ind.  1911).  In 
condemnation  proceedings  by  a  rail- 
road company  the  land  owner  cannot 
set  up  the  defense  that  the  company 
has  not  completed  certain  work  within 
a  certain  time  as  required  by  the 
charter,  nor  the  defense  that  the  com- 
pany has  entered  into  an  illegal  com- 
bination with  another  company. 
Terre  Haute  &  P.  R.  R.  Co.  v.  Robbins, 
93  N.  E.  Rep.  398  (111.  1910).  Al- 
though a  property  owner  cannot 
defend  against  condemnation  pro- 
ceedings on  the  ground  that  the  charter 
of  the  condemning  company  has 
expired,  yet  he  may  compel  the  state 
by  mandamus  to  test  that  question. 
People  V.  Way  man,  99  N.  E.  Rep. 
941  (111.  1912).  Where  land  has  been 
condemned  by  a  railroad  corporation, 
the  grantee  of  the  party  whose  land 
has  been  so  condemned,  the  grant  hav- 
ing been  made  prior  to  the  condemna- 
tion, but  the  grantee  being  represented 
in   the   proceedings,    cannot   maintain 


1950 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  637. 


A  person  who  gives  a  bond  or  note  to  a  corporation  is  not  allowed 

to  defeat  the  same  by  alleging  that  the  corporation  was  not  duly  incor- 

ejeetment  therefor  on  the  ground  that  phia,  etc.  Co.  v.  Intercity,  etc.  R.  R., 
the  railroad  charter  provided  "that  73  N.  J.  L.  86  (1905).  A  railroad 
the  rights,  privileges,  and  powers  of  may  acquire,  by  condemnation  or 
said  corporation  shall  be  null  and  otherwise,  a  right  of  way  as  allowed 
void,"  unless  certain  work  was  done  by  statute,  even  though  no  money  has 
within  a  certain  time,  even  if  the  been  paid  in  on  its  capital  stock. 
work  had  not  been  done  within  the  Fayetteville  St.  Ry.  v.  Aberdeen  & 
prescribed  time.  Only  the  state  can  R.  R.,  142  N.  C.  423  (1906).  In  con- 
question  the  corporate  existence  on  demnation  proceedings  the  ineorpo- 
this  ground.  New  York  &  N.  E.  R.  R.  ration  may  be  attacked  as  not  being 
V.  New  York,  N.  H.  etc.  R.  R.,  52  de  facto.  Its  de  jure  existence  can- 
Conn.  274,  284  (1884).  See  also  not  be  so  attacked.  Brown  v.  Calu- 
Briggs  V.  Cape  Cod  Land  Co.,  137  met  River  Ry.,  125  111.  600  (1888). 
Mass.  71  (1884).  In  this  case  the  A  railroad  company  regularly  organ- 
charter  of  a  corporation  required  it  ized  is  entitled  to  condemn  a  right 
to  deposit  with  the  state  treasurer  of  way,  even  though  it  was  organized 
within  four  months  from  its  date  the  in  the  interest  of  a  coal  company 
sum  of  $200,000  as  security  for  eer-  which  furnished  the  capital  for  such 
tain  purposes,  among  others  for  the  railroad.  The  claim  that  the  railroad 
payment  of  damages  for  taking  land,  company  is  merely  a  dummy  for  the 
and  the  corporation  did  not  deposit  coal  company  is  no  defense  to  the 
the  .$200,000  in  cash,  but  in  bonds  of  condemnation  proceedings.  Kansas, 
the  United  States  of  the  par  value  of  etc.  Ry.  v.  Northwestern,  etc.  Co.,  161 
$200,000,  and  of  the  market  value  of  Mo.  288  (1901).  An  adjacent  owner 
$230,000.  Held,  a  sufficient  compli-  cannot  enjoin  a  street-railway  com- 
ance,  as  the  object  of  the  provision  pany  on  the  ground  that  its  charter 
was  to  provide  security  to  various  is  invalid,  unless  his  property  rights 
interests.  Also  held  that  the  ques-  are  affected.  Nichols  v.  Ann  Arbor, 
tion  whether  a  corporation  has  etc.  Ry.  87  Mich.  361  (1891).  A 
ceased  to  exist  for  non-compliance  person  whose  land  a  corporation 
with  charter  provisions  could  only  be  seeks  to  take  under  power  of  eminent 
judicially  determined  in  a  suit  to  domain  cannot  set  up  that  the  ar- 
which  the  commonwealth  was  a  tides  of  incorporation  had  not  been 
party.  In  condemnation  proceedings  filed  with  the  secretary  of  state,  as 
the  legality  of  the  corporate  existence  required  by  the  incorporating  statute. 
cannot  be  attacked.  Eddleman  v.  Portland,  etc.  Co.  v.  Bobb,  88  Ky.  226 
Union,  etc.  Co.,  217  111.  409  (1905).  (1889).  A  railroad  charter  is  not 
A  property  owner  cannot  maintain  good  so  far  as  the  right  to  condemn 
a  bill  in  equity  for  a  decree  that  a  land  is  concerned,  where  the  terminus 
railroad  corporation  is  not  a  bona  is  stated  to  be  on  the  state  line  in 
fide  railroad  corporation,  and  is  not  a  certain  county.  Atlantic,  etc. 
operating  a  public  road,  but  only  a  R.  R.  v.  SuUivant,  5  Ohio  St.  276 
private  road  for  its  use  in  manufae-  (1855).  In  condemnation  proceed- 
turing,  even  under  the  statutes  of  ings  the  defendant  cannot  set  up  that 
Pennsylvania,  and  even  though  the  the  charter  has  been  violated.  Re 
railroad  company  claims  the  right  to  Long  Island  R.  R.,  143  N.  Y.  67 
take  the  property  of  the  complainant  (1894).  The  existence  of  a  railroad 
under  the  power  of  eminent  domain,  corporation  cannot  be  questioned  in 
Windsor  Glass  Co.  v.  Carnegie  Co.,  an  action  brought  by  it  to  condemn 
204  Pa.  St.  459  (1903).  It  is  no  de-  land.  Wellington,  etc.  R.  R.  v. 
fense  to  a  condemnation  proceeding  Cashie,  etc.  Co.,  114  N.  C.  690  (1894). 
that  the  amended  certificate  of  in-  Where  a  gas  company  opens  the 
corporation  was  not  acknowledged  streets  under  a  statute  and  pays  dam- 
before    the    proper    officer.     Philadel-  ages,  and  partly  lays  its  pipes,  it  can- 

1951 


§  637.]                                  DISSOLUTION,    FORFEITURE,    ETC.  [cH.  XXXVIII. 

porated ;  ^   nor  can  the  corporation  defeat  its  bonds  or  debt  by  alleging 

not  subsequently  be  enjoined  by  a  tion  proceedings  on  the  ground  that  the 
property  owner  on  the  ground  that  raikoad  was  an  illegal  merger  of  eom- 
the  statute  has  subsequentlj'  been  ad-  peting  lines.  Tibby  Bros.  Glass  Co. 
judged  to  be  unconstitutional.  King  v.  Pennsylvania  R.  R.,  219  Pa.  St. 
V.  Philadelphia  Co.,  154  Pa.  St.  160  430  (1908).  See  also  §  938,  infra. 
(1893).  See  also  §  934,  infra.  In  a  ^  The  validity  of  the  incorporation 
condemnation  proceeding  by  a  street  of  an  insurance  company  cannot  be 
railway  to  obtain  a  right  over  a  turn-  questioned  by  a  person  who  has  given 
pike,  the  turnpike  company  may  set  to  it  a  capital-stock  note.  Raegener 
up  that  the  street  railway  charter  has  v.  Hubbard,  167  N.  Y.  301  (1901). 
lapsed  by  reason  of  the  company  not  A  person  who  has  sold  a  bond  and 
having  organized  and  commenced  mortgage  to  a  corporation  and  seeks 
business  mthin  a  certain  time  and  to  recover  it  back  from  one  who  pur- 
that  thereby  the  charter  became  void  chased  it  in  good  faith  from  the  cor- 
by  reason  of  a  constitutional  pro-  poration,  cannot  set  up  that  the  cor- 
vision.  In  re  Philadelphia  &  M.  Ry.,  poration  was  irregularly  organized. 
187  Pa.  St.  123  (1898).  The  legality  Green  v.  Grigg,  98  N.  Y.  App.  Div. 
of  a  consolidation  which  has  com-  445  (1904).  A  member  of  a  building 
plied  substantially  with  the  statute  and  loan  association  who  borrows 
cannot  be  attacked  in  condemnation  money  from  it  cannot  defend  against 
proceedings.  Smith  v.  Cleveland,  etc.  the  loan  on  the  ground  that  it  was 
Ry.,  170  Ind.  382  (1907).  In  con-  illegally  organized.  Manship  v.  New, 
demnation  proceedings  it  is  no  de-  etc.  Assoc,  110  Fed.  Rep.  845  (1901). 
fense  that  the  corporation  is  not  The  maker  of  a  note  in  payment  for 
de  jure,  it  being  shown  that  it  is  goods  sold  by  a  corporation  cannot 
de  facto.  Gillette  v.  Aurora  Ry.,  question  the  corporate  existence. 
228  111.  261  (1907).  Condemnation  Fu-st,  etc.  Church  v.  Grand  Rapids, 
proceedings  by  a  railroad  cannot  be  etc.  Co.,  15  Colo.  App.  46  (1900). 
defeated  on  the  ground  that  it  was  Where  a  bond  has  been  given  to  a 
fraudulently  organized  and.  does  not  corporation  for  the  performance  by 
intend  to  serve  the  public.  Connolly  the  treasurer  of  his  duties,  and  the 
V.  Woods,  1^  Idaho,  591  (1907).  corporation  sues  on  such  bond,  due 
A  property  owner  may  enjoin  condem-  incorporation  cannot  be  denied.  Wood 
nation  proceedings  by  a  railroad  com-  v.  Friendship,  etc.,  106  Ky.  424 
panj'  on  the  ground  that  it  was  not  (1899).  A  railroad  suing  on  a  note 
intended  to  be  for  public  use,  but  was  cannot  be  defeated  by  the  defense 
merely  a  dummy  for  a  coal  company,  that  it  has  forfeited  its  charter,  there 
Harman  v.  Caretta  Ry.,  61  W.  Va.  being  no  adjudication  to  that  effect. 
356  (1907).  Legal  incorporation  of  Toledo,  etc.  R.  R.  v.  Johnson,  49  Mich. 
a  railroad  may  be  questioned  in  con-  148  (1882).  A  suit  by  the  corpora- 
demnation  proceedings.  Warden  v.  tion  on  a  bond  is  not  to  be  met  by 
Madisonville,  etc.  R.  R.,  125  Ky.  a  plea  of  forfeiture  for  non-user. 
644  (1907).  It  is  no  defense  to  con-  West  v.  Carolina,  etc.  Ins.  Co.,  31  Ark. 
demnation  proceedings  that  the  prin-  476  (1876).  Nor  its  suit  on  a  note 
cipal  part  of  the  stock  was  subscribed  by  the  plea  that  it  has  abandoned 
for  by  an  irresponsible  person.  State  its  franchises.  John  v.  Farmers',  etc. 
V.  Superior  Court,  etc.,  95  Pac.  Rep.  Bank,  2  Blackf.  367  (1830) ;  East  Ten- 
490  (Wash.  1908).  Corporate  e.xist-  nessee,  etc.  Co.  v.  Gaskell,  2  Lea 
ence  may  be  proved  in  condemnation  (Tenn.),  742  (1879) ;  Hartsville  Uni- 
proeeedings  by  a  certified  copy  of  the  versitj^  v.  Hamilton,  34  Ind.  506 
certificate  of  incorporation  and  a  (1870).  An  indorser  sued  by  the 
showing  of  compliance  with  the  statu-  corporation  cannot  claim  that  it  has 
tory  requirements.  Calor,  etc.  Co.  v.  rendered  its  charter  liable  to  for- 
Franzell,  128  Ky.  715  (1908).  A  feiture  by  suspension  of  specie  pay- 
land  owner  cannot  enjoin  condemna-  ments.     Atchafalaya  Bank  v.  Dawson, 

1952 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  637. 


its  want  of  lawful  incorporation. ^  A  tenant  cannot,  in  an  ejectment 

13  La.  497  (1839).     See  also  McFar-  Stoutimore    v.    Clark,    70    Mo.    471 

Ian  V.  Triton  Ins.  Co.,  4  Denio,  392  (1875) ;    Blake  v.  HoUev,  14  Ind.  383 

(1847) ;    St.  Louis  v.  Shields,  62  Mo.  (1860) ;    Jones  v.  Cincinnati,  etc.  Co., 

247  (1876)  ;    Loaners'  Bank  v.  Jacoby,  14  Ind.  89    (1860),   holding  also   that 

10  Hun,   143   (1877) ;    Commissioners,  the  corporation  need   not   prove  even 

etc.   V.  BoUes,   94  U.   S.    104   (1876) ;  a  de  facto  existence.     To  same  effect, 

Henriques  v.   Dutch  West   India  Co.,  IMontgomery   R.   R.   v.   Hurst,   9  Ala. 

2    Ld.    Raym.    1532    (1729),   where   a  513    (1846).     Cf.   White  v.   Campbell, 

foreign     corporation     sued     and     the  5  Humph.    (Tenn.)   38   (1844),  where 

general  issue  was  not  pleaded.     Proof  the    remarkable    decision    was    made 

of     organization     in     fact     and     user  that,  if  the  corporation  had  been  dis- 

meets   a   plea    of   nul   tiel   corporation  solved  at  the  time  the  note  was  given, 

by  the  maker  of  a  note  to  the  corpo-  the  maker  was  not  liable  and  could 

ration.     Mitchell  v.  Deeds,  49  111.  416  have   a   mortgage   which   he   gave   as 

(1867) ;       Smelser     v.     Wayne,     etc.  security  set  aside.     A  de  facto  corpo- 

T.  Co.,  82  Ind.  417  (1882).     But  see  ration,    as    indorsee   of   a    note,    may, 

Williams    v.     Bank    of    Michigan,     7  enforce  it.    Wilcox  v.  Toledo,  etc.  R.  R., 

Wend.   .540    (1831).     In  a   suit   by   a  43  Mich.  584  (1880);    Haas  v.  Bank 

corporation  on  a  note,   the  execution  of    Commerce,   41    Neb.   754    (1894)  ; 

of    the    note    to    the    corporation    is  Bank  of  Shasta  v.  Boyd,  99  Cal.  604 

■prima  facie  proof  of  its  incorporation.  (1893). 

A  de  facto  corporation  may  enforce  i  Independent  Order,  etc.  v.  Paine, 
a  note  given  to  it.  Hudson  v.  Green  122  111.  625  (1887) ;  Blackburn  v. 
Hill  Seminary,  113  111.  618  (1885);  Selma,  etc.  R.  R.,  2  Flip.  525  (1879); 
Booske  V.  Gulf  Ice  Co.,  24  Fla.  550  s.  c,  3  Fed.  Cas.  526;  Racine,  etc. 
(1888) ;  Winget  v.  Quincy  Bldg.  etc.  R.  R.  v.  Farmers',  etc.  Co.,  49  lU.  331, 
Assoc,  128  111.  67  (1889).  In  a  suit  346  (1868) ;  Liter  v.  Ozokerite  Mia. 
by  a  bona  fide  indorsee  of  a  note  from  Co.,  7  Utah,  487  (1891) ;  Aller  v. 
a  corporation  as  indorser,  the  maker  Cameron,  3  Dill.  198  (1874) ;  s.  c,  1 
cannot  set  up  that  the  company  was  Fed.  Cas.  522,  where  a  municipality 
not  properly  incorporated.  Briekley  set  up  this  defense  ;  Empire,  etc.  Mfg. 
V.  Edwards,  131  Ind.  3  (1892).  The  Co.  v.  Stuart,  46  ISIich.  482  (1882), 
maker  of  a  note  to  a  bank  cannot  a  promissory  note  case.  A  corpora- 
question  its  incorporation.  Exchange  tion  cannot  defend  against  a  debt  on 
Nat.  Bank  v.  Capps,  32  Neb.  242  the  ground  that  by  a  mistake  oae  of 
(1891) ;  Columbia  Electric  Co.  v.  the  duplicate  originals  of  its  certifi- 
Dixon,  46  Minn.  463  (1891) ;  Butch-  cate  of  incorporation  was  filed  in  the 
ers',  etc.  Bank  i'.  McDonald,  130  Mass.  state  recorder's  office  instead  of  the 
264  (1881) ;  Jones  v.  Bank  of  Ten-  county  recorder's  office.  Huntington, 
nessee,  8  B.  Mon.   (Ky.)   122  (1847) ;  etc.  Co.  v.  Schofield,  28  Ind.  App.  95 


Leonardsville  Bank  v.  Willard,  25  N.  Y. 
574   (1862);    Nutting  v.  Hill,  71   Ga. 


(1901).     Where  the  suit  is  on  a  bond, 
a  stockholder  cannot  sue  to  have  the 


557    (1883) ;     Irvine   v.    Lumberman's  corporation   declared    a  copartnership 

Bank,  2  Watts  &  S.  (Pa.)  204  (1841);  by  reason  of  irregular  incorporation. 

Congregational  Soc.  v.  Perry,  6  N.  H.  Baker   v.    Backnis,   32   111.    79    (1863). 

164    (1833) ;     Pape   v.    Capital   Bank,  Even  though  the  statute  requires  ths 

20     Kan.     440     (1878) ;      Massey     v.  articles    of    incorporation    to    be    filed 

Building  Assoc,  22  Kan.  624  (1879) ;  in   each   county    where    the    company 

Vater  v.  Lewis,  36  Ind.   288   (1871);  does    business,    yet   failure    to   file   ia 

Smith  V.  Miss.   etc.   R.   R.,   14  Miss,  one  county  is   no   defense   to   a   note 

179   (1846),   where  the  maker  of  the  given  to  the  company.     Farmers',  etc 

note    claimed    that    the    corporation  Co.    v.    Borders,    26    Ind.    App.    491 

was    fraudulently    and    illegally    or-  (1901).     The  corporation  itself,  when 

ganized;      Studebaker,     etc.     Co.     v.  sued  upon  notes  which  it  has  made, 

Montgomery,    74    Mo.     101     (1881);  cannot  set  up  any  informality  ia  its 
(123)                                      1953 


§  637.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


suit,  set  up  that  his  landlord  was  not  duly  incorporated.^  The  lessee 
of  a  corporation  cannot  refuse  to  pay  the  rent  on  the  ground  that  the 
company  was  not  legally  organized.^  But  where  a  proposed  national 
bank  is  never  authorized  by  the  comptroller  of  the  currency  to  commence 
business  and  never  does  commence  business,  a  lease  made  in  its  name 
cannot  be  enforced  against  it.^  And  where  the  statute  prohibits  incor- 
poration for  acquiring  and  holding  land,  a  corporation  cannot  be  formed 
to  take  a  lease  of  land  and  erect  a  building  upon  it  to  rent,  and  hence 
such  a  corporation  cannot  maintain  a  suit  for  such  rent,  although  pos- 
sibly it  may  maintain  a  suit  for  use  and  occupation."* 

A  person  who  mortgages  land  to  a  supposed  corporation  cannot  defeat 
a  foreclosure  of  the  mortgage  by  alleging  that  the  mortgagee  is  not  a 
corporation ;  ^  nor  can  the  corporation  itself,  having  given  a  mortgage, 


incorporation.  Kelley  v.  Newbury- 
port,  etc.  R.  R.,  141  Mass.  496  (1886) ; 
Empire  Mfg.  Co.  v.  Stuart,  46  Mich. 
482  (1881),  where  the  corporation  re- 
incorporated in  order  to  cure  the  ir- 
regularity. 

1  Ricketson  v.  Galligan,  89  Wis.  394 
(1895).  Or  where  the  corporation 
sues  for  rent  due  on  a  lease  made 
by  it.  Oregonian  Ry.  v.  Oregon,  etc. 
Nav.  Co.,  22  Fed.  Rep.  245  (1884); 
B.  c,  23  Fed.  Rep.  232  (1885) ;  rev'd 
on  another  point  in  130  U.  S.  1.  A 
lessee  of  corporate  property  cannot 
refuse  to  vacate  on  the  ground  that 
the  company  was  not  properly  in- 
corporated and  officered,  and  that  it 
did  not  own  the  property.  Fayette- 
ville  Waterworks  Co.  v.  Tillinghast, 
119  N.  C.  343  (1896). 

2  Lynch  v.  Ferryman,  29  Okla.  615 
(1911). 

3  McCormick  v.  Market  Nat.  Bank, 
162  111.  1(X)  (1896). 

*  Imperial  Bldg.  Co.  v.  Chicago, 
etc.,  238  111.  100  (1908). 

*  People's  Sav.  Bank  v.  Collins,  27 
Conn.  142  (1858);  California,  etc. 
Exchange  v.  Buck,  124  Pac.  Rep.  824 
(Cal.  1912);  West,  etc.  Sav.  Bank 
V.  Ford,  27  Conn.  282  (1858);  and 
Hasenritter  v.  Kirchhoffer,  79  Mo. 
239  (1883),  where  the  mortgagor's 
grantee  was  held  to  be  estopped ; 
Franklin  v.  Twogood,  18  Iowa,  515 
(1865) ;  Haekensack  Water  Co.  v.  De 
Kay,  36  N.  J.  Eq.  .548  (1883) ;  Hub- 
bard V.  Chappel,  14  Ind.  601  (1860), 
where  it  was  held  that  the  mortgagee 


need  not  even  prove  itself  to  be  a 
de  facto  corporation ;  Jones  v.  Koko- 
mo,  etc.  Assoc,  77  Ind.  340  (1881). 
A  mortgagor  cannot  attack  the  cor- 
porate existence  of  a  mortgagee. 
Equitable,  etc.  Assoc,  v.  Bidwell,  60 
Neb.  169  (1900).  The  regularity  of 
the  incorporation  cannot  be  ques- 
tioned in  a  suit  by  a  corporation  to 
foreclose  a  mortgage.  Washington, 
etc.  Assoc.  V.  Stanley,  38  Oreg.  319 
(1901).  But  the  mortgagor  may 
deny  the  corporate  existence  of  the 
assignee  of  the  mortgagee.  Dundee, 
etc.  Co.  V.  Cooper,  26  Fed.  Rep.  665 
(1886).  A  second  mortgagee  cannot 
question  the  incorporation  of  the  first 
mortgagee.  Williamson  t;.  Kokomo, 
etc.  Assoc,  89  Ind.  389  (1883).  In 
a  mortgage  foreclosure  case  brought 
by  a  corporation,  the  mortgagee  can- 
not claim  that  the  corporation  took 
the  mortgage  before  stock  was  sub- 
scribed to  the  amount  required  by 
its  charter.  Johnston  v.  Elizabeth, 
etc.  Assoc,  104  Pa.  St.  394  (1883). 
Parties  contracting  with  a  corpora- 
tion as  such  cannot  attack  a  mortgage 
given  by  the  corporation  on  the 
ground  that  the  corporation  was 
never  legally  organized.  Andrews  v. 
National,  etc.  Works,  77  Fed.  Rep. 
774  (1897).  A  mortgagor  to  a  for- 
eign insurance  company  cannot  de- 
mur to  a  bill  for  foreclosure  on  the 
ground  that  the  taking  of  the  mort- 
gage was  ultra  vires  and  no  certifi- 
cate was  filed.  Boulware  v.  Davis, 
90   Ala.    207    (1890).     A    stockholder 


1954 


CH.  XXXVIII. 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  637. 


defeat  a  foreclosure  by  such  a  plea.^  It  has  been  held  that  where 
a  consolidation  of  two  railroad  companies  without  statutory  authority 
is  void,  and  the  consolidated  company  is  not  even  a  de  facto  com- 
pany, a  mortgage  deed  of  trust  and  the  bonds  given  by  such  a 
consolidated  company  cannot  be  enforced  and  do  not  bind  even  the 
constituent  companies.-     But  where  there   is   a    statute    authorizing 


who  has  given  a  mortgage  to  the  cor- 
poration cannot  defeat  the  same  on 
the  ground  that  the  charter  was 
unconstitutional.  Building  &  Loan 
Assoc.  V.  Chamberlain,  4  S.  Dak.  271 
(1893).  As  against  its  mortgage  the 
corporation  cannot  set  up  the  defense 
that  it  was  not  legally'  organized,  in 
that  no  stock  was  ever  subscribed 
for.  Jones  v.  Hale,  32  Oreg.  465 
(1898).  As  against  the  purchaser  of 
a  note  and  mortgage  executed  to  a 
corporation,  it  is  no  defense  that  the 
charter  of  the  corporation  had  ex- 
pired when  the  note  and  mortgage 
were  executed.  Citizens'  Bank  v. 
Jones,  117  Wis.  446  (1903).  It  is  no 
defense  to  a  mortgage  given  to  a  cor- 
poration that  the  statute  under  which 
it  was  organized  was  unconstitu- 
tional. Crete,  etc.  Ass'n  v.  Patz, 
1  Neb.  Unof.  768  (1901).  It  is 
no  defense  to  foreclosure  that  the 
company  was  fraudulently  organized. 
Gunderson  t'.  Illinois  Trust  &  Savings 
Bank,  100  111.  App.  Rep.  461  (1902) ; 
aflf'd,  199  111.  422. 

*  Quoted  and  approved  in  Phinizy 
V.  Augusta,  etc.  R.  R.,  62  Fed.  Rep. 
678  (1894);  WaUace  v.  Loomis,  97 
U.  S.  146  (1877) ;  Racine,  etc.  R.  R. 
V.  Farmers',  etc.  Co.,  49  111.  331,  346 
(1868).  Where  the  mortgagor  was 
a  consolidated  company,  the  grantee 
of  the  corporation  cannot  deny  the 
validity  of  its  mortgage  to  another 
person  by  alleging  its  want  of  legal 
incorporation.  Hasselman  v.  U.  S. 
etc.  Co.,  97  Ind.  365  (1884).  The 
lessee  of  the  road  of  a  railroad  cor- 
poration cannot  defeat  the  foreclosure 
of  a  mortgage  given  by  the  latter  by 
alleging  that  the  latter  was  never 
duly  incorporated.  Beekman  v.  Hud- 
son, etc.  Ry.,  35  Fed.  Rep.  3  (1888). 
A  mortgagee  of  a  de  facto  corpora- 
tion is  not  defeated  by  an  attachment 
against  the  company.     Defects  in  in- 


corporation are  immaterial  herein. 
Duggan  V.  Colorado,  etc.  Co.,  11  Colo. 
113  (1888).  In  a  mortgage  foreclos- 
ure the  defense  that  the  mortgagor 
was  not  legally  incorporated  or  or- 
ganized cannot  be  set  up.  Hacken- 
sack  Water  Co.  v.  De  Kay,  36  N.  J. 
Eq.  548  (1883).  A  mortgagor  corpo- 
ration cannot  defend  against  the 
mortgage  on  the  ground  that  the  spe- 
cial charter  of  the  mortgagor  was  un- 
constitutional and  void.  McTighe  v. 
Macon  Const.  Co.,  94  Ga.  306  (1894). 
A  junior  mortgagee  cannot  question 
the  incorporation  of  a  senior  mortga- 
gee, the  latter  being  a  de  facto  cor- 
poration. Williamson  v.  Kokomo,  etc. 
Assoc,  89  Ind.  389  (1883).  It  is  no 
defense  to  a  foreclosure  that  the 
mortgagor  was  not  legally  organized, 
and  a  stockholder  will  not  be  allowed 
to  intervene  to  set  up  that  defense. 
Gunderson  v.  Illinois,  etc.  Bank,  100 
111.  App.  461  (1902).  It  is  no  de- 
fense to  a  mortgage  that  in  the  in- 
corporation of  the  company  most  of 
its  subscriptions  were  made  by  ir- 
responsible parties.  Gunderson  v. 
Illinois,  etc.  Bank,  199  111.  422 
(1902).  Failure  to  enact  by-laws  and 
issue  certificates  of  stock  does  not 
enable  creditors  to  attack  its  mortgage 
on  the  ground  that  it  is  not  a  corpora- 
tion. Powell  Bros.  v.  ]McMullan,  etc. 
Co.,  153  N.  C.  52  (1910).  A  stock- 
holder who  has  taken  part  in  an 
informal  organization  of  the  company 
cannot  attack  a  mortgage  which  has 
been  informally  authorized,  he  having 
taken  part  in  that  also.  Peyton  i'.  ■  , 
Minong,  etc.  Co.,  149  Wis.  5Q    (1912).     'y 

2  American  L.  &  T.  Co.  v.  Minne- 
sota, etc.  R.  R.,  157  lU.  641  (1895). 
Cf.  Coe  V.  New  Jersey,  etc.  Ry.,  31 
N.  J.  Eq.  105  (1879).  An  Illinois 
corporation  has  no  power  to  consoli- 
date with  a  Missouri  corporation  unless 
there  is  a  statute  authorizing  it,  and 


"^ 


1955 


§637. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXMII. 


such  a  consolidation,  the  rule  is  different.^  And  where  a  con- 
soUdated  company  is  Hable  on  an  obligation  of  one  of  the  constituent 
companies,  it  cannot  defend  on  the  ground  that  the  consolidation  was 
not  authorized  by  law.^  In  a  creditor's  suit  to  hold  a  reorganized  com- 
pany liable  for  his  debt  of  the  old  company,  the  legality  of  the  organiza- 
tion of  the  new  company  cannot  be  inquired  into.^ 

A  grantor  of  land  to  a  de  facto  corporation  cannot  deny  the  legality 
of  his  grant  on  the  ground  that  the  corporation  was  not  duly  incorpo- 
rated.*   Theoretically,   however,   a  deed  to  a  supposed  corporation, 


the  so-called  consolidated  company 
may  set  up  that  the  consolidation  is 
illegal.  Gordon  v.  American  Patriots, 
141  S.  W.  Rep.  331  (Tex.  1911). 

1  Thus  no  one  but  the  state  can 
attack  the  legality  of  a  consolidation 
of  a  line  of  railroad  running  through 
Ohio,  Indiana,  and  Illinois,  where  the 
statutes  of  those  three  states  pro- 
vided for  such  consolidation  under 
certain  circumstances,  even  though  a 
judgment  creditor  who  endeavors  to 
attack  such  consolidation  offers  to 
prove  that  this  consolidated  company 
did  not  come  within  the  terms  of  the 
statutes.  Such  a  consolidated  com- 
pany is  a  de  facto  corporation,  and 
no  one  but  the  state  can  attack  its 
de  jure  existence,  there  being  a  stat- 
ute under  which  such  corporations 
apparently  might  exist.  Toledo,  etc. 
R.  R.  V.  Continental  Trust  Co., 
95  Fed.  Rep.  497  (1899).  A  general 
creditor  of  a  consolidated  corporation 
cannot  attack  the  vaUdity  of  the 
bonds  of  the  corporation  on  the 
ground  that  the  consolidation  was  not 
legal.  Louisville  T.  Co.  v.  Louisville, 
etc.  Co.,  84  Fed.  Rep.  539  (1898); 
rev'd  on  other  grounds,  174  U.  S. 
674.  A  steam  railroad  cannot  enjoin 
a  street  railway  from  crossing  its 
lines  on  the  .ground  that  the  latter 
was  a  consolidation  made  before  one 
of  the  constituent  street  railway  com- 
panies was  completed  as  required  by 
statute.  Cleveland,  etc.  Co.  v.  Feight, 
41  Ind.  App.  416  (1908).  Even  though 
two  corporations  are  neither  of  them 
legally  incorporated,  yet  if  they  are 
consolidated  a  stockholder  in  the 
consolidated  company  cannot  claim 
that  the  stockholders  are  partners, 
although    the    consolidated    company 


is  not  a  legal  corporation;  neither 
are  the  officers  of  the  consolidated 
company  merely  agents  for  the  stock- 
holders, no  partnership  being  intended. 
Hence  any  question  of  fraud  on  the 
part  of  the  majority  stockholders 
will  be  determined  by  the  principles 
of  corporation  law.  Cannon  v.  Brush, 
etc.  Co.,  96  Md.  446  (1903). 

2  Green  v.  Michigan,  etc.  Rys.,  159 
Mich.  58  (1909). 

3  Armour  v.  E.  Bement's  Sons,  123 
Fed.  Rep.  56  (1903). 

^  Smith  V.  Sheeley,  12  Wall.  358 
(1870) ;  Frost  v.  Frostburg  Coal  Co., 
24  How.  278  (1860).  See  also  Ca- 
hall  V.  Citizens',  etc.  Assoc,  61  Ala. 
232  (1878),  where  the  corporation 
brought  ejectment ;  Thompson  v.  Can- 
dor, 60  111.  244  (1871),  where  the 
grantor  sued  to  recover  possession ; 
Sword  V.  Wickersham,  29  Kan.  746 
(1883),  where  the  grantee  was  a 
municipality ;  Cowell  v.  Colorado 
Springs  Co.,  3  Colo.  82  (1876);  af- 
firmed, 100  U.  S.  55  (1879),  where 
the  corporation  sued  for  breach  of 
covenant ;  Alexander  v.  ToUeston 
Club,  110  111.  65  (1884),  where  the 
grantor  claimed  the  right  of  way; 
Bakersfield,  etc.  Assoc,  v.  Chester,  55 
Cal.  98  (1880) ;  Keene  v.  Van  Reuth, 
48  Md.  184  (1877);  Baker  v.  Neflf, 
73  Ind.  68  (1880);  Snyder  v.  Stude- 
baker,  19  Ind.  462  (1862),  —  cases 
where  a  grantee  of  the  grantor  was 
held  estopped ;  Fay  v.  Noble,  61  Mass. 
188  (1851),  where  a  third  person  was 
not  allowed  to  impeach  a  transfer 
of  property  by  a  corporation  to  an- 
other person,  setting  up  that  the 
transfer  was  invalid  owing  to  infor- 
malities in  the  corporation.  A  grantor 
of  land  to  a  corporation  cannot  claim 


1956 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§637. 


which  is  not  even  a  de  facto  corporation,  has  been  held  to  be  absokitely 
void.^  A  grant  of  land  by  a  de  facto  corporation  is  vaUd,  except  pos- 
sibly as  to  the  state.^ 


title  on  the  ground  that  the  corpo- 
ration was  not  properly  organized. 
Rannels  v.  Rowe,  145  Fed.  Rep.  296 
(1906).  Whether  a  corporation  was 
properly  organized  cannot  be  ques- 
tioned where  it  is  merely  a  link  in 
a  chain  of  title  to  real  estate.  Thomas 
V.  Wilcox,  18  S.  Dak.  625  (1904).  A 
conveyance  of  property  to  a  corpora- 
tion cannot  be  attacked  on  the  ground 
that  it  was  not  legally  organized. 
Leavengood  v.  McGee,  50  Oreg.  233 
(1907). 

The  grantee  of  the  corporation  can- 
not defeat  an  attachment  against  it 
and  levied  on  the  land  by  setting  up 
this  defense.  Dooley  v.  Wolcott,  86 
Mass.  406  (1862).  But  Carey  t-.  Cin- 
cinnati, etc.  R.  R.,  5  Iowa,  357  (1857), 
allowed  a  grantor  to  a  foreign  cor- 
poration to  allege  this  defense  to  its 


suit  for  possession.  A  grantor  to  a 
corporation  who  aids  the  corporation 
in  conveying  to  others  is  certainly 
not  allowed  this  defense.  Close  v. 
Glenwood  Cemetery,  107  U.  S.  466 
(1882).  A  corporation  may  hold  and 
sell  land,  though  in  its  incorporation 
the  incorporators  did  not  attach  a 
seal  to  their  signatures  as  required 
by  statute.  Stoker  v.  Schwab,  1  N.  Y. 
Supp.  425  (1888).  A  conveyance 
to  or  by  a  de  facto  corporation  can- 
not be  avoided  on  the  ground  of  any 
defect  in  its  organization.  Doyle  v. 
San  Diego,  etc.  Co.,  46  Fed.  Rep.  709 
(1891).  The  grantor  who  has  been 
paid  cannot  rescind  on  the  ground 
that  the  grantee  corporation  could 
not  take.  Long  v.  Georgia  Pae.  Ry., 
91  Ala.  519  (1891).-  In  ejectment  the 
incorporation  of  a  prior  grantor  need 


*  Where  a  statute  extending  the 
existence  of  a  corporation  was  un- 
constitutional the  corporation  cannot 
maintain  a  suit  to  enjoin  its  grantee 
of  land  from  violating  a  restriction 
in  the  deed.  Clark  v.  American,  etc. 
Co.,  165  Ind.  213  (1905).  A  deed  to 
a  corporation  not  in  existence  is  void. 
Provost  V.  Morgan's,  etc.  Co.,  42  La. 
Ann.  809  (1890).  A  purchaser  of 
land  from  a  corporation  may  object 
to  the  title  on  the  ground  that  the 
corporation  took  title  before  a  cer- 
tain amount  of  its  capital  stock  had 
been  obtained,  as  required  by  statute. 
Globe  Realty  Co.  v.  Whitney,  106  La. 
257  (1901).  Where  no  organization 
meetings  are  held  and  no  officers 
elected,  and  no  by-laws  adopted,  and 
no  certificates  of  stock  issued,  and  no 
seal  adopted,  and  no  records  kept,  the 
incorporation  does  not  exist,  even 
though  a  certificate  of  incorporation 
was  issued  by  the  state  officers.  Hence 
a  deed  delivered  to  such  corporation 
does  not  give  title.  Wall  v.  Mines, 
130  Cal.  27  (1900).  A  deed  to  cer- 
tain persons  ."as  incorporators"  of  a 
company  not  yet  incorporated  does 
not  vest  title  in  the  company  when 


incorporated.  McCandless  v.  Inland, 
etc.  Co.,  112  Ga.  291  (1900) ;  s.  c,  115 
Ga.  968.  Where  the  articles  must  be 
filed  with  the  secretary  of  state  and 
a  fee  paid  in  order  to  form  a  cor- 
poration, a  transfer  of  property  be- 
fore this  is  done  does  not  convey  title 
to  the  corporation.  The  transferrer's 
creditors  may  attach  the  property. 
Jones  V.  Aspen  Hardware  Co.,  21  Colo. 
263  (1895).  A  grant  assigned  to  a 
corporation  before  it  is  incorporated 
takes  effect  upon  its  incorporation. 
Heeht  v.  Acme  Coal  Co.,  113  Pac.  Rep. 
786  (Wyo.  1911). 

2  See  cases,  supra.  A  deed  by  a 
de  facto  corporation  having  a  certifi- 
cate of  incorporation  from  the  state, 
is  good  even  though  there  were  no 
bona  fide  stockholders  and  nothing 
had  been  paid  in.  Re  Jackson,  etc. 
Co.,  189  Fed.  Rep.  636  (1911).  A 
partnership  which  holds  itself  out  as  a 
corporation  and  buys  and  sells  land 
in  its  name  is  estopped  from  denying 
the  validity  of  a  deed  to  it  in  a  suit 
against  it  for  violating  the  terms  of  the 
deed.  Daniels  v.  Roanoke,  etc.  Co., 
158  N.  C.  418  (1912). 


1957 


§  637. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


The  question  of  whether  a  deed  to  an  unincorporated  association 
is  vaUd  is  considered  elsewhere,^  as  is  also  the  effect  of  a  deed  to  a 
corporation  to  be  thereafter  organized.-  A  court  in  passing  upon  the 
legahty  of  a  bequest  to  a  foreign  corporation  will  not  pass  upon  the 
legality  of  its  corporate  existence.^ 

In  general  it  may  be  said  that  the  uniform  current  of  authority 
is  to  the  effect  that  only  the  state  may  question  the  legality  of  the  or- 
ganization of  a  de  facto  corporation.  Hence,  if  it  is  a  de  facto  corpora- 
tion, persons  sued  by  a  corporation  in  an  action  ex  contractu,  as  well 
as  persons  sued  by  the  corporation  in  an  action  ex  delicto,  are  equally 
debarred  from  setting  up  the  defense  that  the  corporation  was  not  legally 
organized.* 


not  be  shown.  Finch  t-.  Ullmann,  105 
Mo.  255  (1891).  A  creditor  of  a  sup- 
posed corporation  cannot  attack  a 
mortgage  given  by  it  to  another  cred- 
itor on  the  ground  that  the  company 
was  irregularly  organized.  Briar 
Hill  Coal,  etc.  Co.  v.  Atlas  Works, 
146  Pa.  St.  290  (1892).  A  transfer 
of  land  by  a  de  facto  corporation  is 
valid  as  against  all  parties  except 
the  state.  Crenshaw  v.  Ullman,  113 
Mo.  633  (1893).  In  ejectment  the 
corporate  existence  cannot  be  ques- 
tioned, its  deed  being  in  the  chain 
of  title.  Finch  v.  Ullmann,  105  Mo. 
255  (1891).  In  a  suit  by  a  corpora- 
tion to  protect  real  estate  held  for  it 
by  trustees,  the  defendants  cannot 
attack  the  incorporation  of  the  com- 
pany. First  Baptist  Church  v.  Bran- 
ham,  90  Cal.  22  (1891).  The  grantor 
of  land  cannot  claim  that  the  grantee 
was  unincorporated  and  not  qualified 
to  hold  land,  the  incorporation  being 
only  partially  completed.  Reinhard 
V.  Virginia,  etc.  Co.,  107  Mo.  616 
(1891).  Under  the  Montana  statutes, 
even  though  no  organization  meet- 
ings of  the  stockholders  and  directors 
are  held,  yet  a  deed  of  property  to 
the  corporation  may  be  valid.  Mor- 
rison V.  Clark,  34  Mont.  515  (1900). 
Where  the  owner  of  real  estate  deeds 
it  to  a  supposed  corporation,  and 
many  years  afterwards  makes  an- 
other deed  to  another  corporation,  the 
latter  cannot  claim  that  the  first  cor- 
poration was  illegally  organized.  It 
is  for  the  state  alone  to  make  such 
claim.     Los    Angeles,    etc.    v.    Spires, 


126  Cal.  541  (1899).  A  statute  vali- 
dating deeds  made  to  supposed  cor- 
porations, which  afterwards  become 
incorporated,  applies  to  deeds  made 
after  such  statute.  Cumberland,  etc. 
Co.  V.  Daniel,  52  S.  W.  Rep.  446 
(Tenn.  1899).  A  grantor  of  land  to 
a  corporation  cannot  reclaim  it  on 
the  ground  of  a  dissolution,  there  hav- 
ing been  no  decree  of  dissolution. 
Bohannan  v.  Binns,  31  Miss.  355 
(1856).  The  title  to  land  owned  by 
a  corporation  is  not  affected  by  the 
fact  that  the  articles  of  incorporation 
were  filed  with  the  county  recorder 
instead  of  the  county  clerk,  as  re- 
quired by  statute.  San  Diego,  etc.  Co. 
V.  Frame,  137  Cal.  441  (1902). 

1  See  §  504,  supra. 

2  See  §  694,  infra. 

^  St.  John  V.  Andrews  Institute,  117 
N.  Y.  App.  Div.  698  (1907) ;  s.  c,  191 
N.  Y.  254. 

^  Keokuk  Commercial  Bank  v.  Pfeif- 
fer,  108  N.  Y.  242  (1888).  A  city 
contracting  with  a  water-works  com- 
pany for  water  cannot  defeat  the  rent 
on  the  ground  that  the  company  was 
not  legally  organized.  City  of  Green- 
ville V.  Greenville,  etc.  Co.,  125  Ala. 
625  (1900).  Even  though  an  electric 
light  company  is  incorporated  under 
the  general  manufacturing  act,  yet 
if  a  city  grants  the  company  the 
right  to  use  the  streets  and  the  com- 
pany exercises  the  right  for  nine 
years,  the  city  will  not  then  be  al- 
lowed to  repudiate  its  grant.  The 
state  alone  can  raise  the  question. 
Wyandotte,  etc.  Co.  v.  City  of  Wyan- 


1958 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  637. 


The   same  rule  applies  when  the  corporation  is  defendant  instead 
of  plaintiff.     The  corporation  itself  is  no  more  entitled  to  set  up  the 

dotte,  124  Mich.  43    (1900).     A  city, 
after   granting    a    franchise    to    a    gas 
company,  cannot  afterwards  question 
the    regularity    of    its    incorporation. 
City  of  Kalamazoo  v.  Kalamazoo,  etc. 
Co.,   124  Mich.  74   (1900).     A  person 
purchasing  personal  property  from  a 
supposed  corporation  cannot  when  sued 
by  it  claim  that  it  is  not  incorporated. 
Kelleher  v.  Denver  Music  Co.,  48  Colo. 
212    (1910).     A    de   facto    corporation 
may    sue   on   a   note   assigned    to   it. 
Creditors'    Union   v.    Lundy,    16    Cal. 
App.  .567   (1911).     A  party  making  a 
contract  with  a  supposed  corporation 
in  the  corporate  name,  cannot  there- 
after   when    sued    upon    the    contract 
deny  its    incorporation.     Toledo,   etc. 
Co.  V.  Young,    16   Idaho,  187    (1909). 
A    manager   who    buys    stock   cannot 
complain     of     misrepresentations,     he 
being  more  familiar  with  the  company's 
affairs   than   the   defendants,    and    he 
cannot    claim    that    the    organization 
was  invalid,  because  it  did  not  acquire 
all    the    property    mentioned    in    the 
articles,    and   overstated    the   amount 
of  its   cash.     Andrews   v.   Brace,    154 
Mich.    126    (1908).     In   a   suit   by   a 
corporation    to    obtain    possession    of 
lands  it  is  no  defense  that  the  stock 
was  issued  without  real  consideration. 
Leader  Realty  Co.  v.  Lakeview  Land 
Co.,  127  La.  1059  (1911).     A  treasurer 
cannot  defend  against  a  suit  by  the 
corporation  to  recover  corporate  funds 
taken  by  him  in  excess  of  his  salary  on 
the  ground  that  the  company  was  not 
properly     organized,     it     not     having 
executed  its  articles  in  triplicate,  but 
only    in    duplicate.     Kwapil    v.    Bell 
Tower    Co.,    55    Wash.    583    (1909). 
Even    though    a    receiver    has    been 
appointed   in    a   suit    to   dissolve   the 
company,  this  is  no  defense  to  a  suit 
by  the  company  on  a  note,  no  decree 
of    dissolution    having    been    entered. 
Saunders    v.    Bank    of    Mecklenburg, 
112  Va.  443  (1911).     Where  a  co-part- 
nership  known   as   Knight,   Henry   & 
Co.  is  incorporated  under  that  name, 
a  bank  that  deals  with  it  as  a  cor- 
poration cannot  afterwards  deny  the 
regularity     of     the     incorporation     in 


connection  with  the  contract.  First 
Nat.  Bank  v.  Henry,  159  Ala.  367 
(1905).  Even  though  a  charter  has 
been  taken  out  for  water-works  and 
also  electric  light  purposes,  although 
the  statutes  do  not  authorize  the  com- 
bining of  those  two  businesses  in  one 
corporation,  yet  a  contract  made  by 
the  city  with  such  corporation  to  pay 
certain  hydrant  and  electric  light 
rentals  may  be  enforced,  inasmuch  as 
the  contract  is  valid,  even  if  the  cor- 
poration be  considered  but  a  partner- 
ship. Cunningham  v.  City  of  Cleve- 
land, 98  Fed.  Rep.  657  (1899).  A 
purchaser  of  goods  from  a  corporation 
cannot  allege  that  the  company  com- 
menced business  before  a  certain  part 
of  the  capital  stock  had  been  paid  in  as 
required  by  its  charter.  Wells  Co.  v. 
Avon  Mills,  118  Fed.  Rep.  190  (1902). 
See  same  case,  198  U.  S.  177  and  148 
Fed.  Rep.  1018.  The  legality  of  the 
existence  of  a  gas  company  cannot 
be  tested  by  a  bill  in  equity  filed  by 
a  municipality  to  prevent  its  officers 
and  agents  from  laying  pipes  in  the 
streets,  especially  where  the  corpora- 
tion itself  is  not  made  a  party  de- 
fendant. Mayor,  etc.  v.  Addicks,  7 
Del.  Ch.  56  (1899).  A  member  of  a 
mutual  insurance  company  cannot, 
when  sued  for  an  assessment,  set  up 
that  the  articles  of  incorporation  did 
not  comply  with  the  statute.  Oilman 
V.  Druse,  111  Wis.  400  (1901).  It 
is  no  objection  to  the  validity  of  the 
issue  of  stock  for  patents  that  the 
corporation  selling  the  patents  was 
not  legally  incorporated.  Way  v. 
American,  etc.  Co.,  60  N.  J.  Eq.  263 
(1900).  A  city  which  has  made  a 
grant  to  a  telephone  company  cannot 
thereafter  question  the  validity  of  its 
incorporation.  Old  Colony  Trust  Co. 
V.  City  of  Wichita,  123  Fed.  Rep.  762 
(1903) ;  aff'd,  132  Fed.  Rep.  641.  A 
person  sued  for  goods  sold  to  him  by 
a  corporation  cannot  attack  its  incor- 
poration. Raphael,  etc.  Co.  v.  Crit- 
tenden, 139  Cal.  488  (1903).  A  ven- 
dor of  a  crop  to  a  corporation  cannot 
defend  against  the  contract  on  the 
ground  that  the  corporation  was  not 


1959 


§  637.] 


DISSOLUTION,    FORFEITURE,    ETC. 


CH.  XXXVIII. 


defense  of  irregular,  incomplete,  or  defective  incorporation  of  itself  than 
are  the  persons  who  are  suing  it.^     In  a  criminal  prosecution  of  a  thief 


regularly  organized.  California,  etc. 
Ass'n  V.  Stalling,  141  Cal.  713  (1904). 
The  regularity  of  the  extension  of  a 
charter  of  a  bank  cannot  be  ques- 
tioned by  a  borrower  from  the  bank. 
Campbell  v.  Perth  Amboy,  etc.  Co.,  70 
N.  J.  Eq.  40  (19a5).  Even  though  an 
amendment  to  the  charter  whereby 
the  number  of  directors  is  increased 
is  not  for  several  months  recorded 
in    a    pubUc    office,    as    required    by 


statute,  yet  if  the  increased  number 
of  directors  is  elected  their  acts  bind 
the  corporation.  Werle  v.  Northwest- 
ern, etc.  Co.,  125  Wis.  534  (1905).  A 
person  who  sues  a  corporation  as 
such  and  levies  an  attachment  can- 
not when  sued  for  damages  for  levy- 
ing the  attachment  set  up  the  de- 
fense that  the  corporation  was  not 
legally  organized.  Lincoln  Butter 
Co.  V.  Edwards,  etc.  Co.,  76  Neb.  477 


1  Dooley  v.  Cheshire  Glass  Co.,  81 
Mass.  494  (1860) ;  Callender  v.  Paines- 
ville,  etc.  R.  R.,  11  Ohio  St.  516 
(1860) ;  Holbrook  v.  St.  Paul,  etc.  Ins. 
Co.,  25  Minn.  229  (1878).  See  also 
Bommer  v.  American,  etc.  Co.,  81 
N.  Y.  468  (1880),  where  the  corporation 
sought  to  escape  royalties  by  alleging 
that  it  incorporated  after  .the  con- 
tract by  it  to  pay  them  was  made. 
A  corporation  sued  for  work  done 
cannot  set  up  that  it  was  not  regu- 
larly incorporated.  Merrick  v.  Rey- 
nolds, etc.  Co.,  101  Mass.  381  (1869). 
A  corporation  cannot  defeat  its  taxes 
by  alleging  failure  to  comply  with 
conditions  subsequent  in  its  charter. 
Baltimore,  etc.  R.  R.  v.  Marshall  Co., 
3  W.  Va.  319  (1869).  The  corpora- 
tion cannot  avoid  a  tax  on  the  ground 
that  it  has  ceased  business.  Bank  of 
U.  S.  V.  Commonwealth,  17  Pa.  St.  400 
(1851).  A  corporation  receiving  the 
stock  of  another  corporation  in  con- 
sideration of  certain  agreements  as 
to  renting  machines  belonging  to  said 
latter  company  cannot,  when  enjoined 
from  violating  that  agreement,  set  up 
that  the  latter  company  was  not 
properly  organized.  Automatic,  etc. 
Co.  V.  North  American,  etc.  Co.,  45 
Fed.  Rep.  1  (1891).  Although  there 
are  less  stockholders  and  less  direc- 
tors than  the  statute  or  charter  re- 
quires, yet  the  acts  of  these  are  suf- 
ficient to  sustain  obligations  incurred 
by  the  corporation  with  third  persons. 
Welch  V.  Importers',  etc.  Bank,  122 
N.  Y.  177  (1890).  It  is  no  defense 
to  a  proceeding  by  a  religious  cor- 
poration to  collect  a  legacy  to  allege 


that  there  were  irregularities  in  its 
incorporation,  and  that  there  has 
been  a  non-user  of  its  franchises.  Re 
Cutehogue  Congregational  Church, 
131  N.  Y.  1  (1892).  The  California 
code  provides  that  the  existence  of  a 
de  facto  corporation  shall  not  be 
called  in  question  in  private  suits. 
Lakeside,  etc.  Co.  v.  Crane,  80  Cal. 
181  (1889);  Golden,  etc.  Co.  v. 
Joshua,  etc.  Works,  82  Cal.  184 
(1890).  An  insurance  company  when 
sued  on  a  policy  cannot  deny  its  in- 
corporation on  the  ground  that  its 
charter  required  that  it  be  published 
in  a  certain  way  within  a  specified 
time  after  the  charter  itself  was 
granted  and  that  this  was  not  done. 
Brady  v.  Delaware,  etc.  Co.,  2  Penne- 
will  (Del.),  237  (1899).  In  the  case 
Perine  v.  Grand  Lodge,  48  Minn. 
82  (1892),  where  an  insurance  policy 
was  sued  upon,  the  court  held  that 
it  was  immaterial  that  the  defendant 
was  not  incorporated,  inasmuch  as  it 
had  held  itself  out  as  a  corporation. 
Bon  Aqua  Imp.  Co.  v.  Standard 
F.  Ins.  Co.,  34  W.Va.  764(1891).  Even 
though  the  certificate  of  incorporation 
recites  several  purposes,  where  the 
statute  allows  but  one  purpose,  yet 
a  corporation  exists  and  may  be  held 
liable  as  such.  Marion  Bond  Co.  v. 
Mexican,  etc.  Co.,  160  Ind.  558  (1902). 
Where  two  of  the  four  persons  named 
as  directors  in  the  articles  of  incor- 
poration knew  nothing  about  them, 
the  action  of  the  other  two  binds  the 
corporation.  Smith  v.  Sinbad,  etc. 
Co.,  15  Cal.  App.  166  (1911). 


1960 


CH.  XXXVIII. 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  637. 


for  stealing  from  a  corporation  it  is  sufficient  to  prove  the  de  facto 

termine  the  rights  of  parties  claim- 
ing to  be  trustees.  Commonwealth 
V.  Yetter,  190  Pa.  St.  488  (1899).  The 
legality  of  the  existence  of  the  cor- 
poration cannot  be  questioned  in  a 
creditor's  suit  to  wind  up  and  ad- 
minister the  assets.  Hooven,  etc.  Co. 
V.  Evans,  etc.  Co.,  19.3  Pa.  St.  28 
(1899).  A  person  injured  by  a  rail- 
road cannot  sue  the  lessor  of  such 
railroad  on  the  ground  that  the  lessee 
was  not  a  legal  corporation.  Pinker- 
ton  V.  Pennsylvania,  etc.  Co.,  193  Pa. 
St.  229  (1899).  Even  though  a  cor- 
poration was  incorporated  by  a  spe- 
cial act  in  violation  of  the  constitu- 
tion, yet  its  existence  cannot  be  at- 
tacked collaterally.  Commonwealth, 
etc.  V.  Philadelphia  County,  193  Pa. 
St.  236  (1899). 

An  officer  cannot  defend  against  an 
action  to  make  him  account,  by  set- 
ting up  that  the  company  was  fraud- 
ulently organized.  Haacke  v.  Knights, 
etc.  Club,  76  Md.  429  (1892).  A  per- 
son taking  water  from  an  irrigation 
company  under  contract  cannot  de- 
fend against  an  action  thereon  by 
alleging  that  the  company  was  not 
incorporated.  Fresno,  etc.  Co.  v. 
Warner,  72  Cal.  379  (1887).  A  debtor 
sued  by  a  corporation  on  an  account 
cannot  deny  the  corporate  existence 
which  he  has  recognized.  Plummer  v. 
Struby,  etc.  Co.,  23  Colo.  190  (1896). 
A  debtor  or  creditor  of  a  corporation 
cannot  attack  the  incorporation  on 
the  ground  that  the  certificate  of  the 
payment  of  the  capital  stock  has  not 
been  filed  as  required  by  the  New 
York  statutes.  Port  Jefferson  Bank 
V.  Darling,  91  Hun,  236  (1895).  That 
the  corporation  many  ratify  and  en- 
force contracts  entered  into  in  its 
behalf  by  its  promoters  before  incor- 
poration, see  §  705,  etc.  infra.  A  cor- 
poration cannot  defend  against  its 
contracts  by  alleging  that  it  never 
published  its  articles  of  association 
as  required  by  statute.  Wood  v. 
Wiley,  etc.  Co.,'  56  Conn.'  87  (1888). 
A  corporation  is  liable  for  a  tax  even 
though  it  failed  to  file  its  articles  of 
association  with  the  secretary  of 
state  as  required  by  statute.     Walton 


(1906).  In  a  suit  by  a  corporation 
to  recover  from  the  retiring  treasurer 
the  books  and  corporate  funds  he 
cannot  set  up  that  it  was  not  duly 
incorporated.  Seven,  etc.  v.  Ferguson, 
98  Me.  176  (1903).  A  stockholder 
who  by  proxy  takes  part  in  a  meeting 
extending  the  corporate  existence  can- 
not deny  the  validity  of  such  exten- 
sion. Callahan  v.  Chilcott,  etc.  Co., 
37  Col.  331  (1906).  A  person  suing  a 
corporation  cannot  set  up  that  it  was 
illegally  incorporated.  Compton  v. 
People's,  etc.  Co.,  75  Kan.  572  (1907). 
A  suit  to  declare  void  a  tax  sale  by  a 
municipality  cannot  be  maintained  on 
the  ground  that  the  incorporators  of 
the  municipality  were  not  as  required 
by  the  statute,  the  municipality 
having  existed  and  acted  as  such 
for  many  years.  Whipple  v.  Tux- 
worth,  81  Ark.  391  (1907).  A  pledgee 
of  property  from  a  corporation  can- 
not defend  against  a  suit  by  the 
receiver  thereof  to  recover  the  prop- 
erty by  denying  the  corporate  capac- 
ity of  the  company.  Blanc  v.  Ger- 
mania  Nat.  Bank,  114  La.  739  (1905). 
An  insurance  company  sued  on  a 
policy  which  it  issued  to  a  corporation 
cannot  defend  on  the  ground  that  the 
latter  was  not  a  corporation.  Pala- 
tine Ins.  Co.  V.  Santa  Fe,  etc.  Co., 
13^  N.  Mex.  241  (1905).  A  party 
contracting  with  a  corporation  can- 
not claim  that  it  was  not  legally 
incorporated.  Shawnee  etc.  Co.  v. 
Miller,  Ohio  Circuits  (1903),  p.  198. 
Where  a  corporation  sues  to  prevent 
a  loss  of  its  property,  the  defendant 
cannot  set  up  the  defense  that  the 
articles  of  incorporation  were  not 
acknowledged  as  required  by  statute. 
Franke  v.  Mann,  106  Wis.  118  (1900). 
A  person  who  has  contracted  to  pur- 
chase land  from  a  supposed  corpora- 
tion cannot  avoid  the  contract  by  the 
defense  that  the  charter  of  the  com- 
pany had  expired.  West  Missouri, 
etc.  Co.  V.  Kansas  Citv,  etc.  Ry.,  161 
Mo.  595  (1901). 

The  validity  of  the  charter  of  a 
school  incorporated  as  a  joint-stock 
incorporation  cannot  be  tested  in  quo 
warranto   proceedings    brought    to    de- 


1961 


§  637.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVTII. 


existence  of  the  corporation  and  its  possession  and  ownership  of  the 
property.^ 


V.  Riley,  85  Ky.  413  (1887).  The  de- 
fendant cannot  allege  that  the  cor- 
poration was  for  an  illegal  purpose  — 
that  of  running  blockades  —  the  char- 
ter not  showing  that  fact.  Import- 
ing, etc.  Co.  V.  Lock,  .50  Ala.  332 
(1873).  A  corporation  cannot  be  de- 
feated in  an  action  on  a  contract  by 
the  fact  that  twenty-four  instead  of 
twenty-five  persons  signed  the  arti- 
cles of  incorporation.  Buffalo,  etc. 
Ry.  V.  New  York,  etc.  R.  R.,  22  Alb. 
L.  J.  134  (N.  Y.  1886).  Where  a 
corporation  sues  for  the  price  of 
articles  sold,  the  defendant  cannot  set 
up  that  the  plaintiff  sold  the  articles 
before  its  capital  stock  was  fully  paid 
up,  as  required  by  statute.  Chase's, 
etc.  Co.  V.  Boston,  etc.  Co.,  152  Mass. 
428  (1891);  McCord,  etc.  Co.  v. 
Glenn,  6  Utah,  139  (1889).  A  stock- 
holder cannot  enjoin  the  sale  of  his 
stock  for  non-payment  of  an  assess- 
ment on  the  ground  that  an  amend- 
ment to  the  charter  increasing  the 
number  from  seven  to  nine  had  not 
been  filed  with  the  secretary  of  state, 
as  required  by  statute,  it  being  shown 
that  at  corporate  meetings  he  had 
voted  for  nine  directors  and  had  ac- 
cepted certificates  of  stock  signed  by 
the  president  and  secretary  elected 
by  nine  directors.  Jackson  v.  Crown 
Point,  etc.  Co.,  21  Utah,  1  (1899).  A 
person  sued  for  tolls  cannot  set  up 
that  the  corporation  has  not  rendered 
required  statements,  and  hence  its 
charter  is  forfeitable.  Kellogg  v. 
Union  Co.,  12  Conn.  7  (1837).  Nor 
that  the  charter  was  never  legally 
vested  or  has  been  violated.  In  a 
suit  by  a  toll  road  to  recover  a  pen- 
alty for  refusal  to  pay  toll,  the  valid- 
ity of  the  company's  organization  and 
the  condition  of  the  road  cannot  be 
brought  into  the  controversy  by  way 
of  defense.  Canal  St.,  etc.  Co.  v.  Paas, 
95  Mich.  372  (1893).  But  a  turnpike 
company  cannot  recover  fares  for  the 
part  of  its  road  which  is  constructed 
beyond  its  chartered  limits.     Pontiac, 


etc.  Co.  V.  Hilton,  69  Mich.  115 
(1888);  Dyer  v.  Walker,  40  Pa.  St. 
157  (1861).  Under  the  California 
Code,  §  358,  the  regular  incorporation 
of  a  de  facto  corporation  cannot  be 
questioned  in  an  action  by  it  for 
damages  for  an  injury  to  property. 
Golden  Gate,  etc.  Co.  v.  Joshua,  etc. 
Works,  82  Cal.  184  (1890).  In  a  suit 
by  a  water  company  to  enjoin  an- 
other company  from  diverting  water, 
the  legality  of  the  incorporation  of 
the  plaintiff  cannot  be  questioned 
where  it  is  a  de  facto  corporation. 
People's,  etc.  Co.  v.  '76  Land,  etc.  Co., 
44  Pac.  Rep.  176  (Cal.  1896).  In 
a  trial  for  embezzlement  from  a  cor- 
poration, proof  of  a  de  facto  corpora- 
tion is  sufficient.  People  v.  Leonard, 
106  Cal.  302  (1895).  In  a  trial  for 
receiving  stolen  goods  belonging  to 
a  corporation,  a  corporate  officer's 
testimony  of  its  existence  is  sufficient 
if  not  contradicted.  State  v.  Hahib, 
18  R.  I.  558  (1894).  In  Irvine  Co. 
V.  Bond,  74  Fed.  Rep.  849  (1896),  an 
owner  of  land  in  California  incorpo- 
rated a  company  under  the  laws  of 
West  Virginia,  and  transferred  to  it 
in  payment  for  stock  certain  portions 
of  his  land.  He  owned  all  the  stock 
and  caused  one  share  each  to  be  is- 
sued to  his  lawyer,  his  wife,  and 
three  employees.  The  court  held  that 
the  corporation  was  legal  so  far  as 
the  jurisdiction  of  the  United  States 
court  was  concerned.  A  director  is 
not  personally  liable  in  damages  to 
a  property  owner  over  whose  prem- 
ises the  company's  road  runs  with- 
out warrant.  Lamming  v.  Galusha, 
81  Hun,  247  (1894) ;  aff'd,  151  N.  Y. 
648,  where  it  was  also  claimed  that 
the  incorporation  had  been  insuffi- 
cient. Where  two  railroad  companies 
claim  a  right  of  way,  one  caimot  al- 
lege that  the  other's  charter  is  for- 
feitable. Central,  etc.  R.  R.  v.  Twen- 
ty-third, etc.  R.  R.,  54  How.  Pr.  168, 
185  (1877).  A  religious  corporation 
suing    for   its    real    estate    cannot    be 


1  State  V.  Sowell,  85  S.  C.  278  (1910), 
1962 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  637. 


Where,  however,  a  corporation  is  not  even  a  de  facto  corporation, 

met  by   a   plea   of   dissolution,    there    rectory.     They  need  not  be  observed 
having     been     no     decree.       Baptist    if  the  stockholders  acquiesce.     Brain- 
House  V.  Webb,   66  Me.   398   (1877).     tree,  etc.  Co.  r.  Brain  tree,  146  Mass. 
A     corporation     suing     for     personal    482     (1881).         See      §    590,     swpra. 
property   is   not   defeated    by   a   plea    Though  the  provision  in  the  Kentucky 
that  it  was  not  legally  organized  or    statutes   requiring   publication   of   the 
is  dissolved  by  non-user.     Penobscot,    charter  is  not  complied  with,  yet  the 
etc.    Corp.    V.    Lamson,    16    Me.    224    corporation  is  valid  and  complete,  ex- 
(1839).     A  grantee  of  a  corporation's    cept   that   the  state   may  proceed   to 
right  to  overflow  land  is  not  deprived    annul    the   charter.     No   other   party 
of  his   right   by   dormancy   and   non-    can    raise     the     objection.     Stutz     i\ 
user  of  its  franchises  by  the  corpora-    Handley,  41  Fed.  531   (1890) ;    rev'd, 
tion.     Heard  v.  Talbot,  73  Mass.  113    on    other    grounds,    139    U.    S.    417; 
(1856).     Attachment  lies   against   the    Walton    v.    Riley,    85    Ky.     413,    421 
land  of  a  foreign  corporation  though     (1887),  overruling  Heinig  ?'.  Adams,  etc. 
a   receiver    of    it    exists    in    the   state    Mfg.  Co.,  81   Ky.  300   (1883).     A  de 
creating    it.     Moseby    v.    Burrow,    52    facto  corporation  suffices  where  it  seeks 
Tex.     396     (1880).     One    corporation    to   enjoin  a  city  from   disturbing   its 
cannot   enjoin   a   competing   corpora-    property.     Denver  v.  Mullen,  7  Colo, 
tion  from  proceeding  on   the  ground    345  (1884).     Or  where  an  assignment 
that  the  latter  has  subjected  its  char-    by  the  corporation  was  illegal  and  the 
ter  to  forfeiture  by  misuser  or  non-    assignee    is    sued    by    creditors.     Raf- 
user.     Elizabethtown  Gaslight  Co.   v.    ferty  v.  Bank  of  Jersey  City,  33  N.  J.  L. 
Green,  46  N.  J.   Eq.   118   (1889).     A    368     (1869).     Or     where     the     presi- 
county   cannot    seize   a    turnpike,    al-    dent  is  sued  by  the  company  to  re- 
though  the  company  is  guilty  of  mis-    cover  its  assets  from  him.     Bank  of 
user  or  non-user.     A  judgment  of  for-    Circleville    v.    Renick,    15    Ohio,    322 
feiture   is    first    necessary.     Moore    v.     (1846).     Or  where  an  execution  pur- 
Schoppert,  22  W.  Va.  282  (1883).     A    chaser  of  the  corporate  property  sues 
city  seeking  to  lay  out  a  road  on  a    the    mortgagee    of    the    corporation, 
right   of  way   cannot   claim   that   the    Morgan    v.    Donovan,    58    Ala.    241 
raib-oad   company's   right   is   forfeited     (1877).     Or    where     the     corporation 
by   non-user.     New   Jersey    R.    R.    v.    sues  the  sheriff  for  an  illegal  levy  on 
Long  Branch  Com'rs,  39  N.  J.  L.  28    its   property.     Dannebroge   Min.    Co. 
(1876).     Service  on  a  corporation  can-    v.   Ailment,   26   Cal.   286    (1864).     Or 
not  be  made  by  service  on  a  stock-    where  the  suit  grows  out  of  contracts 
holder  on  the  ground  that  it  has  for-    with     the    corporation.     Imboden    v. 
feited  its  charter  by  non-user.     Bache    Etowah,    etc.    Min.    Co.,    70    Ga.    86 
V.  Nashville,  etc.  Soc,  10  Lea  (Tenn.),     (1883);    Platte  VaUey  Bank  f^.  Hard- 
436   (1882).     The  forfeiture  can  exist    ing,    1    Neb.    461    (1870).     Or   where 
only    after    a    decree    to    that    effect,     a  bank  sues  its  correspondent  bank. 
Chesapeake,  etc.  Co.  v.  Baltimore,  etc.     Bank  of  Toledo  v.  International  Bank, 
R.  R.,  4  G.  «fe  J.  (Md.)  1  (1832).     An    21    N.    Y.    542    (1860).     Or   where   a 
agent    sued    for    conversion   of   funds    foreign   corporation   sues   for   a  stipu- 
cannot  allege  that  the  corporation  is    lated  part  of  the  oil  taken  from  its 
guilty  of  a  non-user  of  its  franchises,    land,  and   the   defendant  alleges  that 
Elizabeth,    etc.    Acad.    v.    Lindsey,    6    it    is    doing    all    its    business    outside 
Ired.  L.  (N.  C.)  476  (1846).     A  squat-    of   the   state   incorporating   it.     New- 
ter  on  corporate  land  cannot  dispute    burg,   etc.   Co.   v.   Weare,  27  Ohio  St. 
the   corporate   title    by   alleging    that    343     (1875).       See    also     §§  237-239, 
it  was  not  legally  incorporated  or  or-    swpra.     Or   where   a   foreign   corpora- 
ganized.     Only   the  state  can  object,     tion    sues    the    sheriff    for     trespass. 
East,  etc.  Church  v.  Froislie,  37  Minn.    Persse,  etc.  Works  v.  Willett,   1  Rob. 
447    (1887).     Statutory   provisions   as     (N.    Y.)    131    (1863).     Or  where   the 
to  notice  of  the  first  meeting  are  di-    company    sues    for    tolls.     Smelser    v. 

1963 


§  637.1 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


':s\ 


y 


tlien,  of  course,  it  falls  back  into  the  category  of  copartnerships  and 
cannot  bring  suit  as  a  corporation.^ 

Wayne,  ete.  Turnp.  Co.,  82  Ind.  417  stock  in  a  company  which  both  the 
(1882).  The  case  Welland  Canal  Co.  vendor  and  the  vendee  believe  to  be 
V.  Hathaway,  8  Wend.  480  (1832),  incorporated,  but  which  has  not  been 
allowed  a  contractor  to  deny  the  ex-  incorporated,  may  rescind,  where  the 
istence  of  a  corporation  which  sued  vendor  stated  that  the  company  was 
to  recover  back  money  which  had  incorporated,  and  it  is  no  defense 
been  overpaid  to  him.  that  the  property  of  the  company  has 
1  See  §§  233,  236,  508,  supra,  since  depreciated  in  value.  In  this 
Where  there  is  no  law  authorizing  case  the  attorney  was  instructed  to 
incorporation,  the  incorporation  may  procure  a  charter,  but  made  no  at- 
be  denied  even  in  a  suit  on  a  contract  tempt  to  do  so.  Bolton  v.  Prather, 
signed  by  the  company  in  the  corporate  35  Tex.  Civ.  App.  295  (1904).  Where 
name.  Western  Union  Tel.  Co.  v.  Mexi-  a  copartnership  in  Connecticut  pro- 
can,  etc.  Co.,  31  Okla.  ■SOS"  (1912).  ceeds  to  incorporate  in  that  state,  but 
'/  Where  a  charter  is  taken  out  but  no  or-  fails  to  file  the  certificate  with  the 
ganizationmeetingheldor  stock  issued,  secretary  of  state,  as  required  by 
the  officers  are  liable  personally  on  a  charter,  and  it  appears  that  the  in- 
note  issued  in  the  name  of  the  eorpo-  tent  to  incorporate  was  abandoned, 
ration  and  signed  by  them  as  such  of-  one  partner,  upon  the  death  of  the 
fleers.  Central  Nat.  Bank  v.  Sheldon,  other,  may  claim  possession  of  the 
86  Kan.  460  (1912).  A  corporation  to  assets  as  against  the  corporation, 
deal  in  bonds  cannot  be  organized  Card  v.  Moore,  68  N.  Y.  App.  Div.  327 
under  a  statute  authorizing  the  for-  (1902) ;  aff'd,  173  N.  Y.  598.  A  cor- 
mation  of  corporations  to  deal  in  poration  whose  articles  are  not  filed 
merchandise  and  conduct  mercantile  in  the  right  county,  and  which  has 
operations.  Such  a  corporation  is  never  had  an  organization  meeting, 
not  even  a  de  facto  corporation,  is  not  de  jure  nor  de  facto.  It  can- 
inasmuch  as  such  a  de  jure  corpora-  not  sue  a  director  for  preventing  or- 
tion  is  impossible  under  such  a  stat-  ganization.  Martin  v.  Deetz,  102  Cal. 
ute.  Hence  such  a  corporation  cannot  55  (1894).  In  order  to  constitute  a 
bring  suit  as  a  corporation.  Indiana,  de  facto  corporation  "there  must  at 
etc.  Co.  V.  Ogle,  22  Ind.  App.  593  least  be  an  organization  under  some 
(1899).  Where  a  proposed  national  existing  charter  or  law.  And  such 
bank  is  never  authorized  by  the  organization  must  be  in  good  faith." 
comptroller  of  the  currency  to  com-  Hence,  where  an  attorney  sues  for 
mence  business,  and  never  does  com-  his  services,  the  supposed  corporation 
mence  business,  a  lease  made  in  its  may  set  up  that  it  is  not  a  de  facto 
name  cannot  be  enforced  against  nor  de  jure  corporation.  Welch  v.  Old 
it.  McCormick  v.  Market  Nat.  Bank,  Dominion,  ete.  Ry.,  10  N.  Y.  Supp. 
162  111.  100  (1896).  Under  the  174  (1890).  A  person  who  agreed  to 
Georgia  railroad  act  a  company  is  and  did  convey  property  to  a  com- 
not  a  corporation  until  directors  have  pany  to  be  incorporated  may  subse- 
been  elected,  even  though  the  certifi-  quently  repudiate  the  corporation  and 
cate  was  issued  by  the  secretary  of  his  conveyance  as  against  his  asso- 
state  some  time  prior  thereto.  Wat-  ciates  who  shared  in  the  stock  re- 
son  V.  Albany,  etc.  Ry.,  Ill  Ga.  10  ceived  therefor.  Doyle  v.  Mizner,  42 
(1900).  In  a  suit  brought  by  a  street  Mich.  332  (1879).  The  case  Boyce 
railway  to  enjoin  ano^ther  street  rail-  v.  Trustees,  etc.,  46  Md.  359  (1876), 
way  from  interfering  with  an  alleged  allowed  a  corporation  to  deny  its 
exclusive  right  of  the  former,  the  existence  as  against  a  director  who 
corporate  existence  of  the  former  sued  it  for  moneys  advanced  to  it. 
may  be  questioned.  Wilmington  City  The  failure  of  a  railroad  to  cause 
Ry.  V.  Wilmington,  etc.  Ry.,  46  Atl.  to  be  paid  in  a  certain  amount  of 
Rep.  12  (Del.  1900).     A  purchaser  of  its  capital  stock  before  incorporation 

1964 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  637. 


Thus  a  corporation  which  files  its  certificate  of  incorporation  with 
the  secretary  of  state,  but  not  with  the  county  clerk,  as  required  by 
statute,  and  transacts  no  business  except  to  authorize  the  issue  of 
stock  for  property,  which  issue  is  never  made,  is  not  even  a  de  facto 
corporation,  and  hence  the  directors  are  not  liable  for  failing  to  file 
a  report  as  required  by  statute.^  And  where  the  statute  authorizes 
incorporation  for  producing  and  selling  electricity,  and  the  certificate 
of  incorporation  includes  this  as  well  as  manufacturing  and  selling  elec- 
trical appliances,  apparatus,  and  supplies,  the  corporation  is  not  a 
de  jure  corporation,  and  hence  is  insufficient  to  support  an  action  by  one 
promoter  against  another,  on  a  contract  of  the  latter  to  convey  land  to 
a  corporation  to  be  formed  and  to  take  stock  in  payment,  especially 
w^here  the  full  capital  stock  of  such  corporation  had  not  been  subscribed 
for.^  The  mere  fact  that  a  person  contracts  with  a  party  and  desig- 
nates the  latter  as  a  "  company  "  will  not  estop  the  former  from  deny- 
ing the  incorporation  of  the  latter.  This  is  the  law,  and  is  reasonable, 
since  many  copartnerships  do  business  and  make  contracts  under  the 
name  of  "  company."  ^  But  where  the  party  contracted  with  is  a  de 
facto  corporation,  then  the  rules  given  above  apply.     It  is  to  be  borne 


may  defeat  munieipal  bonds  which 
are  given  to  it.  Farnham  v.  Bene- 
dict, 107  N.  Y.  159  (1887). 

1  Emery  v.  De  Peyster,  77  N.  Y. 
App.  Div.  65  (1902).  An  older  New 
York  case  held  that  a  director  can- 
not escape  his  statutory  liability  by 
reason  of  the  failure  of  the  company 
to  file  its  certificate  of  incorporation 
with  the  secretary  of  state.  Meriden 
Tool  Co.  V.  Morgan,  1  Abb.  N.  Cas. 
125,  n.  (N.  Y.  Super.  Ct.  1875). 
Where  incorporators  under  the  Illi- 
nois statute  have  not  recorded  the 
certificate  of  incorporation  in  the 
county  where  the  principal  office  is, 
as  required  by  statute,  a  suit  against 
the  incorporators  to  enjoin  unfair 
competition  will  lie,  inasmuch  as  the 
alleged  corporation  never  had  a  legal 
existence.  Elgin,  etc.  Co.  ;;.  Loveland, 
132  Fed.  Rep.  41  (1904).  Where  the 
certificate  of  incorporation  is  filed  in 
the  county  clerk's  office  but  not  in 
the  office  of  the  secretary  of  state, 
as  required  by  statute,  the  corpora- 
tion does  not  legally  exist,  and  a  con- 
veyance to  it  is  not  good.  Lusk  v. 
Riggs,  70  Neb.  713  (1904).  Where  a 
creamery  company's  certificate  of  in- 
corporation is   not   properly  recorded 


and  contains  no  provision  for  the  pay- 
ment of  the  capital  stock,  a  person 
who  subscribed  to  it,  but  who  refuses 
to  deliver  cream  in  accordance  with 
his  contract,  can  defeat  a  suit  for 
breach  of  such  contract.  Byronville, 
etc.  Ass'n  v.  Ivers,  93  Minn.  8  (1904). 
Cf.  §§  231-234,  supra. 

2  Burk  V.  Mead,  159  Ind.  252  (1902). 
A  New  Jersey  corporation  organized 
under  the  general  act  to  manufacture 
and  sell  gas  cannot  do  so  in  New 
Jersey,  inasmuch  as  such  charters 
must  be  taken  out  under  the  gas 
company  act,  and  hence  such  a  com- 
pany cannot  exercise  such  powers  in 
another  state  and  cannot  prevent  its 
plant  in  the  streets  being  treated  as 
a  nuisance  by  a  party  suffering  spe- 
cial injury  thereby.  Seattle,  etc.  Co. 
V.  Citizens',  etc.  Co.,  123  Fed.  Rep. 
588  (1903).  See  also  Carey  v.  Cincin- 
nati, etc.  R.  R.,  5  Iowa,  357  (1857), 
and  §  638,  infra. 

^  See  §  243,  supra.  Where  several 
lines  of  railroad  use  for  convenience 
the  name  "Kanawha  Dispatch"  in 
handling  freight,  such  Kanawha  Dis- 
patch cannot  maintain  a  suit.  Kana- 
wha Dispatch  v.  Fish,  219  111.  236 
(1905). 


1965 


§  637.]  DISSOLUTION,    FORFEITURE,    ETC.  [cH.  XXXVIII. 

in  mind,  also,  that  a  company  which  is  supposed  to  be  incorporated, 
but  is  not,  may  after  incorporation  ratify  and  enforce  contracts  made  in 
its  behalf.^  The  execution  and  dehvery  of  an  instrument  to  a  corpora- 
tion as  a  corporation  raises  a  presumption  that  the  company  was  regu- 
larly incorporated."  A  purchaser  of  stock  in  a  de  facto  corporation 
cannot  repudiate  the  sale  on  the  ground  that  the  company  was 
not  properly  organized.^  A  trustee  in  bankruptcy  of  a  person 
cannot  seize  the  assets  of  a  corporation  on  the  ground  that  it  was 
fraudulently  and  illegally  organized  to  purchase  that  person's  goods 
and  defraud  his  creditors.^  But  a  seller  of  goods  to  a  supposed 
corporation  who  was  informed  that  the  certificate  of  incorporation 
had  been  filed  when  in  fact  it  had  not  been,  may  replevin  the  goods, 
even  if  the  corporation  is  thereafter  organized  and  afterwards  becomes 
insolvent.^  Where  a  railroad  corporation  was  irregularly  organized, 
a  court  may  appoint  a  receiver  of  the  railroad  and  order  its  sale.^ 
And  where  an  irregularly  organized  railroad  has  its  rights  forfeited 
by  quo  warranto  proceedings,  its  title  to  property  then  vests  in  its 
directors  as  trustees.'^ 

Irregularities  in  the  organization  of  a  corporation  created  by  a  state 
will  not  be  inquired  into  in  the  courts  of  another  state,  a  charter  having 
been  issued  to  the  company  in  the  state  where  it  was  organized.^  The 
public  policy  of  the  state,  however,  may  refuse  to  recognize  such  a 
foreign  corporation.^  As  regards  the  jurisdiction  of  the  federal  courts 
the  incorporation  of  a  company  cannot  be  questioned  on  the  ground 
that  the  charter  required  a  certain  amount  of  money  to  be  paid  in  before 
business  was  commenced,  and  that  business  had  been  commenced  with- 
out that  amount  being  paid.^" 

1  See  §  707,  infra.  "  Foster  v.  Hip,  etc.  &  Co.,  243  111. 

2  West  Side,  etc.  Co.  v.  Connecticut,     163  (1909). 

etc.  Co.,  186  111.  156  (1900).  ^  Whiting  &  Sons,   Co.   v.   Barton, 

3  Burwash    v.    Ballou,    230    111.    34    204  Mass.  169  (1910). 

(1907).     In  a  suit  by   the  vendor  of  e  Matter  of  New  York,  etc.  R.  R., 

stock  for  the  price,   it  is  no  defense  193  N.  Y.  72  (1908). 

that  the  corporation  had  not  recorded  '  New  York,  etc.  Ry.  v.  Motil,  81 

its    certificate    of    incorporation    with  Conn.  466  (1908). 

the  recorder  of  deeds  as  required  by  »  Lancaster  v.  Amsterdam  Imp.  Co., 

statute,  it  being  shown  that  the  cer-  140  N.  Y.  576  (1894). 

tificate  had  been  filed  with  the  secre-  '  See  §§  237-240,  supra.     A  eorpora- 

tary    of    state    and    the    corporation  tion  organized  in  Kansas  to  buy  and 

organized     and     is     doing     business,  sell    land     in     Oklahoma    exclusively 

Marshall  v.  Keach,  227  111.  35  (1907).  will  not  be  recognized  as  a  corporation 

A   sale  of  stock   of   a   land   company  in    Oklahoma    and    cannot  enforce   a 

which  does  no  land  business  but  carries  purchase  money  mortgage  which  it  has 

on   a   cooperative   scheme   is   void   as  received   in   payment   for  land.     Laf- 

between  parties  who  participated  there-  ferty  v.  Evans,  17    Okla.  247   (1906). 

in.     Todd  v.  Ferguson,  161  Mo.  App.  "  Wells    Co.    v.    Gastonia    Co.,   198 

624  (1912).     See  §  350,  supra.  U.  S.  177  (1905). 

1966 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


638. 


§  638.  Lapse  of  charter  hy  failure  to  comply  with  conditions.  — 
Frequently  a  charter  of  a  railroad  corporation  requires  it  to  complete 
its  road  or  a  certain  number  of  miles  of  road  within  a  certain  time,  and 
the  charter  expressly  declares  that  for  failure  to  comply  with  this  req- 
uisite the  corporate  powers  and  existence  shall  cease.  There  is  a 
strong  line  of  decisions  to  the  effect  that  such  a  provision  as  this  forfeits 
the  charter  absolutely  upon  non-compliance,  and  that  no  decree  of  a 
court  is  necessary  to  effectuate  that  forfeiture.^     But  this  drastic  and 


1  See  Brooklvn,  etc.  Co.  v.  City,  78 
N.  Y.  524  (1879);  Re  Brooklyn,  etc. 
R.  R.,  72  N.  Y.  245  (1878) ;  Re  Brook- 
lyn, etc.  R.  R.,  75  N.  Y.  335  (1878) ; 
Commonwealth  v.  Lykens,  etc.  Co., 
110  Pa.  St.  391  (1885);  Farnliam  v. 
Benedict,  107  N.  Y.  159  (1887).  C/. 
Re  Kings  County  El.  Ry.,  105  N.  Y. 
97  (1887),  rev'g  41  Hun,  425;  People 
V.  National  Sav.  Bank,  11  N.  E.  Rep. 
170  (lU.  1887);  aflf'd,  129  111.  618 
(1889).  The  New  York  doctrine  that 
a  statute  to  the  effect  that  the  exis- 
tence and  powers  of  a  corporation 
"shall  cease"  if  its  business  is  not 
commenced  within  five  years,  etc.,  is 
self -executing  and  does  not  require 
a  decree  of  the  coiirt,  was  applied  in 
Matter  of  Brooklyn,  etc.  R.  R.,  185 
N.  Y.  171  (1906).  The  New  York 
statute  that  if  a  railroad  company  shall 
not  within  five  years  begin  construc- 
tion of  its  road  and  expend  a  certain 
amount,  and  finish  the  road  within  ten 
years  "its  corporate  existence  and 
powers  shall  cease,"  is  self -executing 
without  any  judicial  decree,  and  applies 
to  a  street  railway,  which  obtained 
the  consent  of  local  authorities,  but 
not  the  abutting  propertj'  owners, 
within  five  years.  Matter  of  Brook- 
lyn, etc.  R.  R.  106  N  .  Y.  App.  Div.  240 
(1905) ;  aff'd,  185  N.  Y.  171.  A  city 
cannot  maintain  a  suit  to  determine 
whether  its  consent  to  the  construc- 
tion of  a  street  railway  has  ceased, 
even  though  the  statute  requires  com- 
pletion of  construction  within  ten 
years  and  those  ten  years  have  elapsed. 
City  of  New  York  v.  Bryan,  196  N.  Y. 
158  (1909).  A  statute  may  provide 
that  corporate  charters  granted  by 
the  state  shall  cease  ipso  facto  on  a 
certain  date  unless  certain  license 
V     fees   to    the   state   are   paid.     Kaiser, 


etc.  Co.  V.  Curry,  155  Cal.  638  (1909). 
A  condition  in  a  grant  from  a  munic- 
ipalitj'  to  a  street  railway  that  if  the 
road  was  not  built  within  a  specified 
time  "then  this  franchise  and  all  the 
rights  thereunder  to  be  null  and  void," 
is  self-executing.  Mill  Creek  v.  Erie, 
etc.  Ry.,  209  Pa.  St.  300  (1904).  A 
statutory  provision  that  the  failure 
of  a  street  railway  to  complete  its 
line  within  a  time  to  be  specified  by  the 
municipality  "works  a  forfeiture"  is 
self-executing  as  to  the  part  not  com- 
pleted. Los  Angeles  Ry.  v.  City  of 
Los  Angeles,  152  Cal.  242  (1907). 
The  California  statute  relative  to 
forfeiture  of  charters  is  self-operative 
without  any  judicial  decree.  Newhall 
V.  Western,  etc.  Co.,  128  Pac.  Rep. 
1040  (Cal.  1912).  A  new  state  con- 
stitution may  forfeit  all  charters  pre- 
viously existing,  but  not  previously 
used  by  the  incorporators.  Chinole- 
clamanehe  Lumber,  etc.  Co.  v.  Com- 
monwealth, 100  Pa.  St.  438  (1882), 
holding  also  that  a  constitutional  pro- 
vision that  charters  under  which  no 
organization  has  been  made  and  busi- 
ness has  been  commenced  shall  lapse 
forthwith  is  constitutional  and  self- 
enforcing.  In  a  condemnation  pro- 
ceeding by  a  street  railway  to  obtain 
a  right  over  a  turnpike,  the  turnpike 
company  may  set  up  that  the  street 
railway  charter  has  lapsed  by  reason 
of  the  company  not  ha\ing  organized 
and  commenced  business  within  a 
certain  time  and  that  thereby  the  char- 
ter became  void  by  reason  of  a  consti- 
tutional provision.  In  re  Philadel- 
phia &  M.  Ry.,  187  Pa.  St.  123  (1898). 
A  provision  in  a  charter  that  it  should 
become  void  unless  a  certain  amount  of 
railroad  is  contructed  by  a  certain  date 
is    self-executory,    and    the    company 


1967 


§  638. 


DISSOLUTION,    FORFEITURE,    ETC, 


[cH.  XXXVIII. 


dangerous  construction  of  charters  does  not  commend  itself  to  law  and 
justice.  It  adds  one  more  to  the  perils  which  are  attached  to  all  great 
corporate  enterprises.  Even  in  New  York,  where  the  above  doctrine 
seems  to  have  had  its  origin,  the  courts  are  inchned  to  limit  its  applica- 
tion.    The  New  York  courts  have  held  that  a  provision  in  a  charter, 


ceases  to  exist  if  construction  is  not 
so  made  within  that  time,  and  hence 
the  company  cannot  maintain  a  suit 
after  that  time.  Maine,  etc.  R.  R.  v. 
Maine,  etc.  R.  R.,  92  Me.  476  (1899). 
The  defense  may  be  set  up  that  the 
company's  time  to  complete  its  road 
had  expired.  Atlantic,  etc.  R.  R.  ;;. 
St.  Louis,  66  Mo.  228  (1877).  The 
provision  in  a  street  railway  charter 
that  the  right  should  become  void 
unless  the  line  was  completed  within 
two  years  and  the  franchises  were 
thereupon  to  wholly  cease  is  self- 
executing.  Williamson  i;.  Gordon,  etc. 
Ry.,  40  Atl.  Rep.  933  (Del.  1898). 
Where  a  charter,  by  its  terms,  is  to  be 
void  unless  the  capital  stock  is  sub- 
scribed within  two  years  and  busi- 
ness commenced,  a  failure  to  secure 
the  whole  subscription  within  that 
time  renders  the  charter  void,  though 
business  was  commenced.  Quo  war- 
ranto lies.  People  v.  National  Sav. 
Bank,  11  N.  E.  Rep.  170  (111.  1887). 
The  provision  in  the  Railroad  Act  of 
New  York  of  1850  relative  to  forfeiture 
of  the  charter  for  failure  to  proceed 
with  the  enterprise  was  self-executing. 
Underground  R.  R.  v.  City  of  New 
York,  116  Fed.  Rep.  952  (1902) ;  aff'd, 
on  other  grounds  in  193  U.  S.  416.  In 
Putnam  v.  Ruch,  54  Fed.  Rep.  216 
(1893),  the  court,  in  a  dictum,  said 
that  the  repeal  of  a  charter  by  a  con- 
stitutional enactment  may  be  self- 
executing,  but  that  in  the  case  before 
the  court  the  judgment  of  the  court 
was  necessary.  Where  by  its  charter 
a  street  railroad  is  to  be  commenced 
within  three  years  and  completed 
within  ten,  but  it  does  not  even  open 
books  for  subscriptions  until  nearly 
twenty  years  have  elapsed,  the  cor- 
poration never  came  into  existence, 
and  an  abutting  property  owner  may 
enjoin  the  laying  of  tracks.  Bona- 
parte V.  Baltimore,  etc.  R.  R.,  75  Md. 
340  (1892).  Contra,  New  York,  etc. 
R.  R.  V.  New  York,  N.  H.  etc.  R.  R., 


52  Conn.  274,  284  (1884).  Cf.  State  v. 
BuU,  16  Conn.  179  (1844).  In  Texas 
the  statute  is  self-executing,  the  words 
used  being  the  same  as  in  the  New 
York  statute.  But  the  property  rights 
survive  for  the  benefit  of  creditors 
and  stockholders.  Sulphur  Springs, 
etc.  Ry.  V.  St.  Louis,  etc.  Ry.,  2  Tex. 
Civ.  App.  650  (1893).  A  provision 
that,  unless  certain  roads  should  be 
completed  within  a  certain  time,  "its 
corporate  existence  and  its  powers 
shall  cease,  so  far  as  it  relates  to  that 
portion  of  said  road  then  unfinished," 
is  self-executing.  Houston  v.  Houston, 
etc.  Ry.,  84  Tex.  581  (1892).  A 
subscriber,  sued  on  his  subscription 
for  stock,  may  defeat  the  suit  by  show- 
ing that  by  statute  the  charter  was  to 
be  void  if  no  work  was  commenced 
within  two  years,  and  that  such  two 
years  have  elapsed  and  no  work  has 
been  done.  Bywaters  v.  Paris,  etc. 
Ry.,  73  Tex.  624  (1889).  Under  the 
Virginia  law  requiring  organization 
within  two  years  or  else  the  charter  is 
void,  the  charter  becomes  void, 
"without  legal  proceedings  of  any  kind, 
from  mere  operation  of  law."  Welch 
V.  Old  Dominion,  etc.  Co.,  10  N.  Y. 
Supp.  174  (1890);  Silliman  v.  Fred- 
ericksburg, etc.  R.  R.,  27  Gratt.  (Va.) 
119  (1876).  A  provision  in  the  general 
statutes  to  the  effect  that  the  powers 
of  a  corporation  shall  cease  if  it  does 
not  organize  within  one  year  does  not 
apply  to  a  special  charter  the  terms 
of  which  indicate  that  organization 
might  be  after  one  year.  People  v. 
Bowen,  30  Barb.  24  (1859);  affirmed 
on  other  grounds,  21  N.  Y.  517.  In 
Bybee  v.  Oregon,  etc.  R.  R.,  139  U.  S. 
663  (1891),  the  court  reviewed  the 
conflicting  decisions  on  the  question 
whether  a  corporate  charter  could  be 
made  by  the  legislature  to  lapse  and 
cease  ipso  facto  and  without  judicial 
action.  As  to  the  effect  on  corporate 
mortgages,  see  §  792,  infra. 


1968 


CH.   XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


638. 


that  unless  certain  things  are  done  within  a  certain  time  the  company 
shall  "  forfeit  the  rights  acquired,"  does  not  work  a  forfeiture  ipso 
facto,^  and  that  a  provision  in  a  charter,  that  unless  work  shall  be  com- 
menced within  two  years  "  all  rights  and  privileges  granted  hereby  shall 
be  null  and  void,"  is  not  self-executing,  and  a  judgment  of  the  court 
is  necessary  before  forfeiture  takes  place,-  and  the  weight  of  authority, 
as  well  as  logic  and  public  policy,  favors  such  a  rule.^     It  is  no  defense 

1  Consequently  this  is  no  defense  judicial  proceedings  to  enforce  it. 
to  condemnation  proceedings.  Re  New  York,  etc.  Ry.  v.  Motil,  81  Conn. 
Brooklyn,  etc.  R.  R.,  125  N.  Y.  434  466  (1908).  A  constitutional  pro- 
(1891).  vision   against   the   legislature   restor- 

2  Re  New  York,  etc.  Bridge  Co.,  148  ing  a  franchise  which  has  been  for- 
N.  Y.  540  (1896).  The  attorney-gen-  feited  refers  to  a  judicial  forfeiture  and 
eral  cannot  enjoin  a  gas  company  not  to  a  legislative  forfeiture.  State 
from  laying  its  pipes  on  the  ground  v.  Howell,  67  Wash.  377  (1912).  A 
that  the  charter  was  void  by  reason  statute  that  a  failure  to  make  reports 
of  the  company  not  having  commenced  is  prima  facie  evidence  that  the  cor- 
work  within  the  prescribed  time.  The  poration  is  out  of  business  and  shall 
local  authorities  are  fully  competent  work  a  forfeiture  of  the  charter  is  not 
to  raise  the  question  if  they  wish,  self-executing  and  is  legal,  but  a  judi- 
People  V.  Equity  Gas  Light  Co.,  141  cial  proceeding  is  necessary.  People 
N.  Y.  232  (1894).  Failure  to  com-  v.  Rose,  207  111.  352  (1904).  The 
mence  work  within  a  time  specified  failure  of  a  railroad  to  organize  within 
in  the  charter,  and  a  penalty  that  there-  the  time  specified  by  the  charter  does 
for  the  company  should  be  dissolved,  not  prevent  organization  thereafter 
does  not  effect  dissolution.  A  judg-  unless  the  charter  has  been  forfeited 
ment  is  necessary.  Day  v.  Ogdens-  by  court  proceedings.  Seaboard,  etc. 
burg,  etc.  R.  R.,  107  N.  Y.  129  (1887).     R.  R.  v.  Olive,  142  N.  C.  257  (1906). 

3  Even  though  a  charter  provides  In  condemnation  proceedings  the  de- 
that  if  the  railway  is  not  completed  fense  that  the  corporation  has  ceased 
within  a  certain  time  then  the  power  to  to  exist  for  failure  to  complete  its 
make  and  complete  the  railway  shall  road  within  ten  years  is  not  good, 
cease,  yet  if  the  railway  acquires  a  inasmuch  as  the  corporate  existence  can 
right' of  way  prior  to  the  expiration  be  attacked  only  in  a  direct  proceed- 
of  the  time  it  may  complete  the  rail-  ing  for  that  purpose.  Morrison  v. 
way.  Great  Western  Ry.  v.  Midland  Forman,  177  111.  427  (1898).  The 
Ry.,  [1908]  2  Ch.  455.  A  charter  of  question  of  whether  or  not  a  charter  has 
a  railroad  that  its  power  to  complete  been  forfeited  by  a  provision  that  its 
its  railway  shall  cease  unless  it  is  rights  should  revert  to  the  state,  m 
completed  within  a  certain  time  does  case  certain  work  was  not  done  within 
not  prevent  it  completing  the  railway  two  years,  cannot  be  raised  by  a  party 
after  that  time.  Midland  Ry.  Co.  litigating  with  such  company,  but  can 
V.  Great  Western  Ry.,  [1909]  A.  C.  be  raised  only  by  a  proceeding  insti- 
445.  Where  by  statute  on  the  sale  tuted  by  the  state.  Olyphant,  etc. 
of  corporate  property  the  corporation  Co.  v.  Borough  of  Olyphant,  196  Pa. 
"shall  cease  to  exist,"  the  state  may  St.  553  (1900).  A  statutory  provision 
maintain  quo  warranto  to  forfeit  the  that  a  corporation,  for  purposes  of 
charter.  Commonwealth  v.  Lumber,  enforcing  the  stockholder's  statutory 
etc.  Co.,  225  Pa.  St.  317  (1909).  A  liability,  shaU  be  deemed  dissolved 
provision  that  if  a  railroad  does  not  one  year  after  it  ceases  to  do  business 
finish  its  line  in  five  vears  its  corporate  does  not  cause  such  dissolution  as  to 
existence  and  powers  shall  cease  is  prevent  the  corporation  being  sued 
not  self-operating  but  is  simply  a  thereafter.  Whitman  v.  Citizens 
ground    for    forfeiture    and    requires     Bank,   110  Fed.  Rep.  503   (1901).     A 

(124)  1969 


638. 


DISSOLUTION,    FORFEITURE,   ETC. 


[CH.  XXXV7II. 


to  condemnation  proceedings  that  the  company  had  not  commenced 
work  within  the  time  fixed  by  statute  nor  expended  the  capital  required 


provision  that  a  railroad  charter  shall 
be  null  and  void  unless  certain  things 
are  done  within  two  years  is  not  self- 
executing.  Brown  v.  Wyandotte,  etc. 
Ry.,  68  Ark.  134  (1900).  Even  though 
a  city  has  reserved  the  power  to  for- 
feit the  right  of  a  street  railway  com- 
pany to  construct  its  road  on  certain 
streets,  if  such  construction  is  not  com- 
pleted within  five  years,  this  in  itself 
does  not  work  a  forfeiture,  but  a  for- 
feiture must  fitrst  be  declared.  Louis- 
ville, etc.  R.  R.  V.  Bowling  Green  Ry., 
110  Ky.  788  (1900).  Although  a  munic- 
ipal grant  to  construct  a  street  rail- 
way provides  that  it  shall  be  forfeited 
and  the  rights  shall  cease  without  any 
action  at  law  or  otherwise  unless  the 
road  is  completed  ^vithin  a  specified 
time,  yet  the  court  will  not  enforce 
the  provision  if  there  was  a  legal 
excuse  for  the  delay  or  a  waiver  of  the 
provision.  Dusenberry  v.  New  York, 
etc.  Co.,  46  N.  Y.  App.  Div.  267 
(1899).  A  provision  in  a  street  rail- 
way charter  that,  if  certain  things 
are  not  done  within  a  certain  time,  the 
"act  of  incorporation  shall  be  void"  as 
to  streets  not  then  covered,  is  not  self- 
executing,  and  delay  in  insisting 
thereon  will  constitute  a  waiver. 
Dern  v.  Salt  Lake,  etc.  R.  R.,  19 
Utah,  46  (1899).  The  act  of  Congress 
granting  lands  to  railroad  companies, 
and  providing  that  if  any  section  of 
the  road  is  not  completed  within  five 
years  after  its  location  the  land  grant 
shall  be  forfeited  is  not  self-executing, 
and  no  forfeiture  takes  place  except 
by  judicial  proceedings  or  an  act  of 
Congress  assuming  title.  Utah,  etc. 
R.  R.  V.  Utah,  etc.  Ry.,  110  Fed.  Rep. 
879  (1901).  Although  the  charter 
states  that  it  shall  be  forfeited  unless 
the  corporation  is  organized  within  two 
years,  yet  a  stockholder  cannot  set 
up  such  a  forfeiture  in  a  suit  involv- 
ing a  lien  of  the  corporation  on  his 
stock.  Boyd  v.  Redd,  120  N.  C.  335 
(1897).  Where  land  has  been  con- 
demned by  a  railroad  corporation,  the 
grantee  of  the  party  whose  land  has 
been  so  condemned,  the  grant  having 
been  made  prior  to  the  condemnation, 


but  the  grantee  being  represented  in 
the  proceedings,  cannot  maintain  eject- 
ment therefor  on  the  ground  that  the 
railroad  charter  provides  "that  the 
rights,  privileges,  and  powers  of  said 
corporation  shall  be  null  and  void," 
unless  certain  work  was  done  within 
a  certain  time,  even  if  the  work  had 
not  been  done  within  the  prescribed 
time.  Only  the  state  can  question 
the  corporate  existence  on  this  ground. 
New  York  &  N.  E.  R.  R.  v.  New  York, 
N.  H.  etc.  R.  R.,  52  Conn.  274,  284 
(1884).  See  also  Briggs  v.  Cape  Cod 
Land  Co.,  137  Mass.  71  (1884).  In 
this  case  the  charter  of  a  corporation 
required  it  to  deposit  with  the  state 
treasurer  within  four  months  from  its 
date  the  sum  of  1200,000  as  security 
for  certain  purposes,  among  others  for 
the  payment  of  damages  for  taking 
land,  and  the  corporation  did  not 
deposit  the  $200,000  in  cash,  but  in 
bonds  of  the  United  States  of  the  par 
value  of  $200,000,  and  of  the  market 
value  of  $230,000.  Held,  a  sufficient 
compliance,  as  the  object  of  the  provis- 
ion was  to  provide  security  to  various 
interests.  Also  held  that  the  ques- 
tion whether  a  corporation  has  ceased 
to  exist  for  non-compliance  with 
charter  provisions  could  only  be  judi- 
cially determined  in  a  suit  to  which 
the  commonwealth  was  a  party.  The 
corporation  itself,  when  sued  for 
taxes,  cannot  set  up  this  defense. 
Baltimore,  etc.  R.  R.  v.  Marshall  Co., 
3  W.  Va.  319  (1869).  An  owner  of 
land  which  a  railroad  has  taken  cannot 
reclaim  possession  by  reason  of  the 
failure  of  the  company  to  complete 
its  road  within  the  time  limited  by 
charter.  Cincinnati,  etc.  R.  R.  v. 
Clifford,  113  Ind.  460  (1888) ;  Bravard 
V.  Cincinnati,  etc.  R.  R.,  115  Ind. 
1  (1888).  A  provision  that  if  the  road 
is  not  completed  within  a  certain 
time  "the  charter  shall  be  forfeited" 
is  not  self -executing.  Galveston,  etc. 
Ry.  V.  State,  81  Tex.  572  (1891).  Such 
also  is  the  rule  where  the  statute 
merely  limits  the  term  of  existence  of 
the  corporation.  Elizabethtown  Gas- 
light Co.  V.  Green,  46  N.  J.  Eq.  118 


1970 


CH.  XXXVin.]  DISSOLUTION,    FORFEITURE,    ETC.  [§§  639,  640. 

by  statute.^  A  statute  that  after  a  year's  suspension  of  business  the 
franchises  shall  be  deemed  surrendered  and  the  corporation  be  adjudged 
dissolved  is  not  self-executory,  but  requires  the  judgment  of  the  court.^ 
Where  the  charter  of  a  railroad  subway  company  lapses  by  reason  of 
the  railroad  not  being  completed  within  a  time  specified  by  the  statute, 
the  question  of  who  is  entitled  to  the  street  rights  should  be  litigated 
between  the  state  and  the  claimants.^ 

Where  by  a  charter  a  bridge  is  to  revert  to  the  state  after  forty  years, 
the  state,  upon  the  expiration  of  the  forty  years,  may,  by  an  informa- 
tion, enforce  the  reversion  of  the  bridge  to  the  public.^  Proof  of  a  char- 
ter and  user  is  sufficient  without  proving  organization  within  the  time 
allowed  by  law.^  \Miere  a  bank  charter  provided  that  it  should  be 
void  unless  the  company  should  organize  and  proceed  to  business  within 
two  years,  and  the  company  organized,  but  failed  to  transact  any  busi- 
ness for  fifteen  years,  a  judgment  of  ouster  against  it  will  not  be  dis- 
turbed.^ The  failure  of  a  street  railway  company  to  perform  a  condi- 
tion of  its  charter  may  enable  a  city  to  make  a  new  grant  to  another 
company.^ 

§§  639,  640.  Repeals  of  charters  —  Right  of  stockholders  to  object. 
—  The  repeal  by  the  state  of  a  charter  before  the  expiration  of  the 
time  it  was  to  exist,  or  the  repeal  at  any  time  where  the  charter  is 
perpetual,  is  an  unconstitutional  breach  of  the  contract  between  the 
state  and  the  corporation  and  the  stockholders.^    Where,  however, 

(1889).     A    provision   in    the    charter  and  finished  its  road  within  a  certain 

that     the     corporate    powers     should  time.     Cluthe  v.  Evans\ille,  etc.  Ry., 

cease  and  become  void  unless  certain  95  N.  E.  Rep.  543  (Ind.  1911).     See 

things    were    done    ^vithin    a    certain  also  §  637,  supra. 

time  does  not  work  a  forfeiture  ipso  ^  Quoted  and  approved  in  Reed  v. 

facto.     A  judicial  proceeding  is  neces-  Sampson,  '  54    Tex.     Civ.    App.    552 

sary.     State   v.    Spartanburg,    C.   etc.  (1909).     Atty.-Gen.    v.    Superior,    etc. 

R.  R.,  51  S.  C.  129  (1897).     See  also  Ry.,  93  Wis.  604  (1896). 

Hardy  Lumber  Co.  v.  Pickerel  Co.,  29  ^  City  of  New  York  v.  Bryan,    196 

Can.  S.  C.  Rep.  211   (1898).  N.  Y.  159  (1909). 

1  Thomas  v.  South  Side,  etc.  R.  R.,  ^  A  subsequent  act  of  the  legislature 

218    111.    571    (1905).     In    condemna-  waiving  the  reversion  upon  condition 

tion   proceedings   by   a  railroad   com-  does  not  prevent  the  reversion  if  the 

pany   the  land  owner  cannot   set   up  condition  is  not  performed.     State  v. 

the  defense  that  the  company  has  not  Old   Town  Bridge  Corp.,   85  Me.    17 

completed  certain  work  within  a  cer-  (1892). 

tain  time  as  required  by  the  charter,  *  St.  Louis,  etc.  R.  R.  v.  Belleville 

nor  the  defense  that  the  company  had  City  Ry.,  158  111.  390  (1895). 

entered    into    an    illegal    combination  «  Henderson,  etc.  Assoc,  v.  People, 

with  another  company.     Terre  Haute  163  111.   196   (1896). 

«S;  P.  R.  Co.  V.  Robbins,  247  111.  376  '  Santa  Rosa,  etc.  R.  R.  v.  Central 

(1910).     It  is  no  defense  to  condemna-  St.    Ry.,    112    Cal.    436    (1896).     See 

tion  proceedings  that  the  charter  of  also    §634,    supra,    and    §§913,    931, 

a  railroad  is  void  in  accordance  with  infra. 

the  statute  because  it  has  not  expended  »  Greenwood    i'.    Freight    Co.,    105 

a  certain  amount  of  its  capital  stock  U.  S.  13  (1881).     ."A  grant  of  corpo- 

1971 


§§  639,  640. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


the  right  of  repeal  is  reserved  by  the  legislature,  then  such  reservation 
becomes  a  part  of  the  contract,  and  the  repeal  of  the  charter  rests  in 
the  discretion  of  the  legislature.^     Upon  a  repeal  the  corporate  property 


rate  privileges  for  a  specified  period 
cannot  be  resumed  by  the  state  within 
such  periqd.  If  the  charter  be  with- 
out limitation  as  to  time  it  is  for- 
ever irrepealable."  Erie,  etc.  R.  R. 
V.  Casey,  26  Pa.  St.  287  (1856).  The 
legislature  cannot  forfeit  a  charter. 
Forfeiture  can  be  decreed  only  by  the 
courts.  It  is  not  a  legislative  function 
unless  reserved.  Allen  v.  Buchanan, 
9  Phila.  (Pa.)  283  (1873).  Congress 
may  repeal  a  charter  granted  by  a 
territory.  Mormon  Church  v.  United 
States,  136  U.  S.  1  (1890).  A  for- 
feiture of  land  by  the  government 
for  non-compliance  with  the  terms  of 
the  grant  may  be  by  legislative  enact- 
ment. Farnsworth  v.  Minnesota,  etc. 
R.  R.,  92  U.  S.  49  (1875).  The  legis- 
lature cannot  repeal  a  charter  granted 
by  the  constitution  of  the  state.  New 
Orleans  v.  Houston,  119  U.  S.  265 
(1886).  The  legislature  may  repeal 
the  charter  of  a  fire-engine  company, 
such  company  being  in  the  nature  of 
a  municipal  corporation.  State  v. 
Washington,  etc.  Co.,  76  Miss.  449 
(1899).  See  §913,  infra.  The  Pub- 
lic Service  Commission  law  of  New 
York  applicable  to  franchises  thereto- 
fore granted  but  not  already  exercised 
is  constitutional.  People  v.  Willcox, 
207  N.  Y.  86  (1912).  See  130  Pac. 
Rep.  879  (Col.  1913). 

1  Under  a  reserved  power  to  repeal 
at  the  pleasure  of  the  legislature  the 
courts  cannot  question  the  necessity 
or  the  legislative  motives  leading  to 
a  repeal.  Greenwood  v.  Freight  Co., 
105  U.  S.  13  (1881);  Lothrop  t;.  Sted- 
man,  42  Conn.  583  (1875) ;  Lothrop  v. 
Stedman,  13  Blatchf.  134  (1875).  See 
Sinking  Fund  Cases,  99  U.  S.  700,  720 
(1878);  Northern  R.  R.  v.  Miller,  10 
Barb.  260  (1851) ;  Erie,  etc.  R.  R.  v. 
Casey,  26  Pa.  St.  287,  302  (1856); 
Miners'  Bank  v.  U.  S.,  1  Greene  (Iowa), 
553  (1848) ;  McLaren  v.  Pennington, 
1  Paige,  102  (1828) ;  Crease  v.  Bab- 
cock,  40  Mass.  334,  344  (1839).  Under 
the  reserved  right  of  repeal  the  legis- 
lature   may    repeal    the    charter   of   a 


water-works  company,  even  though 
the  company  has  given  a  mortgage 
and  the  object  of  the  repeal  is  to  enable 
the  city  to  have  its  own  water- works,  and 
even  though  the  repeal  leaves  in  doubt 
the  continuance  of  the  time  grant 
from  the  city  to  carry  on  the  water- 
works business.  Calder  v.  Michigan, 
218  U.  S.  591  (1910).  Under  the 
reserved  right  of  the  legislature  to 
repeal  the  charter,  it  may  be  repealed 
if  the  corporation  does  not  accept  a 
compulsory  labor  law.  Ives  v.  So. 
Buffalo  Ry.,  201  N.  Y.  271,  320  (1911). 
If  the  power  of  repeal  arises  only  upon 
an  abuse  of  franchise  the  court  may 
review  the  question  whether  there 
was  an  abuse.  Erie,  etc.  R.  R.  v. 
Casey,  26  Pa.  St.  287  (1856);  Balti- 
more V.  Pittsburgh,  etc.  R.  R.,  1  Abb. 
(U.  S.)  9  (1865) ;  8.  c,  2  Fed.  Cas.  570. 
Hence  the  legislature  cannot  forfeit  a 
charter  merely  because  the  corpora- 
tion has  been  incorporated  elsewhere 
and  has  brought  suits  in  the  federal 
courts.  Commonwealth  v.  Pittsburgh, 
etc.  R.  R.,  58  Pa.  St.  26  (1868).  See, 
in  general,  Flint,  etc.  Plank-road  Co. 
V.  Woodhull,  25  Mich.  99  (1872); 
Montgomery  v.  Merrill,  18  Mich.  338 
(1869);  State  i'.  Noyes,  47  Me.  189 
(1859) ;  Canal  Co.  v.  Railroad  Co.,  4 
G.  &  J.  (Md.)  122  (1832) ;  University 
of  Maryland  v.  Williams,  9  G.  &  J. 
(Md.)  365  (1838);  Cooley's  Const. 
Lim.  106 ;  Mayor,  etc.  v.  Twenty-third 
Street,  113  N.  Y.  311  (1889).  Under 
this  reserved  power  the  state  may 
authorize  one  corporation  to  build  its 
road  on  a  route  which  a  prior  corpo- 
ration has  designated  but  not  acquired. 
Re  Cable  Ry.,  40  Hun,  1  (1886). 
A  general  statute  or  constitutional 
provision  reserving  the  right  to  repeal, 
alter,  or  amend  charters  enters  into 
all  charters  granted  subsequent  thereto 
as  much  as  if  actually  inserted  in  such 
charters.  Re  Lee's  Bank  of  Buffalo, 
21  N.  Y.  9  (1860) ;  Commissioners, 
etc.  V.  Holyoke  Waterpower  Co.,  104 
Mass.  446  (1870);  Delaware  R.  R.  v. 
Tharp,    5    Harr.    (Del.)    454    (1854). 


1972 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§641. 


becomes  a  fund  to  be  applied,  first  to  the  payment  of  the  debts  of  the 
corporation,  and  the  balance  to  be  distributed  among  the  stockholders.^ 
The  question  as  to  the  right  of  a  legislature  to  repeal  a  part  of  a  charter, 
such  as  an  exemption  from  taxation,  is  considered  elsewhere.^ 

§  641.  The  assets  upon  dissolution  —  Distribution.  —  Upon  the 
dissolution  of  a  corporation,  all  its  property,  both  personal  and  real, 
is  to  be  used  to  pay  the  debts  of  the  corporation,  and  after  the  debts 
are  paid  the  remainder  is  to  be  distributed  among  the  stockholders.^ 

It  was  formerly  believed  to  be  the  common  law  that  upon  the  disso- 
lution of  a  corporation  all  its  assets  belonged  to  the  state,  and  all 
its  debts  were  canceled,  and  that  the  creditors  were  not  entitled  to  any- 
thing from  the  assets.  This  remarkable  theory  has  been  stated  and 
restated  in  text-books  and  decisions  of  the  courts  for  over  one  hundred 
years.^     It  is  found  in  Blackstone's  Commentaries  and  in  the  old  works 

See  also  §  2,  supra.     The  repeal  of  a    of    the    corporation    acquu'ed    in    the 


general  incorporating  act  and  the 
enactment  of  a  new  one  does  not 
repeal  charters  which  have  already 
been  taken  out  under  the  old  act. 
Freehold,  etc.  Assoc,  v.  Brown,  29 
N.  J.  Eq.  121  (1878);  United,  etc. 
Assoc.  V.  Benshimol,  130  Mass.  325 
(1881).  Contra,  Wilson  v.  Tesson,  12 
Ind.  285  (1859). 

1  See  §  641,  infra. 

2  See  §§  501,  5726,  supra. 

'  Quoted  and  approved  in  Central, 
etc.  V.  Smith,  43  Colo.  90  (1908) ;  Krebs 
V.  Carlisle  Bank,  2  Wall.  (C.  C.)  33 
(1850) ;  8.  c,  14  Fed.  Cas.  856;  Heath 
V.  Barmore,  50  N.  Y.  302  (1872); 
Burrall  i;.  Bushwiek  R.  R.,  75  N.  Y. 
211  (1878);  James  v.  Woodruff,  10 
Paige,  541  (1844) ;  Frothingham  v. 
Barney,  6  Hun,  366  (1876) ;  Wood  v. 
Dummer,  3  Mason,  308,  322  (1824); 
8.  c,  30  Fed.  Cas.  435.  Cf.  Re  Hodges 
Distillery  Co.,  L.  R.  6  Ch.  51  (1870) ; 
Nathan  v.  Whitlock,  9  Paige,  152 
(1841);  Curran  v.  State,  15  How.  304, 
307  (1853);  Hastings  v.  Drew,  76 
N.  Y.  9  (1879),  affirming  8.  c,  50 
How.  Pr.  254  (1887).  The  same  rule 
prevails  where  the  charter  is  repealed 
by  the  legislature.  Lothrop  v.  Sted- 
man,  13  Blatchf.  134  (1875) ;  McLaren 
V.  Pennington,  1  Paige,  102  (1828), 
by  statute ;  Detroit  v.  Detroit,  etc. 
P.  R.  Co.,  43  Mich.  140  (1880) ;  San 
Mateo  County  v.  Southern  Pacific 
R.  R.,  13  Fed.  Rep.  722  (1882),  per 
Field,  J.,  holding  that  ''the  property 


exercise  of  its  faculties  is  held  inde- 
pendently of  such  reserved  power,  and 
the  state  can  only  exercise  over  it  the 
control  which  it  exercises  over  the 
property  of  individuals  engaged  in 
similar  business"  (p.  279).  People 
V.  O'Brien,  HI  N.  Y.  1  (1888).  Where 
the  capital  stock  is  reduced  and  the 
corporate  property  over  and  above 
the  reduced  capital  stock  is  distributed 
among  the  stockholders,  this  is  not  a 
dividend  within  the  meaning  of  the 
New  York  tax  statute.  People,  etc. 
V.  Roberts,  41  N.  Y.  App.  Div.  21 
(1899).  Real  estate  does  not  revert  to 
the  former  owner  upon  the  dissolution 
of  the  corporation  owning  such  estate, 
but  will  be  administered  for  the  bene- 
fit of  the  corporate  creditors  and  stock- 
holders. Diamond,  etc.  Co.  v.  Hus- 
bands, 8  Del.  Ch.  205  (1898). 

^  Hightower  v.  Thornton,  8  Ga.  486 
(1850)  ;  Life  Association  ;;.  Fassett, 
102  111.  315  (1883) ;  Commercial  Bank 
V.  Lockwood,  2  Har.  (Del.)  8  (1835) ; 
State  V.  Rives,  5  Ired.  L.  (N.  C.)  297 
(1844) ;  White  v.  Campbell,  5  Humph. 
(Tenn.)  38  (1844);  Malloy  v.  Mallett, 
6  Jones,  Eq.  (N.  C.)  345  (1863),  hold- 
ing also  that  the  stockholder's  liability 
was  extinguished ;  Port  Gibson  v. 
Moore,  21  Miss.  157  (1849) ;  Bingham 
V.  Weiderwax,  1  N.  Y.  509  (1848); 
Owen  V.  Smith,  31  Barb.  641  (1860) ; 
State  Bank  v.  State,  1  Blatchf.  (Ind.) 
267,  282  (1823);  Acklin  v.  Paschal, 
48  Tex.  147  (1877) ;  St.  Philip's  Church 


1973 


§641. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


of  Kj'd  on  Corporations  and  Grant  on  Corporations.  The  courts,  how- 
ever, while  upholding  the  rule  theoretically,  have  quite  uniformly  re- 
fused to  apply  such  a  doctrine,  and  have  invented  various  theories, 
fictions,  and  arguments  for  avoiding  this  supposed  doctrine  of  the  com- 
mon law.  Finally,  in  1899,  an  English  court  denied  that  the  common 
law  ever  countenanced  such  confiscation,  and  showed  that  in  the  seven- 
teenth and  eighteenth  centuries  many  corporations  were  dissolved,  and 
that  in  not  a  single  case  was  any  such  doctrine  applied.^  It  again  may 
be  said  that,  although  the  common  law  has  its  reproaches,  this  is  not 
one  of  them.  The  American  courts  have  always  refused  to  follow  the 
supposed  common-law  rule  on  this  subject.^  On  the  dissolution  of  a 
corporation  having  no  stockholders,  the  common-law  rules  of  reverter 
and  appropriation  apply .^ 

V.  Zion,  etc.  Church,  23  S.  C.  297  (1860).  A  deed  of  property  to  a  rail- 
road for  fifty  years  or  so  long  as  its 
charter  continues,  which  by  charter 
is  fifty  years,  passes  the  land  to  a  cor- 
poration which  by  legislative  enact- 
ment succeeds  to  the  rights  of  the  first 
corporation.  Davis  v.  Memphis,  etc. 
R.  R.,  87  Ala.  633  (1889).  So  far  as 
land  grants  are  concerned  the  consol- 
idated company  is  the  same  as  the 
old  company.  U.  S.  v.  Southern  Pac. 
R.  R.,  45  Fed.  Rep.  596  (1891) ;  rev'd 
on  another  point  in  146  U.  S.  570.  A 
consolidated  company  succeeds  to 
land  owned  by  one  of  the  consolidating 
companies.  Cashman  v.  Brownlee,  128 
Ind.  266  (1891).  An  agreement  that 
upon  dissolution  of  a  telegraph  company 
the  telegraph  line  should  go  to  the 
railroad  is  binding.  Latrobe  v.  West- 
ern Tel.  Co.,  74  Md.  232  (1891).  On 
dissolution  the  real  estate  does  not 
revert,  etc.  Huber  v.  Martin,  127  Wis. 
412  (1906).  A  debt  due  to  a  corpora- 
tion is  not  canceled  by  its  dissolution. 
Geddis  v.  Northwestern  T.  Co.,  23 
S.  Dak.  531  (1909). 

^  Upon  the  dissolution  of  a  public 
or  charitable  corporation  its  property 
goes  to  the  state  and  former  owners, 
subject  to  the  trust  that  the  prop- 
erty shall  still  be  used  for  similar  pur- 
poses if  those  purposes  be  legal.  Mor- 
mon Church  V.  U.  S.,  136  U.  S.  1  (1890). 
Upon  the  dissolution  to  an  eleemosyn- 
ary corporation  having  no  stockholders 
or  creditors,  the  title  of  its  land  reverts 
to  the  donor.  Danville  Seminary  v. 
Mott,  136  111.  289  (1891).     A  private 


(1885) ;  Coulter  v.  Robertson,  24  Miss 
278  (1852);  Bank  of  Mississippi  v. 
Duncan,  56  Miss.  166  (1878);  Ham- 
ilton V.  Accessory  Transit  Co.,  26  Barb. 
46  (1857). 

1  Re  Higginson  and  Dean,  [1899]  1 
Q.  B.  325. 

^  Quoted  and  approved  in  Richards 
V.  Northwestern,  etc.  Co.,  221  Mo.  149 
(1909),  and  Griflfith  v.  Blackwater,  etc 
Co.,  55  W.  Va.  604  (1904);  Bacon  v 
Robertson,  18  How.  (U.  S.)  480  (1855) 
Heath  v.  Barmore,  50  N.  Y.  302  (1872) 
Lum  u.  Robertson,  6  Wall.  277  (1867) 
Robinson  v.  Lane,  19  Ga.  337  (1856) ; 
Lothrop  V.  Stedman,  13  Blatchf.  134 
(1875);  s.  c,  15  Fed.  Cas.  922;  Blake 
V.  Portsmouth,  etc.  R.  R.,  39  N.  H. 
435  (1859) ;  Re  Woven  Tape  Skirt  Co., 
8  Hun,  508  (1876) ;  Mumma  v.  Poto- 
mac Co.,  8  Pet.  281  (1834);  Fox  v. 
Horah,  1  Ired.  Eq.  (N.  C.)  358  (1841) ; 
Bingham  v.  Weiderwax,  1  N.  Y.  509 
(1848);  Curry  v.  Woodward,  53  Ala. 
371  (1875);  2  Kent,  Com.  307,  n. ; 
Powell  V.  North  Missouri  R.  R.,  42 
Mo.  63  (1867)  ;  Wood  v.  Dummer,  3 
Mason,  308  (1824) ;  s.  c,  30  Fed.  Cas. 
435.  Land  conveyed  to  a  corporation 
in  fee  does  not  revert  to  the  grantor 
or  his  heirs  on  the  extinction  of  the  cor- 
poration. Wilson  V.  Leary,  120  N.  C. 
90  (1897),  overruling  Fox  v.  Horah, 
36  N.  C.  358.  Statutes  are  frequently 
enacted  to  this  effect.  Nevitt  v. 
Bank  of  Port  Gibson,  14  Miss.  513 
(1846) ;  McCoy  v.  Farmer,  65  Mo.  244 
(1877);  Owen  v.  Smith,  31  Barb.  641 


1974 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§641. 


Where  the  statutes  in  existence  at  the  time  of  incorporation  provide 
for  the  extension  of  corporate  charters,  a  stockholder  cannot  prevent 
the  corporation  from  extending  its  existence  in  accordance  with  such 
statutes.^  A  stockholder  in  a  national  bank  who  has  given  the  statutory 
notice  of  his  withdrawal  on  a  renewal  of  the  charter,  is  not  thereafter 
liable  on  the  stock.-    An  extension  of  the  corporate  existence  under 


corporation  —  a  normal  college  — 
cannot  by  act  of  the  legislature  be 
converted  into  a  public  corporation  and 
the  property  vested  in  the  state. 
Bakewell  v.  Board  of  Education,  33 
N.  E.  Rep.  186  (111.  1893).  In  Cali- 
fornia, on  the  dissolution  of  a  corpora- 
tion for  literary  purposes,  its  land 
goes  to  the  state.  People  v.  College 
of  California,  38  Cal.  166  (1869).  An 
incorporated  volunteer  fire  department 
which  has  been  supplanted  by  a  regular 
organized  municipal  fire  department 
has  no  power  to  put  its  property  in 
trust  for  charitable  purposes.  The 
property  must  be  divided  among 
existing  members.  Hopkins  v.  Cross- 
ley,  132  Mich.  612  (1903).  Where  the 
purpose  of  the  organization  of  a  volun- 
teer fire  department  ceases,  and  the 
fund  is  placed  in  the  hands  of  trustees 
for  specified  purposes,  which  are  not 
carried  out,  the  money  does  not  go  to 
the  state  but  belongs  to  the  mem- 
bers and  their  personal  representa- 
tives. Hopkins  v.  Crossley,  138  Mich. 
561  (1904).  Upon  dissolution  of  a 
mutual  insurance  company  ha^•ing  no 
stockholders,  its  assets,  after  the  pay- 
ment of  its  liabilities,  belong  to  the 
state.  Titcomb  v.  Kennebec,  etc.  Co., 
79  Me.  315  (1887).  But  where  an 
insurance  company  is  organized  both 
on  the  stock  and  mutual  plan,  upon  a 
dissolution  of  the  stock  part  of  the 
organization  the  guaranty  accumula- 
tions belong  to  the  stockholders. 
Traders',  etc.  Ins.  Co.  v.  Brown,  142 
Mass.  403  (1886).  Land  reverts  to 
the  former  owner.  Mott  v.  Danville 
Seminary,  129  111.  403  (1889).  Dis- 
tribution of  funds  of  incorporated 
association.  Ashton  v.  Dashaway 
Assoc,  84  Cal.  61  (1890).  As  to  unin- 
corporated associations,  see  ch.  XXIX, 
supra.  The  members  of  a  military 
corporation,  which  is  dissolved  under 
a  statute  cannot  by  a  suit  in  equity 
obtain  control  of  its  property  which 


has  been  acquired  by  donation.  Cum- 
mings  V.  HoUis,  108  Ga.  402  (1899). 
Where  a  police  association  receives 
gifts  from  the  city  and  then  dissolves, 
the  money  will  be  returned  to  the  city. 
In  re  ISIinneapolis,  etc.  Assoc,  85 
Minn.  .302  (1902).  The  rule  that  real 
estate  on  dissolution  of  a  business 
corporation  does  not  revert  or  go  to  the 
state  applies  equally  to  eleemosynary 
corporations.  AIcAlphany  v.  Murray, 
89  S.  C.  440  (1911).  On  dissolution 
of  a  charitable  association  its  property 
is  not  to  be  divided  among  the  mem- 
bers, but  is  to  be  appropriated  to  some 
purpose  akin  to  the  original  associa- 
tion. Re  Centennial,  etc  Assoc,  235 
Pa.  St.  206  (1912). 

1  Smith  V.  Eastwood,  etc.  Co.,  58 
N.  J.  Eq.  331  (1899).  A  Jiisi  prius 
court  in  Colorado  has  held  that  a 
statute  allowing  corporations  to  extend 
their  term  of  existence  by  a  majority 
vote  of  the  stockholders,  is  not  binding 
on  a  dissenting  stockholder  in  a  cor- 
poration existing  at  the  time  of  the 
enactment  of  the  statute,  and  that 
such  dissenting  stockholder  may  insist 
upon  being  paid  the  value  of  his  stock 
to  be  ascertained  by  a  proper  appraise- 
ment ;  otherwise  that  the  company 
be  liquidated  in  due  form.  Pratt  v. 
South  P*ueblo,  etc  Ass'n,  1  Col.  Dec 
Supp.  171  (1901).  Under  the  Cali- 
fornia constitution  the  legislature  has 
no  power,  either  by  general  or  special 
act,  to  extend  the  duration  of  corpora- 
tions beyond  the  period  named  in 
their  charters.  Boca  IVIill  Co.  v.  Curry, 
154  Cal.  326  (1908).  Where  a  charter 
has  expired  by  its  own  limitation, 
it  cannot  thereafter  be  revived  under 
a  statute  providing  for  extension  of 
charters,  because  this  would  be  the 
same  as  creating  a  new  corporation. 
Home  Assoc,  v.  Bruner,  134  Kv.  361 
(1909).  See  130  Pac.  Rep.  879  (Col. 
1913). 

2  Kimball  v.  Apsey,  164  Fed.  Rep. 


1975 


§641.] 


DISSOLUTION,    FORFEITURE,    ETC. 


ICH.  XXXVIH. 


the  Montana  statute  must  be  made  before  the  charter  expires  if  at 
all.i 

A  deed  made  by  a  corporation  after  its  charter  has  expired  is  a  nul- 
lity.^ The  dissolution  of  a  corporation  after  an  execution  has  been  levied 
upon  its  property  does  not  prevent  a  sale.^ 

When  the  corporation  owns  a  right  of  way  or  other  franchise  obtained 
from  a  municipality  or  by  the  exercise  of  the  state's  power  of  eminent 
domain,  this  right-of-way  franchise  is  a  corporate  asset  upon  the  dis- 
solution of  the  corporation  and  may  survive  the  death  of  the  corporation. 
It  does  not  revert  to  the  state  or  municipality.^     Upon  the  termina- 


§30   (1908) ;   aff'd,  sub  nom.  Apsey  v. 
Kimball,  221  U.  S.  514  (1911). 

1  Merges  v.  Altenbrand,  123  Pac. 
Rep.  21  (Mont.  1912). 

2  Bradley  v.  ReppeU,  133  Mo.  545 
(1896) ;  Marysville  Inv.  Co.  v.  Munson, 
44  Kan.  491  (1890).  Where  by  stat- 
ute, after  dissolution,  the  corporation 
continues  for  three  years  for  the  pur- 
pose of  winding  up,  it  may,  during 
those  three  years,  convey  its  real  estate 
to  a  trustee  in  trust  to  wind  up  its 
business.  Hanan  v.  Sage,  58  Fed. 
Rep.  651  (1893).  A  corporation  can- 
not deed  land  after  its  charter  has 
expired.  Marysville  Invest.  Co.  v. 
Munson,  44  Kan.  491  (1890).  A  deed 
duly  authorized  is  good,  though  exe- 
cuted after  the  corporation  is  consoli- 
dated with  another.  Edison,  etc.  Co. 
V.  New  Haven,  etc.  Co.,  35  Fed.  Rep. 
233   (1888). 

'  Boyd  V.  Hankinson,  83  Fed.  Rep. 
876  (1897) ;  rev'd  on  another  point  in 
92  Fed.  Rep.  49. 

^  Where  a  legislature,  under  its 
reserved  right  of  repeal,  repeals  a  street 
railroad  charter,  the  right  to  use  the 
streets  and  operate  the  road  does  not 
revert  to  the  state,  but  passes  as  prop- 
erty to  the  receiver  for  the  benefit 
of  the  creditors  and  stockholders  of  the 
corporation.  People  v.  O'Brien,  111 
N.  Y.  1  (1888).  "The  charter  of  a 
corporation  is  the  law  which  gives  it 
existence  as  such.  That  is  its  general 
franchise,  which  can  be  repealed  at 
the  will  of  the  legislature.  A  special 
franchise  is  the  right,  granted  by  the 
public,  to  use  public  property  for  a 
public  use,  but  with  private  profit, 
such  as  the  right  to  build  and  operate 
a   railroad    in    the    streets    of   a   city. 


Such  a  franchise,  when  acted  upon, 
becomes  property,  and  cannot  be 
repealed,  unless  power  to  do  so  is 
reserved  in  the  grant,  although  it  may 
be  condemned  upon  making  compen- 
sation." Lord  V.  Equitable,  etc.  Soc, 
194  N.  Y.  212,  225  (1909).  On  the 
expiration  of  the  charter  of  a  gas  com- 
pany its  rights  of  way  do  not  revert 
but  are  property  rights  constituting 
assets  of  the  dissolved  company.  Mun- 
cie,  etc.  Co.  v.  Citizens',  etc.  Co.,  100 
N.  E.  Rep.  65  (Ind.  1912).  See  also 
§  792,  infra.  In  Pennsylvania  the 
franchise  of  the  right  of  way  of  a  rail- 
road vests,  upon  its  dissolution,  in  the 
state,  and  the  state  may  grant  it  to 
another  railroad.  Erie,  etc.  R.  R.  v. 
Casey,  26  Pa.  St.  287  (1856).  See 
also  Plitt  V.  Cox,  43  Pa.  St.  486  (1862). 
In  Ohio  it  seems  that  the  right  of 
way  reverts  to  the  owner  of  the  fee. 
New  York,  etc.  R.  R.  v.  Parmalee,  1 
Ohio  C.  C.  Rep.  239  (1885).  See  also, 
as  to  the  rule  in  New  York,  Heard  v. 
Brooklyn,  60  N.  Y.  242  (1875) ;  Peo- 
ple V.  White,  11  Barb.  26  (1851); 
Hooker  v.  Utiea,  etc.  Turnp.  Co.,  12 
Wend.  371  (1834).  There  is  no  rever- 
sion of  the  right  of  way  on  the  disso- 
lution of  the  company  after  fifty  years. 
Davis  V.  Memphis,  etc.  R.  R.,  87  Ala. 
633  (1889).  A  lottery  grant  cannot 
be  repealed,  when  mortgaged  by  the 
corporation,  until  the  mortgage  is  paid. 
Gregory  v.  Shelby  College,  2  Mete. 
(Ky.)  .589  (1859).  Compare,  in  general. 
Turnpike  Co.  v.  Illinois,  96  U.  S.  63 
(1877).  Where  the  stockholders  of 
an  old  plank-road  company  are  still 
operating  the  road,  but  under  another 
charter,  they  cannot  be  ousted  from 
the  latter  by  an  injunction  suit  against 


1976 


fH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§641. 


tion  of  a  charter  of  a  subway  company  by  reason  of  failure  to  comply 
with  conditions,  the  franchise  to  use  the  streets  may  or  may  not  be 
forfeited,  according  to  the  circumstances  of  the  case.^ 

But  ordinary  dissokition  does  not  have  that  effect.  And  even  though 
a  railroad  franchise  to  use  a  street  is  limited  to  fifty  years,  yet  if  it  con- 
solidates with  another  railroad  under  a  statute  which  authorizes  cor- 
porate existence  for  five "  hundred  years  and  a  transfer  of  all  fran- 
chises, this  eliminates  the  limitation  of  fifty  years.^  This  is  the  natural 
and  logical  result  of  the  principle  of  law  that  a  railroad  company  may 
make  a  contract  to  run  longer  than  its  chartered  existence ;  ^    that  a 

their    operating    under     the     former.    U.  S.  417,  430  (1910).      A  corporation 

may  give  or  take  a  long-time  lease 
even  though  it  exceeds  the  term  of 
its  corporate  existence.  Lancaster 
County  V.  Lincoln,  etc.  Assoc,  87  Neb. 
87  (1910).  A  contract  between  two  rail- 
road companies  by  which  one  is  given 
the  right  to  run  its  trains  over  the 
tracks  of  the  other  may  be  for  a  period 
beyond  the  duration  of  the  charter  of 
one  of  the  companies,  the  court  say- 
ing that  the  contingency  that  the  com- 
pany "will  cease  to  exist  and  leave 
neither  assigns  nor  successors  is  far 
too  remote  to  have  any  influence  upon 
the  validity  of  this  contract."  Union, 
etc.  Ry.  V.  Chicago,  etc.  Ry.,  163  U.  S. 
564,  592  (1896).  A  corporation  may 
lease  its  property  for  a  hundred  years, 
even  though  the  statutes  forbid  any 
disposition  of  property  which  suspends 
the  absolute  power  of  controlling  the 
same  for  more  than  two  lives  and 
twenty-one  years,  and  may  mortgage 
its  interest  as  lessor.  Sioux,  etc.  Co. 
V.  Trust  Co.,  82  Fed.  Rep.  124  (1897) ; 
aflf'd,  173  U.  S.  99  (1899).  The  agree- 
ment of  a  corporation  to  pay  an  annuity 
may  be  legal,  even  though  it  may 
extend  beyond  the  life  of  the  corpora- 
tion. Burnes  v.  Burnes,  132  Fed.  Rep. 
485  (1904) ;  aff'd,  137  Fed.  Rep.  781. 
A  national  bank  may  take  a  lease  of 
property  for  a  term  longer  than  its 
own  chartered  existence.  Weeks  v. 
International  T.  Co.,  125  Fed.  Rep. 
370  (1903) ;  aff'd,  203  U.  S.  364.  A  rail- 
road company,  having  statutory  power 
to  extend  the  period  of  its  existence, 
may  make  a  lease  of  its  railroad  for  a 
period  of  time  extending  beyond  the 
duration  of  its  charter,  and  such  lease 
is  valid  and  binding  upon  the  company 


The  court  stated  that  it  did  not  favor 
such  a  confiscating  suit.  People  v. 
De  Grauw,  133  N.  Y.  254  (1892).  An 
unused  right  of  way  does  not  revert  to 
the  original  owner.  MeConihay  v. 
Wright,  121  U.  S.  201  (1887).  See 
also  §  906,  infra.  The  state  may 
grant  an  unused  street-railway  fran- 
chise to  another  company.  Hender- 
son V.  Central,  etc.  Ry.,  21  Fed.  Rep. 
358  (1884).  No  reverter  where  the 
railroad  takes  a  fee.  Yates  v.  Van  De 
Bogert,  56  N.  Y.  526  (1874).  See 
also,  in  general,  Norton  v.  WaUkQl, 
etc.  R.  R.,  42  How.  Pr.  228  (1871); 
State  V.  Rives,  5  Ired.  (N.  C.)  L.  297 
(1844) ;  Hopkins  v.  Whitesides,  1  Head 
(Tenn.)  31  (1858).  Where  a  turn- 
pike company  is  authorized  to  coUect 
tolls  only  for  fifteen  years,  the  road  is 
free  after  that  date.  People  v.  Ander- 
son, etc.  Co.,  76  Cal.  190  (1888). 
The  dissolution  of  a  water-works 
company  does  not  put  an  end  to  the 
contract  between  it  and  the  city. 
Weatherly  v.  Capital,  etc.  Co.,  115 
Ala.  156  (1897).  In  Haffcke  v.  Clark, 
50  Fed.  Rep.  531  (1892),  the  court  said 
in  a  dictum  that  inasmuch  as  a  license 
is  not  assignable,  the  dissolution  of  a 
corporation,  which  is  the  licensee,  puts 
an  end  to  the  license.  See  note  3, 
p.  1978,  infra. 

1  City  of  New  York  v.  Bryan,  196 
N.  Y.  158  (1909). 

'  2  New  York  Central,  etc.  R.  R.  v. 
City  of  New  York,  142  N.  Y.  App.  Div. 
578  (1911);  aflf'd,  202  N.  Y.  212. 

'  "The  mere  fact  that  a  contract 
may  extend  beyond  the  term  of  the 
life  of  a  corporation  does  not  destroy 
it."     Minneapolis   v.   Street   Ry.,   215 


1977 


§  641.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


grant  may  be  made  by  a  city  to  a  street  railway  for  a  period  longer  than 
the  duration  of  the  charter  of  the  corporation  ;  ^  that  a  corporation  may 
take  a  deed  of  land  in  fee,  although  the  company's  duration  is  limited  ;  ^ 
and  may  acquire  a  perpetual  right  of  way  under  the  same  circumstances.^ 
On  the  other  hand  "  the  right  to  be  a  corporation,   or  the  corporate 

right  of  life,  is  inseparable  from  the  corporation  itself.     It  is  a  part  of 

it  and  cannot  be  sold  or  assigned.  That  franchise  is  general  and  dies 
with   the    corporation,  for  it  cannot  survive  dissolution  or  repeal."  * 

for  at  least  the  period  of  its  existence.  (1894),  rev'g  Detroit  v.  Detroit  City 
Gere  v.  New  York  Central,  etc.  Ry.,  56  Fed.  Rep.  867,  and  60  Fed.  Rep. 
R.  R.,  19  Abb.  N.  C.  193  (1885).  In  161,  a  case  where  a  thirty-year  street 
this  case  the  validity  of  a  mortgage  by  easement  was  given  to  a  corporation 
the  West  Shore  Railroad  Company  to  having  only  fourteen  years  of  cor- 
become  due  four  hundred  and  seventy-  porate  life.  To  same  effect.  People  v. 
five  years  from  its  date,  although  O'Brien,  111  N.  Y.  1  (1888).  A  grant 
the  corporate  existence  of  the  company  by  a  municipality  to  a  street  railway 
was  only  one  hundred  years,  was  not  will  not  be  construed  as  perpetual 
questioned,  the  court  holding  that  a  where  other  grants  of  other  parts  of 
lease  made  at  the  same  time  for  the  the  system  are  limited  to  twenty-five 
same  length  of  time  by  the  company  years  and  there  was  no  intention  indi- 
was  legal.  A  corporation  may  give  cated  of  making  the  grant  unlimited, 
or  take  a  long  time  lease  even  though  Blair  v.  Chicago,  201  U.  S.  400,  485 
it  exceeds  the  term  of  its  corporate  (1906).  A  municipal  grant  to  a  tele- 
existence.  Lancaster  County  v.  Lin-  phone  company  terminates  with  its 
coin,  etc.  Assoc,  87  Neb.  87  (1910).  dissolution,  even  though  the  grant  did 
A  lease  for  a  longer  period  than  the  not  specify  any  term.  People  v.  Cen- 
lessor's  corporate  existence  is  good  tral,  etc.  Tel.  Co.,  232  111.  260  (1908). 
during  its  existence  and  for  any  Cf.  §§  913,  927,  931,  infra. 
period  to  which  its  existence  is  extended  ^  NicoU  v.  New  York,  etc.  R.  R.,  12 
not  exceeding  the  term  of  the  lease.  N.  Y.  121  (1854).  See  also  §  694, 
Hill  V.  Atlantic,  etc.  R.  R.,  143  N.  C.  note,  infra. 

539  (1906).  A  bank  may  take  a  lease  ^  Miner  v.  New  York,  etc.  R.  R.,  123 
of  land  for  ninety-nine  years  even  N.  Y.  242  (1890) ;  Davis  v.  Memphis, 
though  its  charter  will  expire  before  etc.  R.  R.,  87  Ala.  633  (1889) ;  Bailey 
that  time.  Brown  v.  Schleier,  118  v.  Platte,  etc.  Co.,  12  Colo.  230 
Fed.  Rep.  981  (1902) ;  aff'd,  194  U.  S.  (1889).  See  note  4,  p.  1976.  Dissolu- 
18.  The  liability  of  a  corporation  tion  does  not  terminate  a  lease  to  a 
on  a  contract  extending  beyond  the  corporation.  People  v.  National  Trust 
corporate  existence  is  discussed  else-  Co.,  82  N.  Y.  284  (1880).  A  contract 
where.  See  §  642,  infra.  A  traffic  between  a  city  and  an  individual  as 
contract  between  two  connecting  tele-  to  wharves  which  is  assignable  and  is 
phone  lines  which  does  not  specify  the  assigned  by  the  individual  to  a  cor- 
term  of  its  duration  will  expire  on  the  poration  does  not  cease  merely  because 
expiration  of  the  charter  of  either  of  the  corporate  existence  ceases.  Fleitas 
the  companies.  Campbellsville  Tel.  v.  City  of  New  Orleans,  51  La.  Ann.  1 
Co.  V.  Lebanon,  etc.  Tel.  Co.,  118  (1898);  also  §642,  infra.  A  gas 
Ky.  277  (1904),  also  §934,  infra.  company  may  receive  a  municipal 
1  Detroit  v.  Detroit,  etc.  Ry.,  184  grant  for  a  term  of  years  extending 
U.  S.  368  (1902).  A  street  railway  beyond  the  life  of  the  gas  company  as 
company  may  legally  receive  from  a  fixed  by  its  charter.  Keith  v.  John- 
city  a  grant  of  street  rights  for  a  period  son,  109  Ky.  421  (1900). 
extending  beyond  the  chartered  life  ^  Lord  v.  Equitable,  etc.  Soc,  194 
of  the  corporation.  Detroit  Citizens'  N.  Y.  212,  226  (1909). 
St.  Ry.  V.  Detroit,  64  Fed.  Rep.  628 

1978 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§641. 


Upon  dissolution  the  stockholders  are  entitled  to  an  immediate  settlement 
of  the  corporate  debts  and  a  distribution  of  the  residue.^  Usually 
they  are  not  obliged  to  accept  the  stock  of  another  corporation  as  pay- 
ment upon  a  final  distribution,  but  may  demand  that  the  distribution 
be  in  cash.^  They  may  also  demand  that  the  property  be  sold,  unless 
the  statutes  provide  otherwise.^    The  statutes  of  New  Jersey  seem  to 


1  Frothingham  v.  Barney,  6  Hun, 
366  (1876).  A  committee  appointed 
by  the  stockholders  to  sell  the  prop- 
erty for  stock  in  a  new  corporation 
and  dissolve  the  old  corporation  and 
distribute  the  assets  may  be  liable  to 
the  stockholders  if,  after  making  such 
sale,  they  delay  in  dissolving  the  old 
corporation  and  distributing  the  assets 
until  the  new  stock  becomes  worth- 
less. Their  liability  is  a  question  of 
negligence  for  the  jury.  In  re  Lin- 
coln, etc.  Co.,  190  Pa.  St.  124  (1899). 

-  Quoted  and  approved  in  Craycraft 
V.  National,  etc.  Ass'n,  117  Ky.  229 
(1904),  holding  that  even  though  on 
dissolution  the  directors  authorize 
the  distribution  of  land  in  kind  by 
deeds  to  stockholders  in  proportion  to 
their  interests,  the  final  assets  to  be 
distributed  among  other  stockholders, 
any  surplus  to  be  distributed  among 
all  proportionately,  yet  a  title  so 
derived  is  not  indefeasible,  inasmuch  as 
dissenting  stockholders  may  object. 
See  §  671,  infra. 

5  See  §  670,  infra.  A  minority 
stockholder  may  enjoin  a  public  sale 
of  the  property  of  a  prosperous  corpora- 
tion, even  though  the  company  has 
been  dissolved,  under  the  New  York 
statute,  where  he  shows  that  the  pub- 
lic sale  is  not  being  fairly  advertised 
and  conducted,  and  shows  also  that 
the  dissolution  is  for  the  purpose  of 
reorganization  under  the  laws  of 
another  state  and  freezing  out  the 
minority,  and  that  information  could 
not  be  obtained  as  to  the  actual  con- 
dition of  the  company.  Treadwell  v. 
United,  etc.  Co.,  47  N.  Y.  App.  Div. 
613  (1900).  Even  though  a  New 
York  mining  company  dissolves  and 
sells  its  property  to  a  West  Virginia 
company  in  order  to  avoid  New  York 
taxes,  a  share  of  stock  and  some  bonds 
in  the  new  company  being  given  for 
each  share  of  stock  in  the  old  company, 


and  even  though  a  dissenting  stock- 
holder is  entitled  to  have  a  public  sale 
of  the  property,  yet  if  when  the  time 
for  depositing  the  stock  was  about  to 
expire  he  sells  most  of  his  stock  to  a 
business  associate  who  makes  the 
exchange,  he  cannot  then  insist  on  a 
public  sale,  especially  where  such  sale 
would  destroy  a  profitable  concern, 
but  the  court  will  order  that  he  be 
allowed  to  participate,  notwithstand- 
ing that  the  time  has  expired,  or  that 
he  be  paid  the  value  of  his  stock. 
Treadwell  v.  United,  etc.  Co.,  134  N.  Y. 
App.  Div.  394  (1909).  Where  in  a 
dissolution  proceeding  an  injunction 
has  been  issued  against  a  corporation 
doing  any  further  business  or  disposing 
of  its  property,  a  sale  or  mortgage  of 
its  property  to  one  of  its  stockholders 
is  illegal  and  will  be  set  aside  by  the 
court,  especially  where  it  is  made  to 
a  director  for  an  inadequate  consid- 
eration. Grant  v.  Lowe,  89  Fed.  Rep. 
881  (1898).  Upon  dissolution  a  com- 
pany may  sell  its  good- will  and  trade 
name.  Townsend  v.  Jarman,  [1900] 
2  Ch.  698.  In  distributing  the  assets 
the  court  has  no  power  to  give  cer- 
tain parts  of  the  property  to  some 
stockholders  and  other  parts  to  others, 
without  the  value  thereof  being  ascer- 
tained, even  though  such  stockholders 
originally  contributed  that  which  the 
court  decreed  should  be  returned  to 
them.  Clow  v.  Redman,  6  Idaho, 
568  (1899).  On  the  dissolution  of  a 
national  bank  its  assets  may  be  con- 
veyed to  a  new  bank  from  which  some 
of  the  minority  are  excluded,  and  they 
cannot  complain  if  the  full  value  and 
the  best  price  was  thereby  obtained. 
Green  v.  Bennett,  110  S.  W.  Rep.  108 
(Tex.  1908).  Upon  dissolution  a 
majority  of  the  stockholders  may  sell 
the  corporate  property  to  another 
corporation  at  a  fair  price  and  take 
stock     in     payment,     pro\aded     non- 


1979 


§641. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


provide  for  distribution  In  kind.^  A  corporation  which  has  sold  its 
property  and  distributed  most  of  its  assets  among  its  stockholders  can- 
not use  its  remaining  cash  to  buy  stock  in  another  corporation  for  the 
purpose  of  distributing  such  stock.-  The  stockholders  upon  dissolu- 
tion may  make  a  contract  as  to  the  mode  of  distribution.^  It  is  legal 
for  the  stockholders  to  agree  to  sell  all  the  stock  and  pay  the  corporate 
debts  and  to  receive  from  the  purchasers  the  value  of  the  property  owned 
by  the  company."*  Where  one  corporation  buys  the  assets  of  another, 
the  stock  of  the  former  being  issued  to  the  stockholders  of  the  latter, 
a  new  stockholder  in  the  former  cannot  complain  that  the  latter  cor- 
poration distributed  its  assets  before  dissolution.^  The  company  by 
unanimous  consent  may  distribute  the  assets  without  a  dissolution, 
provided  all  creditors  are  paid.^     Where  the  company  is  insolvent  and 


consenting  stockholders  are  paid  in 
cash.  Slattery  v.  Greater  New  Orleans, 
etc.  Co.,  128  La.  871  (1911). 

1  See  §  317,  supra,  where  the  courts 
passed  upon  the  distribution  by  the 
Northern  Securities  Company  of  prop- 
erty owned  by  it  when  the  capital 
stock  was  reduced  to  a  nominal  figure. 

2  Ferry  v.  Latrobe,  etc.  Co.,  155 
Fed.  Rep.   161   (1907). 

3  White  V.  Boreing,  45  S.  W.  Rep. 
242  (Ky.  1898).  In  the  case  Con- 
sumers', etc.  Co.  V.  Quinby,  137  Fed. 
Rep.  882  (1905),  a  natural-gas  com- 
pany was  so  organized  that  all  the 
stock  was  placed  in  the  names  of 
five  trustees  selected  from  the  stock- 
holders with  irrevocable  power  to 
vote  the  stock  as  owners  and  elect  a 
board  of  nine  directors,  and  after  the 
dividends  had  repaid  to  the  stock- 
holders their  investment  with  eight 
per  cent,  interest,  the  price  of  gas  was 
to  be  reduced  to  cost,  so  that  there 
should  be  no  futher  profits  on  the 
stock.  The  gas  having  given  out,  the 
court  held  that  the  stockholders  had 
a  right  to  have  the  corporation  wound 
up  and  its  assets  distributed  to  them. 
Where  the  state  by  a  suit  in  the  state 
court  has  forfeited  the  charter  of  a 
waterworks  company,  no  receiver 
being  appointed,  and  thereafter  on  a 
bill  filed  in  the  United  States  court  a 
receiver  is  appointed  by  the  latter 
court,  and  thereafter  under  a  statute 
the  governor  of  the  state  appoints  a 
liquidator  of  the  affairs  of  such  cor- 
poration, and  thereafter  the  liquidator 


is  brought  in  as  a  party  defendant  to 
the  suit  in  the  United  States  court 
and  interposes  a  plea,  and  thereafter 
the  stockholders  organize  a  new  cor- 
poration and  receive  its  stock  in 
exchange  for  their  stock  in  the  old  cor- 
poration, the  state  cannot  maintain  a 
suit  to  forfeit  the  charter  of  the  latter 
corporation  and  enjoin  a  transfer 
of  the  assets  of  the  old  corporation  to 
the  new  corporation  on  the  ground 
that  the  stock  of  the  new  corporation 
is  issued  at  a  fictitious  value,  the 
proof  being  insufficient  to  sustain  any 
such  claim,  and  the  plant  itself  not 
yet  having  been  sold  and  its  value 
ascertained.  State  v.  New  Orleans, 
etc.  Co.,  Ill  La.  1049  (1904).  On 
dissolution  the  assets  may  be  dis- 
tributed in  kind  by  agreement,  and  a 
stockholder  cannot  afterwards  com- 
plain as  to  the  property  which  he  took 
unless  there  was  actual  fraud  on  the 
part  of  the  directors.  Bacon  v.  Soule, 
126  Pac.  Rep.  384  (Cal.  1912). 

4  Goodman  v.  Purnell,  187  Fed. 
Rep.  90  (1911). 

^  O'Dea  V.  Hollywood,  etc  Ass'n, 
154  Cal.  53  (1908). 

^  A  statutory  liability  for  dividends 
paid  out  of  the  capital  stock  abro- 
gates all  common-law  liability,  and  if 
such  statute  does  not  prohibit  such 
dividends  they  may  be  declared  and 
paid  subject  to  such  liability.  People 
V.  Barker,  141  N.  Y.  251  (1894).  See 
also  §  546,  supra ;  Rorke  v.  Thomas, 
56  N.  Y.  559  (1874).  A  city  in  buying 
a  waterworks  plant  may  take  a  deed 


1980 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  641. 


all  its  property  is  sold  and  the  proceeds  divided  among  the  stockholders, 
the  creditors  may  compel  them  to  repay  the  same.^ 

Upon  dissolution  a  stockholder  may  file  a  bill  for  distribution  of  the 
assets.^  Where  a  charter  expires  and  is  not  renewed,  but  the  company 
continues  to  do  business  as  a  corporation,  the  attorney-general  may 
file  an  information  against  the  continuance  of  business  by  it  as  a  cor- 
poration.^    Upon  the  expiration  of  the  charter  of  a  banking  corpora- 


of  the  plant  itself,  and  also  a  transfer 
of  all  the  shares  of  stock,  and  this 
does  not  prevent  the  former  stock- 
holders distributing  among  themselves 
the  purchase  price.  Connor  v.  City 
of  Marshfield,  128  Wis.  280  (1906). 
Where  a  corporation  has  sold  all  its 
property,  and  all  the  stockholders 
but  one  have  transferred  their  stock 
and  received  pay  therefor,  he  cannot 
sue  for  his  share,  because  the  trans- 
action is  a  division  of  the  capital  stock 
prohibited  by  the  California  statutes, 
and  his  remedy  is  to  undo  the  trans- 
action. Tapscott  V.  Mexican,  etc.  Co., 
153  Cal.  664  (1908).  Although  the 
state  is  prosecuting  a  suit  to  forfeit 
the  charter  for  entering  into  a  combina- 
tion, yet  a  sale  of  part  of  the  corporate 
property  to  a  stockholder  pending  the 
suit  is  legal,  and  the  receiver  cannot 
follow  the  property.  A  writ  of  pro- 
hibition will  issue  against  him.  Have- 
meyer  v.  Superior  Court,  84  Cal.  327 
(1890).  Where  a  corporation  dis- 
tributes all  its  assets  among  its  stock- 
holders without  paying  the  debts,  a 
corporate  creditor  may  hold  them 
liable ;  but  he  must  first  obtain  a 
judgment  against  the  corporation  and 
execution  must  be  returned  unsatis- 
fied. Lamar  v.  Allison,  101  Ga.  270 
(1897).     See  §§548,  671. 

1  Mitchell  V.  Jordan,  36  Wash.  645 
(1905).     See   also    §672,    infra. 

2  Brown  v.  Mesnard  M.  Co.,  105 
Mich.  653  (1895).  Where  a  corpora- 
tion has  been  dissolved  at  the  instance 
of  the  state,  a  stockholder  may  file 
a  bill  for  the  appointment  of  a  receiver 
to  administer  the  assets.  Olmstead 
V.  Distilling,  etc.  Co.,  73  Fed.  Rep. 
44  (1895),  the  court  holding  also 
that  the  appointment  could  not  be 
questioned  collaterally.  Where  a 
charter  has  expired,  a  court  of  equity 
has  power  to  take  charge  of  its  property 


and  wind  up  its  affairs  at  the  instance 
of  a  stockholder  upon  a  proper  show- 
ing. Stewart  v.  Pierce,  116  Iowa, 
733  (1902).  Where  the  stockholders 
have  dissolved  a  corporation  by  reso- 
lution, under  the  West  Virginia  statute, 
the  court  will  not  interfere  and  appoint 
a  receiver,  unless  it  is  shown  that  pro- 
vision has  not  been  made  for  payment 
of  the  debts.  Mere  cessation  of  busi- 
ness is  not  dissolution.  Law  v.  Rich, 
47  W.  Va.  634  (1900).  A  corporation 
cannot  appeal  from  a  decree  appoint- 
ing a  receiver  of  it,  where  the  same 
decree  dissolves  the  corporation,  and 
no  appeal  is  taken  from  that  portion 
of  the  decree.  State  v.  Fidelity,  etc. 
Co.,  113  Iowa,  439  (1901).  Upon  dis- 
solution, if  no  receiver  is  appointed, 
the  title  to  land  vests  in  the  stock- 
holders as  tenants  in  common,  in 
Texas.  Baldwin  v.  Johnson,  95  Tex. 
85  (1901).  Where  a  corporation  is 
dissolved  by  lapse  of  its  charter,  but 
the  directors  by  statute  continue  for 
the  purpose  of  winding  up  the  busi- 
ness, a  receiver  wiU  not  be  appointed. 
Anderson  v.  Buckley,  126  Ala.  623 
(1900).  After  the  state  has  caused 
a  charter  to  be  declared  illegal,  the 
duty  of  the  state  is  finished,  and  a 
receiver  will  not  be  appointed,  all  the 
debts  having  been  paid  and  all  the 
parties  in  interest  being  satisfied,  the 
stockholders  ha\ang  been  declared 
personally  liable  the  same  as  in  a 
copartnership.  State  v.  New  Orleans, 
etc.  Co.,  107  La.  562  (1902).  Even 
though  the  time  to  wind  up  the 
affairs  of  a  corporation  after  dissolu- 
tion has  expired,  the  stockholders 
may  sue  for  the  assets.  Connecticut, 
etc.  Co.  V.  Dunseomb,  108  Tenn.  724 
(1902). 

<  .'Bird  V.  Gay,  162  Mich.  612 
(1910).  See  also  §  243,  supra.  Where 
after    the    charter    of    a    corporation 


1981 


§641.] 


DISSOLUTION,    FOKFEITURE,    ETC. 


CH.  XXXVIII. 


tion  its  affairs  may  be  wound  up  without  the  intervention  of  the  state.^ 
Where  the  directors  are  winding  up  a  corporation  properly  the  court 
will  not  appoint  a  receiver  to  do  so.^  Upon  the  dissolution  of  the  cor- 
poration the  directors  as  trustees  may  sell  or  lease  the  property.^  The 
court  may  order  the  property  of  an  insolvent  corporation  to  be  sold 
pending  litigation  for  winding  up  its  affairs.^  A  stockholder  in  a  dis- 
solved national  bank  may  have  a  receiver  appointed  by  a  state  court, 
and  especially  so  where  the  funds  are  being  diverted.^  Questions  rela- 
tive to  the  title  of  the  receiver  to  the  corporate  property  are  discussed 
elsewhere.^  A  receiver  of  an  insolvent  corporation  which  is  subject  to 
the  bankruptcy  act  must  turn  the  property  over  to  a  trustee  in  bank- 
ruptcy upon  the  appointment  of  the  latter.^  On  the  termination  of  the 
charter  of  a  bank  its  good-will  is  an  asset,  and  if  a  director  appropriates 
it  to  his  own  use  he  will  be  liable  in  damages  or  may  be  compelled  to 
return  it  or  to  account  for  profits  received  from  it.^    When  corporate 


expires  the  business  is  continued  in 
its  name,  this  is  done  as  a  copart- 
nership and  the  property  cannot  be 
assessed  for  taxation  in  the  name  of  the 
corporation.  Ewald  Iron  Co.  v.  Com- 
monwealth, 140  Ky.  692  (1910). 

1  Clifford,  etc.  Co.  v.  Donovan,  etc. 
Co.,  195  Mo.  262  (1906). 

2  Brookshire  v.  Farmers',  etc.,  73 
S.  C.  131  (1905).  Where  upon  dissolu- 
tion the  directors  become  trustees  to 
wind  up  its  affairs  and  they  do  not 
do  their  duty,  the  court  will  appoint 
a  receiver.  Buckley  v.  Anderson,  137 
Ala.  325  (1903).  The  trustees  of  a 
dissolved  corporation  may  employ 
counsel  to  protect  its  interests.  Amer- 
ican Ice  Co.  V.  Pocono  Spring,  etc.  Co., 
183  Fed.  Rep.  193   (1910). 

^  Sullivan,  etc.  Co.  v.  Black,  159 
Ala.  570  (1909).  Even  though  an 
irregularly  organized  railroad  has  its 
rights  forfeited  by  quo  warranto  pro- 
ceedings, yet  its  title  to  property  then 
vests  in  its  directors  as  trustees. 
New  York,  etc.  Ry.  v.  Motil,  81  Conn. 
466  (1908).  Where  all  the  stock  of 
a  dissolved  corporation  is  owned  by 
one  family  and  one  of  their  number 
contracts  to  sell  its  land  as  trustee, 
the  contract  is  binding  although 
another  trustee  who  was  a  director 
knew  nothing  about  it,  he  having  sold 
all  his  stock.  Heenan  &  Finlen  v. 
Parmele,  80  Neb.  509  (1908).  A 
majority  of  the  stockholders  of  a  dis- 


solved corporation  may  authorize  a 
sale  of  all  its  property.  Hoag  v. 
Edwards,  69  N.  Y.  Misc.  Rep.  237 
(1910). 

^McGraw  v.  Mott,  179  Fed.  Rep. 
646  (1910). 

*  Cogswell  V.  Second  Nat.  Bank,  76 
Conn.  252  (1903).  The  appointment 
of  a  receiver  does  not  prevent  the 
directors  adopting  resolutions  to  bring 
about  an  equitable  distribution  of  the 
assets  of  the  company.  In  re 
C.  Moench  &  Sons  Co.,  123  Fed.  Rep. 
965  (1903) ;  aff'd,  130  Fed.  Rep.  685. 
Where  minority  stockholders  in  a 
corporation,  the  charter  of  which  has 
expired,  file  a  bill  in  the  state  court 
to  wind  up  its  affairs,  a  creditor  who 
subsequently  commences  a  suit  in  the 
federal  court  cannot  have  a  receiver 
appointed.  Louisville  Trust  Co.  v. 
Knott,  130  Fed.  Rep.  820  (1904),  rev'g 
Knott  V.  Evening  Post  Co.,  124  Fed. 
Rep.  342.  Where  a  charter  has  been 
forfeited  for  non-payment  of  taxes, 
a  stockholder  may  file  a  bill  to  have  a 
receiver  appointed  in  place  of  the  direc- 
tors. Tompkins  v.  Transit,  etc.  Co., 
78  Atl.  Rep.  398  (N.  J.  1910). 

^  See  §  866,  infra. 

^  Hooks  V.  Aldridge,  145  Fed.  Rep. 
865  (1906). 

8  Lindemann  v.  Rusk,  125  Wis.  210 
(1905).  Where  on  a  consolidation 
the  president  of  a  constituent  com- 
pany  receives   for   the   benefit   of   all 


1982 


CH.  xxx\^II.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§wi. 


assets  are  placed  in  the  hands  of  a  corporate  officer  or  other  person  for 
distribution,  a  stockholder  may  file  a  bill  in  equity  for  his  part,  but  in 
such  a  suit  the  corporation  is  a  necessary  party. ^  The  remedy  in  such 
a  case  is  not  at  law.-  Where  upon  dissolution  the  trustees  pay  over  to  a 
trust  company  funds  for  distribution  among  the  stockholders  and  the 
trust  company  does  not  pay  the  dividend  to  a  certain  stockholder  he 
may  sue  the  trustees  therefor.^ 

The  stockholders  may  insist  on  the  application  of  the  statute  of  limita- 


tlie  stockholders  the  stock  in  the  new 
company  and  also  certain  assets  of 
the  old  company,  a  stockholder  in  a 
suit  to  compel  him  to  account  must 
join  the  constituent  company  and  also 
other  stockholders.  Knickerbocker  v. 
Conger,  110  N.  Y.  App.  Div.  125 
(1905).  A  judgment  in  a  suit  between 
the  corporation  and  the  president 
which  fixes  his  liability  is  not  binding 
on  stockholders  in  a  suit  to  adjust 
equities  among  the  stockholders  on 
winding  up.  Gund  v.  Ballard,  73 
Neb.    547    (1905). 

1  Young  V.  Moses,  53  Ga.  628  (1875). 
For  the  remedy  and  procedure  when 
the  directors  on  dissolution  have 
divided  the  assets  fraudulently,  see 
Horner  v.  Carter,  11  Fed.  Rep.  362 
(1882).  A  stockholder  in  a  national 
bank  may  bring  suit  in  a  state  court 
to  have  the  liquidating  agent  of  the 
bank  distribute  the  remaining  assets, 
the  creditors  having  been  paid,  even 
though  such  agent  was  appointed  by 
the  comptroller  of  the  currency. 
Ingold  V.  Gilmore,  118  N.  Y.  App.  Div. 
727  (1907).  The  minority  may  bring 
the  officers  to  an  accounting  for  an 
unfair  distribution  of  the  bonds,  etc., 
owned  by  a  construction  company. 
Meyers  v.  Scott,  2  N.  Y.  Supp.  753 
(1888).  The  corporation  may  file  a 
bill  to  distribute  a  specific  fund  only, 
and  need  not  in  that  bill  have  a  gen- 
eral distribution  of  all  its  funds. 
Pacific  R.  R.  V.  Cutting,  27  Fed.  Rep. 
638  (1886).  If  the  directors,  who  by 
statute  are  made  trustees  to  wind  up 
the  corporation  upon  dissolution,  delay 
in  so  doing,  the  court  will  appoint 
a  receiver.  Re  Pontius,  26  Hun,  232 
(1882).  Although  the  charter  is  for- 
feited at  the  instance  of  the  state, 
yet  the  directors  are  trustees  to  wind 
up    the    company    under    the    statute 


unless  a  receiver  is  appointed  at  the 
instance  of  a  creditor  or  stockholder. 
Havemeyer  v.  Superior  Court,  84  Cal. 
327  (1890).  Although  the  fund  upon 
dissolution  is  small  and  the  number 
of  stockholders  large,  yet  the  directors 
cannot  avoid  their  duty  as  to  the  dis- 
tribution of  the  fund  by  turning  it 
over  to  a  court  to  administer.  Re 
Centennial  Board,  48  Fed.  Rep.  350 
(1891).  Where  trustees,  who  are 
bound  to  wind  up  the  affairs  of  a  cor- 
poration, sell  its  property  with  a 
covenant  that  they  had  authority  to 
sell,  they  are  liable  personally  if  the 
assignment  was  void,  there  being  no 
covenant  against  personal  liability. 
Shannon  v.  Mastin,  108  S.  W.  Rep. 
1116   (Mo.   1908). 

2  Brown  v.  Adams,  5  Biss.  181 
(1870) ;  s.  c,  4  Fed.  Cas.  350.  Cf. 
Pacific  R.  R.  V.  Cutting,  27  Fed.  Rep. 
638  (1886) ;  Hodsdon  v.  Copeland,  16 
Me.  314  (1839).  It  has  been  held 
that  surplus  assets  ought  to  be  dis- 
tributed in  proportion  as  the  sub- 
scriptions to  the  stock  have  been  paid. 
Krebs  v.  Carlisle  Bank,  2  Wall.  (C.  C.) 
33  (1850);  s.  c,  14  Fed.  Cas.  856; 
Sheppard  v.  Scinde,  etc.  Ry.,  56 
L.  T.  Rep.  180  (1887) ;  aflf'd,  57  L.  T. 
Rep.  585  (1887);  aff'd,  H.  of  L.,  60 
L.  T.  Rep.  641  (1889) ;  Re  Hodges,  etc. 
Co.,  L.  R.  6  Ch.  51  (1870).  On  wind- 
ing up,  stockholders  who  have 
advanced  on  the  subscription  price 
more  than  the  calls  required,  under  an 
agreement  of  repayment  with  inter- 
est, are  entitled  to  repayment  before 
a  general  dividend  is  made.  So  held 
where  full-paid  stock  was  issued  for 
property,  but  other  stock  for  cash  was 
not  fully  paid  up.  Exchange,  etc. 
Co.,  L.  R.  38  Ch.  D.  171  (1888). 

'  Janeway  v.  Burn,  91  N.  Y.  App. 
Div.  165  (1904) ;  aff'd,  180  N.  Y.  560. 


1983 


§641. 


DISSOLUTION,    FORFEITURE,    ETC. 


CH.  XXXVTII. 


tions  as  far  as  it  is  a  bar  to  the  claim  of  corporate  creditors  upon  the 
assets.^  The  statute  of  Hmitations  does  not  run  as  against  the  estate  of 
a  dissolved  corporation.^  Where  the  corporation  has  been  dissolved, 
and  its  assets  distributed,  and  its  trustees  discharged  by  a  decree  of 
court,  a  creditor  who  was  a  party  to  the  suit  cannot  afterward  main- 
tain a  bill  against  the  trustees  to  reach  unpaid  subscriptions.^ 

If  the  directors  distribute  the  assets  among  the  stockholders  without 
paying  the  debts,  they  may  be  personally  liable  for  such  debts.*  The 
mode  of  distribution  among  corporate  creditors,  where  some  have  other 
security  and  others  not,  is  considered  elsewhere.^ 

The  rights  of  the  stockholders  in  the  assets  upon  a  dissolution  depend 
upon  the  law  of  the  country  creating  the  corporation.®  And  these  rights 
cannot  be  taken  from  the  stockholders  by  an  act  repealing  the  charter.^ 

In  winding-up  proceedings  an  assessment  may  be  levied  upon  stock 
which  is  not  fully  paid,  in  order  to  adjust  the  rights  of  the  stockholders 
as  between  themselves.^    On  dissolution  and  distribution  the  stock  of 


'Johnston  v.  Talley,  60  Ga.  540 
(1878).  On  a  bill  to  wind  up  an 
insolvent  corporation  the  stockholder 
may  prove  that  some  claims  against 
the  company  were  not  legally  con- 
tracted. Crutchfield  v.  Mutual,  etc. 
Co.,  2  S.  W.  Rep.  658  (Tenn.  1886). 

2  Ludington  v.  Thompson,  153  N.  Y. 
499  (1897).  The  running  of  the  stat- 
ute of  limitations  is  not  suspended  by 
the  dissolution  of  the  corporation. 
Bradley,  etc.  Co.  v.  Norfolk,  etc.  Co., 
101  Fed.  Rep.  681   (1900). 

3  Chavent  v.  Schefer,  59  Fed.  Rep. 
231  (1894).  If  a  corporation  has  been 
dissolved,  garnishee  process  does  not 
lie  against  a  stockholder  at  the  in- 
stance of  a  corporate  creditor  to  reach 
an  unpaid  subscription.  Pasohall  v. 
Whitsell,  11  Ala.  472  (1847). 

^See  §682,  infra. 

5  See  §  763,  infra. 

*  Hamilton  v.  Accessory  Transit  Co., 
26  Barb.  46  (1857). 

'  Lothrop  V.  Stedman,  13  Blatchf. 
134  (1875);  8.  c,  15  Fed.  Cas.  922. 
The  benefits  given  by  a  certificate 
issued  by  a  fraternal  benefit  or  life 
insurance  association,  cannot  be  modi- 
fied by  amendments  to  the  by-laws, 
even  though  the  certificate  provided 
that  the  applicant  should  conform  to 
all  by-laws  then  in  force  or  there- 
after adopted,  and  even  though  the 
certificate    of    incorporation   .provided 


that  beneficiaries  should  receive  such 
sums  as  the  by-laws  from  time  to 
time  prescribed.  Evans  v.  So.  Tier, 
etc.  Assoc,  182  N.  Y.  453  (1905). 

8  Welton  V.  Saffery,  [1897]  A.  C.  299. 
Upon  dissolution  the  court  may  and 
will  call  in  unpaid  subscriptions  where 
this  is  necessary  in  order  to  make 
a  proper  distribution.  Re  Sheppard's, 
etc.  Co.,  70  L.  T.  Rep.  3  (1893). 
In  Re  Anglo,  etc.  of  W.  A.,  [1898]  1 
Ch.  327,  the  court  ordered  a  call  as 
a  matter  of  form  on  subscriptions,  so 
as  to  equalize  the  amount  already 
paid  on  such  subscriptions  with  a 
view  to  distribution  on  dissolution. 
Bonus  preferred  stock  will  not  be 
allowed  an  interest  in  the  assets  on 
distribution,  it  being  ultra  vires.  Re 
Home,  etc.  Co.  Ltd.,  [1912]  1  Ch.  72. 
The  assets,  after  paying  the  debts,  are 
distributed  in  proportion  as  the  stock- 
holders have  paid  in  their  subscrip- 
tions. Connecticut,  etc.  Co.  v.  Duns- 
comb,  108  Tenn.  724  (1902).  A 
receiver's  suit  on  notes  given  in  pay- 
ment for  stock  cannot  be  defeated  on 
the  ground  that  all  the  creditors  have 
been  paid.  Pope  v.  Merchants'  T.  Co., 
118  Tenn.  506  (1907).  On  dissolu- 
tion of  a  building  and  loan  associa- 
tion even  though  some  of  the  stock 
is  paid  up,  and  other  stock  not,  yet 
the  distribution  is  among  all,  each 
share  being  given  a  value  according 


1984, 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§641. 


a  bankrupt,  whose  estate  has  paid  only  a  part  of  the  calls,  is  considered 
paid-up  only  to  the  extent  of  cash  actually  paid.^  Where  increased 
capital  stock  is  only  partly  paid  up,  and  a  dissolution  is  had,  the  court 
will  order  repayment  of  all  that  was  paid  on  the  original  capital  stock 
and  on  the  increased  capital  stock,  and  then  a  distribution  of  the 
surplus  on  the  whole  capital  stock.^    In  the  distribution  of  the  assets 


to  the  amount  paid  on  it.  Fitz- 
gerald V.  State  etc.  Assoc,  76  N.  J. 
Eq.  137  (1909).  A  final  decree  of 
distribution  specifying  the  amount  to 
be  paid  each  stockholder  on  his  filing 
his  certificate  of  stock  with  the  receiver 
cannot  be  objected  to  by  a  stockholder 
who  has  filed  his  certificate  of  stock 
and  taken  his  part  of  the  assets.  Allen 
V.  Clare,  136  Ga.  656  (1911). 

1  Re  West  Coast,  etc.  Ltd.,  [1906] 
1  Ch.  1,  aff'g  [1905]  1  Ch.  597. 

2  Re  Driffield  Gas  L.  Co.,  [1898]  1 
Ch.  451.  Where  the  original  stock  is 
paid  for  in  cash  at  par,  and  then 
increased  stock  is  paid  for  at  the  rate 
of  $3  on  $10,  and  upon  the  winding 
up  of  the  company  a  large  surplus 
exists  for  distribution,  the  court 
ordered  that  the  original  stock  should 
first  receive  $7  on  each  $10,  and  then 
that  the  remaining  assets  should  be 
distributed  pro  rata  on  all  the  stock. 
Re  Weymouth,  etc.  Co.,  [1891]  1  Ch. 
66.  Where  there  is  a  surplus  remain- 
ing after  paying  back  all  that  the 
stockholders  have  paid  in,  the  com- 
mon-law rule  is  that  such  surplus  is 
divided  pro  rata  among  the  stock- 
holders, even  though  some  of  the 
stock  had  been  paid  up  and  other 
stock  only  partially  paid  up.  This 
rule  may  be  varied  by  the  charter  so 
as  to  divide  the  surplus  in  proportion 
to  the  paid-up  capital,  and  not  in  pro- 
portion to  the  number  of  shares,  irre- 
spective of  the  amount  paid  thereon. 
Re  Mutoscope,  etc.  Syndicate,  Ltd., 
[1899]  1  Ch.  896.  On  a  dissolution 
and  winding  up,  where  part  of  the 
stock  is  paid  up  and  part  not,  each 
class  of  stockholders  is  repaid  the 
amount  paid  upon  that  class  of  stock, 
and  then  the  surplus  is  divided  pro- 
portionately. Re  Wakefield,  etc.  Co., 
[1892]  3  Ch.  165.  On  a  winding  up, 
if  it  turns  out  that  the  profits  had 
been  systematically  overestimated  for 


many  years,  thereby  depriving  com- 
mon stockholders  of  the  dividends,  an 
account  should  be  taken  and  such 
dividends  be  then  paid.  Re  Bridge- 
water,  etc.  Co.,  [1891]  2  Ch.  317. 
Founders'  shares  are  a  species  of  pre- 
ferred or  deferred  stock ;  and  where, 
on  dissolution,  the  founders'  shares 
are  to  have  one  fifth  of  the  surplus 
assets,  the  words  "surplus  assets" 
were  construed  to  be  the  assets  remain- 
ing after  paying  the  debts,  and  also 
paying  back  whatever  the  stock- 
holders had  originally  paid  in.  Re 
New  Transvaal  Co.,  [1896]  2  Ch.  750. 
Even  though  there  are  different  classes 
of  stock,  a  reduction  of  the  capital 
may  be  made  on  a  different  basis  from 
the  basis  specified  as  applicable  upon 
a  dissolution  and  winding  up.  Re 
Credit  Assurance,  etc.  Corp.,  [1902] 
2  Ch.  601.  Where  stockholders  in  a 
national  bank  have  been  assessed  irreg- 
ularly, and  a  surplus  remains  after 
paying  creditors,  the  stockholders  who 
have  paid  the  irregular  assessments 
will  first  be  repaid  out  of  the  surplus 
assets.  In  re  Hulitt,  96  Fed.  Rep.  785 
(1899).  Under  the  terms  of  a  charter, 
distribution  on  dissolution  may  be 
according  to  the  amount  paid  in,  some 
of  the  stock  not  being  full  paid.  Shep- 
pard  V.  Murphy,  70  L.  T.  Rep.  3  (1893). 
Even  though  a  holder  of  stock,  which 
was  only  one  tenth  paid  up.  sells  a 
part  to  his  brother  at  par,  yet  on  the 
winding  up  of  the  company  and  the 
division  of  the  property,  they  are  to 
divide  according  to  their  stockholdings, 
and  not  according  to  the  money  they 
invested.  Donner  v.  Donner,  217 
Pa.  St.  37  (1907).  Stock  not  paid  for 
may  not  be  entitled  to  share  in  the 
distribution  of  the  assets  on  dissolu- 
tion when  there  are  not  enough  assets  to 
pay  back  the  money  paid  by  those  who 
paid  for  their  stock.  Ogden  v.  Dela- 
ware,  etc.    R.    R.,  83    Atl.   Rep.    991 


(125) 


1985 


§  641.]  DISSOLUTION,    FORFEITURE,    ETC.  [cH.  XXXVIII. 

of  a  corporation  upon  Its  winding  up,  the  accumulated  profits  will  be 
considered  separate  from  the  capital,  if  some  of  the  stock  is  held  in 
trust  for  life  tenants  and  remaindermen.^  Where  the  entire  capital 
stock,  $500,000,  is  issued  for  patents,  and  the  patentee  transfers  about 
one  fifth  of  it  back  to  the  corporation,  and  it  is  then  sold  by  the  company 
at  par  as  treasury  stock,  and  the  company  is  then  dissolved,  a  purchaser 
of  some  of  such  treasury  stock  may  maintain  a  bill  to  have  the  surplus 
assets  over  and  above  the  debts  applied  to  such  treasury  stock  before 
anything  is  paid  on  the  promoter's  stock  in  distribution,  it  being  shown 
that  the  patents  had  little  or  no  value.  No  request  to  the  receivers  to 
bring  such  a  suit  need  be  made,  because  it  is  a  personal  suit.^  A  con- 
test between  the  preferred  and  common  stockholders  as  to  who  shall  be 
entitled  to  the  surplus  will  not  be  decided  in  a  foreclosure  suit,  but  the 
surplus  will  be  paid  to  the  corporation  for  distribution.^  In  the  distribu- 
tion of  the  assets  of  an  insolvent  corporation  citizens  of  other  states 
cannot  be  discriminated  against.^  Debts  due  from  the  stockholder  to 
the  corporation  are  to  be  deducted  from  his  interest  in  the  assets.^ 

Where  profits  have  been  earned  and  properly  entered  as  profits  on 
the  corporation  books  they  belong  to  the  stockholder,  even  though 
thereafter  the  corporation  becomes  insolvent  and  is  wound  up  before 
such  profits  are  declared  to  be  dividends.  The  creditors  of  the  corpora- 
tion are  entitled  to  the  corpus  of  the  estate,  but  not  to  such  profits. 
If  there  is  preferred  stock  such  profits  go  to  that  stock. ^    A  person  who 

(N.  J.   1912).     Several  subscribers  to  that    the    surplus    be    divided    among 

stock  who  have  paid  more  than  other  the     stockholders     after     paying     all 

subscribers  cannot  obtain  a  temporary  general    creditors    who    present    their 

injunction     against     the     corporation  claims   within  a  fixed   time.     Toledo, 

using  its  funds  as  it  sees  fit  on  the  etc.  R.  R.  v.  Continental  Trust  Co.,  95 

theory  that  the  corporation  must  pay  Fed.  Rep.  497  (1899). 

back  such  excess.     Miller  v.  Hawkey e,  ^  Blake  v.  McClung,   176  U.   S.  59 

etc.  Co.,  137  N.  W.  Rep.  507   (Iowa,  (1900). 

1912).  5  James  v.  Woodruff,  10  Paige,  541 

1  Re  Rogers,  22  N.  Y.  App.  Div.  428,  (1844) ;  Nathan  v.  Whitlock,  9  Paige, 
4.35  (1897) ;  aff'd,  161  N.  Y.  108.  152    (1841) ;   Purton  v.   New   Orleans, 

2  Weber  v.  Nichols,  75  N.  J.  Eq.  etc.  R.  R.,  3  La.  Ann.  1932  (1848). 
117  (1908).  In  insolvency  proceed-  Where  a  stockholder  in  an  insolvent 
ings  a  stockholder  may  contest  the  national  bank  does  not  pay  the  assess- 
legality  of  other  stock  and  its  right  ment  levied  by  the  comptroller,  he 
to  participate  in  any  surplus.  Jones  cannot  participate  in  a  dividend  to 
V.   Ezell  &  Co.,   134  Ga.   .5.53    (1910).  the   stockholders  after    the    debts  are 

3  Continental  Trust  Co.  v.  Toledo,  paid,  such  dividend  being  less  than  his 
etc.  R.  R.,  86  Fed.  Rep.  929  (1898).  assessment.  Neither  can  his  trans- 
On  a  foreclosure  sale  the  court  may  ferae,  nor  the  purchaser  of  his  stock 
order  a  distribution  of  any  surplus  at  an  execution  sale.  Richardson  v. 
remaining  after  the  payment  of  the  Wallace,  39  S.  C.  216  (1893). 
mortgage  debt,  and  the  court  need  ^  Bishop  v.  Smyrna,  etc.  Co.,  [1895] 
not    turn    over    such    surplus    to    the  2  Ch.  265. 

insolvent  corporation,  but  may  decree 

1986 


CH.  xxxvni.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§641. 


conveys  property  to  the  corporation  in  payment  for  stock  may  contract 
that  upon  dissolution  he  shall  receive  back  that  property''.* 

An  assignment  or  transfer  of  stock  by  a  stockholder  after  the  dissolu- 
tion of  the  corporation  is  merely  an  equitable  assignment  of  his  interest 
in  the  assets  of  the  concern  as  it  may  appear  upon  the  settlement.^ 
In  Maine  it  has  been  held  that  while  a  corporation  may  pay  an  ordinary 
dividend  to  a  stockholder  of  record,  yet  that  a  dividend  paid  in  the  liq- 
uidation and  winding  up  of  the  corporation  must  be  paid  to  the  holder 
of  the  certificate,  even  though  such  holder  be  a  transferee  who  has  not 
been  recorded  as  such  on  the  books  of  the  company,  and  that  the  com- 
pany is  hable  to  him  for  dividends  in  liquidation,  even  though  it  has 
paid  them  to  the  registered  stockholder,  and  that  this  rule  applies  to  a 
pledgee  of  a  certificate  of  stock  as  well  as  a  purchaser  of  a  certificate 
of  stock.^  After  dissolution  directors  in  charge  as  trustees  cannot  be 
compelled  by  mandamus  to  transfer  stock  on  the  books.^    The  corpo- 


1  Fish  V.  Nebraska,  etc.  Co.,  25  Fed. 
Rep.  795  (1885).  Where  one  of  the 
organizers  of  the  corporation,  who  is 
also  its  president,  sells  goods  to  it  for 
stock,  the  corporation  is  protected  in 
its  title,  even  though  it  turns  out  that 
he  held  part  of  the  goods  to  sell  on 
commission,  but  if  he  retains  the 
stock  and  the  company  is  dissolved,  it 
is  bound  to  respect  the  rights  of  the 
owner  of  the  goods  in  distributing  its 
assets.  Wyeth  v.  Renz  Bowles  Co., 
66  S.  W.  Rep.  825  (Ky.  1902). 

2  Quoted  and  approved  in  Muir  v. 
Citizens',  etc.  Bank,  39  Wash.  57 
(1905) ;  James  v.  Woodruff,  10  Paige, 
541  (1844) ;  aff'd,  2  Denio,  574  (1845) ; 
Sewall  V.  Chamberlain,  82  Mass.  581 
(1860).  At  any  time  before  a  dissolu- 
tion is  actually  completed  a  stock- 
holder may  sell  and  transfer  his  stock. 
Central,  etc.  v.  Smith,  43  Colo.  90 
(1908).  After  dissolution  a  certifi- 
cate of  stock  when  transferred  no 
longer  conveys  legal  title  to  the  stock, 
the  title  being  merely  an  equitable 
right  to  a  distributive  share  in  the 
assets.  Bijur  v.  Standard,  etc.  Co., 
74  N.  J.  Eq.  546  (1908).  Where  two 
directors  in  a  failing  bank  cause  it 
to  purchase  their  stock,  and  the 
receiver  compels  one  of  them  to  pay 
back  the  amount,  the  other  being  a 
non-resident,  and  in  liquidation  all 
debts  are  paid  and  there  is  a  fund 
for     distribution    among     the     stock- 


holders, the  director  who  had  to  pay 
the  amount  cannot  compel  the  other 
director  to  contribute  his  share  in 
connection  with  the  distribution  of 
the  assets  but  he  is  entitled  to  the 
benefit  of  the  stock  sold  to  the  bank 
itself.  Avery  v.  Central  Bank,  221 
Mo.  71   (1909). 

'  Bath  Sav.  Inst.  v.  Sagadahoc  Nat. 
Bank,  89  Me.  500  (1897).  In  the 
final  distribution  of  assets  of  a  building 
association  payment  may  be  to  the 
stockholder  of  record,  even  though  he 
has  pledged  his  certificate,  the  asso- 
ciation not  being  aware  of  that  fact, 
but  the  rule  is  different  where  actual 
notice  has  been  given  before  the  dis- 
tribution. Campbell  v.  Perth  Amboy 
etc.  Assoc,  76  N.  J.  Eq.  347  (1909). 
An  unrecorded  pledgee  of  stock  is  not 
entitled  to  be  notified  of  proceedings 
for  a  consolidation  with  another  com- 
pany. A  corporation  is  not  liable  to 
an  unrecorded  pledgee  of  its  stock, 
even  though  a  consolidation  is  brought 
about  and  the  new  stock  issued  to  the 
pledgor,  thereby  depriving  the  pledgee 
of  the  value  of  the  stock  held  in 
pledge,  the  corporation  having  acted 
in  good  faith.  Cleveland  City  Ry. 
V.  First  Nat.  Bank,  68  Ohio  St.  582 
(1903). 

*  Lewis  V.  Miller  &  Lux,  156  Cal. 
101  (1909).  After  a  national  bank 
has  gone  into  voluntary  liquidation 
it  cannot  be  required  to  transfer  stock 


1987 


§  641.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


rate  records,  stock  books,  minutes,  etc.,  may  be  sold  at  a  receiver's  sale.^ 
Where  on  a  reduction  of  the  capital  stock  certain  bad  debts  are  set  aside 
for  the  express  benefit  of  the  then  existing  stockholders  of  record,  they 
are  entitled  to  the  same,  even  though  they  are  not  stockholders  of  record 
when  the  corporation  is  dissolved  later.^  Where  a  pledgee  of  stock  is 
garnisheed  and  the  company  goes  into  liquidation,  the  garnishee  proc- 
ess covers  the  distribution  on  the  stock  less  his  claim. ^ 

The  dissolution  of  a  corporation  pending  a  suit  brought  by  it  abates 
the  suit,  but  it  may  be  revived.^  A  suit  cannot  be  instituted  in  the  name 
of  a  dissolved  corporation,  inasmuch  as  it  is  dead,  but  by  statute  it  is 
often  provided  that  such  suits  may  be  brought  for  purposes  of  liquida- 
tion.^   Where  a  New  York  statute  provides  that  on  consolidation  of 


on  its  books.  Muir  v.  Citizens',  etc. 
Bank,  39  Wash.  57  (1905).  See  also 
§872,  infra,  and  §266,  supra.  After 
dissolution  proceedings  have  been 
commenced  it  is  in  the  discretion  of 
the  court  whether  to  allow  a  transfer 
on  the  books  of  the  company,  the 
court  saying  that  such  transfers  should 
not  be  allowed  except  for  strong 
reasons.  Re  Onward  Bldg.  Soc, 
[1891]  2  Q.  B.  463.  A  stockholder 
may  by  suit  compel  a  receiver  to 
transfer  her  stock  on  the  corporate 
books.  People  v.  California,  etc.  Co., 
124  Pac.  Rep.  558  (Cal.  1912). 

1  Hirsehfield  v.  Reading,  etc.  Co., 
82  Atl.  Rep.  690  (Del.  1912). 

2  Jerome  'v.  Cogswell,  204  U.  S.  1 
(1907).  Where,  upon  the  sale  of  all 
the  assets  of  one  corporation  to 
another,  stock  of  the  latter  is  issued 
to  stockholders  of  the  former,  and  it 
is  provided  that  any  surplus  remain- 
ing from  a  certain  fund  shall  be 
divided  among  all  the  stockholders  of 
both  companies,  this  interest  in  the 
surplus  vests  in  the  then  existing 
stockholders  individually,  and  this 
interest  does  not  pass  on  a  subsequent 
sale  of  his  stock  by  a  stockholder. 
Read  v.  Citizens',  etc.  R.  R.,  110  Tenn. 
316  (1903). 

3  Cooley  V.  Janes,  71  Kan.  297 
(1905).  Money  in  the  hands  of  the 
court  on  the  liquidation  of  a  company, 
even  though  it  belongs  to  a  stock- 
holder, cannot  be  garnisheed  for  his 
debts  under  the  English  statute. 
Spence't;.  Coleman,  [1901]  2  K.  B.  199. 

4  Kelly  V.  Rochelle,  93  S.  W.  Rep. 


164  (Tex.  1906).  Upon  dissolution  a 
pending  suit  by  the  corporation  abates. 
MacRae  v.  Kansas  City,  etc.  Co.,  69 
Kan.  457  (1904).  See  also  §642, 
irifra. 

*  Neither  a  dissolved  corporation  nor 
its  trustees  can  maintain  a  suit  in  its 
behalf.  State  v.  Grant  University,  115 
Tenn.  238  (1905).  A  dissolved  cor- 
poration cannot  maintain  a  suit. 
Buck,  etc.  Co.  v.  Vickers,  80  Kan.  29 
(1909).  Where  a  statute  extending 
the  existence  of  a  corporation  was 
unconstitutional,  the  corporation  can- 
not maintain  a  suit  to  enjoin  its  grantee 
of  land  from  violating  a  restriction 
in  the  deed.  Clark  v.  American,  etc. 
Co.,  165  Ind.  213  (1905).  A  consolida- 
tion under  a  statute  which  provides 
that  the  consolidated  corporation  shall 
thereupon  "form  one  consolidated  cor- 
poration" is  a  dissolution  of  the  con- 
stituent companies.  A  stockholder 
in  one  of  the  constituent  companies 
may  maintain  a  suit  to  have  the  con- 
solidation declared  illegal,  and  the 
value  of  his  stock  ascertained  and 
paid,  where  he  alleges  that  the  terms 
of  the  consolidation  were  unfair  and 
that  the  other  constituent  company 
had  been  grossly  overcapitalized. 
Jones  V.  Missouri,  etc.  Co.,  144  Fed. 
Rep.  765  (1906).  A  corporation  is 
not  dissolved  until  its  charter  expires 
or  a  decree  to  that  effect  rendered,  and 
hence  up  to  that  time  may  institute 
a  suit  to  collect  its  assets  for  voluntary 
liquidation.  Wilson  v.  First  State 
Bank,  77  Kan.  589  (1908).  Under 
the  Nebraska  statute  a  dissolved  cor- 


1988 


CH.  XXXVIII. 


DISSOLUTION,    FORFEITURE,    ETC. 


[§64I. 


New  York  corporations  pending  suits  shall  not  abate,  this  applies  to  a 
suit  against  one  of  those  corporations  in  Rhode  Island.^  Although  a 
corporation  brings  suit  after  it  has  been  dissolved,  yet  after  judgment 
is  entered  this  question  cannot  be  raised.-  Where  the  corporation  is 
dissolved,  but  by  statute  suits  may  be  brought  during  the  three  succeed- 
ing years,  a  stockholder  must  request  the  directors  to  sue  before  he  sues 
to  compel  a  creditor  to  restore  property  illegally  taken. ^  A  New  York 
stockholder  in  a  Connecticut  railroad  corporation  cannot  sue  in  the 
New  York  courts  on  behalf  of  himself  and  other  stockholders  to  hold 
liable  another  Connecticut  railroad  corporation  for  acquiring  a  majority 
of  the  stock  of  the  former  railroad  and  fraudulently  acquiring  its  assets 
where  the  first  named  corporation  has  ceased  to  exist,  and  hence  its 
assets  should  be  administered  in  Connecticut  by  a  suit  brought  there.* 
An  order  of  the  court  that  a  person  pay  money  to  a  corporation  ceases 
upon  the  dissolution  of  the  corporation.^  Upon  the'  expiration  of  a 
charter  of  a  bridge  company  it  can  no  longer  charge  tolls  unless  it  obtains 


poration  may  bring  suit.  Schmidt, 
etc.  Co.  V.  Mahoney,  60  Neb.  20 
(1900).  Even  though  a  Canadian 
corporation  has  been  dissolved,  yet, 
if,  under  the  statutes  of  Canada,  it 
remains  in  force  to  wind  up  its  busi- 
ness, it  may  bring  suit  in  Rhode 
Island  to  recover  a  debt.  Ham  v. 
Banque  VUle  Marie,  22  R.  I.  248 
(1900).  In  the  case  Singer,  etc.  Co. 
V.  Hutchinson,  176  lU.  48  (1898),  the 
court  held  that  the  expiration  of  the 
two  years  prescribed  by  statute  for 
a  dissolved  corporation  bringing  suits, 
etc.,  does  not  bar  a  writ  of  error  sued 
out  after  the  two  years.  Where  by 
statute  upon  dissolution  the  directors 
are  made  trustees  to  wind  up  the 
affairs  of  the  company,  they  may 
maintain  a  suit  in  another  state, 
inasmuch  as  they  are  not  receivers, 
but  are  successors  of  the  corporation. 
Root  V.  Sweeney,  12  S.  Dak.  43  (1899). 
Under  the  New  Jersey  statutes  a  suit 
by  a  New  Jersey  corporation  may  be 
continued  even  though  before  trial 
the  corporation  is  dissolved.  Bucki, 
etc.  Co.  V.  Atlantic,  etc.  Co.,  128  Fed. 
Rep.  332  (1904).  Even  after  dissolu- 
tion, the  directors  of  a  New  Jersey 
corporation  may,  under  its  statutes,  be 
sued  to  obtain  a  conveyance  of  prop- 
erty which  the  corporation  had  sold. 
General  Ry.  etc.  Co.  v.  Cade,  122 
N.   Y.    App.   Div.   106   (1907).     Even 


after  the  charter  of  a  New  Jersey  cor- 
poration has  been  revoked  by  reason 
of  the  non-payment  of  taxes  yet  under 
the  New  Jersey  statute  it  may  for 
five  years  thereafter  bring  suit  in  its 
own  name.  Kelly  &  Jones  v.  Hooker 
&  Co.,  178  Fed.  Rep.  71  (1910).  A 
dissolved  New  Jersey  corporation  may 
sue  or  be  sued  in  that  or  any  other 
state  as  a  corporation  in  winding  up 
its  affairs  under  the  New  Jersey  stat- 
ute authorizing  such  suits.  Harris- 
Woodburv,  etc.  Co.  v.  Coffin,  179 
Fed.  Rep.  257  (1910).  Under  the 
Illinois  statute  a  banking  corporation 
may  continue  suit,  even  though  it 
goes  into  voluntary  dissolution  during 
the  suit.  Commercial,  etc.  Co.  v. 
Mailers,  242  lU.  50  (1909).  See 
also  §  642,  infra. 

1  Riddell  v.  Rochester,  etc.  Co.,  85 
Atl.  Rep.  273  (R.  I.  1912). 

-  Commercial,  etc.  Co.  v.  Mailers,  242 
lU.  50  (1909).    See  130  Pac.  Rep.  1021. 

3  General  Electric  Co.  v.  West  Ashe- 
ville  Imp.  Co.,  73  Fed.  Rep.  386 
(1896).  Even  after  dissolution  a 
stockholder  may  file  a  bill  to  recover 
assets  that  have  been  wrongfully 
diverted.  Boyd  v.  Hankinson,  92 
Fed.  Rep.  49  (1899). 

*  Howe  V.  New  York,  etc.  R.  R., 
142  N.  Y.  App.  Div.  451   (1911). 

6  Matter  of  SkeUy,  109  N.  Y  App. 
Div.  58  (1905). 


1989 


§  642.]  DISSOLUTION,    FORFEITURE,    ETC.  [cH.  XXXVIII. 

new  authority  therefor  in  accordance  with  the  statutes.^  A  forfeiture 
of  a  charter  by  a  state  court  does  not  affect  the  status  of  a  receiver  ap- 
pointed by  the  United  States  court.  Such  receiver  may  proceed  to 
administer  the  property.^  A  railroad  charter  under  a  special  act, 
which  does  not  specify  when  it  expires,  will  expire  in  fifty  years  if  the 
general  laws  prescribe  that  period.^ 

§  642.  The  liabilities  upon  dissolution,  consolidation,  or  sale.  —  As 
already  seen,  the  old  rule  that  upon  dissolution  all  debts  by  or  to  the 
corporation  are  rendered  unenforceable  is  no  longer  the  law.^  All 
debts,  however,  do  not  stand  on  the  same  basis.  First,  there  are  debts 
arising  out  of  a  receiver's  acts;  second,  debts  or  claims  arising  from 
contracts  which  are  still  executory  when  the  receiver  is  appointed ; 
third,  debts  or  claims  arising  out  of  contracts  which  have  been  carried 
out  when  the  receiver  is  appointed. 

As  to  a  receiver's  acts  or  contracts  the  law  is  comparatively  clear. 
Where  a  receiver  is  appointed  he  generally  finds  a  number  of  executory 
contracts  in  force  —  contracts  of  employment,  or  for  rental  of  premises, 
or  for  purchases  of  material,  etc.  He  then  must  decide  whether  he 
wishes  to  adopt  any  of  these  contracts  as  his  own.  If  he  does  not  adopt 
a  particular  contract,  then  that  contractor  has  no  preferred  claim  against 
the  receiver,  as  a  part  of  the  receiver's  expenses  or  disbursements,  but 
has  merely  a  claim  against  the  corporation  and  its  general  assets,  and 
this  claim  may  be  for  past  sums  due  or  for  breach  of  contract,  or  both. 
On  the  other  hand,  if  the  receiver  does  adopt  the  contract,  then  as  to 
sums  becoming  due  before  such  adoption  the  contractor  is  a  general 
creditor  only,  but  as  to  sums  becoming  due  after  such  adoption,  they 
are  a  part  of  the  receiver's  expenses  or  disbursements  and  must  be  paid 
as  such.  The  law  is  clear  that  a  receiver  may  refuse  to  carry  out  an 
executory  contract  of  the  corporation.^  The  law  is  also  clear  that  claims 
arising  out  of  corporate  contracts  which  have  been  completed  when  a 
receiver  is  appointed  are  not  debts  of  the  receiver  entitled  to  a  prefer- 


1  Roekwith  v.  State,  etc.  Co.,  145  (1904),  holding  also  that  where  with 
Mich.  455  (1906).  the  consent  of  all   the  directors   and 

2  City,  etc.  Co.  v.  State,  88  Tex.  600  stockholders,  one  of  the  directors  is 
(1895).  But  where,  after  an  injunc-  interested  in  a  contract  with  the  cor- 
tion  has  been  obtained  in  the  federal  poration,  but  upon  the  corporation 
court,  the  corporation  is  dissolved  in  becoming  insolvent  and  being  dis- 
the  state  court,  the  suit  in  the  federal  solved  the  court  cancels  the  contract 
court  falls.  Lang  v.  Louisiana  Tan-  at  the  instance  of  creditors,  such  con- 
ning Co.,  56  Fed.  Rep.  675  (1893).  tractor  is  entitled  to  pay  for  services 

3  People  V.  Wayman,  99  N.  E.  Rep.  already  rendered,  and  to  reimburse- 
941  (111.  1912).     See  §  2,  supra.  ment   for   actual   and    necessary   out- 

''  See  preceding  section.  lays  in  connection  with  the  contract. 

^  Quoted  and  approved  in  Griffith  See  also  §  874,  infra. 
V.  Blackwater,  etc.  Co.,  55  W.  Va.  604 

1990 


CH.  XXXV^III. 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  642. 


ence,  except  certain  labor  and  material  claims  which  are  incurred  within 
six  months  before  the  receivership,  which  are  considered  elsewhere.^ 

The  status,  however,  of  a  contract  which  is  still  executory  at  the  time 
when  a  receiver  is  appointed  is  decidedly  uncertain.  The  receiver  is 
not  bound  to  carry  out  such  a  contract,  and,  furthermore,  damages  for 
breach  of  such  a  contract  are  of  course  not  a  preferred  claim  as  against 
the  general  corporate  assets  in  the  hands  of  a  receiver.  In  fact,  in  some 
cases  at  least  such  damages  for  not  carrying  out  such  an  executory  con- 
tract are  not  even  a  good  claim  against  the  general  corporate  assets 
in  the  hands  of  the  receiver.  The  question  arises  most  often  in  connec- 
tion with  executory  contracts  for  the  services  of  corporate  managers, 
agents,  or  employees.  The  New  York  courts  hold  that  dissolution  or 
the  appointment  of  a  receiver  terminates  at  once,  so  far  as  the  future 
is  concerned,  all  executory  contracts  for  services,  commissions,  and 
salaries.^  The  courts  of  other  states  have  generally  followed  this  New 
York  rule.^    New  Jersey,  however,  has  adopted  a  rule  to  the  contrary 


iSee  §  861,  in/ra. 

2  Where  an  insurance  company  be- 
comes insolvent  and  passes  into  a  re- 
ceiver's hands  the  time  contract  of  its 
general  agent  for  its  services  for  a 
specified  term  ceases,  and  it  has  no 
valid  claim  on  the  funds  in  the  re- 
ceiver's hands  for  damages  for  breach 
of  contract.  People  v.  Globe,  etc.  Co., 
91  N.  Y.  174  (1883),  the  court  holding 
that  the  state  had  enjoined  both  parties 
from  continuing  to  perform  the  con- 
tract, and  that  the  agent  was  bound  to 
take  notice  of  that  contingency  happen- 
ing when  he  made  the  contract,  and 
that  the  contract  stopped  upon  his 
natural  death  or  upon  the  corporate 
death  of  the  company,  the  company 
having  been  dissolved  at  the  instance 
of  the  state.  In  the  case  People  v. 
American  L.  &  1*.  Co.,  172  N.  Y.  371 
(1902),  the  court  said  (p.  377):  "A 
corporation  is  created  by  the  edict  of 
the  legislature  and  dies  at  its  command. 
Knowledge  is  imputed  to  all  who  deal 
with  it  that  when  it  suspends  business 
the  law  takes  charge  of  its  affairs, 
liquidates  its  debts,  converts  its  assets 
and  distributes  the  proceeds  among  its 
creditors.  Those  who  contract  with 
it  do  so  'with  knowledge  of  the  statu- 
tory conditions,  and  these  must  be 
deemed  to  have  permeated  the  agree- 
ment and  constituted  elements  of  the 
obligation.'"     In  the  case  Ely  v.  Van 


Kannel,  etc.  Co.,  184  Fed.  Rep.  459 
(1911),  the  court  held  that  sitting  in 
New  York  it  would  follow  the  New 
York  rule  that  a  contract  of  employ- 
ment ceases  upon  the  corporate  in- 
solvency, the  court  saying  (p.  462)  : 
"The  New  York  rule  would  seem  to  be 
that  any  legal  termination  of  busi- 
ness (especially  under  court  order) 
which  could  have  been  reasonably  in 
the  minds  of  the  contracting  parties 
as  a  possible  intervention  of  some  vis 
major  could  not  be  relied  upon  as  a 
breach  of  contract  in  case  it  did  occur." 
'  Upon  the  appointment  of  a  re- 
ceiver the  contract  of  employment  of 
the  general  manager  ceases,  such 
termination  being  impliedly  within  the 
contemplation  of  the  parties  when  the 
contract  was  made.  Du  Pont  v. 
Standard  etc.  Co.,  81  Atl.  Rep.  1089 
(Del.  1912);  Sullivan,  etc.  Co.  v. 
Black,  159  Ala.  570  (1909);  Law  v. 
Waldron,  230  Pa.  St.  458  (1911); 
Commonwealth  v.  Eagle,  etc.  Ins.  Co., 
96  Mass.  344  (1867) ;  Lenoir  v.  Linville 
Imp.  Co.,  126  N.  C.  922  (1900) ;  Wil- 
liamson, etc.  Trust  Co.  v.  Roberts,  etc. 
Co.,  118  Tenn.  340  (1906).  Prima  facie 
a  contract  with  the  treasurer  for  his 
services  continues  notwithstanding  it 
assigns  for  the  benefit  of  its  creditors. 
Potts  V.  Rose  VaUey  MiUs,  167  Pa.  St. 
310  (1895).    Cf.  78  S.  E.  Rep.  727. 


1991 


§642.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[cH.  xxxvni. 


and  holds  that  such  a  broken  contract  of  employment  entitles  the  em- 
ployee to  damages  for  breach,  the  same  as  though  the  contract  was 
broken  before  the  receiver  was  appointed  or  dissolution  adjudged.^ 
The  English  decisions  seem  to  incline  towards  the  New  Jersey  rule.^ 
In  Ohio  it  is  held  that  if  an  embarrassed  corporation  discharges  an  em- 
ployee in  violation  of  its  contract  with  him,  he  may  recover  damages 
even  though  the  corporation  was  dissolved  soon  after  the  discharge.* 
Doubtless  the  same  conclusion  would  be  reached  under  the  New  York 
rule,  yet  if  the  breach  was  by  the  appointment  of  a  receiver  instead  of 
by  discharge  by  the  corporation  the  day  before  the  receivership,  no 
damages  could  be  recovered. 

Turning  now  to  other  classes  of  executory  contracts,  the  New  York 
rule  seems  to  have  been  applied  quite  generally.^   The  Hability  of  the  cor- 


1  Spader  v.  Mural,  etc.  Mfg.  Co., 
47  N.  J.  Eq.  18  (1890).  Rosenbaum 
V.  United  States,  etc.  Co.,  61  N.  J.  L. 
543  (1898).  An  individual  is  not 
released  from  his  contracts  by  his  in- 
solvency. 20  Am.  &  Eng.  Ency.  of 
Law,  2d  ed.,  p.  45. 

2  In  England  it  is  held  that  a  bank 
manager  who  has  a  time  contract  for 
his  salary  may  file  a  claim  for  the 
unexpired  period  if  the  company  is 
wound  up  eompulsorily,  a  reduction 
being  made  in  view  of  the  possibility  of 
his  obtaining  new  employment.  Hart- 
land  V.  General  Ex.  Bank,  14  L.  T.  Rep. 
863  (1866) ;  Yelland's  case,  L.  R.  4  Eq. 
350  (1867) ;  Ex  parte  Clarke,  L.  R.  7 
Eq.  550  (1869).  If  his  contract  pro- 
vides for  a  specified  payment  if  dis- 
charged, he  is  entitled  to  it  if  the  com- 
pany is  wound  up  eompulsorily.  Ex 
-parte  Logan,  L.  R.  9  Eq.  149  (1870). 
So  also  where  the  dissolution  is  volun- 
tary. Stirling  v,  Maitland,  5  B.  &  S. 
840  (1864).  The  dissolution  of  a  firm 
before  the  expiration  of  a  manager's 
term  of  service,  entitles  him  to  damages. 
Brace  v.  Calder,  2  Q.  B.  253  (1895). 
A  contract,  however,  that  the  em- 
ployee shall  be  paid  a  certain  sum  if 
discharged,  does  not  entitle  him  to  that 
sum  if  the  company  is  wound  up  com- 
Xjulsorily,  because  such  discharge  re- 
ferred to  a  voluntary  discharge.  Tait's 
case,  16  Sol.  J.  46  (1871).  The  com- 
mission on  future  business  stops  on 
voluntary  liquidation.  Ex  -parte 
Maclure,  L.  R.  5  Ch.  737  (1870). 
Lewine's  case,   15  Sol.  J.  828   (1871). 


Buckley  on  Company  Law,  9th  ed., 
p.  458,  says  that  the  last  two  cases 
probably  rest  on  the  principle  laid  down 
in  Rhodes  i'.  Forwood,  1  A.  C.  256 
(1876),  that  where  two  parties  mutually 
agree  for  a  fixed  period,  the  one  to 
employ  the  other  as  his  sole  agent  in  a 
certain  business  at  a  certain  place,  the 
other  that  he  will  act  in  that  business 
for  no  other  principal  at  that  place, 
there  is  no  implied  condition  that  the 
business  itself  shall  continue  to  be 
carried  on  during  the  period  named. 
In  England  an  order  for  the  compul- 
sory winding  up  of  a  company  operates 
as  a  notice  to  dismiss  the  servants  and 
employees,  and  the  appointment  of  a 
receiver  and  manager  at  the  instance 
of  a  debenture  holder  has  the  same 
effect.  This  is  on  account  of  the 
change  of  personality,  but  does  not 
apply  where  there  is  a  voluntary 
winding  up  in  order  to  transfer  the 
business  to  another  company.  Mid- 
land, etc.  Bank,  Ltd.  v.  Attwood, 
[1905]  1  Ch.  357. 

3  Tiffin  Glass  Co.  v.  Stoehr,  54  Ohio, 
157  (1896). 

^  The  bond  of  a  surety  company, 
recourse  to  which  is  had  after  a  re- 
ceiver has  been  appointed,  cannot  be 
enforced  as  against  the  corporate  assets 
unless  there  is  a  surplus  after  paying 
the  corporate  debts  or  it  resumes  busi- 
ness. The  court  held  that  all  corpo- 
rate liabilities  "must  be  valued  and 
determined,  and  their  status  fixed,  as 
to  the  date  of  the  commencement  of  the 
action     for     dissolution."     People     v. 


1992 


CH.   XXXVIII. 


DISSOLUTION,    FORFEITURE,    ETC. 


[§  W2. 


poration  on  indorsements  is  not  considered  in  the  distribution  of  assets 
by  the  receiver,  except  so  far  as  such  indorsements  have  matured  and 

party  to  the  contract  to  damages, 
putting  him  in  the  same  position  as  if 
the  contract  had  been  completed,  and 
he  may  file  a  claim  for  that  amount. 
Re  Vic  Mill  Co.,  Ltd.,  108  L.  T.  Rep. 
25  (1912).  When  a  corporation  is 
forced  into  involuntary  liquidation  its 
executory  contracts  become  nugatory, 
and  a  contractor  having  a  "supply 
contract"  entitling  him  to  a  lien  is 
not  entitled,  under  such  conditions,  to 
recover  damages  for  the  breach  of  his 
contract,  but  he  is  entitled  to  a  just 
compensation  for  the  actual  expendi- 
ture of  labor  and  money  by  him  in  ful- 
fillment of  his  contract,  subject  to  a 
deduction  of  all  sums  paid  him  there- 
under. Griffith  V.  Blaekwater,  etc.  Co., 
55  W.  Va.  604  (1904) ;  s.  c,  on  prior 
appeal,  46  W.  Va.  56  (1899).  In  55 
W.  Va.  604,  the  court  said :  "Can  the 
dissolution  of  the  corporation  have  the 
effect  of  undoing  that  which  was  bind- 
ing at  the  time  it  was  done,  and  of  re- 
leasing obligations  fixed  and  unalter- 
able by  the  parties  themselves  ?  It 
cannot  be  done  upon  any  theory  ex- 
cept that  which  was  supposed  once  to 
have  been  a  principle  of  the  common 
law,  under  which  the  dissolution  of  a 
corporation  canceled  all  its  obligations, 
released  it  of  its  debts,  vested  the 
title  to  its  personal  assets  in  the 
king,  and  retiu-ned  its  real  estate  to 
the  donors  —  a  doctrine  which  Cook 
well  says  has  been  declared  by  the 
English  court  never  to  have  been  a 
part  of  the  common  law,  and  which 
has  never  been  adopted,  approved, 
and  recognized  in  America.  There 
is  certainly  no  room  for  any  such 
principle  under  the  statutes  of  this 
state  creating,  regulating,  and  pro- 
viding for  the  dissolution  of  corpo- 
rations and  of  the  distribution  of 
their  assets."  Goods  ordered  but  not 
tendered  before  a  receiver  of  the  buyer 
is  appointed  do  not  sustain  a  claim  for 
damages  for  loss  of  profit  as  against 
corporate  assets  in  the  receiver's  hands. 
Wells  V.  Hartford  Manilla  Co.,  76  Conn. 
27  (1903).  The  circuit  court  of  the 
United  States  has  even  gone  so  far  as 
to   hold    that   an   executory   contract 


Metropolitan  Siirety  Co.,  205  N.  Y. 
135  (1912).  Upon  receivers  being 
appointed  of  a  street  railway  company 
an  express  company  cannot  recover 
damages  for  expected  future  profits 
of  a  contract  it  has  with  the  street 
railway.  Re  New  York  City  Ry.  188 
Fed.  Rep.  339  (1911)  where  it  is  said 
(p.  340)  :  "I  think,  notwithstanding 
the  confusion  respecting  the  matter  in 
which  the  mind  is  left  after  reading  the 
decisions  in  the  reports,  federal  and 
state,  that  the  weight  of  authority 
supports  the  rule  that,  where  there  has 
been  no  breach  of  an  executory  con- 
tract up  to  the  date  of  an  involuntary 
adjudication  of  insolvency,  damages 
resulting  from  that  fact,  or  from  any 
later  breach,  cannot  be  proven  as 
against  other  creditors  whose  claims  are 
then  absolute,  and  that,  quite  indepen- 
dent of  any  express  statutory  provision, 
such  as  the  bankruptcy  act,  this  rule 
applies  to  the  administration  in  equity 
of  the  property  and  estate  of  an  in- 
solvent corporation.  The  cases  cited 
are  varied,  do  not  arise  under  the 
bankruptcy  acts,  and  suggest  claims 
for  rent  not  accrued,  for  damages  for 
subsequent  breaches  of  outstanding 
contracts,  both  for  the  sale  and  the 
purchase  of  goods,  for  claims  on 
guaranties  which  had  not  ripened  into 
fixed  liabilities  at  the  date  of  the 
adjudication  of  insolvency,  and  for 
claims  arising  out  of  contracts  for 
personal  services."  Upon  insolvency 
of  the  corporation  its  existing  contracts 
cease  and  a  contractor  entitled  to  a  lien 
cannot  recover  damages  for  a  breach  of 
the  contract  but  onlj^  a  fair  compensa- 
tion for  his  expenditures  in  money  and 
labor,  less  what  he  has  already  re- 
ceived. Tredegar  Co.  v.  Seaboard, 
etc.  Ry.,  183  Fed.  Rep.  289,  292  (1910). 
Even  though  a  corporation  is  dissolved 
voluntarily  it  continues  liable  on  a 
bond  of  indemnity,  though  unliqui- 
dated. Wisconsin,  etc.  Lumber  Co. 
V.  Cable,  140  N.  W.  Rep.  211  (Iowa, 
1913).  Where  a  company  goes  into 
liquidation  a  contract  under  which  it 
agrees  to  purchase  specially  manu- 
factured machinery  entitles  the  other 


1993 


§642. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


have  not  been  paid.^     Dissolution  may  put  an  end  to  a  guaranty  of 


of  a  corporation  to  sell  and  deliver 
certain  merchandise  is  canceled  by 
the  appointment  of  a  receiver  and  no 
damages  can  be  recovered  against  the 
company  or  its  assets  for  such  breach 
of  contract,  although  the  vendee 
proved  as  damages  the  additional 
amount  he  was  obliged  to  pay  for 
merchandise  elsewhere.  The  court 
said  the  question  was  not  free  from 
doubt,  but  it  would  follow  the  New 
York  decisions  rather  than  the  New 
Jersey  decisions.  Malcomson  v. 
Wappo  Mills,  88  Fed.  Rep.  680  (1898). 
In  the  case  General  Electric  Co.  v. 
Whitney,  74  Fed.  Rep.  664  (1896),  the 
court  held  that  a  receiver  appointed 
on  account  of  corporate  insolvency  and 
fraud  was  not  bound  to  carry  out 
executory  contracts  existing  at  the 
time  of  his  appointment,  and  hence 
need  not  pay  to  a  corporate  creditor  in 
accordance  with  an  executory  contract 
certain  income  which  the  company 
received  from  time  to  time  from  the 
city  for  electric  lighting.  The  court 
said  (p.  667):  "It  is  contended  that 
there  is  a  marked  distinction  between 
the  powers  and  duties  of  the  court  and 
its  receivers  in  proceedings  where  no 
foreclosure  of  liens  is  sought  and  in 
proceedings  for  foreclosure;  that  in 
the  former  case,  which  was  this  case 
up  to  the  passing  of  the  decree  we  are 
reviewing,  the  property  and  affairs  of 
the  insolvent  and  mismanaged  cor- 
poration must  be  taken  hold  of  by  the 
court,  if  at  all,  with  all  its  burdens. 
If  by  this  is  meant  only  that  all  exist- 
ing liens  on,  or  vested  rights  in,  prop- 
erty must  be  respected  and  enforced, 
the  distinction  disappears ;  for  in  aU 
proceedings  a  court  of  equity  respects 
vested  rights  in  property  and  enforces 
the  existing  liens  thereon.  If,  how- 
ever, it  is  meant  that  in  such  pro- 
ceedings as  do  not  seek  foreclosure, 
and  are  founded  on  the  insolvency  and 
fraudulent  management  of  a  trust 
estate,  the  court  of  chancery  cannot 
take  hold  of  that  estate  except  on  the 
condition  of  carrying  out  all  of  the 
valid   contracts   of   the   insolvent,    we 


are  constrained  to  say  that  the  marks 
pointing  to  that  conclusion  are  not 
legible  to  us,  and  we  repeat  the  sug- 
gestion that  such  a  contention  leads 
to  the  denial  of  the  jurisdiction  of  the 
court  to  administer  such  estate.  A 
distinction,  not  clearly  marked  or 
defined,  is  referred  to  in  the  reported 
opinions  of  eminent  judges,  and  does 
exist."  In  the  case  Liverpool,  etc. 
Co.  V.  McNeill,  89  Fed.  Rep.  131  (1898), 
the  court  held  that  the  appointment  of 
the  receiver  of  two  insolvent  corpora- 
tions had  the  effect  of  dissolving  all 
contracts  between  such  two  corpora- 
tions. A  judgment  declaring  a  cor- 
poration illegal,  void,  and  the  associa- 
tion dissolved  puts  an  end  to  a  contract 
by  it  to  pay  certain  parties  its  bonds 
and  stock  if  they  would  build  its  road. 
Vinal  V.  Continental,  etc.  Co.,  32  Fed. 
Rep.  345  (1887).  A  contract  made  by 
a  corporation  to  pay  when  it  is  in  funds 
is  not  enforceable  if  the  company 
abandons  business.  Zimmer  v.  Brook- 
lyn Sub.  Ry.,  6  N.  Y.  Supp.  316  (1889). 
Where  a  receiver  refuses  to  carry  out 
a  contract  with  an  express  company 
which  was  to  run  for  many  years,  the 
latter  may  prove  its  damages  as  against 
the  estate.  Pennsylvania  Steel  Co.  v. 
New  York  City  Ry.,  198  Fed.  Rep. 
721  (1912).  The  agreement  of  an 
insolvent  corporation  to  pay  taxes  to 
become  due  in  the  future  is  not  a  prov- 
able claim  because  of  uncertainty. 
Pennsylvania  Steel  Co.  v.  New  York 
City  Ry.,  198  Fed.  Rep.  721  (1912). 
If  a  receiver  delivers  goods  under  a 
contract  existing  when  he  was  ap- 
pointed and  afterwards  cancels  the 
contract,  so  far  as  he  is  concerned,  the 
other  party  may  counterclaim  the 
damage  as  against  a  suit  for  the  price 
of  the  goods  delivered  by  the  receiver. 
Parsons  v.  Sovereign  Bank  of  Canada, 
107  L.  T.  Rep.  572  (1912) ;  the  Privy 
Council  saying  that  the  receiver  "is 
an  officer  of  the  court  put  in  to  dis- 
charge certain  duties  prescribed  by 
the  order  appointing  him ;  duties 
which  in  the  present  ease  extended  to 
the  continuation  and  management  of 


1  Oyster  v.  Short,   177  Pa.   St.  601   (1896). 
1994 


CH.   XXXVIII. 


DISSOLUTION,    FORFEITURE,    ETC. 


[§642. 


dividends  on  the  stock  of  the  company,^  except  as  to  dividends  already- 
accrued.-  The  guaranty  of  the  lessee  of  a  railroad  to  pay  bonds  of  the 
lessor  is  an  agreement  to  pay  any  deficiency  after  the  mortgage  secur- 
ing the  bonds  has  been  foreclosed,  excepting  as  to  interest  due  at  the 
time  the  claim  was  filed  in  the  receivership.^    Where  suit  for  dissolution 


the  business.  The  company  remains 
in  existence,  but  it  has  lost  its  title  to 
control  its  assets  and  affairs,  with  the 
result- that  some  of  its  contracts,  such 
as  those  in  which  it  stands  to  an  em- 
ployee in  the  relation  of  master  to 
servant,  being  of  a  personal  nature, 
may,  in  certain  eases,  be  determined 
by  the  mere  change  in  possession,  and 
the  company  may  be  made  liable  for  a 
breach.  But  it  does  not  follow  that  all 
the  contracts  of  the  company  are 
determined  even,  to  put  the  highest 
case,  when  a  mortgagee  acting  under  a 
power  in  his  mortgage  assumes  control 
of  the  business  of  the  mortgagor."  , 

1  In  the  case  Lorillard  v.  Clyde,  142 
N.  Y.  456  (1894),  holding  that  a  guar- 
antee by  an  individual  that  certain 
dividends  will  be  paid  on  the  stock 
of  the  corporation,  was  terminated  by 
the  dissolution  of  the  corporation,  the 
court  said  (p.  462)  :  "It  is  now  well 
settled  that  when  performance  de- 
pends on  the  continued  existence  of  a 
given  person  or  thing,  and  such  con- 
tinued existence  was  assumed  as  the 
basis  of  the  agreement,  the  death  of 
the  person  or  destruction  of  the  thing 
puts  an  end  to  the  obligation. 
Executory  contracts  for  personal  ser- 
vices ;  for  the  sale  of  specific  chattels, 
or  for  the  use  of  a  building,  are  held  to 
fall  within  this  principle.  These  cases 
are  not  exceptions  to  the  rule  that 
contracts  voluntarily  made  are  to  be 
enforced,  but  the  courts  in  accordance 
with  the  manifest  intention  construe 
the  contract  as  subject  to  an  implied 
condition  that  the  person  or  thing  shall 
be  in  existence  when  the  time  of  per- 
formance arrives.  So,  if  after  a  con- 
tract is  made  the  law  interferes  and 
makes  subsequent  performance  im- 
possible, the  party  is  held  to  be  ex- 
cused." A  guaranty  by  an  individ- 
ual of  future  dividends  on  a  going 
corporation  is  not  a  debt  provable 
against    him    in    bankruptcy.     In    re 


Pettingill  «fe  Co.,  137  Fed.  Rep.  143 
(1905).  A  guarantee  of  dividends  on 
stocks,  so  long  as  the  certificates  are 
outstanding,  but  not  to  exceed  the 
period  for  which  the  company  was 
incorporated,  ceases  upon  the  dis- 
solution of  the  company,  even  though 
the  guarantor  owns  a  majority  of  the 
stock  of  the  company  and  brings  about 
the  dissolution,  unless  the  dissolution 
was  for  the  purpose  of  escaping  this  lia- 
bility. Mason  t'.  Standard,  etc.  Co., 
85  N.  Y.  App.  Div.  520  (1903).  Cf. 
§  775,  infra.  A  corporation  that  owns 
stock  in  another  corporation  may  vote 
such  stock  in  favor  of  dissolution  of  the 
latter,  even  though  it  was  influenced  so 
to  vote  by  the  fact  that  it  has 
guaranteed  di\adends  on  the  stock  of 
the  latter  so  long  as  the  latter  exists. 
Windmuller  v.  Standard,  etc.  Co.,  114 
Fed.  Rep.  491  (1902),  also  115  id.  748. 
See  a  criticism  of  this  case  on  page 
1917,  supra.  A  contract  whereby  a 
stockholder  sells  his  stock  to  an  in- 
dividual who  guarantees  that  the 
former  will  be  employed  at  a  stated 
salary  by  the  corporation  for  two  years 
is  enforceable  against  the  person  so 
purchasing  the  stock,  even  though  the 
corporation  passes  into  the  hands  of  a 
receiver  before  the  expiration  of  the 
two  years  and  the  employment  is 
thereby  stopped.  Kinsman  v.  Fisk, 
37  N.  Y.  App.  Div.  443  (1899). 

'^  A  guaranty  by  a  lessee  railroad  of 
dividends  on  the  stock  of  the  lessor, 
payable  directly  to  the  stockholders  or 
through  the  medium  of  the  lessor,  is  a 
claim  provable  against  the  state  of  the 
lessee  so  far  as  it  has  accrued  at  the 
time  of  filing  the  claim  but  not  for 
future  di\'idends.  Pennsylvania  Steel 
Co.  V.  New  York  City  Ry.,  198  Fed. 
Rep.  721  (1912). 

3  Pennsylvania  Steel  Co.  v.  New 
York  City  Ry.,  198  Fed.  Rep.  721 
(1912).    See  s.  c,  204  Fed.  Rep.  513. 


1995 


§642. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  xxxviir. 


is  instituted  against  an  insurance  company,  the  claims  against  it  are 
figured  at  their  value  at  the  commencement  of  the  suit,  even  though 
an  insured  person  dies  thereafter  and  before  distribution.^  Where  a 
contractor  has  but  partially  completed  his  contract,  and  a  receiver  is 
appointed,  he  is  entitled  to  consider  the  contract  as  abandoned  on  that 
day,  but  before  deciding  he  may  wait  a  reasonable  time  to  see  what  the 
parties  in  interest  or  the  receiver  do  in  regard  to  the  completion  of  the 
contract.^  The  voluntary  dissolution  of  a  corporation  and  the  appoint- 
ment of  a  receiver  does  not  relieve  it  from  performing  its  contracts 
when  such  dissolution  was  for  that  purpose  and  the  company  was 
able  to  perform  its  contracts,  especially  where  the  property  is  after- 
wards turned  back  to  the  corporation  by  the  receiver.^ 

Coming  now  to  the  question  of  leases  which  have  not  expired 
when  a  receiver  is  appointed,  the  courts  are  again  in  conflict.  Here 
New  York  holds  that  the  landlord,  if  the  receiver  does  not  adopt 
the  lease,*  may  maintain  a  claim  against  the  general  corporate 
assets    for    rent    accruing    after    the    receiver    was    appointed.^     In 


'  People  V.  Commercial  A.  L.  Ins. 
Co.,  154  N.  Y.  95  (1897).  In  winding 
up  an  insolvent  insurance  company 
the  court  will  ascertain  the  present 
value  of  executory  obligations  of  the 
company.  Taber  v.  Royal,  etc.  Co., 
124  Ala.  681  (1899),  the  court  saying 
that  !'When  it  falls  out  that  the  com- 
pany is  unable  longer  to  keep  its  prom- 
ises, and  its  assets  are  taken  possession 
of  by  the  eoiu"t,  for  pro  rata  applica- 
tion to  its  debts,  the  court  has  a  right 
to  fix  a  day  up  to  which  engagements 
under  contract  may  be  regarded  as 
continuing,  but  after  which  the  credi- 
tors may  regard  them  as  terminated 
on  account  of  the  altered  condition  of 
the  company,  disabling  it  further  to 
meet  its  reciprocal  promises.  That  is 
an  option  afforded  to  creditors  by  the 
coiirt,  in  view  of  the  contract  relations 
of  the  parties,  and  is  strictly  in  the 
nature  of  a  rescission  by  them,  and  the 
proof  by  them  in  such  cases  is  in  the 
way  of  damages  and  is  measurable 
by  the  present  value  of  their  contracts." 

2  Commonwealth,  etc.  Co.  v.  North 
American  T.  Co.,  135  Fed.  Rep.  984 
(1905).  Where  a  contractor  is  pre- 
vented from  completing  his  contract 
by  the  appointment  of  a  receiver  he 
may  claim  a  statutory  lien  for  work 
already    done.     Wetzel,    etc.    Ry.    v. 


Tennis  Bros.  Co.,  145  Fed.  Rep.  458 
(1906).  The  agreement  of  a  managing 
director  not  to  compete  for  a  series  of 
years  during  which  he  was  to  receive  a 
certain  salary,  ceases  if  the  company  is 
wound  up,  this  being  equivalent  to  a 
wrongful  dismissal  of  him.  Measures, 
etc.  Ltd.  V.  Measures,  102  L.  T.  Rep. 
7  (1909) ;  aff'd,  102  L.  T.  Rep.  794.  A 
merger  of  two  insurance  companies 
under  the  New  York  statute  forms  a 
new  corporation,  and  a  person  under 
contract  of  employment  in  one  of  the 
companies  is  not  bound  to  work  for 
the  new  company  and  may  recover 
damages  for  breach  of  the  contract. 
Globe,  etc.  Co.  v.  Jones,  129  Mich.  664 
(1902). 

3  Stannard  v.  Reid  &  Co.,  114  N.  Y. 
App.  Div.  135  (1906) ;  8.  c,  118  N.  Y. 
App.  Div.  304. 

^  As  to  this  see  §  874,  infra. 

^People  V.  National  Trust  Co.,  82 
N.  Y.  283  (1880),  explained  in  91  N.  Y. 
181,  as  involving  a  different  class  of 
cases  from  employment  cases.  The 
court  said:  "They  are  such  as  affect 
property  rights  and  survive  the  death 
of  the  parties.  Performance  can  be 
made  by  assignees  or  successors,  and 
nothing  in  the  essence  of  the  agreement 
depends  upon  the  life  of  the  parties,  or 
forbids     its     complete     execution     by 


1996 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§642. 


New  Jersey  and  Massachusetts,   however,  a  contrary  rule  seems  to 

prevail.^ 

Claims  against  the  corporate  assets  on  dissolution  or  the  appointment 
of  a  receiver,  based  on  contracts  or  acts  already  completed,  are  of  course 
entitled  to  payment  and  they  constitute  the  great  mass  of  claims  pre- 
sented. So  also  as  to  torts  committed  by  the  corporation  itself.  They 
are  not  eliminated  by  dissolution  or  the  appointment  of  a  receiver.^ 

A  foreclosure  sale  by  consent  of  the  bondholders  and  stockholders 
does  not  necessarily  eliminate  a  claim  for  damages  for  breach  of  a 
guaranty  by  the  mortgagee.^ 

Of  course  dissolution  does  not  cancel  obligations  not  yet  due  even 
though  extending  beyond  the  duration  of  the  company's  charter.*     In 


others."  See  also  People  v.  St. 
Nicholas  Bank,  151  N.  Y.  592  (1897) ; 
Kalkhoff  V.  Nelson,  60  Minn.  284 
(1895).  Even  though  the  receiver 
surrendered  leased  premises,  the  land- 
lord may  file  a  claim  for  rent  due  and 
to  become  due  until  the  expiration  of 
the  lease  or  until  he  is  able  to  obtain 
a  new  tenant  at  the  same  rental. 
Woodland  v.  Wise,  112  Md.  35  (1910). 
The  mere  fact  that  a  bank  becomes 
Insolvent  and  a  receiver  is  appointed 
does  not  release  it  from  subsequent 
rent  on  a  lease,  the  landlord  ha\dng 
reduced  the  damage  as  much  as  possi- 
ble, any  more  than  if  the  bank  had 
abandoned  the  lease  while  continuing 
business.  McGraw  v.  Union  T.  Co., 
135  Mich.  609  (1904J  ;  New  York,  Pa. 
etc.  R.  R.  V.  New  York,  Lake  Erie, 
etc.  R.  R.,  58  Fed.  Rep.  268  (1893) ; 
Chemical  Nat.  Bank  v.  Hartford  De- 
posit Co.,  161  U.  S.  1  (1896);  Re 
New  Oriental  Bank,  [1895]  1  Ch.  7.53. 
Where  the  receiver  continues  in  pos- 
session under  an  existing  lease,  he 
is  liable  for  the  rent  for  the  time  he 
occupies  the  premises,  and  the  lessor 
may  put  in  a  claim  as  a  general  creditor 
for  the  remainder  of  the  rent.  Shackell 
V.  Chorlton,  [1895]  1  Ch.  378.  In  the 
bankruptcy  court  the  landlord  cannot 
prove  a  claim  for  rent  not  yet  due,  but 
which  would  accrue  thereafter  under 
the  lease.  In  re  Arnstein,  101  Fed. 
Rep.  706  (1899).  Dissolution  as  al- 
lowed by  statute  may  be  had,  even 
though  it  will  enable  a  landlord  to  can- 
cel a  lease  to  the  injury  of  secured  cor- 
porate creditors.     Re  Criggleston,  etc 


Co.,  Ltd.,  [1906]  2  Ch.  327 ;  aff'd,  95 
L.  T.  Rep.  510,  on  the  ground  that  the 
unsecured  creditors  might  possibly 
thereby  obtain  something.  The  sureties 
on  a  lease  to  a  corporation  are  not  liable 
for  the  rental  after  the  dissolution  of 
the  company,  inasmuch  as  the  com- 
pany is  no  longer  liable.  Hastings 
V.  Letton,  [1908]  K.  B.  378. 

1  Stockton  V.  Mechanics',  etc.  Bk.,32 
N.  J.  Eq.  163  (1880);  Klein  v. 
Gavenesch,  64  N.  J.  Eq.  50  (1902). 
Inasmuch  as  the  courts  of  New  York 
allow  claims  for  rent  not  accrued,  while 
the  courts  of  Massachusetts  do  not, 
the  United  States  court  in  New  York, 
having  appointed  an  ancillary  re- 
ceiver of  a  Massachusetts  corpora- 
tion, while  the  United  States  court 
in  Massachusetts  has  appointed  the 
main  receiver,  will  direct  the  New 
York  funds  to  be  sent  to  the  United 
States  court  in  Massachusetts  for 
distribution.  Whelan  v.  Enterprise, 
etc.  Co.,  166  Fed.  Rep.  138  (1908). 
On  this  subject  see  §  881,  infra. 

2  Shayne  v.  Evening  Post  Co..  168 
N.  Y.  70  (1901).  The  stockholders 
are  not  individually  liable  for  damages 
due  to  the  negligence  of  the  corpora- 
tion, even  though  it  has  been  dissolved. 
Hudson  V.  Limestone,  etc.  Co.,  1.32 
Fed.  Rep.  410  (1904).  The  expiration 
of  the  charter  of  the  corporation  does 
not  put  an  end  to  an  existing  statutory 
liability  of  the  stockholder.  Wheat- 
ley  V.  Glover,  125  Ga.  710  (1906). 

'Northern  Pacific  Ry.  v.  Boyd,  228 
U.  S.  482  (1913). 

*  See  §  641,  supra,  and  §  913,  infra. 


1997 


§642. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


distribution,  debts  not  yet  due  participate  with  a  rebate  of  interest  for 
the  unexpired  time.^  After  a  receiver  is  appointed,  interest  on  a  cor- 
porate debt  ceases  as  between  the  creditors,  but  continues  as  against 
the  corporation  and  its  stockholders. ^  The  adjudicated  insolvency  of 
the  mortgagor  operates  to  mature  mortgage  bonds  in  order  that  they 
may  participate  in  the  distribution  of  the  general  assets  not  covered  by 
the  mortgage,  in  case  the  mortgage  security  is  insufficient.^  Upon  a 
sale  of  the  assets  and  the  winding  up  of  the  company,  bonds  not  yet 
due  may  be  paid  at  par  and  accrued  interest.^  Bonds  of  an  insol- 
vent corporation  become  due  on  its  dissolution,  and  accordingly  the 
stockholders'  statutory  liability  thereon  commences  at  that  date.^  A 
pledgee  need  not  institute  proceedings  against  the  estate  of  the  pledgor 
and  is  entitled  to  the  extent  of  his  debt  to  participate  in  the  distribu- 
tion of  the  assets  of  the  corporation  on  dissolution.^  A  pledgee  of 
bonds  of  the  corporation  cannot  be  enjoined  from  selling  the  same, 
although  dissolution  proceedings  are  pending.'' 

An  important  question  arises  in  this  connection  where  one  corporation 
sells  out  all  its  property  to  another  corporation  leaving  some  of  the  debts 
of  the  former  corporation  unpaid.  The  rights  and  remedies  of  the 
creditors  in  such  a  case  are  fully  considered  elsewhere.^ 


^  Jones  V.  Arena  Pub.  Co.,  171 
Mass.  22  (1898). 

2  People  V.  American,  etc.  Co.,  172 
N.  Y.  371  (1902).  See  also  §  881, 
infra.  Under  the  New  Hampshire 
statutes,  when  a  corporation  is  wound 
up  under  insolvency  proceedings,  all 
claims  are  allowed  as  of  the  same  date, 
interest  being  added  for  those  past  due, 
and  a  rebate  of  interest  made  on  those 
not  yet  due.  An  assignee  in  insolvency 
cannot  agree  that  a  trustee  to  whom  the 
corporation  pledged  mortgages  as  se- 
curity for  debentures  shall  purchase 
such  securities  at  a  price  named. 
Bank  Com'rs  v.  New  Hampshire,  etc. 
Co.,  69  N.  H.  621  (1899). 

3  Union  T.  Co.  etc.  v.  Belvedere, 
etc.  Co.,  105  Md.  507  (1907). 

*  Re  Southern,  etc.  Ry.  Co.,  Ltd., 
[1905]  2  Ch.  78.  Where  a  mortgaged 
water- works  plant  is  taken  over  by  the 
state  as  allowed  by  its  original  con- 
tract with  the  water-works  company, 
and  the  bonds  secured  by  the  mortgage 
have  to  be  paid  first,  they  may  be 
paid  at  the  redemption  price  specified 
in  the  mortgage,  but  cannot  be  called 
in  merely  at  par  and  accrued  interest. 
Harnickell  v.  Omaha  Water  Co.,   146 


N.  Y.  App.  Div.  693  (1911).  Dis- 
solution of  a  corporation  before  Decem- 
ber 31st  does  not  release  it  from  the 
obligation  to  pay  the  United  States 
Special  Excise  Tax.  United  States  v. 
General  Inspection,  etc.  Co.,  192  Fed. 
Rep.  223  (1911).    See  108  L.T.  Rep.  488. 

^  Ramsden  v.  Knowles,  151  Fed. 
Rep.  718  (1906).  The  statute  of  limi- 
tations begins  to  run  against  the 
stockholders'  liability  upon  the  in- 
solvency of  a  Kansas  corporation, 
even  though  its  outstanding  bonds  do 
not  become  due  for  many  years  there- 
after. Ramsden  v.  Knowles,  151  Fed. 
Rep.  721  (1907). 

«  Clarke  v.  First  State  Bank,  150 
S.  W.  Rep.  203  (Tex.  1912). 

^  Matter  of  Binghamton  Gen.  El. 
Co.,  143  N.  Y.  261  (1894). 

8  See  ch.  XL,  infra.  Where  a  ma- 
jority stockholder  in  a  railroad  com- 
pany causes  it  to  issue  mortgage  bonds 
to  another  railroad  company,  which 
then  guarantees  them  and  takes  a  lease 
of  the  first-named  railroad,  and  also 
purchases  the  stock,  a  part  of  the  bonds 
being  used  to  pay  such  stockholder  for 
the  stock,  an  unsecured  creditor  of  the 
first-named    railroad    may    hold     the 


1998 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§642. 


So  also  it  frequently  becomes  important  to  know  whether  a  consoli- 
dated company  is  liable  for  the  debts  of  the  constituent  companies,^ 
and  whether  a  purchaser  at  a  foreclosure  sale  is  liable  for  the  debts  of 
the  foreclosed  corporation.- 

Dividends  paid  to  the  stocldiolders  out  of  the  capital  stock  are  il- 
legal as  against  corporate  creditors  whether  paid  before  or  at  the  time 
of  dissolution.^  Under  the  ordinary  statute  rendering  corporate  officers 
Uable  for  dividends  or  diversion  of  funds  leaving  the  corporation  un- 
able to  meet  its  obligations,  corporate  officers  who  bring  about  a  dissolu- 
tion and  distribution  of  corporate  assets  among  the  stockholders  with- 
out paying  debts,  are  personally  liable  for  such  debts.^ 

The  question  of  liability  where  the  corporation  is  a  mere  "  dummy" 
is  considered  elsewhere.'' 

Another  question  is  whether  a  person  or  corporation  which  owns 
all  the  stock  of  another  corporation  is  ever  liable  for  the  debts  of  the 
latter  on  the  ground  that  the  latter  is  a  mere  "  dummy"  for  the  former. 
This  subject  also  is  considered  elsewhere.^ 

At  common  law,  upon  dissolution  of  a  corporation,  all  suits  by  or 
against  it  abate. ^ 


second  railroad  liable  on  its  claim  to 
the  extent  of  the  bonds  issued  in  pay- 
ment for  the  stock.  Northern  Pacific 
Ry.  V.  Boyd,  228  U.  S.  482  a913). 

*  See  eh.  LIII,  infra. 
2  See  ch.  LII,  infra. 

^  See  §  546,  supra. 

*  Wisconsin,  etc.  Lumber  Co.  v. 
Cable,  140  N.  W.  Rep.  211  (Iowa, 
1913).     See  §  682,  infra. 

6  See  §§  6,  supra,  and  663,  664,  709, 
infra. 

«  See  §§  6,  supra,  and  663,  664,  709, 
infra. 

'  McCuUoch  V.  Norwood,  58  N.  Y. 
562  (1874);  Re  Norwood,  32  Hun, 
196  (1884) ;  Venable  Bros  v.  Southern, 
etc.  Co.,  135  Ga.  508  (1910) ;  Greeley 
V.  Smith,  3  Story,  C.  C.  657  (1845) ; 
8.  c,  10  Fed.  Cas.  1075;  Saltmarsh 
V.  Planters',  etc.  Bank,  17  Ala.  761 
(1850);  Merrill  v.  Suffolk  Bank,  31 
Me.  57  (1849) ;  Ingraham  v.  Terry,  11 
Humph.  (Tenn.)  572  (1851);  Life 
Assoc.  V.  Fassett,  102  111.  315  (1882) ; 
Piatt  V.  Ashman,  32  Hun,  230  (1884). 
A  judgment  against  a  corporation  after 
its  charter  has  been  forfeited  by  de- 
cree of  the  court  is  void.  Insurance 
Com'r  V.  United,  etc.  Co.,  22  R.  I. 
377    (1901).     Dissolution    dissolves    a 


pending  attachment.  Morgan  v.  New 
York,  etc.  Assoc,  73  Conn.  151 
(1900).  A  judgment  against  a  corpo- 
ration that  has  been  dissolved  is  void. 
A  stockholder  may  have  it  expunged 
from  the  record.  Newhall  v.  Western, 
etc.  Co.,  128  Pac.  Rep.  1040  (Cal. 
1912).  A  judgment  in  Illinois  ren- 
dered against  a  New  York  corpora- 
tion after  it  has  been  dissolved  is 
not  evidence  against  the  New  York 
receiver,  even  though  the  suit  was 
commenced  before  the  dissolution,  it 
appearing  that  the  attorneys  for  the 
company  had  withdrawn  their  ap- 
pearance before  the  judgment  and 
the  receiver  had  not  appeared. 
People  V.  Mercantile,  etc.  Co.,  65  N.  Y. 
App.  Div.  306  (1901).  Where  the 
attorney  fails  to  call  the  attention  of 
the  court  to  the  fact  that  his  client, 
one  of  the  parties  in  the  case,  has 
been  dissolved,  he  may  be  liable  for 
costs  thereafter.  Salton  v.  New  Bees- 
ton,  etc.  Co.,  [1900]  1  Ch.  43.  An 
action  for  tort  abates  upon  the  ex- 
piration of  the  corporate  charter. 
Grafton  ;;.  Union  Ferry  Co.,  13  N.  Y. 
Supp.  878  (1891).  Corporate  suits 
end  when  the  charter  expires.  Logan 
V.   Western,   etc.   R.    R.,   87   Ga.   533 


1999 


§642. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH.  XXXVIII. 


Where  a  corporation  is  dissolved  while  an  infringement  suit  is  pend- 
ing against  it  the  suit  may  be  revived  against  the  receiver.^  Suit 
does  not  lie  against  a  corporation  which  has  been  dissolved.-     But  the 


(1891).  Where  by  consolidation  a 
corporation  ceases  to  exist,  suits 
against  it  abate.  Council,  etc.  Ry.  v. 
Lawrence,  3  Kan.  App.  274  (1896). 
A  dissolution  of  a  corporation  puts 
an  end  to  a  suit  at  law  for  damages 
for  personal  injuries.  Grafton  v. 
Union  Ferry  Co.,  19  N.  Y.  Supp.  966 
(1892).  Upon  dissolution  of  a  cor- 
poration all  suits  abate.  Marion  Phos- 
phate Co.  V.  Perry,  74  Fed.  Rep. 
425  (1896).  The  dissolution  of  a 
foreign  corporation  ends  a  suit 
against  it.  Wamsley  v.  Horton,  12 
N.  Y.  App.  Div.  312  (1896);  aff'd, 
153  N.  Y.  687.  A  judgment  in  lUinois 
against  a  New  York  corporation  that 
has  already  been  dissolved  in  New 
York  is  not  good  in  New  York. 
Rodgers  v.  Adriatic  F.  Ins.  Co.,  87 
Hun,  384  (1895).  An  action  in  tort 
for  personal  injuries  abates  upon  the 
dissolution  of  the  company.  Re 
Yuengling  Brewing  Co.,  24  N.  Y.  App. 
Div.  223  (1897).  A  judgment  against 
a  corporatibn  after  it  has  been  dis- 
solved is  a  nuUity.  Crossman  v. 
Vivienda,  etc.  Co.,  150  Cal.  575 
(1907).  A  judgment  may  be  entered 
against  a  corporation  even  though  an 
assignee  has  been  appointed  under 
statutory  proceedings.  Anglo-Ameri- 
can, etc.  Co.  V.  Cheshire,  etc.  Inst., 
124  Fed.  Rep.  464  (1903) ;  aff'd,  132 
Fed.  Rep.  968.  A  judgment  against 
a  corporation,  which  by  expiration  of 
charter  has  ceased  to  exist,  may 
nevertheless  be  good  against  its 
property,  if  that  fact  is  not  availed 
of  until  after  the  statute  of  limita- 
tions has  run  against  the  individuals. 
Droege  v.  Emery,  105  S.  W.  Rep.  374 
(Ky.  1907).     See  also  §  641,  supra. 

1  Griswold  v.  Hilton,  87  Fed.  Rep. 
256  (1898).  Even  though  a  suit 
against  a  corporation  for  libel  abates 
by  reason  of  the  dissolution  of  the 
corporation,  yet  it  may  be  revived 
and  continued  against  the  former  di- 
rectors in  order  to  reach  assets  in 
their  hands  as  trustees,  under  the 
New  York  statute.     Shayne  v.  Even- 


ing Post,  etc.  Co.,  168  N.  Y.  70  (1901). 
An  action  against  a  corporation  may 
be  continued  against  those  who  ad- 
minister its  assets  where  the  corpo- 
ration is  dissolved  pending  the  suit. 
Hepworth  v.  Union  Ferry  Co.,  62  Hun, 
258  (1891). 

2  Jacobs  V.  Bement's  Sons,  161  Mich. 
415  (1910) ;  Dobson  v.  Simonton,  86 
N.  C.  492  (1882) ;  Gold  v.  Clyne,  58 
Hun,  419  (1890) ;  aff'd,  134  N.  Y.  262. 
The  legislature  may  provide  for  suits 
against  corporations  after  dissolution, 
thus  changing  the  common-law  rule. 
Stetson  V.  City  Bank,  etc.,  2  Ohio  St. 
167  (1853);  Foster  v.  Essex  Bank, 
16  Mass.  245  (1819).  Under  the  New 
York  statute  dissolution  does  not  bar 
an  action  for  damages.  Marstaller  v. 
Mills,  143  N.  Y.  398  (1894).  After 
a  corporation  has  been  dissolved  by 
the  repeal  of  its  charter,  a  bill  of 
review  against  it  to  set  aside  a  de- 
cree in  its  favor  cannot  be  main- 
tained. Board  of  Couneilmen,  etc.  v. 
Deposit  Bank,  etc.,  120  Fed.  Rep.  165 
(1902);  aff'd,  124  Fed.  Rep.  18.  As 
to  a  suit  in  New  Hampshire  against 
a  New  Jersey  corporation  which  has 
been  dissolved,  see  White  Mountain, 
etc.  Co.  V.  Morse  &  Co.,  127  Fed.  Rep. 
643  (1904).  Even  though  under  a 
state  statute  a  bank  is  being  wound 
up  and  the  property  transferred  to 
an  assignee,  yet  this  is  not  a  dissolu- 
tion preventing  a  suit  against  the 
bank  in  the  federal  court,  although 
the  enforcement  of  a  judgment  there- 
in may  be  difficult.  Cheshire,  etc. 
Inst.  V.  Anglo-American,  etc.  Co., 
132  Fed.  Rep.  968  (1904).  Even 
though  a  Connecticut  corporation 
which  owns  a  railroad  in  Kentucky 
is  being  wound  up,  in  accordance 
with  the  statutes  of  Connecticut,  and 
even  though  the  company  has  as- 
signed to  the  statutory  receiver  in 
Connecticut  all  its  property,  yet  such 
an  assignment  is  not  an  assignment 
for  the  benefit  of  creditors,  and 
hence  a  creditor  of  the  railroad  may 
attach    in    Kentucky    assets    in    that 


2000 


CH.  XXXVIII.] 


DISSOLUTION,    FORFEITURE,    ETC. 


[§641 


statutes  often  contain  a  provision  that  the  corporate  existence  shall  be 
continued  for  a  fixed  time,  pending  the  proceedings  for  dissolution,  so 
that  suits  may  be  brought  b\'  and  against  the  corporation  for  the  pur- 
pose of  closing  the  business  and  disposing  of  the  assets.^    A  statute  that 


state.  Huntington  v.  Chesapeake,  etc. 
Ry.,  98  Fed.  Rep.  459  (1899).  A  suit 
to  collect  a  debt  against  a  corpo- 
ration, the  charter  of  which  has  ex- 
pired, can  be  in  a  court  of  equity 
only.  Stiles  v.  Laurel,  etc.  Co.,  47 
W.  Va.  838  (1900).  Suit  does  not 
lie  against  a  dissolved  corporation, 
and  a  statute  authorizing  suit  against 
a  domestic  dissolved  corporation  does 
not  apply  to  a  foreign  corporation. 
Fitts  V.  National,  etc.  Assoc,  1.30  Ala. 
413  (1901).  An  irregular  dissolution 
of  a  Connecticut  corporation  is  no  bar 
to  a  subsequent  attachment  against 
such  corporation  in  New  York  state. 
Hammond  v.  National,  etc.  Assoc,  31 
N.  Y.  Misc.  Rep.  182  (1900);  aff'd, 
58  N.  Y.  App.  Div.  453  (1901).  A 
statute  authorizing  a  dissolved  cor- 
poration to  bring  suit  enables  such 
corporation  to  sue  in  the  federal 
courts.  Dundee,  etc.  Co.  v.  Hughes, 
89  Fed.  Rep.  182  (1898).  Even  after 
dissolution  a  stockholder  may  file  a 
bill  to  recover  assets  that  have  been 
wrongfully  diverted.  Boyd  v.  Han- 
kinson,  92  Fed.  Rep.  49  (1899).  A 
corporation  may  be  sued  as  such  for 
a  tort  committed  by  it  after  its  char- 
ter has  expired.  MiUer  v.  Newburg, 
etc.  Co.,  31  W.  Va.  836  (1888).  Where 
an  attorney  brings  suit  in  the  name 
of  a  corporation  that  has  been  dis- 
solved before  the  action,  he  is  liable 
for  costs  if  beaten.  Attleboro  Nat. 
Bank  v.  Wendell,  64  Hun,  208  (1892). 
After  dissolution  has  been  decreed  it 
is  too  late  for  a  corporate  creditor 
to  bring  an  action  to  hold  the  direc- 
tors liable  for  declaring  dividends  out 
of  the  capital  stock,  no  fraud  in  ob- 
taining the  dissolution  being  alleged. 
Coxon  V.  Gorst,  [1891]  2  Ch.  73.  Upon 
dissolution,  the  directors  becoming 
trustees  by  statute,  the  statute  of 
limitations  begins  to  run  against 
claims  against  the  secretary.  Landis 
V.  Saxton,  105  Mo.  486  (1891).  A 
corporation  may  give  a  bond  on  ap- 
peal,   even    though    the    charter    has 


been  forfeited,  an  appeal  having  been 
taken  from  the  judgment  of  forfeit- 
ure. Texas,  etc.  R.  R.  v.  Jackson,  85 
Tex.  605  (1893).  See  also  §  641,  supra. 
1  Stetson  V.  City  Bank  of  New  Or- 
leans, 12  Ohio  St.  577  (1861);  Mc- 
Goon  V.  Scales,  9  Wall.  23  (1869); 
Mariners'  Bank  v.  Sewall,  50  Me.  220 
(1861) ;  Muscatine  Turn  Verein  v. 
Funck,  18  Iowa,  469  (1865);  Thorn- 
ton V.  Marginal  Freight  Ry.,  123 
Mass.  32  (1877) ;  Folger  r.  Chase,  35 
Mass.  63  (1836) ;  Crease  v.  Babcock, 
51  Mass.  525,  567  (1846);  Re  Inde- 
pendent Ins.  Co.,  Holmes,  103  (1872) ; 
8.  c,  13  Fed.  Cas.  13;  Franklin  Bank 
V.  Cooper,  36  Me.  179  (1853) ;  Nevitt 
V.  Bank  of  Port  Gibson,  14  Miss.  513 
(1846).  A  dissolved  New  Jersey  cor- 
poration may  sue  or  be  sued  in  that  or 
any  other  state  as  a  corporation  in 
winding  up  its  affairs  under  the  New 
Jersey  statute  authorizing  such  suits. 
Harris-Woodbury,  etc  Co.  v.  Coffin, 
179  Fed.  Rep.  257  (1910) ;  aff'd,  187 
Fed.  Rep.  1005.  A  case  may  be 
removed  to  the  federal  court  by  a 
defendant  New  Jersey  corporation, 
even  though  it  has  been  dissolved,  but 
by  statute  may  for  five  years  sue  and 
be  sued  in  the  corporate  name.  Groom 
V.  Mortimer  Land  Co.,  192  Fed.  Rep. 
849  (1912).  Under  the  New  Jersey 
statute  a  corporation  after  dissolution 
may  be  sued  in  tort.  Hould  i*.  Squire 
&  Co.,  81  N.  J.  L.  103  (1911).  In  a 
suit  on  a  cause  of  action  against  a  dis- 
solved corporation,  the  corporation 
should  be  made  the  defendant  and 
not  the  directors  who  continued  as 
trustees  to  wind  up  its  affairs.  Cun- 
ningham V.  Glauber,  133  N.  Y.  App. 
Div.  10  (1909).  A  state  statute 
cannot  give  its  courts  jurisdiction 
over  a  foreign  corporation  after  it  has 
been  dissolved.  Robinson  v.  Mutual, 
etc.  Co.,  182  Fed.  Rep.  850  (1910); 
s.  c,  189  Fed.  Rep.  348.  The  life  of 
the  corporation  is  frequently  extended 
by  these  statutes  for  three  years. 
Herron  v.  Vance,  17  Ind.  595  (1861) ; 


(126) 


2001 


§642. 


DISSOLUTION,    FORFEITURE,    ETC. 


[CH. 


corporations  shall  continue  for  a  certain  time  after  their  dissolution  for 
purposes  of  litigation  does  not  apply  to  foreign  corporations.^  Where  a 
New  York  statute  provides  that  on  consolidation  of  New  York  cor- 
porations pending  suits  shall  not  abate,  this  applies  to  a  suit  against 
one  of  those  corporations  in  Rhode  Island.^  A  corporation  which  ap- 
pears and  files  an  answer  cannot  set  up  that  it  was  dissolved  before  the 
suit  was  commenced.^  Where  a  corporation  becomes  bankrupt  pend- 
ing a  suit  against  it,  the  plaintiff  may  proceed  with  the  suit  or  take  his 
share  of  the  corporate  assets.  The  former  may  be  preferred  if  no  dis- 
charge in  bankruptcy  takes  place,  but  in  that  case  the  judgment  is 
good  only  against  assets  acquired  by  the  debtor  after  the  date  of  the 
bankruptcy  proceedings.^  The  liability  of  a  corporation  for  negligence 
does  not  end  with  its  dissolution.^ 

Upon  the  dissolution  of  the  corporation  the  liability  of  the  stock- 
holder as  to  any  further  business  ceases.  If  the  business  is  carried 
on  thereafter  by  the  agents,  no  liability  therefor  attaches  to  the  former 
stockholders,^  unless  they  expressly  authorize  it.^  Where  an  act  of 
congress  provides  that  a  national  bank  charter  on  its  expiration  may  be 
renewed,  dissenting  stockholders  to  be  paid  the  appraised  value  of  their 
stock,  the  latter,  who  have  done  all  in  their  power  to  obtain  the  appraise- 
ment, are  not  Uable  on  the  stock  if  the  corporation  subsequently  be- 
comes insolvent.^ 

Foster  v.   Essex  Bank,   16  Mass.  245    66  N.  Y.  424  (1876),  aff'g  5  Hun,  34 ; 


(1819) ;  Blake  v.  Portsmouth,  etc. 
R.  R.,  39  N.  H.  435  (1859);  Von 
Glahn  v.  De  Rosset,81  N.  C.  467  (1879) ; 
Michigan  State  Bank  v.  Gardner,  81 
Mass.  362  (1860).  Sometimes  five 
years.  Tuskaloosa,  etc.  Assoc,  v. 
Green,  48  Ala.  346  (1872).  Cf.  Lin- 
coln, etc.  Bank  v.  Richardson,  1  Me.  79 
(1820).  A  suit  abates  upon  the  expira- 
tion of  the  time  limited,  where  by 
statute  the  corporation  continues  for 
five  years  after  dissolution  for  the 
purpose  of  prosecuting  and  defending 
suits.  Dundee,  etc.  Co.  v.  Hughes, 
77  Fed.  Rep.  855  (1896). 

1  Olds  V.  City,  etc.  Co.,  185  Mass. 
500  (1904). 

2  Riddell  v.  Rochester,  etc.  Co.,  85 
Atl.  Rep.  273  (R.  I.  1912). 

3  Hammar  v.  St.  Louis,  etc.  Co., 
155  Mo.  App.  441  (1911). 

^  Hackett  v.  Supreme  Council,  etc., 
206  Mass.  139  (1910). 

^  Cunningham  v.  Glauber,  133  N.  Y. 
App.  Div.  10  (1909). 

8  Central  City  Sav.  Bank  v.  Walker, 


Wilson  V.  Tesson,  12  Ind.  285  (1859). 
A  contract  made  by  the  officers  after 
the  charter  has  been  forfeited  does 
not  bind  the  stockholders.  Wilson  v. 
Tesson,  12  Ind.  285  (1859).  Even 
though  a  charter  has  ceased  to  exist 
by  reason  of  a  statute,  yet  the  stock- 
holders are  not  personally  liable  for 
its  debt  thereafter  created,  they  not 
having  taken  part  in  the  creation  of 
such  debts.  Commercial  Nat.  Bank 
V.  Gilinsky,  142  Iowa,  178  (1909). 
Where  a  grain-dealing  corporation 
becomes  insolvent  and  a  trustee  is 
appointed  and  thereafter  the  president 
continues  to  do  business  on  his  own  ac- 
count, but  uses  the  name  of  the  corpora- 
tion, moneys  received  by  him  are  not 
subject  to  the  debts  of  the  corporation. 
Boyle  0.  Northwestern,  etc.  Bank,  125 
Wis.  498  (1905).     See  also  §  243,  supra. 

'  National  Union  Bank  v.  Landon, 
45  N.  Y.  410  (1871). 

sApsey  V.  Kimball,  221  U.  S.  514 
(1911),  aff'g  199  Mass.  65,  and  164 
Fed.  Rep.  830. 


2002 


CH.  XXXVIII.]  DISSOLUTION,    FORFEITURE,    ETC.  [§  642. 

A  director  who  is  a  creditor  of  the  corporation  may  share  propor- 
tionately with  other  creditors  in  the  assets.^ 

Where  a  company  owing  debts  allows  a  foreclosure  of  a  mortgage 
and  buys  in  the  property  and  holds  it  secretly  in  the  name  of  a  trustee, 
an  execution  may  be  levied  on  it  by  a  judgment  creditor  of  the  company .^ 
The  directors  are  not  personally  liable  for  attorney  fees  for  services 
rendered  in  a  voluntary  dissolution  of  the  company .^  Even  though 
the  charter  has  expired,  a  stockholder  may  maintain  a  suit  to  hold  the 
directors  liable  for  fraud."  After  dissolution  the  directors  cannot  be 
sued  personally  for  negligence  of  the  corporation.^  Where  upon  disso- 
lution of  a  corporation  the  directors  distribute  all  the  assets  without 
paying  a  judgment,  they  are  personally  liable  for  what  would  have  been 
paid  on  the  judgment,  under  the  New  York  statutes.^ 

1  Thompson  v.  Huron  Lumber  Co.,  '  Hoag  v.  Edwards,  69  N.  Y.  Misc. 
4  Wash.  St.  600  (1892).  Rep.  237  (1910). 

2  State  V.  McBride,  105  Mo.  265  ^  Cunningham  v.  Glauber,  61  N.  Y. 
(1891).  Misc.  Rep.  443  (1908) ;  aff'd,  133  N.  Y. 

3  Drew    V.  Longwell,  81    Hun,   144  App.  Div.  10. 

(1894)  ^  Tapley  v.  Keller,  133  N.  Y.  App. 

Div.  54  (1909).     See  §  682,  infra. 


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